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Company directors

You will find the documents relevant to this article at the end of this information.

Introduction

This article explains the legal responsibilities and role of a director. Most of the advice on this page has limited application to directors of public companies, whose obligations are considerably more.

Legal responsibilities of a Director

The following information is from the Registrar of Companies. We acknowledge Crown copyright. The annotations in red are from Net Lawman. They do not form part of the government advice.

Role of a company director

Can anyone be a director?

Generally it is up to the members to appoint the people they believe will run the company well on theirbehalf. The only restrictions that prevent anyone becoming a director are:

the person must not have been disqualified by a court from acting as a company director (unless he or she has been given leave (permission) to act by a court for a particular company)
The person must not be an undischarged bankrupt (except with leave of the court);
In Scotland, anybody under the age of 16; and
For a PLC or their subsidiaries, anybody over the age of 70 unless specifically approved by a general meeting of the company.

It is not advisable ever to appoint a director under the age of 18 on account of the difficulty a young adult would have in executing any function.

What responsibilities does a director have towards Companies House?
Every company director has a personal responsibility to ensure that statutory documents are delivered to the Registrar as and when required by the Act. In particular:

Accounts (only for limited companies);
Annual returns (Form 363);
Notice of change of directors or secretaries or in their particulars (Forms 288a/b/c); and
Notice of change of registered office (Form 287).

What happens if accounts or annual returns are not filed?

All the directors of the company could be prosecuted. Failure to deliver documents on time is a criminal offence. On conviction, a director could end up with a criminal record and a fine of up to £5,000 for each offence.

In practice, the Registrar’s staff deal with a very light hand, sending out thousands of reminders each year. Heavy fines are imposed only in cases where there is some other problem or prospective problem. There are fines for late submission, but they become heavier only for persistent or serious offenders.

Alternatively, if the Registrar believes that the company is no longer carrying on business or in operation, he could strike it off the register and dissolve it. If this happens all the assets of the company, including its bank account and property, generally become the property of the Crown.

The Registrar will notify you before taking any such action and will informally advise on any administration problem.

The company can only be restored to the register and continue in existence by means of a court order. See our booklet, 'Strike-off, Dissolution and Restoration' or 'Strike-off, Dissolution and Restoration (Scotland)', for details.

This is expensive. Try to avoid it!

Are directors really prosecuted?

Yes. On average more than 1,000 directors are prosecuted each year for failing to deliver accounts and returns to the Registrar on time. Persistent failure to deliver statutory documents on time may also lead to a director being disqualified from taking part in the management of a company, for a specified period.

What happens if accounts are delivered late?

As a director of a private limited company, you normally have a maximum of 10 months from the accounting reference date in which to deliver your company's accounts to the Registrar. The accounting reference date is the date to which your accounts must be prepared.

As a director of a public limited company, you normally have a maximum of 7 months from the accounting reference date in which to deliver your company's accounts to the Registrar.

Important if your company's first accounts cover a period of more than 12 months, they must reach Companies House within 22 months of the date of incorporation for private companies and 19 months for public companies.

If accounts are received late, the company will automatically be charged a 'late filing penalty'. These penalties can be in addition to any fine imposed by a court - as explained in question 3 of this chapter. The late filing penalty will be calculated according to the following scale:

Length of delay Private company Public company

3 months or less £100 £500

3 months one day to 6 months £ 250 £1000

6 months one day to 12 months £ 500 £2000

More than 12 months £1000 £5000

How can prosecution and penalties be avoided?

Make sure your company complies on time with all its filing obligations, not only in connection with its accounts and annual returns, but in connection with all other documents required under the Act.

Isn't my accountant supposed to do all this?

Your accountant's responsibilities depend on the agreement you have with him or her. However, the responsibility to deliver accounts and other statutory documents rests entirely with the directors.

Ensure that your accountants have all the necessary information to prepare your accounts and get them audited on time. If necessary, chase your accountants. Don't just assume they are getting on with the job.

End of Registrar advice

Responsibilities to the company

In a private company, the director has a responsibility to act in the best interests of the company without regard to his pay or terms of employment.
Personal responsibility for the actions of the company - there are several areas where directors may be personally liable. The most recent addition to the list came into force on 20 June, when, for the first time, individuals become personally accountable for the anti-competitive activities of their companies. The Enterprise Act 2002 is set out in full on another page. Possible criminal penalties apply to all employees, although directors are most at risk because the boardroom is where “the buck stops”. The criminal penalties include imprisonment, heavy fines and disqualification from directorships.
Health and safety - The Health and Safety Commission have issued guidance (INDG 343 “Directors’ responsibilities for health and safety”) advising that organisations assign directorial responsibility to a Board Director and outlining the range of board level tasks. It is likely that this will increase directors’ responsibilities in this area in the near future.

Directors’ service contracts

Directors’ service contracts are becoming increasingly complex as a result of the introduction of new employment law over the last ten years. Very simply, directors are entitled to all the rights of any other employee and companies have the same obligations to a director as to any other employee. That means that the company must provide terms of employment to a director just as to the most junior office clerk. Here are some comments and suggestions about terms from the viewpoint of the director, not the company.

Directorship is an “office” not an employment. It follows that a director may or may not be an employee. If a director is paid for working in an executive capacity (doing more than attend board and similar meetings), then he is most probably an employee.
A director will have difficulty in making a claim against the company for a default for which he, as a director or employee was responsible. Nevertheless, such claims do succeed from time to time.
For maximum operational convenience, make sure your job description is broad and not specific and that it covers the main areas of future expansion as well as today’s business.
It is not unreasonable that you should opt out of the Working Time Regulations.
Pension - it is a good idea to negotiate a pension arrangement specific to you or the whole board. If it is separate from any other general scheme, it gives more flexibility for change. It may be most advantageous to use a self-invested pension plan where you have control personally over the assets of your fund. Take care to stay on the right side of the tax law, as it is both complicated and inflexible.
Company car - this is not the perk it used to be since the amount charged back to you against tax gives you a tax bill, which effectively eliminates the benefit as against buying the car personally. Consider instead negotiating for the value of the car to which you are entitled, while the running expenses are still paid by the company, then buying something similar yourself. If your choice costs less, you have a financial advantage.
Covenant against competition - clearly, the managing director of a company is the best placed person to set up new competition. Strong covenants against competition are therefore normal. Because English law interprets such a clause against the company, it has to be drawn in a way that may at first appear to duplicate the intention. Subject to that, do make sure it is acceptable to you, in every aspect of its effect.
Insurance - the last five years have seen a massive increase in claims against directors in all manner of areas. Even when such claims fail or simply fizzle out, there is an enormous cost in legal fees. Insurance against such claims is therefore essential for directors who do not also control their company as shareholders. There are many policies available. Read the small print!

Now you know what the facts are, you might like to buy a document to help you get started.

EMP051	:	Directors Service Contract
EMP052	:	Non-exec director employee service contract
EMP055	:	Non-exec director service contract self employed
EMP061	:	Non-exec unpaid director service contract
EMP071	:	Letter to prospective non-executive director to offer directorship
EMP072	:	Letter to director, to discuss termination of directorship and employment
EMP103	:	Company cars policy (free)

If by chance you find some error of law or fact in any Net Lawman information page, do please tell us. We should also welcome your suggestions for new subjects for information pages. These notes:

do not provide a complete or authoritative statement of the law.
do not constitute legal advice by Net Lawman.
do not create a contractual relationship.
do not form part of any other advice, whether paid or free.

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