This article explains the legal responsibilities and role of a director. This page has limited application to directors of public companies, whose obligations are considerably wider.
Who can be appointed as a director?
Usually, it is the shareholders who appoint directors to manage the day to day running of the company on their behalf. They can chose anyone to become a director, provided that person:
- has not been disqualified by a court
- is an undercharged bankrupt (except with leave of the court)
- is aged over 16
- is under the age of 70 (this is for public companies only and does not apply to directors that have been specifically approved by a general meeting of the company).
Although the lower age limit is 16, general advice is never to appoint a director under the age of 18 because of the difficulty he or she would have in executing any function as a minor.
You can find out more about the appointment of directors.
Responsibility for filing documents
Every director has a personal responsibility to make sure that certain statutory documents are delivered to Companies House (the registrar) whenever required by the Companies Act 2006. These include:
- annual financial statements (for limited companies)
- the annual Confirmation Statement (formerly an 'annual return')
- notices of change of directors or secretaries
- notice of change of registered office
Note that all of these can now be filed online using Companies House webfiling service, so there is no need to use paper forms.
Traditionally, the company secretary would be responsible for filing documents, but since the CA 2006 removes the requirement for a private limited company to have a secretary, the directors are responsible for delivering the above documents.
What happens if documents are not delivered
If the documents are not delivered then any or all of the directors of the company could be prosecuted. Failure to do so is a criminal offence, punishable by a fine of up to £5,000 and a possible criminal record.
However, Companies House are lenient, and instead of prosecuting, send out reminders before issuing relatively small fines. Large fines are given only when there is a problem that is unlikely to be resolved.
Despite the light touch regulation, over 1,000 directors are prosecuted each year. Persistent failure to file on time can also result in a director being temporarily disqualified from managing any other company.
If Companies House believes that the company is no longer trading, it could be struck it off the register and dissolved. In this case, the remaining assets become the property of the Crown. The registrar notifies you before doing so 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. Restoration is expensive so as to provide a disincentive for it to happen.
Late delivery of financial statements
Directors of private limited companies are usually given a minimum of 3 months from the date of the notice, or a maximum of 10 months from the accounting reference date to deliver accounts. The reference date is the date of the financial statements.
If the company is a public one, then the directors are given a maximum of 7 months from the accounting reference date.
If the first set of accounts for a new company span a period of more than 12 months, then they must be filed within 22 months of the date of incorporation for private companies and within 19 months for public companies. In practice, it is easier to file for the initial short period between the date of incorporation and the date of the first accounts, and then file on an annual basis after that.
If the financial statements reach Companies House after the deadline, then the company is charged a late filing penalty. The later the date of delivery, the greater the fine.
To help avoid late filing and the resulting prosecution and penalties, you can sign up to an alerts service provided by Companies House that should remind you in advance of your responsibilities and dates in respect to all documents that need to be filed.
Responsibilities to the company
In a private company, the director has a responsibility (a fiduciary duty) to act in the best interests of the company without regard to their pay or terms of employment.
There are several areas where directors may be personally liable for the actions of the company. The duties of directors include, for example, anti-competitive activities, and corporate manslaughter.
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
The Health and Safety Commission have issued guidance advising that organisations assign directorial responsibility to a board director, and outlining the range of board level tasks.
Directors' service contracts
Directors' service contracts have become increasingly complex as a result of the introduction of additional employment law.
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 member of the office.
If you are a director, we suggest that you are aware of the following relating to employment:
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 or she is most probably an employee.
A director will have difficulty in making a claim against the company for a default for which he or she, 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.
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 (SIPP) 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.
A company car 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.
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 and Welsh 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.
There has been a massive increase in claims against directors in all manner of areas as their responsibilities increase in number. 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.