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COMPANIES - DIRECTORS' RESPONSIBILITIES

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Running a limited company

Directors' responsibilities - As a director of a limited company, the law says you must try to make the company a success, follow the company’s rules (specified in its articles of association), make decisions for the benefit of the company, tell other shareholders if you might personally benefit from a transaction the company makes, keep company records and report changes to Companies House and HMRC and make sure the accounts show a ‘true and fair view’.

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    When you are appointed a director of a company you become an officer with extensive legal responsibilities. For a director of an incorporated body, the Companies Act 2006 sets out a statement of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The Companies Act 2006 highlights the connection between what constitutes the good of your company and a consideration of its wider corporate social responsibilities.

     

    The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those  of the company.

    The aim of the codification of directors’ duties in the Companies Act 2006 is to make the law more consistent and accessible

     

    The Act outlines seven statutory directors' duties, which also need to be considered for shadow directors. These are detailed below.

     

    Duty to act within their powers

    As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.

     

    Duty to promote the success of the company

    You must act in such a way that you feel would be most likely to promote the success of the company (ie. its long-term increase in value), for the benefit of its members as a  whole. This is

    often called the ‘enlightened shareholder value’ duty. However, you must also consider a number of other factors, including:

    • the likely long-term consequences of any decision
    • the interests of company employees
    • fostering the company’s business relationships with suppliers, customers and others
    • the impact of operations on the community and environment
    • maintaining a reputation for high standards of business conduct
    • the need to act fairly as between members of the company.

     

    Duty to exercise independent judgment

    You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.

     

    Duty to exercise reasonable care, skill and diligence

    This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objective’ standards. You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.

     

    Duty to avoid conflicts of interest

    This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.

     

    This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.

     

    This clarifies the previous conflict of interest provisions, and makes it easier for directors  to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.

     

    Duty not to accept benefits from third parties

    Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director

     

    This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

     

    Duty to declare interest in a proposed transaction or arrangement

    Any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors, before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.

     

    The requirement to make a disclosure also applies where directors ‘ought reasonably to be aware’ of any such conflicting interest.

     

    However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or ‘ought reasonably to be aware’) of the interest.

     

    Enforcement and penalties

    The Companies Act states that they will be enforced in the same way as the Common Law, although under Company Law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.

    Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by:

     

    • the company itself (ie the Board or the members in general meeting) deciding to commence proceedings; or
    • a liquidator when the company is in liquidation
    • an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omission (involving negligence), default or breach of duty or trust.

     

Taking money out of a limited company - As a director/shareholder you can take money from the company as salary, dividends, interest on directors’ loans & repayment of directors’ loans.

Company changes you must report - You must tell Companies House if you want to change your company’s registered office address and director & company secretary details.

Company and accounting records must be kept. HMRC may check these to make sure you’re paying the right amount of tax. Keep records for at least 6 years. An annual return must be sent to Companies House as well as annual accounts and tax returns to HMRC.

Signs and stationery - You must display a sign showing your company name at your registered company address.  You must include your company’s name on all company documents. On business letters, invoices and websites, you must show the registered number, registered office address, where the company is registered and the fact that it’s a limited company. If you want to include directors’ names, you must list all of them.

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