Becoming a Director…liabilities?

As a Director, you will probably already understand the day to day decisions for the company and the metaphorical buck now stops firmly with you, but what about company procedures, legal duties, lifetime liabilities and the ‘fine print’ of being a Director?

Entrepreneurs and new Directors will always see the benefit to Limited Liability status in their pursuits to profitability and riches, but this article aims to summarise the key points you should also bear in mind as a Director.

The Fine Print of the Law

As a Director on a Board, you will be acting as a collective and decisions made are on behalf of the company as a whole and which can affect the whole business. A Director therefore holds a number of general duties not just to the legal entity of the company but also to the shareholders.

The most prominent duties are:

  • A duty to act in accordance with the company’s Articles of Association and to exercise powers only for the purposes for which they have been granted;
  • A duty to act on behalf of the company and in good faith in order to promote the general success of the company;
  • A duty to exercise independent judgment;
  • A duty to avoid conflicts of interest;
  • A duty to exercise reasonable care, skill and diligence;
  • A duty not to make any personal profit from their position as a Director unless authorised by the Articles or a Resolution; and
  • A duty to disclose any personal interest in a proposed transaction or arrangement of the company which may or may not lead to a conflict.

Failure to follow the above duties may result in the company itself bringing a civil claim against you as a Director for breach of that duty or even a shareholder may do it on the company’s behalf. In some circumstances, there may also be criminal penalties. Although in smaller companies, the Directors will usually be shareholders or the entire board may be the only Shareholders, a company will not always be this way and you should ensure you protect yourself at all times.

Directors Meetings – The Procedure

If you are a Director for a company incorporated post 2006, you will be using the Model Articles (as Amended from time to time), and so decisions can be made by the directors either by a majority vote in a meeting (i.e. a board meeting), or usually unanimously in writing.

Although you should look carefully at the Model Articles your Company is using to ensure there are no amendments to this, the Articles will allow slight flexibility in contrast to older companies to permit directors to hold a meeting even when not all of them are physically present, provided that they can all communicate with each other maybe by telephone or video conference.

At any meeting, there must be a minimum number of Directors. This is called the ‘quorum’ and will usually be any two directors, but this may be fixed from time to time by a decision of the directors. Where you are the sole director, the requirement for a quorum of two is waived. It is common for the Directors to appoint one of their members to be the chairperson. In some circumstances, if there is an equality of votes then the chairman will have the casting vote but you should again look carefully at your own company’s Model Articles because for some small companies this is simply impracticable and removed so that the chairman role is purely as a conductor of the meeting.

As noted above, as your company expands and the composition of Directors and shareholders changes, following the correct procedures and filing the right documents as a result become incredibly more important and failure to do so may lead to disgruntled shareholders, a fine by Companies House or criminal proceedings against you personally.

Money, Money, Money…

It is important to again check your Articles of Association or Model Articles for when you will be paid money. This is even more important if you are not taking a personal shareholding to receive dividends. Most Model Articles will state that directors are entitled to remuneration and other directors shall determine the level of this remuneration. Some companies will have a third party review this salary.

The Articles will usually state that as a Director you may be paid for out of pocket expenses incurred in attending meetings which are connected with the discharge of your duties. What constitutes an expense is variable depending on the meeting and your company policy. Most companies should have a clear guideline on this and will also follow the rules HMRC outline.

It is important to be aware that if a Director’s service contract provides for a guaranteed term of more than two years, you must obtain prior approval from the shareholders’ by passing a resolution. This is the case even when all the Directors constitute all the shareholders.

Buying Power

Formally known as Substantial Property Transactions, law prevents companies from transferring substantial assets not only from or to Directors of the company but also from or to a person who is a relative, friend or generally connected with one of the Directors.

Further to the above, shareholder approval is required where the Directors are approving a transaction where the value of the asset is more than £100,000 or 10% of the company’s net assets (by reference to the last set of company accounts). As an exception to this rule, you do not need approval for transactions that involve an asset valued at less than £5,000.

Trouble in Paradise

If you as a Director commit negligence, default, breach of duty or breach of trust, then the shareholders can actually ratify the breach by passing an ordinary resolution. This is because they are the owners of the company and can agree to waive the right to pursue you. Where you are in a small company, this is naturally a benefit.

However, be aware and note that if you are also a shareholder of the company you have inadvertently wronged, then any votes you cast in your own favour (as well as votes of your family or other ‘connected persons’) will be disregarded when calculating the required 50% unless everyone is unanimously agreed.

If you cannot obtain the ratification of your actions, your fellow Directors may pursue you in the Courts for your actions and the loss to the company. If they fail to do so, apart from potentially being in breach of their duty to the company itself, a shareholder may start an action against you on the company’s behalf. However, they require the Court’s permission and any damages are payable to the company and not the shareholder.

A Retirement or an Encore

Liability for decisions you have made will last your lifetime, even when you have left the company and are enjoying peaceful retirement. A company cannot exclude or exempt a Director from their liability for negligence, default, breach of duty or breach of trust in relation to the company and any such attempt to do will be considered null and void.

However, as an outgoing Director will always be wary of such a point arising, it is common for the company to purchase insurance for its Directors against any such liability attaching to them in connection with any such negligence, default, breach of duty or trust that may arise in the future and/or provide an indemnity within an agreed.

Exit Agreement. If you can persuade them to do both of these, you can go back to planning your relocation to a to the Seychelles in peace!

For more information contact us…

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