Director’s Responsibilities and Liabilities
Successful business people often become company directors. But what duties and risks does it involve? John Wiblin, Partner in the Dispute Resolution team, answers the difficult questions that few people ask before accepting the role.
Is there any qualification or training required to become a company director?
Any adult can be a director as long as they have not been previously disqualified from holding the position or they are an undischarged bankrupt. The percentage of directors who have any formal business training is very small.
Does the law take account of the fact that most company directors have not training in their role?
Not at all. Judges hold directors to very high standards. One might say that there is a significant disjunct between the casual way in which most well-intentioned people take on the role and the serious approach the court’s take to director conduct.
Why do people become company directors?
In my experience, mainly because accountants tell them they should form a company and be its director! And that is generally good advice because having a company means that personal liability can be avoided in most cases. And there can be tax advantages. It is not the accountant’s fault that the role comes without any training in how to conduct a board meeting and so on.
Where do company directors commonly get into trouble unwittingly?
Minority shareholders may complain that the director is not acting in the interests of all shareholders and point to failures to comply with company rules that the minority say has caused them to lose out. And, if it becomes apparent that the company may not be able to pay its debts, the director’s conduct at that point may be placed under a magnifying glass by a liquidator and a court if the company is wound-up.
Is there any danger you would particularly alert directors to?
Company law requires a director’s personal effort and involvement in the business and the application of their independent judgment to decisions. But in the real world roles tend to be assigned to specific people. When someone has not been pulling their weight for some time or, worse, has done something improper the other directors may be asked to explain why they did not know about it. It can be an uncomfortable position to be in after a company has failed and a liquidator is asking these questions.
Do you have any concluding thoughts?
Being a director can be rewarding but it can also be challenging when you are new to the role. A mentor in the form of a more experienced director in a similar industry can be helpful, and a junior director will come to rely on their accountant and commercial solicitor. It cannot do any harm to have a quick look at chapter 2 of the Companies Act 2006. An internet search engine will turn it up readily. The list of duties of a company director can be found there.
Here to Help
The role of a director is a serious one. Many rules apply, there is the possibility of personal liability, much responsibility, and accepting the role is a decision not to be taken lightly.
From the moment you become a director there are legal obligations placed upon you. So, it is essential for all young directors and seasoned professionals to understand the duties of a director and what you can and cannot do.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
This article was originally written for Inspire Magazine September 2023.
NLA article not to be reproduced.