It
is often the case that being a director confers status,
power, authority, money, respect and self-esteem. However,
before accepting appointment as a director it is important
to be aware of some of the key issues and to consider whether
the responsibility and risks are in keeping with your understanding
of the role. Some of the thoughts and guidelines concerning
the scope and responsibilities of a director, no matter
the size of a company, are noted below:
A
director, by whatever title, is a person who is responsible
for the management of a company's affairs. In some companies
management may be entrusted to 'governors' or 'council members'
who are likely to be the directors of such company. A de
factor director is one who acts as a director without having
been specifically appointed i.e. you don't need the title
of director to be one
A
company must have a minimum of two directors if a public
company, and a minimum of one if a private company. The
method of appointment of directors will generally be governed
by the company's articles of association. Normally the first
directors are chosen by the subscribers of the company's
memorandum and thereafter at an annual general meeting,
although directors can be co-opted if a vacancy/requirement
arises at any time during a year.
Shadow
director
Certain
legislative provisions concerning directors extend to shadow
directors. A shadow director is a person in accordance with
whose directions or instructions the directors of a company
are accustomed to act, although a person is not deemed a
shadow director by reason only that the directors act on
advice given by him in a professional capacity. Depending
on the facts, it is possible for a bank or a company doctor
to be a shadow director.
Non-executive
director
Other
than as indicated below, executive and non-executive directors
have the same responsibilities in law. An executive director
is one who has separate and special responsibilities within
a company e.g. finance. The role of the non-executive director
is referred to below.
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Normally,
the company's articles of association will deal with the
appointment of directors but there are certain statutory
restrictions:
- a
person cannot be a company's sole director and its secretary
at the same time.
- with
certain exceptions, a person who has reached the age of
70 may not be appointed or continue to serve as a director
of a public company or of its subsidiary.
- an
undischarged bankrupt may not, without leave of the court,
act as a director.
- a
person subject to a disqualification order from the court
or who has signed an undertaking may not act as a director.
- a
person cannot be a company's auditor, or its reporting
accountant, and a director at the same time.
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A
director is an officer of a company but not necessarily
an employee. The status of an employee is governed by the
contract under which he serves the company. An executive
director is likely to be deemed both a director and an employee.
A
director is entrusted with powers by the company's articles
of association. He is in some senses an agent of the company
and in some senses a trustee of its assets.
A
director owes fiduciary duties of loyalty and good faith
to a company, analogous to those owed by a trustee, and
duties of care and skill, but differing fundamentally from
those owed by a trustee specifically appointed as such.
A
director may have executive status or operate in a non-executive
capacity. The non-executive director has a positive
contribution to make in ensuring that the board fulfils
its main objectives. He can exercise impartial influence
and bring experience gained from other fields. It is for
this reason that executive directors consider being appointed
as such with great care.
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Directors
derive their power from the company's articles of association
and should study carefully the articles of their particular
company lest they have been changed over the years. Directors
should also have regard to the powers given to the company,
which are to be found in the memorandum of association,
in particular the objects clause. If a company acts outside
these powers the act may be ultra vires and void. The companies
act 1985 made a number of changes in this area intended
to give broad relief from the ultra vires rule, while retaining
it as a limit on the powers of the directors.
A
company in general meeting may, in certain circumstances,
exercise powers normally vested in directors, for example
where there is deadlock on the board or where there are
no directors. Hopefully, such circumstances are rare.
Directors
must exercise their powers collectively and a majority decision
will prevail. The articles of association will govern how
the directors are to proceed when decisions are taken and
will often authorise directors to delegate the exercise
of their powers to a committee consisting of one or more
directors, or to a managing or other executive director.
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A
director's duties are owed to the company as a whole. Duties
and responsibilities arise from common law and statute,
and can be classified as follows:
- fiduciary
duty to act honestly and in good faith.
- duty
to exercise skill and care.
- statutory
duty.
Directors
and shadow directors should bear in mind that breach of
these duties, inter alia, may result in their being judged
unfit to be concerned in the management of a company.
Fiduciary
duty
Four
areas are worthy of note:
- directors
must act in good faith in what they believe to be the
best interests of the company. Generally speaking, the
interests of the company are to be equated with the interests
of all stakeholder groups as a whole and the directors
must act fairly. Where there is a possibility that the
company will not be able to meet its obligations to its
creditors and are likely to have a higher level of importance.
- directors
must exercise their powers only for the purposes for which
they were granted.
- directors
must not place themselves in a position in which there
is a conflict between their duties to the company and
their personal interests or duties to others e.g.
- they
must not, except as authorised by the articles of
association, be interested in any contract with the
company. If they are, the contract will be voidable
by the company and they will be accountable to the
company for any profit they make.
- they
must not, without the informed consent of the shareholders,
use for their own profit the company's assets, opportunities
or information. If they do, they will be accountable
to the company for such profit.
- directors
must not fetter their discretion by agreeing, either with
one another or with third parties, how to vote at future
board meetings. This would not prevent them from committing
the company to a contract which requires further action
at subsequent board meetings.
Duty
of skill and care
Responsibilities
of directors include taking reasonable steps to ensure that
the company's assets are properly collected, safeguarded,
insured and invested, as appropriate, and that all payments
are supported by proper documentation.
A
director is required in the performance of his duties:
- to
exhibit such a degree of skill as may reasonably be expected
from a person with his knowledge and experience.
- to
take such care as an ordinary man might be expected to
take on his own behalf.
In
applying these standards no distinction is to be drawn between
executive and nonexecutive directors.
Directors
should be aware of acting in the best interests of the company.
For example:
- executive
directors should devote their time and energies to company
matters in accordance with the terms of their contract
which, in most cases, will require them to devote all
of their working time. If they are to act as non-executive
directors of other companies, with the corresponding responsibilities
that such appointments bring, they should ensure that
the contract does not prevent that and allows them the
necessary time to do so.
- non-executive
directors are not required to give continuous attention
to company affairs. However, they should familiarise themselves
with the company's affairs, including its financial position,
and should attend board meetings, and of any committee
of the board of which they are members, whenever they
are reasonably able to do so.
- if
a director, whether executive or non-executive, has a
particular skill e.g. a qualified accountant, he should
exhibit the skill or ability reasonably expected from
a person of his experience in that profession.
- having
regard to the articles of association and the demands
of the business, directors are likely to entrust many
duties to other officials of the company. Where that occurs
then, in the absence of grounds for suspicion, the directors
are justified in trusting those officials to perform those
duties honestly.
Duty
to employees
As
an employer, the company must comply with the requirements
of employment law. Directors are charged with the management
of the company's affairs and should have this in mind when
dealing with all employment matters.
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Directors,
as persons involved in carrying on the company's business,
will be responsible should the company trade with intent
to defraud creditors if they are knowingly a party to such
conduct, and may be liable to a fine, imprisonment, or both.
Responsibility for fraudulent trading will arise whether
or not the company is in the course of winding up. In a
winding up, however, the court may impose additional penalties
on those guilty of fraudulent trading and may order them
to make such contributions to the company's assets as it
thinks proper, and may also make a disqualification order.
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Where
the company is in the course of winding up, the provisions
of section 214 of the Insolvency Act 1986 regarding wrongful
trading may also apply. An action for wrongful trading may
be brought against a director, or a former director, if
at some time before the commencement of the winding up of
the company that person knew or ought to have concluded
that there was no reasonable prospect that the company would
avoid going into insolvent liquidation. In section 214,
director includes shadow director. Although legal action
cannot be commenced until a company is in insolvent liquidation,
it is based on events and conclusions drawn by directors
prior to the commencement of the winding up.
Directors
should have regard to the implications of section 214, and
ensure that the accounting records kept by the company are
sufficient to enable them to draw their own conclusions
about the position of the company. The penalty for wrongful
trading is a personal one, and a director or former director
may be directed to make such contribution from his personal
resources to the company's assets as is felt proper by the
court, and is also liable to disqualification.
The
primary defence available to the director is that, from
the time when he first knew or should have concluded that
there was no reasonable prospect that the company would
avoid going into insolvent liquidation, he took every step
that he should have taken towards minimising potential losses
to creditors. In assessing the conduct of the director,
a court will assume that the facts which the director ought
to know or ascertain, the conclusions he ought to reach
and the steps he ought to take are those which would be
known or ascertained, or reached or taken, by a reasonably
diligent person with both the general knowledge, skill and
experience which the director actually has, and the general
knowledge, skill and experience which could reasonably be
expected of a person carrying out the same functions as
the director carries out in relation to the company.
The
requirement to have regard to the functions carried out
by the director in relation to the company involves having
regard to the particular company and its business and even
in the case of a small company, certain minimum standards
are assumed to be attained. The knowledge imputed to a director
is not limited to the facts which he ought to know, but
includes facts which he ought to ascertain.
Where
there is a real possibility of insolvent liquidation the
directors may wish to consult a licensed insolvency practitioner
and/or to take legal advice. Further, it should be remembered
that directors are required to maintain minutes of all proceedings
at meetings, particularly where facts/information are discussed
and decisions taken. Where insolvent liquidation is a real
possibility, it is important that a full record is kept
of all decisions taken and the reasons for them. If the
directors disagree on material questions, any dissenting
director should ensure that his views are clearly recorded,
and each director may wish to consider taking independent
advice about their position.
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A
subsidiary company's directors should not act in accordance
with the instructions of the directors of the holding company
unless they are satisfied that the request is prudent and
in the interests of the subsidiary. Acting blindly in accordance
with instructions may well expose those directors to liability
in respect of breach of duty as well as wrongful trading.
In addition, the directors of the holding company and the
holding company itself, may be deemed to be shadow directors
of the subsidiary and liable to an action for wrongful trading
if the subsidiary goes into insolvent liquidation. Again,
it is important that all instructions given by holding company
directors are fully minuted and that appropriate independent
advice sought as deemed appropriate.
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Under
the Theft Acts 1968 and 1978, criminal liability is imposed
for obtaining property or pecuniary advantage by deception
and for false accounting. Where such an offence is committed
by a company with the consent or connivance of a director
or other officer, that person is likely to be liable as
well as the company. Also, an offence will be committed
by an officer of a company who, with the intention of deceiving
members or creditors of the company, publishes, or concurs
in publishing, any written statement or account which he
knows is or may be misleading, false or deceptive in a material
manner.
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Contents
A
company is required to keep accounting records which are
sufficient to show and explain the company's transactions.
For example, such records must:
- disclose
with reasonable accuracy, the financial position of the
company at any time.
-
enable
the directors to ensure that the balance sheet and profit
and loss account comply with the requirements of the
companies act as to the form and content of company
accounts.
-
contain
entries from day to day of all sums of money received
and expended by the company and the matters to which
the sums relate.
- contain
a record of company assets and liabilities.
In
the case of a company dealing in goods, the accounting records
must also:
- contain
statements of stock held by the company at the end of
each financial year.
- contain
statements of stocktakings from which any statement of
stock is made.
- except
when the sale is an ordinary retail sale, contain statements
of all goods sold and purchased showing the goods and
the buyers and sellers in sufficient detail to enable
the goods, the buyers and the sellers to be identified.
A
parent company must also take reasonable steps to ensure
that each subsidiary keeps such records as are needed to
enable the parent company to produce group and individual
accounts in accordance with the requirements of the companies
act.
Failure
to keep proper accounting records may render every officer
of the company liable to a fine, imprisonment or both.
In
addition to the statutory requirement to keep proper accounting
records, the directors have an overriding responsibility
to ensure that they have adequate information to enable
them to discharge their duty to manage the company's business.
The
duty to manage the company's business will involve ensuring
that adequate control is kept over its records and transactions,
for example:
- cash.
- debtors
and creditors.
- stock
and work in progress.
- capital
expenditure.
- major
contracts.
The
nature and extent of the accounting and management information
needed to exercise adequate control will depend upon the
nature and extent of the company's business.
To
restrict the possibility of an action for wrongful trading,
directors need to be aware of the company's financial position
and progress on a regular basis, and the accounting records
should be sufficient to enable them to be provided with
the information required for drawing conclusions on these
matters. The directors should also be satisfied that proper
systems to provide them with regular and prompt information
are in place.
Directors
may consider it prudent to prepare a plan against which
the subsequent performance of the business can be measured.
Periodic management accounts assist in enabling operating
results and cash position to be compared with the plan.
The need for, extent and frequency of the preparation of
such accounts and the level of management to which they
are presented, will depend upon the size, scope and nature
of the business.
Retention
of records
Accounting
records are required to be kept at the company's registered
office or at such other place as the directors think fit
and such records must be open at all times to inspection
by the company's officers. Special provisions apply where
the records are kept outside Great Britain .
Subject
to any directions in respect of the disposal of records
in a winding up, the records must be preserved in the case
of a private company, for 3 years from the date on which
they were made, and in the case of a public company, for
6 years from the date on which they were made.
However,
directors may feel that it is wise to keep documents for
longer in view of the periods which the law allows for legal
actions to be brought. Thus, leases, insurance arrangements/policies,
minutes and contracts are the type of documentation likely
to be retained in long term filing.
Directors
will also wish to be aware of various tax and related requirements
for record keeping:
- for
corporation tax purposes, a company must keep and preserve
its records for a period of six years from the end of
the period for which a tax return may be required. Records
for these purposes includes records of all receipts and
expenses and sales and purchases together with any supporting
documents which includes accounts, books, deeds, contracts,
vouchers and receipts. If a company fails to keep and
preserve its records, it is liable to a fine of up to
£3,000. The Inland Revenue has the power to require
a company to produce documents relating to its tax liability.
- for
VAT purposes, every taxable person must keep records,
including accounts and all related documents, for 6 years.
- for
PAYE purposes, employers are under a duty to retain documents
and records relating to the calculation or payment of
their employees' emoluments for not less than 3 years
after the end of the year to which they relate.
- for
tax credits purposes, employers must keep copies of all
wage sheets, deduction working sheets and other documents
and records relating to the calculation and payment of
tax credits to employees. These should be retained for
at least three years after the end of the tax year to
which they relate.
- for
national minimum wage purposes, employers must keep records
to establish that an employee is receiving at least the
national minimum wage. These records must be kept for
a minimum period of three years from the end of the pay
reference period.
- for
student loan purposes, employers must keep a record of
all wages sheets, deductions working sheets and other
documents and records relating to the calculation and
deduction of student loan repayments for a period of at
least three years after the end of the tax year to which
they relate.
The
original records will be the best evidence of the information
they contain, but copies will be acceptable as long as the
copies can be regarded as trustworthy. If original company
documents are to be copied or microfilmed, directors should
ascertain that the procedures adopted not only ensure that
all records are copied but also that they are legible, stored
safely and capable of being properly authenticated. If accounting
records are in electronic form, any software necessary to
retrieve the information in a usable form should be retained.
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