To be a responsible director is easier said than done. This is a position that only a few can handle accordingly since it’s not just simply utilizing all your skills while honestly carrying out directives to accomplish company goals. A competitive director should be fully aware of his responsibilities and legal obligations. If it’s proven that he is not qualified for the position based on his performance within a reasonable period of time, the director will have to face civil or criminal liabilities and be ousted from office.
Such strict rule guarantees that companies will promote excellent management standards. But then again, despite its good aim to hold back incompetent directors, it brought upon an increased burden of responsibility on all directors regardless how simple their business structure is or where it originated. There are numerous legislations which gave way to this situation which include the Company Director’s Disqualification Act of 1986, the Insolvency Act 1986, the Companies Act 2006, the Value Added Tax Act 1994 with its VAT penalties, the Enterprise Act of 2002, the Data Protection Ac 1998, Environmental legislation, and the Financial Services legislation. Every director should be reminded that these laws apply regardless if their designation is full or part-time, executive or non-executive. A responsible director must also make sure that he gains access to every bit of information needed to fulfil his duties. Moreover, he should be aware of co-director’s responsibilities and check whether they are doing their tasks.
Being assigned as a company director is much more challenging than majority of us believe so this booklet aims to inform the reader about various obligations and responsibilities tide to this position. After reading through this guide, it’s expected that a director will gain more knowledge about various strategies on how he can safeguard himself from probable personal liabilities and impending disqualification.
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What is a company?
The establishment of a company requires a group of persons bonded by a legal agreement known as memorandum of association. They will be referred as subscribers to the Memorandum and turn out to be the company’s pioneering members. Nevertheless, a company whether it’s private or public can be formed by a single person as what is stated in the Companies Act 2006 (the”2006 Act”).
A company is either public or private. The first type greatly differs from the latter it is subjected a couple of legal requirements which are unneeded if we talk about private companies. A public and private company also differs on the extremity and marketing influence of their share capital. Several countries today such as England are home to hundreds of well-established companies formed through limited shares from its members which are called shareholders.
Furthermore, a company can be bound to limitations or not in terms of liability. To finalize the legality as a certain company is created, constitutional documents which compose articles of association (“Articles”) and other declarations that are in relation to these Articles are formulated accordingly aside from the initial Memorandum of the Company.
The directors are often granted with the power to decide regarding crucial changes and decisions in a business despite the fact that companies are considered as separate legal entities. They are accountable to the members who basically own the company. Members are not obliged to have involvement with a company’s debt if has a limited structure. They only need to pay an amount in relation to the shares they hold or guarantee given the company is limited through guarantee. The case is different if the company is not limited since such business scheme requires its members to share all the liabilities.
What are Public Limited Companies?
Public limited companies (“PLC”) are amassing nowadays since most people believe that such kind of business structure is more prominent and effective. For one to be considered as a share holder of a PLC, he needs to invest at least $50,000. If the PLC ends up bankrupt or as instructed by the directors, shareholders are required to pay $37,500 or an amount in proportion to their respective investment. The recent constitution update namely the 2006 Act eliminated the rule which insisted that companies should have an authorised share capital. For companies built prior the regulation as applied, the act limits the amount of shares which can be issued to a member. Nevertheless, a company can decide to remove such rule in its Articles through an ordinary resolution.
PLCSs including private companies which involve marketed shares over the last ten years need to comply with the City Code on Takeovers and Mergers. If a company ends up missing in the list, it has the option to obtain a waiver from the Code’s requirements and solve the problem. In any case, any type of company can’t offer their share to the public without going through strict regulations and distributing brochures and pamphlets contacting facts that describe what every interested shareholder needs to know regarding the company.
Bounds of a Director’s Powers and Responsibilities
Directors do not only shoulder the responsibility of monitoring daily company activities but are the ones commissioned to make important policy decisions. A bill from the Articles or a special resolution from the company’s members can either limit or widen a director’s duties any time. Despite their clear influence in the operation of a company, directors are not liable for any debt unless they did something out of their assigned duties and powers which brought upon serious loses to the company. If ever one of the company’s members was given the opportunity to become a director, the responsibilities, duties, and liabilities he acquired out of the position won’t be affected or limited.
The primary role of a director is to manage a business for the members. They are also considered as trustees of the company’s assets giving them enough power to unite the company and make it work as a system which enjoys steady development in every business aspect. In a PLC, the directors are also responsible in assigning a competent company secretary who will be in-charge in carrying our various statutory responsibilities. This is a different case for private companies since such kind of requirement is optional for them. PLCs must also have at least two directors while a private company can be established even with just one. Regardless what type of business structure a company follows, it must have one natural person as a director. Although directors are treated as officers of the company, there’s no rule which states that they should be employees. There are a few cases where individuals who shoulder another position in the company are assigned as directors at the same time. This is where the difference between executive and non-executive directors comes in. The first are employees while the latter are not.
Appointment and Removal
Who is qualified to be a director?
There is no particular rule which strictly introduces qualifications that one should bear before being appointed as a director. A director does not even need to be an individual since a company or one of its departments can act as one. Yet there are some professional qualifications are still applicable in this situation. The following rules must also be considered:
- Unless permitted by court, a broke individual can’t be a director
- anyone ineligible with regards to the Company Director’s Disqualification Act 1986
- the company’s auditor
- individuals aged 15 years and below
The Appointment Process
There are two ways for the first directors to be appointed. The first is by naming them in the Articles while the other is through the involvement of the company members. If the company concludes that they need more directors, future appointments are done via meetings with company members while following every directive stated in the company’s Articles. Given they act in accordance to the company’s Articles, directors can fill casual vacancies or even appoint new directors. However, such an arrangement is only valid before the general meeting where a formal re-election is performed by the members. Before a new director can function, his name must first be listed on a ‘notice of appointment’ signed by the director concerned and the company secretary or an active director, and is filed at Companies House. An amendment on the 2006 Act states that a service address must integrated on the company’s directors list. On the other hand, a separate register prohibited from public view stores the residential address details of company directors.
Retirement and removal
Here is a list of probable circumstances where a director can vacate his position:
- by filing a formal resignation
- on death
- when the company decides to disband
- through retirement, given his case fits the rules governing retirement included in the Articles; in some cases, the company Articles insist that a third of the total number of directors can retire during the company’s annual general meeting and be re-elected if they are interested
- if stated in the company’s Articles
- out of disqualification; a director can only be disqualified to keep his position through a disqualification order from a court of law under the Company Directors’ Disqualification Act 1986 or if entries in the Act regarding automatic disqualification are applicable
- a director can be removed from office via an ordinary resolution brought upon by a simple majority; however the director doomed to dismissal must be given prior notice 28 days before despite what is stated in the Articles and the company’s contract between the director involved; the director also has the right to write each member and speak during meetings to clear his name or make clarification; if ever the dismissal process proceeds, he still retains the right to file legal complains if ever the company breached any of the terms stated in his service contract
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Directors in a group are regarded as Board of Directors (‘the Board’). There are a few cases where the Board can take action on behalf of the company but the company Articles commonly distribute specific powers among directors or to a team of directors. It won’t matter whether the director is executive or non-executive since he will still carry out the basic duties and responsibilities include in the position.
In most cases, the only requirement for one to be an executive director of a company is to work full time on their management sector. You must also establish a formal service contract with the company to be qualified for this kind of position.
Non-executive Directors are often seen on larger companies where individuals with expertise in specific fields are need. They usually work part-time and are only called to provide an objective view to the board in formulating effective business strategies.
The chairman is a member of the Board of directors elected by the majority to preside meetings whenever he is present. In several cases, he is also tasked to be involved at meetings with the company’s shareholders.
The Managing Director’s main responsibility is to make sure that the strategy formulated by the company is well implemented. Usually, the Board is responsible in appointing one of them to take this position or as stated in the company’s Articles.
During impermanent period of absence, an Alternate Director can be appointed by a director to take his place. However, this is only possible upon the authorization of the company’s Articles.
The basic duties of a nominee director are basically identical with other directors. The only thing that made a nominee director unique is his responsibility to represent the opinion of someone significant in the company like the company’s banker or a big-time shareholder.
Some situations require managers to be given limited power to further encourage unity in a company. These managers are misleadingly described as divisional directors or associates. Such misunderstanding should be avoided as much as possible since the Board is strictly for directors. Before everything gets out of hand and third parties assume that these managers are member of the Board, abrupt legal actions should be implemented.
An individual or company who is not a member of the Board yet is a source of directions and instructions directors are used to perform are referred to a shadow director. This definition s often misunderstood as some consider accountants and lawyers who provide professional advice to directors as shadow directors. We should be reminded that they do not pass the criteria since their advices are acted upon and not accustomed. Like usual directors, shadow directors are also subjected to most statutory provisions.
People who are connected with a director are also affected by the company law. The director’s wife, children, and other companies he has a relation with, a partner of the director, wife, child or associated company, and trustees of a trust where the director, wife, child or associated company is a beneficiary are all included. Despite having no background about the duties of a director these individuals or companies still belong to the scope of specific restrictions on directors in relation to transactions with the company. The director’s civil partner, the director’s parents, children and step-children 18 years old and above were added in the definition by the 2006 Act.
A must watch for soon-to-be Directors!
The 2006 Act overhauled the case law stating that directors are required to carry out both general and fiduciary duties for the company. It brought upon a set of statutory regime for directors’ duties as a replacement. Despite the changes, the Act insisted that the new general duties in the statute should be understood and implemented in the same manner with equitable principles and law rules. Here are the seven statutory duties of directors described in the 2006 Act:
Duty to act within powers
A director should properly exercise the powers his position entails as stated in the company’s constitution and for their proper purpose. This duty replaced the common law principle requiring directors to follow directives from the company’s Memorandum and Articles. Moreover, the director’s motivation and the previous case law play vital roles as the proper purposes of his duties are identified since the 2006 Act does not set any standard regarding this matter.
Duty to promote the success of the company
This duty replaced the previous fiduciary duty which obliged directors to act in the company’s best interest. Unlike the law that precedes it, this is more firm in assuring that directors will come up with effective ways for company members as a whole to gain more benefits. The statute even included a set of factors for this purpose which includes:
- The possible long term effects of a director’s decision
- The welfare of employees working for the company
- How the director’s actions can help cultivate the company’s important business relationships particularly towards customers and suppliers
- The environmental effects of the company’s actions and the various changes it can bring upon the surrounding communities
- The company’s interest to preserve its name known for high standards of business conduct
- The call for fair treatment among members of the company
The mentioned list does not completely include all the aspects directors should consider while making decision so most companies also express purposes in their Articles that directors can refer to as well. But then again, it’s imperative that these six factors should be pondered upon before the Board comes up with any conclusion. To be certain about this, the deliberation of these factors must be clearly stated in Board minutes.
Duty to exercise independent judgement
While pondering about crucial decisions that can greatly affect the company’s welfare, a director must do it on his own and avoid the influence of an outside party.
Duty to use reasonable care, skill and diligence
This duty basically encourages directors to act based on what is expected out of them as diligent person who has all the experience and general skill in performing all the functions of a director. The 2006 Act also clearly states that any skill and experience the director has that are not included in the qualifications needed for him to be qualified in the position should be used given it can promote the overall welfare of the company.
To simplify, a director is expected to perform well in the first test regarding his skill and care. However the standards will be lifted if ever he ends up having a higher subjective knowledge than usual.
Duty to avoid conflicts of interest
This duty is the replacement of a previous rule which describes that a director must keep away from conflicts between his duties to the company and his personal goals and objectives or responsibilities for other companies or individuals outside the company. The new statute is less demanding compared to the previous since it allows independent members of the Board to vote and allow a director to deliver an interest which may collide with one that the company currently has. Nevertheless, such action needs to be written into the articles and approved by shareholders.
Duty not to accept benefits from third parties
A director should never use his powers for personal gain. He must not accept anything from a third party awarded because of his position, his actions which compliments to their goals, or not doing anything to preserve the company’s welfare.
Nonetheless, an addition or amendment in the company’s Articles can be made to allow directors to accept benefits limited to a certain degree so they can’t be accused of breaching their duties just because of showing corporate hospitality and following good business conducts.
Duty to declare an interest in a proposed transaction or arrangement with the company
Upon the involvement of a transaction where the company’s interest is directly affected, the director is required to obtain the company’s approval beforehand as stated in the 2006 Act. The nature and bounds of the concern and whether it indirectly or directly affects the company should be shared among directors prior to the company’s full participation.
Only the company has the right to enforce the director’s duties described in the 2006 Act. However, there are a few cases where shareholders can do such task for the company. They also have the right to seek for legal advice and submit complains to the court if they notice that certain company relationships are unfair to some or all of its members.
Although the rights of creditors is not among the list of factors that directors should ponder about while discussing matters in promoting the company’s success, there is a certain condition which states that the interest of creditors must be taken into account if the company is bankrupt or close to bankruptcy. The terms found in the Insolvency Act 1986 must also be deliberated in this given situation.
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