Directors Duties [2024 Guide]

1. Overview of director duties?

Directors play a crucial role in managing and operating a company, ensuring its success and compliance with its legal obligations.

The Companies Act 2006 outlines directors’ duties primarily in Sections 170-181, encompassing various obligations to safeguard the company’s interests and those of its stakeholders. Key duties include

• acting within their powers as defined in the company’s constitution (CA 2006, Section 171),
• promoting the company’s success for the benefit of its members (CA 2006, Section 172), and
• exercising independent judgment (CA 2006, Section 173).

These duties apply equally to shadow directors and de facto directors, ensuring all individuals influencing the company adhere to the same standards.

Directors must also be vigilant about maintaining the company’s financial health and operational integrity. In the UK, there are approximately 5.6 million private sector businesses, with 1.4 million having employees and 4.1 million being non-employing businesses. This large number of companies underscores the critical nature of directors’ roles in ensuring sustainable business practices and long-term success.

Our lawyers at Francis Wilks & Jones, our director services experts are well-versed in guiding directors through the intricacies of these duties, providing tailored advice to safeguard their interests and those of the company.

2. To act within their powers (CA 2006, Section 171)

Directors must act in accordance with the company’s constitution and exercise their powers only for the purposes conferred. The company’s constitution includes its articles of association and resolutions of shareholders. Directors must familiarise themselves with these documents to ensure they act within legal boundaries.

Actions taken outside these powers, known as ultra vires acts, can lead to personal liability and invalidate those actions. This duty ensures directors do not misuse their authority, preserving the company’s integrity and governance structure.

Our legal experts at Francis Wilks & Jones can provide comprehensive reviews of key company documents, helping directors understand and adhere to their specific powers and limitations.

Understanding the company’s constitution is fundamental for directors to avoid overstepping their legal boundaries.

• The articles of association, which outline the company’s rules and regulations, and shareholder resolutions, which capture decisions made by the shareholders, are critical documents.
• Directors should regularly review these documents and seek clarification where needed to ensure they fully understand their obligations as directors and prevent any inadvertent breaches that could lead to significant legal and financial repercussions.

3. Promote the success of the company (CA 2006, Section 172)

Directors must act in a way they believe, in good faith, would most likely promote the success of the company for the benefit of its members as a whole. This involves

• considering the long-term consequences of their decisions,
• the interests of employees,
• the need to foster business relationships with suppliers and customers,
• the impact of operations on the community and environment,
• maintaining high standards of business conduct, and
• acting fairly between members.

This duty applies to all directors’ actions, not just those taken at board meetings. In the UK, there were approximately 5.6 million private sector businesses at the start of 2023, highlighting the significant number of entities directors are responsible for managing and guiding towards success.

Promoting the success of the company requires directors to balance various competing interests and make informed decisions that drive the company forward. This includes fostering positive relationships with key stakeholders, such as employees, customers, suppliers, and the community.

Expert guidance from our director services experts at Francis Wilks & Jones can help directors navigate these complex considerations and ensure directors fulfil their duty to promote the company’s success effectively.

4. Exercise independent judgment (CA 2006, Section 173)

Directors are required to exercise independent judgment, making decisions based on their own assessment rather than being unduly influenced by others. While directors can seek advice from experts, the final decision must reflect their own.

• This duty is crucial for maintaining the directors’ accountability and ensuring decisions are made in the company’s best interests.
• Independent judgment helps directors remain objective and avoid conflicts of interest that could compromise the company’s integrity.

Maintaining independent judgment is essential, especially in complex decision-making scenarios where external pressures might be significant. Directors must be able to assess situations critically and make decisions that align with the company’s strategic goals. Recording how decisions were reached is also vital in the event of future problems.

At Francis Wilks & Jones, our our director services legal experts can provide directors with the necessary tools and advice to uphold this duty, ensuring their decisions are both legally sound and strategically beneficial.

5. Exercise reasonable care, skill, and diligence (CA 2006, Section 174)

Directors must exercise the care, skill, and diligence that would be expected of a reasonably diligent person with both the general knowledge, skill, and experience that may reasonably be expected of someone carrying out the director’s functions and the actual knowledge, skill, and experience the director has.

• This objective and subjective standard ensures directors are held to a high level of accountability, reflecting both general expectations and their personal expertise.
• With over 1.4 million businesses employing staff and many more operating with non-employing owners, the need for diligent and skilled directorship across England & Wales is evident.

To meet this duty, directors should continually enhance their knowledge and skills relevant to their role. This can involve ongoing professional development and seeking advice from industry experts. Francis Wilks & Jones offers tailored advice to help directors meet these high standards, ensuring they are well-equipped to lead their companies effectively and responsibly.

6. Avoid conflicts of interest (CA 2006, Section 175)

Directors must avoid situations where they have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

• This applies particularly to the exploitation of any property, information, or opportunity.
• Directors must disclose any potential conflicts to the board, which may authorise the conflict in accordance with the company’s constitution, provided the conflicted director does not participate in the decision.

Managing conflicts of interest is critical for maintaining trust and integrity within the company. Directors should be vigilant in identifying potential conflicts and proactive in addressing them transparently.

At Francis Wilks & Jones, our legal experts can assist directors in establishing robust conflict-of-interest policies and procedures, ensuring that any issues are managed appropriately and in compliance with legal requirements.

7. Not accept benefits from third parties (CA 2006, Section 176)

Directors must not accept any benefit from a third party conferred by reason of their being a director or doing (or not doing) anything as a director.

• This duty is intended to prevent bribery and ensure directors remain unbiased and act solely in the company’s interests.
• Exceptions may apply where acceptance of such benefits cannot reasonably be regarded as likely to give rise to a conflict of interest.

Maintaining impartiality and avoiding undue influence from third parties is essential for ethical governance. Directors should implement strict policies to manage gifts and hospitality, ensuring compliance with anti-bribery laws.

8. Declare interest in proposed transactions or arrangements (CA 2006, Section 177)

Directors must declare any direct or indirect interest in proposed transactions or arrangements with the company.

• This declaration must be made to the other directors before the company enters into the transaction or arrangement.
• This duty ensures transparency and allows the board to consider any potential conflicts before proceeding.
• Transparency in business dealings fosters trust and accountability within the company.

Properly declaring interests in transactions helps prevent conflicts and ensures that all decisions are made with full knowledge of any potential biases. Directors should document these declarations meticulously to maintain a clear record of compliance.

The director services experts Francis Wilks & Jones can assist directors in establishing effective procedures for declaring interests and ensuring that these declarations are managed appropriately and transparently.

The role of a director is multifaceted and extends beyond mere oversight of day-to-day operations.

Directors are responsible for

• setting the company’s strategic direction,
• making high-stakes business decisions, and
• ensuring compliance with legal and regulatory requirements.

This includes safeguarding the company’s assets, ensuring financial stability, and protecting the interests of shareholders and other stakeholders.

Directors must balance immediate operational needs with long-term strategic goals, which requires a deep understanding of the company’s industry and market dynamics. Their decisions can significantly impact the company’s trajectory, making their role both critical and challenging. And they also impact on a wider economic level given that the number of SMEs in the UK increased by 1.1 million (24%) since 2010. Directors play a vital role in sustaining this growth.

Engaging with our team of legal experts can provide directors with the necessary insights and guidance to support their strategic roles and responsibilities.

Directors bear a wide array of responsibilities fundamental to the governance and success of a company.

These include

• ensuring the company’s financial health by maintaining accurate accounting records (CA 2006, Section 386) and
• preparing annual reports and accounts (CA 2006, Section 394).

Directors must also

• manage risks,
• ensure the company adheres to health and safety regulations, and
• oversee the corporate governance framework.
• follow the company’s rules as outlined in its articles of association,
• report changes, and keep company records
• file accounts and the Company Tax Return as well as informing shareholders if they might personally benefit from a company transaction, and paying Corporation Tax.

Consulting with Francis Wilks & Jones can provide directors with the legal expertise needed to fulfil these responsibilities efficiently, reducing the risk of legal issues and ensuring compliance.

Fiduciary duties are a core aspect of a director’s responsibilities, requiring them to act in the best interests of the company and its shareholders. This includes duties such as loyalty, good faith, and the duty to avoid conflicts of interest (CA 2006, Section 175).

• Directors must prioritise the company’s interests over their own, ensuring that all decisions and actions benefit the company as a whole.
• This duty also extends to the interests of connected persons, ensuring no indirect conflicts.

Many organisations, including the ICAEW in their guide to director responsibilities emphasise that directors must also be aware of the consequences of not adhering to these duties, such as personal liability and potential disqualification.

For more detailed information on fiduciary duties, you can refer to our brilliant fiduciary duties explained guide setting out more detail on the subject . Understanding and adhering to these duties is crucial, and seeking legal advice can help directors navigate these obligations effectively.

The Companies Act 2006 outlines seven general duties of a director, which form the backbone of a director’s responsibilities. These duties are:

1) to act within powers as defined by the company’s constitution (CA 2006, Section 171),

2) to promote the success of the company for the benefit of its members (CA 2006, Section 172),

3) to exercise independent judgment (CA 2006, Section 173),

4) to exercise reasonable care, skill, and diligence (CA 2006, Section 174),

5) to avoid conflicts of interest (CA 2006, Section 175),

6) to not accept benefits from third parties (CA 2006, Section 176), and

7) to declare any interest in proposed transactions or arrangements (CA 2006, Section 177).

Each duty is designed to ensure that directors act responsibly and in the best interests of the company. Understanding these duties and how to fulfil them is essential for directors to perform their roles effectively and avoid legal pitfalls.

Our friendly lawyers can provide the necessary guidance to ensure directors meet these duties and protect both their personal and the company’s interests.

Directors face numerous risks that can impact their professional and personal lives.

These risks include

• personal liability for company debts,
• regulatory fines,
• disqualification from serving as a director,
• reputational damage,
• conflicts of interest,
• breaches of fiduciary duties,
• insolvency issues,
• cybersecurity threats, and
• non-compliance with health and safety regulations.

With around 5.6 million private sector businesses in the UK, the role of directors is under constant scrutiny to ensure compliance and proper governance.

One thing directors can do to help mitigate risk is to consider insurance. For example, the IoD highlights the importance of Directors’ and officers Liability Insurance as essential protection against personal liability for business losses.

All these challenges highlight the importance of proactive risk management and legal compliance. Engaging with legal experts can help directors identify and mitigate these risks, ensuring they can perform their duties confidently and effectively. By seeking expert advice from our team at Francis Wilks & Jones, directors can navigate the complexities of their roles, protect their interests, and contribute to the company’s success.

Examples of poor conduct by directors include

• the misappropriation of company assets,
• failure to act in the company’s best interests,
• neglecting to declare conflicts of interest
• fraudulent trading,
• breaches of health and safety regulations, and
• non-compliance with environmental laws.

There are plenty more examples of behaviour which drops below the standard of conduct required, and our team is here to advise you on this. Get it wrong and the implications can be serious and lead to severe legal consequences, including fines, director disqualification, and even imprisonment.

Directors must adhere to high standards of conduct to maintain the trust of shareholders and other stakeholders. Given that half of the companies on the UK register are aged under five years, maintaining good conduct is also crucial for the stability and growth of newer businesses.

To avoid these pitfalls, directors can seek guidance from our friendly team of legal experts who can provide the necessary advice and support to maintain compliance and uphold your company’s reputation. Engaging with our experienced lawyers helps directors understand their duties and avoid actions that could lead to further legal repercussions.

As a director, you are legally responsible for ensuring that key information is sent to Companies House on time. This includes

• filing the confirmation statement,
• annual accounts (even if the company is dormant) and
• notifying any changes in the company’s officers or their personal details.

Additionally, directors must report changes to the company’s registered office address, allotment of shares, registration of any charges (such as mortgages), and any changes in people with significant control (PSCs) or their personal details.

• Confirmation Statement. This document confirms that the company information held by Companies House is up to date. There is more free information about filing your confirmation statement with Companies House which is available to the public.
• Annual Accounts. Directors must prepare and file annual accounts, which provide an overview of the company’s financial performance over the financial year. Companies House also has a useful section on filing your company annual accounts – where you can read more about this.
• Changes in Officers. Any appointment, resignation, or change in the details of directors or company secretaries must be reported. You can read more about this on the “update director or company secretary details” on Companies House.
• Registered Office Address. Any change in the registered office address of the company must be promptly updated. Again, on Companies House there is a useful section on limited company formation and company addresses.
• Allotment of Shares. Any issuance of new shares must be recorded and filed. This is done on a return of allotment of shares SH01 form.
• Registration of Charges. You must register a charge or mortgage for a company.
• People with Significant Control (PSCs). This is a very hot topic, registering people with significant control. Changes in PSCs or their details must be reported to ensure transparency of ownership and control.

These filings are crucial for legal compliance and transparency. Failure to meet these obligations can lead to penalties and legal consequences. Ensuring timely and accurate filings with Companies House is an essential part of a director’s duties, and seeking assistance from legal experts can help manage these responsibilities effectively.

1. How do directors ensure they are acting within their powers?

Directors ensure they act within their powers by thoroughly understanding and adhering to the company’s constitution, including the articles of association and any shareholder resolutions. Regular consultation with legal advisors and continuous education on corporate governance can also help directors stay within their legal boundaries.

2. What steps can directors take to promote the success of the company?

Directors can promote the success of the company by making decisions that benefit the company’s long-term growth, considering stakeholder interests, fostering strong relationships with employees, customers, and suppliers, and maintaining high ethical standards. Strategic planning and regular performance reviews are also essential.

3. How can directors effectively exercise independent judgment?

Directors can exercise independent judgment by

• critically evaluating all available information,
• seeking diverse perspectives,
• avoiding undue influence from other board members or external parties, and
• basing their decisions on the best interests of the company.

Regular training on decision-making processes and ethical standards can support this practice.

4. What are the common pitfalls that directors should avoid to ensure compliance with their duties?

Common pitfalls include

• conflicts of interest,
• failure to adequately disclose personal interests,
• neglecting to keep updated with legal and regulatory changes, and
• making decisions without sufficient information or due diligence.

Directors should avoid these by adhering to robust governance practices and seeking continuous professional development.

Directors’ duties are primarily governed by the Companies Act 2006, which provides a comprehensive framework outlining the responsibilities and obligations of company directors. Sections 170-181 of the Act specifically codify directors’ duties, ensuring that directors act in the best interests of the company and its stakeholders.

These duties encompass

• acting within their powers (CA 2006, Section 171),
• promoting the success of the company (CA 2006, Section 172),
• exercising independent judgment (CA 2006, Section 173
• the duty to exercise reasonable care, skill, and diligence (CA 2006, Section 174), and
• to avoid conflicts of interest (CA 2006, Section 175).

In addition to the Companies Act, directors must also comply with various other laws and regulations, such as the Insolvency Act 1986.

These laws collectively ensure that directors manage their companies responsibly and ethically.

At Francis Wilks & Jones, our director services team can provide guidance on navigating this complex legal landscape, ensuring directors fulfil their statutory obligations effectively.

Directors’ duties are enforced through various mechanisms, including internal company procedures, shareholder actions, and regulatory oversight.

• Internally, companies can establish governance frameworks and policies to monitor and ensure directors adhere to their duties.
• Shareholders play a crucial role by holding directors accountable through voting rights and, in some cases, bringing derivative claims on behalf of the company if directors breach their duties.

Regulatory bodies such as the Financial Conduct Authority (FCA) and the Insolvency Service also have the authority to investigate and take action against directors who fail to comply with their duties.

• For instance, the Insolvency Service can initiate disqualification proceedings under the Company Directors Disqualification Act 1986 against directors deemed unfit to manage a company. For more information on this, visit our free Company Directors Disqualification Act 1986 Guide.
• Penalties for breaches can include fines, personal liability for company debts, and disqualification from holding directorships.

Our experienced lawyers at Francis Wilks & Jones can assist directors in understanding and mitigating these risks, providing expert advice on compliance and best practices.

The penalties for breaching directors’ duties can be severe and varied, depending on the nature and extent of the breach. They include

• financial penalties,
• personal liability for company debts, and
• disqualification from serving as a director.

Under the Insolvency Act 1986, directors can be held personally liable for wrongful trading if they continue to trade while knowing the company is insolvent. This can lead to significant personal financial loss.

Our excellent guide on Defending Liquidator Claims deals with the types of claims a director can face if the company goes in to liquidation.

Additionally,

• breaches of the Companies Act 2006 can result in fines and criminal charges, particularly in cases involving fraudulent activities or serious misconduct.
• The Health and Safety at Work etc. Act 1974 also holds directors personally liable for health and safety breaches that result in workplace injuries or fatalities.

The potential for these severe penalties underscores the importance of directors understanding their duties and seeking expert legal advice to ensure compliance.

Francis Wilks & Jones can provide comprehensive support to directors facing allegations of misconduct, helping to navigate the legal challenges and minimise potential repercussions.

Directors comply with their statutory duties by adhering to the legal requirements set out in the Companies Act 2006 and other relevant legislation. This involves

• understanding and following the company’s constitution,
• maintaining accurate records, and
• ensuring transparent decision-making processes.

Regular board meetings, thorough documentation of decisions, and clear communication with shareholders are essential practices for compliance.

Additionally, directors should seek continuous education on legal and regulatory changes that affect their responsibilities.

Engaging with legal professionals, such as our at Francis Wilks & Jones, can provide directors with the necessary insights and guidance to meet their statutory obligations effectively. Implementing robust corporate governance frameworks and seeking periodic legal audits can also help ensure ongoing compliance.

The statutory duties of directors, as codified in the Companies Act 2006, include the following:

1. Act within their powers (CA 2006, Section 171). Directors must act according to the company’s constitution and use their powers for their intended purposes.
2. Promote the success of the company (CA 2006, Section 172). Directors should act in a way they believe will most likely promote the company’s success for the benefit of its members as a whole.
3. Exercise independent judgment (CA 2006, Section 173). Directors must make decisions independently, without undue influence from others.
4. Exercise reasonable care, skill, and diligence (CA 2006, Section 174). Directors should perform their duties with the care, skill, and diligence expected of someone in their position.
5. Avoid conflicts of interest (CA 2006, Section 175). Directors must avoid situations where their interests conflict with those of the company.
6. Not accept benefits from third parties (CA 2006, Section 176). Directors should not accept any benefits from third parties that may create a conflict of interest.
7. Declare interest in proposed transactions or arrangements (CA 2006, Section 177). Directors must declare any interest, direct or indirect, in proposed transactions or arrangements with the company.

These duties form the foundation of good corporate governance and ensure directors act in the company’s best interests. Francis Wilks & Jones can provide detailed advice on fulfilling these duties and help directors implement best practices to meet their legal obligations.

Directors have several reporting obligations to ensure transparency and accountability in the management of the company. These include

• filing annual accounts,
• confirmation statements, and
• notices of significant changes with Companies House.
• reporting changes in the company’s officers, registered office address, and share capital.

Compliance with these reporting requirements is critical to maintain the company’s legal standing and avoid penalties.

Accurate and timely reporting helps build trust with shareholders, creditors, and regulatory bodies. Directors should establish robust internal systems to manage these reporting obligations effectively.

Francis Wilks & Jones offers comprehensive support in setting up these systems and ensuring that all reporting requirements are met accurately and on time. By maintaining diligent records and adhering to statutory requirements, directors can demonstrate their commitment to transparency and good governance.

1. How does the Companies Act 2006 impact directors’ responsibilities?

The Companies Act 2006 codifies directors’ duties, aligning them with long-standing common law principles. It outlines specific duties such as acting within powers, promoting company success, and avoiding conflicts of interest, ensuring directors uphold high standards of corporate governance and accountability.

2. What role do regulatory bodies play in enforcing directors’ duties?

Regulatory bodies such as the Insolvency Service and the Financial Conduct Authority (FCA) monitor and enforce compliance with directors’ duties. They can investigate misconduct, impose penalties, and initiate disqualification proceedings against directors who fail to meet their legal obligations.

3. What are derivative claims, and how do they relate to breaches of directors’ duties?

Derivative claims are legal proceedings initiated by shareholders on behalf of the company against directors who have breached their duties. This mechanism allows shareholders to seek redress for wrongs committed against the company, holding directors accountable for their actions.

4. How can directors stay informed about changes in company law and best practices?

Directors can stay informed through continuous professional development, attending training sessions, subscribing to industry publications, participating in professional networks, and consulting with legal and corporate governance experts. Staying updated ensures they can effectively comply with evolving legal and regulatory requirements.

A de jure director is an individual who has been formally appointed and registered as a director of a company in accordance with the Companies Act 2006 and the company’s Articles of Association.

These directors are officially listed on the Companies House register.

Their responsibilities include

• managing the company’s affairs,
• making strategic decisions, and
• ensuring compliance with legal requirements.

De jure directors must adhere to their statutory duties as outlined in the Companies Act 2006, Sections 171-177, including acting within their powers, promoting the success of the company, and avoiding conflicts of interest. Given their formal recognition, de jure directors are the most commonly identified type of director within a company.

A de facto director is someone who, despite not being formally appointed or registered as a director, performs the functions and duties of a director.

This can include

• making executive decisions,
• managing company operations, and
• representing the company to third parties.

The key distinction is that a de facto director acts as a director in practice, even if not in title. Courts will consider the role and responsibilities undertaken by the individual to determine whether they are a de facto director. Under the Companies Act 2006, de facto directors are subject to the same statutory duties and liabilities as formally appointed directors. This includes adhering to duties such as exercising reasonable care, skill, and diligence, and avoiding conflicts of interest.

A shadow director is defined under Companies Act 2006, Section 251 as a person in accordance with whose directions or instructions the directors of a company are accustomed to act.

• Unlike de facto directors, shadow directors do not actively manage the company or present themselves as directors.
• Instead, they exert significant influence over the board’s decisions from behind the scenes.

Shadow directors are often individuals or entities such as major shareholders, advisors, or parent companies. Despite not being formally recognised as directors, shadow directors are still bound by many of the statutory duties imposed on de jure directors, particularly regarding fiduciary responsibilities and conflicts of interest.

Non-executive directors (NEDs) do not engage in the daily management of the company but provide independent oversight and strategic guidance.

They typically attend board meetings and contribute to high-level decision-making.

• NEDs are valued for their impartiality, broad business experience, and ability to offer a fresh perspective on company matters.
• Their primary responsibilities include monitoring executive management, advising on corporate strategy, and ensuring robust corporate governance.
• The Companies Act 2006 holds NEDs to the same legal duties as executive directors, including acting within their powers and promoting the success of the company.
• NEDs are crucial for maintaining a balance of power within the board and enhancing the company’s accountability to its stakeholders.

The roles of de jure, de facto, shadow, and non-executive directors intersect in various ways, contributing to the overall governance and strategic direction of the company.

• De jure directors typically handle the operational and strategic management, ensuring compliance with statutory obligations.
• De facto directors, although not formally appointed, perform similar roles and bear the same responsibilities and liabilities.
• Non-executive directors provide independent oversight and strategic advice.
• Shadow directors influence the company’s decisions indirectly – although they tend to want to keep out of the public eye,

Effective corporate governance relies on the harmonious interaction of these different types of directors (the exception tending to be shadow directors who often deliberately want to avoid the responsibility of directorship).

Each type brings unique perspectives and expertise, which can enhance the board’s decision-making process. However, it’s crucial for companies to clearly define the roles and responsibilities of each type of director to avoid conflicts and ensure accountability.

Our team of legal experts at Francis Wilks & Jones can provide tailored advice to help companies navigate these complexities and establish robust governance structures.

1. What distinguishes a de jure director from other types of directors?

A de jure director is formally appointed and registered according to legal requirements and the company’s articles of association. They have official recognition and authority to act on behalf of the company, unlike de facto or shadow directors who may not be formally appointed but still influence company decisions.

2. How can de facto directors be identified within a company?

De facto directors can be identified by their actions and decision-making roles within the company, even if they are not formally appointed. They perform duties typically associated with directors, such as signing contracts and making strategic decisions, and are recognised by their influence over the company’s operations.

3. What are the key characteristics of a shadow director?

A shadow director is someone whose directions the de jure directors follow, although they are not formally appointed. They exert significant control over company decisions and operations behind the scenes and are subject to the same legal duties and liabilities as formally appointed directors.

4. How do the roles of nominee and alternate directors differ?

Nominee directors represent the interests of specific stakeholders, such as shareholders or investors, on the board. Alternate directors are appointed to act in place of regular directors when they are unavailable. Both must balance their duties to the appointing entity with their fiduciary responsibilities to the company.

5. What is the difference between a shadow director and a de facto director?

The main difference between a shadow director and a de facto director lies in their mode of operation and level of visibility within the company.

• A de facto director acts openly as a director, performing functions and making decisions that are typically associated with the role of a director, despite not being formally appointed.
• In contrast, a shadow director operates behind the scenes, influencing the board’s decisions without being directly involved in the company’s day-to-day management.

Both types of directors are subject to the same statutory duties under the Companies Act 2006, including acting within their powers, promoting the success of the company, and avoiding conflicts of interest.

The legal implications for failing to fulfil these duties are significant, making it essential for individuals and companies to clearly understand and differentiate these roles.

Legal advice from Francis Wilks & Jones can help identify potential issues and ensure compliance with relevant laws and regulations.

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It encompasses the mechanisms through which a company’s objectives are set and achieved, how risk is monitored and assessed, and how performance is optimised.

• Corporate governance structures typically involve a clear distribution of rights and responsibilities among different participants in the corporation, including the board of directors, management, shareholders, and other stakeholders.
• Effective corporate governance ensures that companies are accountable and transparent to their stakeholders and operate in a fair and responsible manner. It is essential for maintaining investor confidence and sustaining economic growth.

Corporate governance ensures accountability through various mechanisms, including the board of directors, which acts as the company’s governing body. The board oversees management, ensuring that the company’s operations align with its strategic objectives and comply with legal and ethical standards.

Key elements of corporate governance that enhance accountability include.

1. Board oversight. The board is responsible for monitoring the performance of executive management and making decisions on major company issues. This oversight helps prevent conflicts of interest and ensures that the company’s activities are in the best interest of shareholders and other stakeholders.
2. Transparency and disclosure. Corporate governance requires companies to provide accurate and timely information about their financial performance, operations, and governance practices. This transparency allows stakeholders to make informed decisions and hold the company accountable for its actions.
3. Internal controls and audits: Effective corporate governance includes establishing robust internal control systems and conducting regular audits. These controls help detect and prevent fraud, ensure the accuracy of financial reporting, and promote compliance with laws and regulations.

Directors have a fiduciary duty to manage the company’s finances prudently and in the best interests of the company and its stakeholders.

Key responsibilities include:

1. Budgeting and forecasting. Directors should ensure that the company has a realistic budget and financial forecast. This involves setting financial goals, monitoring cash flow, and making adjustments as needed to stay on track.
2. Financial reporting. Directors must ensure that the company maintains accurate financial records and complies with relevant accounting standards. Regular financial reporting, including quarterly and annual reports, provides transparency to shareholders and other stakeholders.
3. Risk management. Directors should identify financial risks and implement strategies to mitigate them. This includes diversifying investments, maintaining adequate reserves, and ensuring that the company has appropriate insurance coverage.
4. Compliance Directors must ensure that the company complies with all relevant financial regulations, including tax laws and reporting requirements. This involves staying informed about changes in legislation and working with financial professionals to maintain compliance.

Directors are responsible for ensuring that the company complies with all applicable UK tax laws and regulations. This involves:

1. Timely filing. Directors must ensure that all tax returns are filed on time and that all taxes owed are paid promptly. Late filings and payments can result in penalties and interest charges.
2. Accurate reporting. Directors should ensure that the company’s financial records are accurate and complete. This includes maintaining proper documentation for all transactions and ensuring that all income and expenses are reported correctly.
3. Tax planning. Directors should engage in tax planning to minimise the company’s tax liability. This may involve taking advantage of tax credits, deductions, and incentives available under the law.
4. Advisors. Directors should work with qualified tax advisors to navigate complex tax issues and ensure compliance with all relevant tax laws.

The key principles of corporate governance include:

1. Accountability. Directors and management are accountable to shareholders and other stakeholders for their actions and decisions.
2. Transparency. Companies must provide accurate and timely information about their activities, financial performance, and governance practices.
3. Fairness. Companies must treat all stakeholders fairly, including shareholders, employees, customers, and the community.
4. Responsibility Companies must operate in a socially responsible manner, considering the impact of their activities on society and the environment.
5. Risk management. Companies must identify and manage risks effectively to protect the interests of stakeholders.

The primary purpose of corporate governance is to ensure that companies are managed in a way that maximises shareholder value while taking into account the interests of other stakeholders.

• Good corporate governance provides a framework for achieving a company’s objectives, ensures effective decision-making, and enhances the company’s accountability and transparency.
• By promoting ethical behaviour and compliance with laws and regulations, corporate governance helps build trust and confidence among investors, employees, customers, and the broader community.

Corporate governance is crucial to investors because it provides assurance that a company is being managed effectively and ethically. Strong corporate governance practices reduce the risk of fraud, mismanagement, and financial irregularities, making companies more attractive to investors.

• It also enhances the long-term sustainability and profitability of a company by ensuring that management decisions align with the best interests of shareholders and other stakeholders.
• Investors are more likely to invest in companies with a reputation for good corporate governance, as it indicates a lower risk and a higher potential for sustainable returns.

i. Who owns a private limited company?

A private limited company is owned by its shareholders. The shareholders invest capital in the company and, in return, receive shares that represent their ownership interest. The number of shares held determines the extent of each shareholder’s ownership and their influence over company decisions. Shareholders’ liability is limited to the amount they have invested in the company.

ii. Who runs a limited company?

A limited company is run by its board of directors, who are appointed by the shareholders. The directors are responsible for managing the company’s operations, making strategic decisions, and ensuring compliance with legal and regulatory requirements. While the directors handle day-to-day management, major decisions can require shareholder approval.

iii. What is the role of the board of directors?

The board of directors oversees the management of the company and ensures that it operates in the best interests of the shareholders and other stakeholders. The board sets the company’s strategic objectives, monitors performance, and ensures compliance with legal and ethical standards. It also appoints senior executives, such as the CEO, and evaluates their performance.

iv. How do you maintain accounting accuracy?

Maintaining accounting accuracy involves keeping detailed and accurate financial records, implementing robust internal controls, and conducting regular audits. Directors should ensure that all financial transactions are properly recorded, that financial statements are prepared in accordance with relevant accounting standards, and that any discrepancies are promptly investigated and resolved.

v. How long should accounting records be kept?

According to the Companies Act 2006, accounting records must be kept for at least six years from the end of the financial year to which they relate. This period may be extended if required by other regulations or for legal reasons.

vi. What records do businesses have to keep?

Businesses must keep various records, including financial records (such as ledgers, journals, and invoices), records of assets and liabilities, records of stock and inventory, and documentation of all transactions. Additionally, businesses must maintain records of company meetings, minutes, and resolutions, as well as statutory registers (such as the register of directors and shareholders).

vii. How much tax does a business pay?

The amount of tax a business pays depends on its structure, income, and location. In the UK, a limited company pays Corporation Tax on its profits, currently at a rate of 25% unless profits are below £50,000. Other taxes may include VAT, PAYE (for employee salaries), and business rates. Tax liabilities can vary based on the specific circumstances of the business.

viii. How much tax does a Ltd company pay?

A limited company in the UK pays Corporation Tax on its profits at a rate of 25% unless profits are below £50,000. The company may also be liable for other taxes, such as VAT and PAYE, depending on its activities and structure.

ix. How do I register my business as a limited company?

To register a business as a limited company in the UK, you must incorporate it with Companies House. This involves choosing a company name, preparing a Memorandum and Articles of Association, appointing directors and a company secretary (if required), and registering your office address. You will also need to complete Form IN01 and pay the registration fee.

x. How do I register my business with Companies House?

You can register your business with Companies House online or by mail. The process involves submitting Form IN01, the Memorandum and Articles of Association, and paying the registration fee. Once registered, you will receive a Certificate of Incorporation confirming that your company is legally recognised.

xi. Can the board of directors be held liable?

Yes, the board of directors can be held liable for their actions or omissions in managing the company. Directors have a fiduciary duty to act in the best interests of the company and its shareholders. Breaches of these duties can result in personal liability, director disqualification, or even criminal charges.

xii. Can a board member be sued individually?

Yes, a board member can be sued individually for actions that breach their duties as a director. This can include negligence, breach of fiduciary duties, or fraudulent activities. Individual directors can be held personally liable for losses incurred by the company or its stakeholders due to their misconduct.

xiii. What positions make up a board of directors?

A board of directors typically includes executive and non-executive directors. Key positions may include the Chairperson, Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other senior executives. Non-executive directors provide independent oversight and strategic advice, while executive directors manage the company’s day-to-day operations.

xiv. Are board directors employees?

Executive directors are usually employees of the company and have employment contracts outlining their duties and compensation. Non-executive directors, however, are not typically employees and are instead engaged on a part-time basis to provide independent oversight and advice.

xv. Who appoints board directors?

Board directors are typically appointed by the shareholders of the company during the annual general meeting (AGM) or through a board resolution. In some cases, directors may be appointed by a nominating committee or other governing body within the company.

xvi. How many board members should a startup have?

The number of board members for a startup can vary, but it is generally recommended to have at least three to five members. This provides a balance of perspectives and expertise while maintaining a manageable size for effective decision-making.

xvii. What is the job of a board member?

The primary job of a board member is to oversee the management of the company and ensure it operates in the best interests of the shareholders and other stakeholders. This includes setting strategic objectives, monitoring performance, ensuring compliance with legal and ethical standards, and making major decisions affecting the company’s direction.

xviii. What are the duties and responsibilities of the board of directors?

The board of directors is responsible for overseeing the company’s management, setting strategic goals, ensuring financial stability, and maintaining compliance with legal and regulatory requirements. Key duties include

• acting within their powers,
• promoting the success of the company,
• exercising independent judgment, and
• avoiding conflicts of interest

The board must also ensure that the company operates ethically and responsibly, protecting the interests of shareholders, employees, customers, and the wider community.

The board of directors holds a critical role in the governance and strategic direction of a company. Key duties of the board include:

1. Strategic oversight. The board is responsible for setting the company’s strategic goals and ensuring that management implements these strategies effectively.
2. Governance. The board must establish a governance framework that promotes accountability, transparency, and ethical behaviour within the company.
3. Risk management. The board is tasked with identifying and mitigating potential risks to the company, ensuring that proper risk management practices are in place.
4. Financial oversight. The board must oversee the company’s financial health, including approving budgets, financial statements, and major capital expenditures.
5. Compliance. Ensuring that the company adheres to legal and regulatory requirements is a key duty of the board. This includes compliance with the Companies Act 2006 and other relevant legislation.
6. Executive appointment and remuneration: The board is responsible for appointing senior executives, including the CEO, and determining their compensation.

The role of the board of directors is multifaceted, involving oversight, guidance, and support to the company’s executive team. Specifically, the board:

1. Guides corporate strategy. The board provides direction on the company’s strategic plans and ensures alignment with its vision and mission.
2. Monitors performance. By setting performance benchmarks and reviewing results, the board ensures that the company meets its goals.
3. Protects shareholder interests. The board acts in the best interests of shareholders, ensuring that the company’s actions enhance shareholder value.
4. Ensures accountability. The board holds the executive team accountable for their performance and ensures that the company operates with integrity and transparency.

The board of directors typically makes decisions through a structured process that includes:

1. Meetings Regular board meetings where directors discuss and vote on key issues. The frequency of these meetings can vary but typically occurs quarterly.
2. Committees. Specialised committees (e.g., audit, compensation, governance) that focus on specific areas and make recommendations to the full board.
3. Resolutions. Formal decisions made by the board, documented in board minutes. These resolutions often require a majority vote.
4. Consultation. Seeking advice from external experts or internal stakeholders to inform decision-making.

The structure of a board of directors can vary depending on the size and nature of the company but generally includes:

1. Executive directors These are directors who are also part of the company’s management team. They are involved in the day-to-day operations of the company.
2. Non-executive directors (NEDs). Independent directors who provide oversight and an external perspective. They are not involved in daily operations.
3. Chairperson. Leads the board, sets the agenda for meetings, and ensures that the board functions effectively.
4. Committees. Sub-groups of the board focusing on specific areas such as audit, risk, remuneration, and nominations.

Board performance should be evaluated regularly to ensure that it remains effective. Key aspects of evaluation include:

1. Self-assessment. Directors evaluate their own performance and the performance of the board as a whole.
2. External reviews. Engaging external consultants to conduct independent evaluations of the board’s performance.
3. Performance metrics. Using specific criteria such as meeting attendance, participation, and the quality of decision-making to assess performance.
4. Feedback. Gathering feedback from senior management and other stakeholders to gain insights into the board’s effectiveness.

Board members have several critical duties and responsibilities, including:

1. Fiduciary duty. Acting in the best interests of the company and its shareholders.
2. Duty of care. Making informed and prudent decisions by thoroughly reviewing relevant information.
3. Duty of loyalty. Avoiding conflicts of interest and putting the company’s interests above personal interests.
4. Duty of confidentiality. Keeping sensitive company information private and not using it for personal gain.

1. Establishing mission and vision. Defining the company’s mission, vision, and strategic goals.
2. Strategic planning. Developing and approving the company’s strategic plan.
3. Oversight of management. Hiring, evaluating, and, if necessary, replacing the CEO and senior executives.
4. Performance monitoring. Ensuring that the company meets its performance objectives and financial targets.
5. Risk management. Identifying and mitigating risks to the company.
6. Financial oversight. Approving budgets, financial statements, and major expenditures.
7. Compliance and integrity. Ensuring that the company complies with laws and operates ethically.
8. Stakeholder communication. Communicating with shareholders and other stakeholders about the company’s performance and governance.
9. Resource management. Ensuring that the company has adequate resources to achieve its goals.
10. Board development. Continuously improving the board’s effectiveness through training and development.

i. Who runs a company?

A company is run by its board of directors and senior management team. The board provides strategic direction and oversight, while the senior management team handles day-to-day operations.

ii. What is the role of a board of directors?

The role of the board of directors includes setting the company’s strategic direction, overseeing management, ensuring compliance with laws and regulations, and protecting shareholders’ interests.

iii. What does a board of directors do?

The board of directors makes key decisions about the company’s strategic direction, financial health, and governance practices. It also monitors the performance of the executive team and ensures accountability.

iv. Can board directors be held liable?

Yes, board directors can be held liable for their actions or omissions. This includes personal liability for breaches of fiduciary duties, negligence, and failure to comply with legal requirements.

v. Can a board member be sued individually?

Yes, a board member can be sued individually for actions that breach their duties as a director. This can include cases of negligence, misconduct, or fraudulent activities.

vi. What positions make up a board of directors?

A board of directors typically includes executive directors, non-executive directors, and a chairperson. Specific roles may include the CEO, CFO, and heads of various committees (e.g., audit, compensation).

vii. How many board members should a startup have?

A startup should ideally have three to five board members to ensure a balance of perspectives and expertise while maintaining effective decision-making.

viii. What is the job of a board member?

The job of a board member is to oversee the management of the company, set strategic goals, monitor performance, and ensure compliance with legal and ethical standards. They must act in the best interests of the company and its shareholders.

Definition and overview. Non-executive directors (NEDs) are independent advisors to a company and are members of the company’s board of directors. Unlike executive directors, NEDs do not participate in the day-to-day management of the company. Instead, they provide oversight, sectoral expertise, and constructive challenge to the executive directors.

Distinction between executive and non-executive directors. Executive directors are responsible for running the business, managing people, and making operational decisions. NEDs, on the other hand, focus on providing strategic advice, ensuring robust governance, and monitoring the performance of the executive team. They act as a bridge between the company and its stakeholders, ensuring that the company’s actions align with its long-term objectives and ethical standards.

A non-executive director has the following main responsibilities:

1. Performance review.

NEDs evaluate the performance of the management team against the company’s goals and objectives. They oversee the executive members of the board, can recommend the removal of senior management, and plan subsequent appointments. Additionally, they ensure that the company’s responsibilities towards stakeholders are consistently met.

2. Strategic direction.

NEDs play a critical role in formulating and overseeing the company’s strategy. They provide constructive criticism and a broader view of the external factors affecting the business. By challenging existing plans and suggesting improvements, NEDs help to refine and enhance the company’s strategic direction.

3. Time commitment.

NEDs must dedicate a substantial amount of time to their role, attending board meetings and participating in key discussions. They must disclose their other significant commitments to the board and obtain approval before taking on additional roles that could affect their ability to fulfil their duties as a NED.

4. Risk management.

NEDs share responsibility with executive directors for developing and implementing risk management frameworks. They ensure that financial information is accurate and that robust controls and risk management systems are in place to safeguard the company and its stakeholders.

5. People and networking.

NEDs bring valuable external connections and insights to the company. They can represent the company to outside firms, help secure financial and human resources, and contribute to achieving the company’s objectives.

6. Professional development.

NEDs may seek independent training to fulfil their duties effectively, at the company’s expense. This ensures that they remain informed about best practices in corporate governance and can continue to add value to the company.

7. Participation in committee meetings.

NEDs often serve on various board committees, such as audit or remuneration committees. They must understand the purpose of these committees and actively participate in their meetings to ensure effective governance.

NED’s are important on a number of levels. For example

1. Objectivity and independence.

NEDs provide an independent perspective that is not influenced by the company’s internal dynamics. This objectivity is crucial for fair and balanced decision-making, especially in areas where there may be conflicts of interest.

2. Enhancing company performance.

By offering strategic guidance and oversight, NEDs help to improve the company’s performance. They challenge the executive team to achieve higher standards and ensure that the company’s activities align with its long-term goals.

3. Providing external expertise.

NEDs bring a wealth of experience from other industries and sectors. This external expertise can help the company identify new opportunities, innovate, and navigate challenges more effectively.

There are dangers which go with the role of a NED. These include

1. Legal responsibilities and liabilities.

NEDs share the same legal responsibilities as executive directors under the Companies Act 2006. They must act within their powers, promote the success of the company, and avoid conflicts of interest. Failure to meet these duties can result in personal liability.

2. Financial penalties and legal action.

NEDs can face significant financial penalties and legal action if they fail to challenge unethical practices or poor corporate governance. They must be vigilant in ensuring that the company adheres to legal and ethical standards.

3. Reputational risk.

NEDs must be mindful of the reputational risks associated with the companies they serve. Any negative publicity or legal issues can affect their personal and professional reputation.

4. Director Disqualification. A NED is just as liable under the Company Director Disqualification Act 1986 as any other director. Read more about can a non executive director be disqualified.

There are upsides for anyone considering a NED position. These include

1. Broadening experience.

NEDs gain valuable experience by working with different companies across various industries, enhancing their strategic thinking and governance skills.

2. Networking opportunities.

Non-executive directors have the chance to expand their professional network, connecting with other experienced directors, executives, and industry leaders.

3. Influence and impact.

Non-executive directors can make a significant impact on a company’s direction and success by providing strategic guidance, oversight, and objective advice.

4. Remuneration.

NEDs typically receive remuneration for their time and expertise, which can be a rewarding aspect of the role.

5. Professional development.

The role of a NED involves continuous learning and professional development, keeping them engaged and updated on best practices in corporate governance.

This can be achieved int he following ways

1. Objective oversight.

Non-executive directors provide unbiased oversight of the company’s operations and performance, ensuring that executive directors remain accountable and focused on the company’s long-term goals.

2. Strategic input.

Non-executive directors contribute to the development and refinement of the company’s strategy, leveraging their external experience and insights to challenge existing plans and suggest new opportunities.

3. Risk management.

Non-executive directors play a critical role in identifying and managing risks, ensuring that robust controls and frameworks are in place to protect the company and its stakeholders.

4. Governance and ethics.

Non-executive directors help maintain high standards of corporate governance and ethical behaviour, ensuring that the company operates transparently and responsibly.

5. Mentoring and support.

Non-executive directors often act as mentors to executive directors and senior management, providing guidance and support to help them navigate complex challenges and improve their leadership skills.

Yes, non-executive directors can be held liable for their actions or inactions in the same way as executive directors. They share the same statutory duties and can face personal liability for breaches of these duties, misconduct, or failure to act in the company’s best interests. Liability can include financial penalties, disqualification, and even criminal charges in severe cases.

i. What does a non-executive director do?

A non-executive director provides oversight, strategic guidance, and an external perspective to the company’s board. They participate in board meetings, assess the performance of executive directors, and ensure robust risk management and governance practices.

ii. What is the difference between executive and non-executive directors?

Executive directors are involved in the day-to-day management of the company, while non-executive directors provide independent oversight and strategic advice. Executive directors are employees of the company, whereas non-executive directors typically are not.

iii. Is the CEO a non-executive director?

No, the CEO is an executive director responsible for the day-to-day operations of the company. Non-executive directors do not have these operational responsibilities.

iv. Does a non-executive director get paid?

Yes, non-executive directors typically receive compensation for their time and expertise. This can be in the form of a fee or other remuneration agreed upon by the company.

v. Can anyone be a non-executive director?

While anyone with the necessary skills, experience, and knowledge can potentially be a non-executive director, they must be able to fulfil the statutory duties and legal responsibilities associated with the role.

vi. Is it good to be a non-executive director?

Yes, being a non-executive director can be highly rewarding, offering opportunities for professional development, networking, and making a significant impact on a company’s success. However, it also comes with substantial responsibilities and risks

vii How do non-executive directors contribute to risk management?

Non-executive directors contribute to risk management by providing an independent perspective on the company’s risk framework, ensuring robust financial controls, and overseeing the implementation of effective risk management strategies. They also challenge executive decisions and assess potential risks to protect stakeholders’ interests.

viii What are the typical time commitments required of a non-executive director?

Non-executive directors typically commit to attending regular board meetings, committee meetings, and strategy sessions. They may also need to participate in ad-hoc meetings, provide mentorship, and stay informed about the company’s activities and industry developments. The exact time commitment varies based on the company’s size and complexity.

ix How do non-executive directors ensure they remain independent?

Non-executive directors ensure their independence by avoiding conflicts of interest, not engaging in the company’s daily operations, and maintaining a critical distance from executive management. They also disclose any potential conflicts and recuse themselves from decisions where impartiality could be compromised.

x What additional roles might non-executive directors take on in committee meetings?

Non-executive directors often serve on key board committees, such as audit, remuneration, and nomination committees. In these roles, they provide oversight, ensure compliance with regulations, and help develop policies that align with the company’s strategic objectives and governance standards.

Directors can be held liable for a variety of issues arising from their actions or inactions in managing the company. These liabilities can be categorised into civil, criminal, and statutory liabilities.

Civil liability

Directors may face civil liability for breaches of their duties to the company. This can include:

• Breach of fiduciary duty. Directors must act in the best interests of the company. Failure to do so can result in personal liability for any losses incurred by the company.
• Negligence Directors must exercise reasonable care, skill, and diligence. If they fail to meet this standard, they can be held liable for any resulting damages.
• Misrepresentation. If directors provide false or misleading information to shareholders, creditors, or the public, they can be held liable for any losses that arise from reliance on that information.

Criminal Liability

Directors can also face criminal liability for certain actions, including:

• Fraudulent trading. If a director continues to trade while knowing that there is no reasonable prospect of avoiding insolvent liquidation, they can be held criminally liable under the Insolvency Act 1986.
• Health and safety breaches. Directors can be held liable for breaches of health and safety regulations, particularly if negligence leads to injury or death.
• Breach of statutory duties Directors can be prosecuted for failing to comply with statutory requirements, such as filing annual returns or financial statements with Companies House.

Statutory Liability

Under various laws, directors have specific statutory liabilities, including:

• Company Directors Disqualification Act 1986: Directors can be disqualified from acting as directors for up to 15 years for misconduct.
• Companies Act 2006: Directors have statutory duties, including the duty to act within their powers, promote the success of the company, and avoid conflicts of interest (CA 2006, Sections 171-177).

Directors can take several steps to mitigate their liabilities:

• Diligent performance. Ensuring they perform their duties with due diligence and in good faith. It might sound obvious, but this can go a long way to avoiding problems.
• Proper documentation. Keeping thorough records of decisions and the rationale behind them. This can be vital in the event of a later claim or company investigation. We see too many examples of claims which could have been defended, but it isnt possible due to an absence of proper paperwork.
• Seeking professional advice. Consulting with legal, financial, and other professionals when making significant decisions. Our director services legal team are here to help – and we also know a lot of other trusted third party professionals such as accountants and tax advisers.
• Directors’ and Officers’ Insurance. Obtaining D&O insurance to cover potential personal liabilities. This can be hugely important is a claim is made later on against a director personally.
• Regular training. Staying informed about their legal responsibilities and changes in the law.

The consequences of director misconduct can be severe and include:

• Disqualification. Directors can be disqualified from serving on the board of any company for a period ranging from 2 to 15 years under the Company Directors Disqualification Act 1986.
• Personal financial liability. Directors can be held personally liable to repay money to the company or its creditors.
• Criminal charges. Directors can face criminal charges for fraudulent activities, leading to fines and imprisonment.
• Reputational damage. Allegations of misconduct can severely damage a director’s reputation, making it difficult to hold future directorships or positions of trust.

Directors’ and Officers’ (D&O) insurance provides financial protection to directors against personal losses resulting from legal actions taken against them for alleged wrongful acts while acting in their managerial capacity. This insurance typically covers:

• Legal fees. Costs associated with defending against lawsuits and investigations.
• Settlements and judgments. Financial settlements or judgments resulting from legal actions.
• Regulatory investigations. Costs related to regulatory or governmental investigations into the directors’ conduct.

For more information the ABI has a good section on choosing the right directors and officers insurance policy.

Common pitfalls that can lead to director liability include:

• Inadequate record-keeping. Failing to maintain proper records can make it difficult to defend against allegations of misconduct.
• Conflicts of interest. Not properly managing or disclosing conflicts of interest.
• Ignoring legal requirements. Failing to comply with statutory obligations, such as filing deadlines and health and safety regulations.
• Trading whilst insolvent. Continuing to trade when the company is insolvent or on the brink of insolvency.
• Poor decision-making Making decisions without adequate information or professional advice.

1. How does directors’ liability differ in public versus private companies?

In public companies, directors face stricter regulatory scrutiny and more rigorous reporting requirements compared to private companies. They are also more likely to be held accountable for compliance with stock exchange regulations and shareholder communications, increasing their potential liabilities.

2. What steps can directors take to avoid wrongful trading allegations?

To avoid wrongful trading allegations, directors should ensure they have a clear understanding of the company’s financial position, seek professional advice when insolvency looms, act promptly to minimise creditor losses, and avoid incurring further debts when insolvency is inevitable. Keeping detailed records of decisions can also provide evidence of diligent behaviour.

3. How can directors ensure they are not personally liable for company debts?

Directors can avoid personal liability for company debts by adhering strictly to their fiduciary and statutory duties, ensuring that all decisions are made in the company’s best interest, maintaining accurate financial records, and not engaging in wrongful or fraudulent trading practices.

4. What role does directors’ and officers’ (D&O) insurance play in protecting directors?

Directors’ and officers’ (D&O) insurance provides financial protection against claims arising from alleged wrongful acts, errors, or omissions made by directors in their official capacity. It covers legal defence costs, settlements, and other related expenses, helping directors manage personal financial risks associated with their role.

5. Are directors personally liable for VAT?

Directors are generally not personally liable for the company’s VAT liabilities. However, they can become personally liable in cases where:

• Fraud or negligence If directors are found to have acted fraudulently or negligently in relation to the company’s VAT affairs.
• Wrongful trading. If the company continues to trade while insolvent, leading to increased VAT debts, directors may be held personally liable.

Understanding these potential liabilities is crucial for directors to effectively navigate their roles and protect themselves from personal financial risk. It is always advisable to seek expert legal advice to ensure compliance with all statutory and fiduciary duties.

Company insolvency occurs when a business is unable to pay its debts as they fall due or when its liabilities exceed its assets. Insolvency can result from various factors, including poor financial management, declining market conditions, or unexpected economic shocks. There are two primary tests to determine insolvency:

1. Cash flow test: This test assesses whether the company can pay its debts as they come due. If a company cannot meet its financial obligations on time, it is considered insolvent.
2. Balance sheet test: This test evaluates whether the company’s liabilities exceed its assets. If a company’s total liabilities surpass its total assets, it is deemed insolvent.

Understanding insolvency is crucial for directors as it triggers a shift in their duties, requiring them to act in the best interests of the creditors rather than the shareholders.

If you have concerns about this – we have an expert company rescue team who can not only help directors, but also help save the company from formal insolvency.

When a company approaches insolvency, directors’ duties shift significantly. Instead of prioritising the interests of the shareholders, directors must act in the best interests of the creditors to minimise potential losses. Key changes include:

1. Duty to minimise losses. Directors must take every step possible to minimise losses to creditors (Insolvency Act 1986, Section 214).
2. Avoiding fraudulent trading. Directors must not continue to trade if there is no reasonable prospect of the company avoiding insolvency (Insolvency Act 1986, Section 213).
3. Transparency and honesty. Directors should maintain honest and open communication with creditors and avoid any actions that could be construed as misleading or deceptive.

Failure to adhere to these duties can lead to personal liability for directors, including disqualification and financial penalties.

Identifying early warning signs of insolvency can help directors take proactive steps to address financial difficulties before they escalate. Common indicators include:

1. Cash flow problems. Persistent issues with paying bills, suppliers, and employees on time.
2. Increasing debt levels. A rising debt burden, including overdue taxes and unpaid invoices.
3. Declining revenue. A significant drop in sales or revenue, leading to an inability to cover operating expenses.
4. Creditor pressure. Frequent demands for payment, legal actions, or threats of winding-up petitions from creditors.
5. Overdrawn Director’s Loan Accounts. Directors taking more money out of the company than they are entitled to, leading to financial strain. Our free director loan account guide sets out more information in this important subject.

Recognising these signs early can allow directors to seek professional advice and explore restructuring options to avoid insolvency.

When a company is facing insolvency, directors should take the following steps to manage the situation effectively:

1. Seek professional advice. Engage insolvency practitioners or legal advisors to understand the options available and the best course of action. Our company rescue team as FWJ has been advising struggling business for over 20 years. We can give immediate hope and also have excellent trusted relationships with insolvency practitioners.
2. Conduct a financial review. Perform a thorough review of the company’s financial position, including assets, liabilities, cash flow, and future prospects.
3. Communicate with creditors. Maintain open lines of communication with creditors, negotiating payment plans or restructuring debts where possible.
4. Consider insolvency procedures. Explore formal insolvency procedures such as administration, company voluntary arrangements (CVAs), or liquidation. Each option has different implications and benefits.
5. Document decisions. Keep detailed records of all decisions made and the rationale behind them to demonstrate that directors acted responsibly and in the best interests of creditors.

Directors can take several measures to protect themselves from personal liability during insolvency:

1. Act diligently. Ensure all actions are taken with due care and in the best interests of creditors.
2. Avoid preferential payments. Do not favour one creditor over others, as this can lead to claims of preferential treatment.
3. Document everything. Maintain comprehensive records of all decisions, actions, and communications to provide evidence of responsible management.
4. Obtain professional advice. Regularly consult with legal and financial advisors to ensure compliance with all legal obligations.
5. Resign if necessary. If continuing as a director could lead to further liabilities or conflicts, consider resigning. However, resignation should be a last resort and done with proper legal guidance to avoid accusations of wrongful trading.

Directors can face significant liabilities if they fail to manage insolvency appropriately. These liabilities include:

1. Wrongful Trading. Personal liability for debts incurred if directors continue trading when they knew, or should have known, there was no reasonable prospect of avoiding insolvency (Insolvency Act 1986, Section 214).
2. Fraudulent Trading. Criminal liability if directors conduct business with the intent to defraud creditors (Insolvency Act 1986, Section 213).
3. Misfeasance. Directors can be held liable for misfeasance if they misapply company assets or breach their fiduciary duties.
4. Disqualification. Directors can be disqualified from acting as directors for up to 15 years under the Company Directors Disqualification Act 1986 if found unfit to manage a company. We have a specialist Director Disqualification team who can help defend these claims

i. What happens if a Ltd company goes bust?

If a limited company becomes insolvent, it may enter into one of several insolvency procedures such as

• administration,
• liquidation, or
• company voluntary arrangement (CVA).

The chosen procedure depends on the company’s specific circumstances and the advice of insolvency practitioners. The goal is to either rescue the company, achieve a better result for creditors than immediate liquidation, or realise the company’s assets to pay creditors.

ii. Will the directors be liable to creditors for the insolvency of the company?

Directors can be held personally liable to creditors if they are found to have engaged in wrongful or fraudulent trading, breached their fiduciary duties, or misapplied company assets. However, if directors act responsibly and seek professional advice when insolvency is imminent, they can mitigate the risk of personal liability.

iii. What are the powers of directors after liquidation?

Once a company enters liquidation, the directors lose their powers to control the company’s affairs. The appointed liquidator takes over the management of the company, including the sale of assets and distribution of proceeds to creditors. Directors are required to cooperate with the liquidator and may need to provide information or assistance during the process.

iv. When can a director be held personally liable?

Directors can be held personally liable in cases of wrongful trading, fraudulent trading, breach of fiduciary duties, or misfeasance. Personal liability arises if directors fail to act in the best interests of creditors or engage in activities that exacerbate the company’s financial difficulties.

v. When can a director be held personally liable for company debts?

Directors can be personally liable for company debts if they continue to trade while knowing the company is insolvent, engage in fraudulent activities, or breach their statutory duties. This liability can extend to repaying creditors out of their own assets.

vi. What are the duties of directors during liquidation?

During liquidation, directors must cooperate fully with the liquidator, provide all necessary information and documentation, and refrain from any actions that could prejudice the liquidation process. They must also ensure they do not dispose of company assets or make payments to creditors without the liquidator’s approval.

vii. Can directors be personally liable for liquidation?

Yes, directors can be personally liable if it is proven that they have engaged in wrongful trading, fraudulent trading, or other misconduct leading to the company’s insolvency. Personal liability can include repaying debts, fines, and in severe cases, criminal charges.

viii. Can personal assets of directors be seized from a Ltd company?

Personal assets of directors can be at risk if they are found personally liable for the company’s debts due to wrongful trading, fraudulent trading, or breaches of fiduciary duties. Courts can order directors to use personal assets to satisfy company debts.

ix. Can I lose my house if my limited company goes bust?

While directors’ personal assets are generally protected by the limited liability structure, they can be at risk if directors are found personally liable for the company’s debts. This can occur in cases of wrongful trading, fraudulent trading, or if personal guarantees have been provided for company loans.

x. Can a director of a Ltd company be personally liable?

Yes, a director of a limited company can be personally liable for actions such as wrongful trading, fraudulent trading, breaches of fiduciary duties, and failure to comply with statutory obligations. Personal liability can result in significant financial and legal consequences for the director.

Navigating insolvency is complex and fraught with risks for directors.

At Francis Wilks & Jones, our expert lawyers provide comprehensive advice and support to directors facing insolvency issues, helping them understand their duties, mitigate risks, and protect their interests. Contact us today for professional guidance tailored to your situation.

xi. What are the directors’ responsibilities during the early stages of financial distress?

During the early stages of financial distress, directors must closely monitor the company’s financial health, seek professional advice, communicate transparently with creditors, and explore options such as restructuring or refinancing to prevent insolvency. They should also document all actions taken to address financial issues.

xii. How can directors identify and address cash flow insolvency?

Directors can identify cash flow insolvency by regularly reviewing financial statements, cash flow forecasts, and debt obligations. Addressing cash flow insolvency involves negotiating with creditors, improving cash management practices, and exploring financing options to ensure the company can meet its short-term liabilities.

xiii. What are the implications of wrongful trading for directors during insolvency?

Wrongful trading occurs when directors continue to incur debts knowing the company cannot repay them. Implications include personal liability for the company’s debts, potential disqualification from directorships, and legal action by creditors. Directors must take all reasonable steps to minimise creditor losses to avoid wrongful trading charges.

iv. How do directors balance the interests of creditors and shareholders during insolvency?

During insolvency, directors must prioritise the interests of creditors over shareholders, as creditors have a higher claim on the company’s assets. This involves making decisions that protect creditors’ rights, such as stopping trading to prevent further debt accumulation and working towards an orderly resolution of the company’s financial issues. Directors should ensure transparency and fairness in all dealings to maintain trust and comply with legal obligations.

Resigning as a director is a significant decision with various legal and practical implications. Upon resignation, a director is no longer responsible for the management of the company or bound by the duties specific to their directorial role. However, certain responsibilities and potential liabilities may continue beyond the resignation date. The immediate effects of resignation include:

1. Cessation of directorial powers. The resigning director loses all authority to act on behalf of the company.
2. Update of corporate records. The company must update its records and notify Companies House of the change using form TM01 within 14 days.
3. Handing over responsibilities: The resigning director should ensure a smooth transition by handing over ongoing projects and responsibilities to remaining or new directors.

To resign properly, a director should follow a structured process to ensure compliance with legal requirements and maintain professionalism. Key steps include:

1. Review company’s articles of association. Check the company’s articles of association for any specific provisions regarding resignation.
2. Formal notice. Submit a written notice of resignation to the board of directors. This notice should include the effective date of resignation.
3. Board meeting. Attend a board meeting to formally announce the resignation and discuss the transition of responsibilities.
4. Notification to Companies House. Ensure the company files form TM01 with Companies House to officially record the resignation.
5. Update internal records. The company should update its internal records, including the register of directors and other relevant documentation.

Resigning as a director does not absolve one from all responsibilities. Legal implications may include:

1. Ongoing liabilities. Directors remain liable for any actions taken during their tenure, including potential breaches of duty or wrongful trading.
2. Contractual obligations. Resigning directors may still be bound by contractual obligations, such as non-compete clauses or confidentiality agreements.
3. Investigations. If the company faces insolvency or regulatory investigations, former directors may be required to assist and could be held accountable for past decisions.

Financial consequences of resignation can vary depending on the director’s involvement in the company and any agreements in place:

1. Severance pay. Depending on the director’s employment contract, they may be entitled to severance pay or other termination benefits.
2. Shares and investments. Directors who are also shareholders may retain their shares but lose any director-specific benefits.
3. Personal guarantees. If the resigning director has provided personal guarantees for company loans, they may remain liable for those debts unless the lender agrees to release them.

To ensure a smooth transition, a resigning director should:

1. Prepare a handover plan. Create a detailed handover plan outlining ongoing projects, key contacts, and critical issues.
2. Communicate with stakeholders. Inform key stakeholders, including employees, clients, and suppliers, about the resignation and introduce them to the new point of contact.
3. Support successor. Assist the successor with understanding their new role and responsibilities to ensure continuity.
4. Maintain professionalism. Leave on good terms by maintaining professionalism throughout the resignation process.

i. Can I resign as a director and remain an employee?

Yes, it is possible to resign as a director while remaining an employee of the company. The roles of director and employee are legally distinct, so one can resign from the directorship and continue working under the terms of their employment contract. However, the resignation should be clearly communicated and documented to avoid any confusion regarding roles and responsibilities.

ii. Can I resign as a director and remain a shareholder?

Yes, a director can resign from the board and still retain their shares in the company. The ownership of shares and the position of director are separate matters. Resigning as a director does not affect the individual’s rights or interests as a shareholder. They can continue to receive dividends and participate in shareholder meetings.

iii. What happens if all directors resign from a company?

If all directors resign simultaneously, the company may face significant operational challenges, including the inability to make decisions or conduct business legally. In such cases, shareholders typically convene an emergency general meeting to appoint new directors. If no action is taken, the company may be at risk of dissolution or administrative intervention.

iv. Am I still liable for anything after resignation?

Yes, resigning as a director does not absolve one from liabilities incurred during their tenure. Former directors can still be held accountable for wrongful trading, breaches of fiduciary duties, and other actions taken while they were in office. Additionally, they may need to assist with ongoing investigations or litigation related to their time as a director.

Resignation as a director is a significant step that requires careful consideration and adherence to legal procedures. At Francis Wilks & Jones, our experienced lawyers can guide you through the resignation process, ensuring compliance and minimising potential risks. Contact us today for expert advice tailored to your specific situation.