Director’s Responsibilities – are you sure what they are?
Being a Director can be exciting or daunting, but the position comes with legal responsibilities that you MUST be aware of. Are you clear on them and the way they apply to you?
Watch this to find out what you’re REALLY responsible for!
Hi and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and to help your business grow.
When you set up a business, you have to decide what format you want that business to be. So it could be a sole trader, it could be a limited company, it could be a limited liability partnership.
For the last two, there are significant responsibilities that a director needs to realise that they have responsibility for when they become a director of that business.
So it can be quite daunting but you really must be aware of them, they’re decided and designated by the Companies Act 2006. If you want to know more detail than I’m about to give you in this episode, you can go off and have a look at the Companies House website and just type in director’s responsibilities and that will give you a whole load of additional information.
The primary thing to think about is the type of information that you need to make sure that you give to Companies House. And that is the primary responsibility.
So that’s things like:
- the confirmation statement on an annual basis
- your annual accounts
- updates to any changes in officers or their personal details that might crop up
- changes to the Registered Office
- changes to the share allocation or who’s got how many shares
- the registration of any charges like mortgages that the company may take out
- the details of people with significant control in the business
The good news is that if you’re a client of ours than we take care of most of that information on your behalf as long as you give us the right information because there are some things in there that we don’t know about without you telling us.
Moving on from those things there are seven other different considerations and different responsibilities that the directors have to the business, and you remain legally responsible for all of these and the submission of all of the information I’ve already mentioned.
So, the first one is that you must follow the company’s constitution.
This lays out the rules of the company, and these are outlined in the Memorandum and Article of Association. These are approved by the directors and the members in advance of the company being formed and the Company Secretary. So you need to make sure that you know what’s in those and you know how to act in accordance with those rules.
Secondly, you must act at all times to promote the success of the company.
So this is things like making sure that you think about the long-term implications of your decisions on the company. You need to think about the interests of the employees and you need to support the relationship between the company, with suppliers and customers and make sure that you’re enhancing those and certainly not doing them any disservice. You need to think about the impact of the company’s operation in terms of the environment and your local and wider community, and you need to maintain the company’s reputation too because that’s obviously very important, personally, but also from a company perspective.
You also need to make sure that you’re seen to act fairly in all of your dealings. So that could be with the aforementioned suppliers and customers, it could be someone in the community. Lots of different implications.
If the company becomes insolvent you have a responsibility to act then not for the good of the company but for the good of your creditors, i.e. the people to whom the company owes money.
You have to make sure that thirdly, you operate with independent judgement.
Now as a director, it can be a really lonely place to be. So you might want to seek advice from various people around you, trusted advisors, so it could be your accountant, it could be a bank manager, it could be friends, colleagues, other people you meet that are in similar positions or mentors, that sort of thing. Regardless of what those people say, you have to act using your own judgement. So whatever decision you take it will be deemed that that was your decision. And one of the things with all of these responsibilities is that it doesn’t matter whether you’re an active working director, whether you’ve been formally appointed or not. If you are a director of a company, you are deemed to be responsible. So it is deemed and understood that it’s independent decision-making that you have used to make those decisions.
You have to exercise reasonable skill and diligence.
This one actually is a bit of double-edged sword because the more able you are deemed to be, the higher the standard of your actions will be expected. So for example, if you’re a qualified accountant, more will be expected of you than if you left school with no qualifications and have never operated in this industry or been a director in the past. So it’s just being aware that the more competent you are deemed to be and seen then the more will be expected of you.
You have to avoid conflicts of interest.
You need to make sure that if there is anything that presents itself in the day-to-day running of the business, that you become aware of that puts you personally in a difficult position, you need to make sure that your co-directors and the members are made aware of that. So for example, if there’s a case of divided loyalty so say a family member is going to benefit if the company wins a particular contract, you have to make sure that you make that known that there could be a conflict of interest there. You need to make sure that you check the Articles of Association for how to react in those situations and what decisions need to be made. and it also continues to apply if you cease to be a director, so you can’t use information that you knew when you were inside the company to make decisions now that you’re outside.
You need to be aware of third-party benefits.
You can’t technically accept benefits offered to you by third parties, because that could be deemed to be bribery. The company however, to be realistic, it’s possible within the Articles of Association that it will accept the fact that reasonable hospitality is accepted; a bottle of wine at Christmas is acceptable, those sorts of things, but do make sure that you check, particularly given the time of year we’re entering into now.
The seventh point is interests in a transaction.
So you must declare the situation I mentioned before where there could be a potential conflict of interest if there’s a family member’s own business who might be seen to benefit from a company contract or any other interests in a particular transaction going through the company. You need to make sure that everyone within the company is aware of that and that that’s handled in line with the Articles of Association.
You need to also make sure that there is no misuse of company property and make sure that you apply confidentiality to the company affairs so that you’re not talking about things that could be sensitive just to benefit other people that might be in your circle and not necessarily in those of the company.
In the past, directors have come to us that are blissfully ignorant of those responsibilities. It can be seen as a really nice promotion to become a director if you’ve been within a business for a long time. And similarly people have decided to set up as a limited company without really being aware of those responsibilities. So please make sure that you are aware of those.
As I say, you can look into them in more depth on the Companies House website and you can see all of the different implications from the Companies Act 2006.
If you want to give us a call and chat about anything that you might be concerned about, then obviously, as ever, please do get in touch.
Otherwise, I’ll see you very soon.