The essentials to know if you are about to become a limited company director for the first time :-
- there is a fundamental difference between directors and shareholders. The shareholders own the company, the directors run it. With many small companies the shareholders may also be the directors.
- the power and authority of the directors derive from a company’s articles of association, these are the rules that govern how the company operates and every company must have articles. There are a standard set called table A which most companies have but it is always worth considering whether these should be amended.
- there is no limit to the number of directorships allowed and it is quite common for some company directors to hold the position of director with numerous companies at the same time, but a director should be careful to avoid any conflicts of interest. See below on directors duties for more about this and a link through to the relevant legislation.
- directors can either be executive or non-executive. The difference here is that executives are employees of the company, non-executive directors are generally more distant from the day to day running of the company, providing objective oversight as consultants effectively. there is no requirement to have both executive and nonp0executive directors, most small companies will not have both. There is also no right, in law, to require payment for services as a company director, so if you are not a shareholder of a company and are invited to become a director, it will be normal to negotiate a fee for your services, either by way of employment contract or director service agreement.
- administration issues in terms of filing of accounts and annual returns for a company normally vest with the Company Secretary, but directors will be required to sign off oin the company’s formal accounts, so should be very careful to ensure their accuracy.
- company law now provides a set of directors duties which directors need to comply with. here is a link to a guide, but be aware they are generally still principles and if you are in doubt, you should obtain legal advice. Here is a link to the full Companies Act 2006 legislation.
- bankruptcy or unlawful behaviour as a company director can lead to being disqualified for a set period, so it’s important to take the role seriously.
- in some cases a director can even be personally liable to the company or it’s creditors. The main ways in which this can happen are :-
Wrongful Trading – continuing to trade or enter into contracts after the director or shadow director, knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation.
Fraudulent Trading – carrying on a business with the intention to defraud creditors or other fraudulent purpose. Sanctions can also include prison for up to 7 years.
Personal guarantees – Personal guarantees may have been given by directors to obtain credit for the company.
Misfeasance – This is a breach of fiduciary duties owed to the company as a director.
Preferences – favouring one creditor over another.
Transactions at an undervalue – transferring assets for significantly less than their market value.