Auto Insight Magazine – Directors’ Responsibilities

Mar 7, 2023 | TC news, Business support hub

HAPPY ANNIVERSARY!

Congratulations to the Scottish Motor Trade Association (SMTA) on their 120th anniversary.

Find out more about their journey in the 12th edition of their fantastic Auto Insight magazine.

We are delighted to have been invited to contribute to the magazine again.

On pages 18-19 Senior Partner Andrew Croxford outlines Directors’ Responsibilities and why making the decision to become a Director should never be taken lightly.

Read the magazine here. 

       

Directors’ Responsibilities 

Are you a Company Director? If the answer is yes, and someone were to ask you to explain your legal responsibilities as a director of a limited company, would you be able to answer? We often encounter situations where people accept the position of Director without appreciating that being appointed as a director comes with legal responsibilities.

A company works on the basis of two groups of people working together, its shareholders and its directors. While shareholders own the company, the directors are responsible for making the strategic and operational decisions of the company.  Limited companies in the UK must have at least one director aged 16 or above. Directors have specific legal duties, and if a director fails to perform these, penalties and fines can be enforced.

Under the Companies Act 2006, there are seven core statutory duties that a director must perform.

The company’s constitution

You must follow the company’s constitution and its articles of association. These are written rules about running the company, agreed upon by the shareholders and directors. The constitution sets out what powers you have as a director and the purpose of those powers.

Promote the success of the company

You must act in the company’s best interests to promote its success. You must consider the:

  • consequences of decisions, including the long term
  • interests of employees
  • need to support business relationships with suppliers, customers, and others
  • impact of the company’s operations on the community and environment
  • company’s reputation for high standards of business conduct
  • need to act fairly to all members of the company

If the company were to become insolvent, your responsibilities as director will apply to the creditors, instead of the company.

Use independent judgment

You must not allow other people to control your powers as a director. You can accept advice, but you must use your own judgment to make final decisions.

Exercise reasonable care, skill and diligence

You must perform to the best of your ability. The more qualified or experienced you are, the greater the standard expected of you. You must use any relevant qualifications, knowledge, skill or experience you have.

Avoid conflicts of interest

You must avoid situations where your loyalties might be divided. You should consider the positions and interests of your family, to avoid possible conflicts. You should tell other directors and members about any possible conflict of interest, and follow any process set out in the company’s articles of association. This duty continues to apply if you are no longer a director. You must not take advantage of any property, information or opportunity you became aware of as a director.

Third-party benefits

You must not accept benefits from a third party that are offered to you because you are a director. This could cause a conflict of interest. The company may allow you to accept benefits like reasonable corporate hospitality if it is clear there is no conflict of interest.

Interests in a transaction

You must tell the other directors and members if you might personally benefit from a transaction the company makes. For example, if the company plans to enter a contract with a business owned by a member of your family.

These duties will still apply even if:

  • you are not active in your role as director
  • someone else tells you what to do
  • you act as a director but have not been formally appointed
  • you control a board of directors without being on it

Other responsibilities

As well as the above statutory responsibilities, there are other responsibilities that directors have to undertake to ensure the smooth running and growth of the business. These include:

Keeping company records – which must include up-to-date records about the company and its financial transactions.

These will also include:

  • Statutory registers of shareholders, directors and company secretaries
  • Accounting and finance records, and preparation and filing of the annual statutory accounts at Companies House
  • Preparation and filing of company tax returns
  • Resolution and minutes of meetings
  • Stock transfer forms and share certificates

Minutes of board meetings must be kept for ten years as these provide a record of the board’s decision-making process. This can be particularly important if the evidence is required later to confirm that the directors’ responsibilities were fulfilled in relation to any crucial decisions which were made. In practice we often find that in owner managed businesses minutes of meetings are not well maintained.

Company changes

Over time changes may occur in the company. The directors are responsible for notifying any changes to Companies House.

These can include:

A change of registered office address, change of company name, change of the location of statutory records, issue of shares, change of articles of association, etc.

Compliance with legislation

There are also regulations and legislation that must be considered when running a company including employment law, consumer rights, health and safety laws, trade descriptions, etc. Directors’ responsibilities include ensuring these are complied with.

Directors must also ensure that equal consideration is given to all shareholders. The articles of association will usually outline and include protections to ensure minority shareholders are included in the decision-making process and their interests are considered.

Think before becoming a director

The role of a director involves many responsibilities and ultimately a breach by a director of their legal duties exposes them to possible legal action. When setting up a company or being invited to become a director, it is always advisable to seek reliable legal and financial advice.  That way you can be sure to comply with all the legislation to run the company and act in the capacity of a director, legally, and as effectively and efficiently as possible.

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