What obligations does a director have?
Part II: other general duties
Overview
Becoming a director gives status and a direct impact on the strategy and success of a business. How free is a director to act alone? What obligations and duties should a director bear in mind?
This is the second of four articles summarising the general duties and potential liabilities of a director of an English private company (which is not in a group with a PLC).
Day-to-day management of a company is delegated to the directors by its shareholders. Directors are initially appointed by the shareholders and can usually themselves appoint additional directors up to any limit set by the articles of association.
The decisions of the directors are taken collectively by the board of directors. A director cannot act as a director on his own unless only one director has been appointed. Decisions are either taken by majority vote at board meetings or by the signing by all the directors of a written resolution.
The director's role and his powers are primarily defined in the company's articles and, if he is also an employee, in his service contract.
The mere fact of appointment does not normally give a director any executive powers. Most directors are, however, also employees of the company with specific powers delegated to them. A managing director usually has extensive powers to take day-to-day decisions on behalf of the company. Other directors such as sales directors or finance directors will have a more limited role.
Directors owe a duty to the company and, if insolvency threatens, to creditors (see Directors and insolvency). Certain key duties of directors have been placed on a statutory footing under the Companies Act 2006 (the "Act"). These duties are owed to the company.( See What obligations does a director have? Part I: statutory duties)
Directors are also subject to a number of other statutory requirements and restrictions. These include a duty to keep proper books and records and restrictions on entering into certain transactions with the company or accepting loans from the company. Breach of these duties and requirements can result in a director being disqualified from acting as a director and in many cases can lead to the director incurring personal liability (see Personal Liabilities of directors). Insurance can be obtained to cover some cases of personal liability.
Other (non-statutory) general duties
Other, non-statutory duties which a director may owe to a company include:
- Duty of confidentiality - A director owes a common law duty of confidentiality to the company of which he is a director. This duty overlaps with the statutory duties to promote the success of the company and to avoid conflicts.
- Authority exceeded - A director who causes the company to act beyond its powers will be guilty of misfeasance and will be personally liable to the company for any resulting loss. Such acts will not be capable of ratification. However, acts of a director which merely exceed the authority granted to him by the articles or by resolution may be ratified by the shareholders. (See Powers and authority.)
A transaction to which a director or any person connected with a director is a party, and which exceeds the authority granted by the articles, may be voidable by the company. Further, the party to the transaction and any director who authorised the transaction will be liable to account to the company for any profit made on the transaction and to indemnify the company against any loss resulting from the transaction.
An act of a director carried out without authority is not always invalidated (for example, the issue of shares, without authority from shareholders under section 550 or 551 of the Act, remains valid although the director will be liable for permitting the issue).
Other statutory requirements and restrictions
Shareholders’ consent to be obtained for substantial property transactions
A director is required to obtain the consent of the shareholders of the company to any substantial property transactions between the company and the director or any person connected with the director (section 190 of the Act). The section applies to transactions involving ‘non-cash assets’ of a value exceeding (a) £100,000 or (b) 10% of the company's net assets at the time the arrangement is entered into (whichever is less). Transactions involving assets with a value of less than £5,000 are exempted from this provision.
Loans
A private company may not make a loan to a director (or director of its holding company) or provide any guarantee or security for such a loan, without prior shareholder approval (section 197 of the Act). If the director is also a director of the holding company, approval is also required from the shareholders of the company. No approval is required from the shareholders of a wholly owned subsidiary or of an overseas company. An arrangement in breach of this provision is voidable by the company, save for certain exceptions including:
- loans not exceeding a total of £10,000; and
- the provision of funds to enable a director to perform his or her duties; for example the making of an advance to meet business expenses.
(A private company which is the subsidiary of a public company is subject to some further restrictions.)
Accounting records and duty to register documents
Directors are required to keep accounting and other records which show with reasonable accuracy the financial position of the company. The directors must prepare annual accounts including a balance sheet, a profit and loss account and a directors' report showing a true and fair view of the state of affairs of the company as at the end of the financial year.
Once approved by the directors the accounts must be sent to all shareholders. There is no longer and statutory requirement to lay accounts for approval at a general meeting.
The accounts must be filed with the Registrar of Companies within nine months of the end of each financial year. (Separate rules apply where the first accounting period ends more than 12 months after the date of incorporation of the company.)
The directors are also required to file an annual return each year, setting out details of the directors, secretary (if any), registered office, business activities and issued share capital of the company. The annual return must be filed within 28 days of the date to which it is made up (generally the anniversary of the date of incorporation).
In addition, the directors are required to file numerous other documents including details of any change in the identity or details of the directors, secretary, registered office, issued share capital, special resolutions and certain other types of resolutions. There are prescribed time limits for each filing. Failure to comply with these time limits results in fines but does not of itself invalidate the underlying event.
The directors are also responsible for ensuring that the company maintains its statutory books namely the register of directors, the register of secretaries, the register of members, the minute books, and the register of charges. Failure to do so may result in a fine, daily default fines and in severe cases, imprisonment.
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