“I have been asked to be a director of a limited company. What do I need to know?”
Congratulations! Being asked to be a director of a limited company is a privilege and shows that the owners and other directors value your skills. They will do this if they think you are a responsible person and a strategic thinker. In effect, you are being asked to help “direct” the company’s affairs. This is in addition to your usual job at the company. You will more than likely be paid more and enjoy some tax perks. However, there is a catch! Or, more to the point, a much-increased responsibility you cannot avoid. Keep reading to find out more.
Responsibilities Of A Director
The Companies Act 2006 states that the directors of the company, whether they are paid more or not, have a fiduciary duty to act in the best interests of the company and its stakeholders. They should exercise reasonable care and skill, avoid conflicts of interest, and ensure that the company acts within the law. So, if the company breaks the law, i.e. unsafe working conditions, and an accident occurs, directors can be held responsible and face possible fines and prosecution.
In addition, directors have a statutory duty under the law to ensure the following:
- Filing annual accounts with Companies House.
- Submitting annual returns or confirmation statements.
- Reporting changes in company details, like directorship, share capital, or registered address.
- Ensuring the company pays Corporation Tax or informs HMRC if there’s no Corporation Tax.
Don’t just assume that these are the jobs of the MD or the Finance Director. If the company fails to meet these duties, you will find that letters from Companies House or HMRC may be sent to your home address. If this happens, then you must make sure that you raise it with the other relevant director. This action protects you if something goes wrong.
Directorial Decision-Making In Financial Crisis
Given the above, you can see why you need to be a responsible person! Remember that the responsibilities of being a director do not end there. When all is going well, and the company is making money, then being a director shouldn’t be a problem. However, if the company finds itself in financial difficulty, then the responsibilities of the directors change, and you could find yourself personally at risk.
If a company becomes insolvent, the directors must act in the best interests of the creditors – not the directors/shareholders or even the employees. In cases where the directors have not acted appropriately, they could be banned from being directors or even held personally liable for the company’s debts. The sort of actions that could lead to this are the following:
- Continued trading when the directors knew or should have known that there was no chance of the company being able to pay its debts and then allowed the situation to worsen. A classic example of this is taking deposits for work or products that you know cannot be delivered.
- Failing to keep proper records and defrauding creditors.
- Paying some creditors ahead of others because you desire them to be better off, i.e. paying off a family member.
- Selling or transferring the company’s assets at below-market value
- Deliberately putting a company into a liquidation procedure to avoid paying tax.
It should be noted that these last two points may be reversed, but this doesn’t normally mean harsh penalties for directors. Should you have to put your company into liquidation, for instance, seeking advice from experts, such as those at Company Rescue, could help you to make the best-informed decision on how to move forward.
Additional Responsibilities For Directors
In addition to their core duties and decision-making in financial crises, directors shoulder additional responsibilities critical to a company’s well-being and compliance. These added obligations encompass various facets of business operations, ensuring the company operates ethically, securely, and responsibly. Let’s delve into some of these crucial areas:
- Protection Of Confidential Information – Directors safeguard confidential information vital to the company’s operations and competitive advantage. Ensuring the secure handling, storage, and controlled access to this information is crucial to maintaining the company’s integrity and protecting it from potential breaches or unauthorised disclosures.
- Compliance With Data Protection – Directors must ensure the company complies with privacy laws and regulations. Non-compliance with data protection can lead to legal consequences and reputational damage for the company.
- Workplace Pension And Upholding Employment Rights – Directors must oversee the company’s workplace pension scheme, ensuring it meets legal requirements and provides employees with a secure retirement plan. Neglecting these responsibilities can lead to legal disputes and damage the company’s reputation.
- Adequate Insurance Coverage For The Company – Directors are crucial in assessing and securing appropriate insurance coverage to protect the company against various risks. Failing to secure adequate insurance coverage may leave the company vulnerable to financial losses in unexpected incidents, such as accidents, lawsuits, or property damage.
Understanding Language Differences Between CEOs and Directors
Of course, all these responsibilities can have a significant impact on a company. However, it is also crucial to remember the other factors that can influence your success as a director. One of these factors Is the terminology and language used in the United States and the United Kingdom. This can vary when it comes to corporate governance.
In the US, the term “CEO” or Chief Executive Officer is commonly used to refer to the top executive responsible for the overall management of a company. The CEO often holds a significant leadership role and may also serve as a director on the company’s board. In contrast, the UK tends to differentiate between directors and CEOs more explicitly.
A director in the UK context is seen as a board member with specific legal and fiduciary duties. At the same time, the CEO is typically the top executive responsible for day-to-day operations. Understanding these language differences is crucial for anyone navigating the corporate landscape in these two distinct but interconnected business environments.
The Bottom Line
Ultimately, don’t be deterred by all these responsibilities, as there are ways to ensure you are not at risk if things go wrong. This could make it your business to know what is happening in the company. To do this, you could ensure you attend all board meetings to stay informed about what is happening in the business. If you can’t attend, get meeting minutes or a summary from a fellow director.
Aside from staying informed, don’t be afraid of the owners of the business. If they are not directors but are exerting undue influence on the day-to-day decisions, then they are what are called shadow directors. This could mean that they could be seen as actual directors. They may not be aware of this fact.
Last, and certainly no means least, if you suspect your co-directors are breaching their fiduciary or statutory duties, speak up and ensure your objection is recorded. In extreme cases, then you should resign. If criminality is going on, then you must report it to the authorities. As a director, you are complicit if you don’t report wrongdoing.
In the end, if you feel the company is genuine and a good prospect, then go for it! It could be the start of an unforgettable career journey.