The directors are the people who the shareholders appoint to run the company on a day-to-day basis. In a private limited company, there will always be at least one.
In a start-up, it is usual for the founders to be directors as well as owners. There may be other non-director owners (such as lenders) and there may be other directors (such as advisors).
Confusingly, there is no fixed definition in law – the best we can do is say that anyone acting as a director is one.
You hopefully know if you are one – you should have accepted the position as it comes with significant legal responsibilities. If you haven’t, but think you do the job of one, be aware that you can also be a shadow director – someone who is not a director, but who still has those responsibilities because of the control over the board that he or she has.
If you do hold a directorship, it should be recorded at Companies House (along with a service address for notices). The first directors to a new company are registered at incorporation. Afterwards, the articles of association should set out the process by which new ones are appointed or removed.
Who can’t be appointed as a director?
Certain people are prohibited from holding directorships by law. These include:
- someone under the age of 16 (unless he or she has been excepted by the Secretary of State)
- an undischarged bankrupt, or someone subject to bankruptcy restrictions
- someone who has been disqualified by a court
- someone who is an auditor of the company
Additionally, the company’s articles of association may prohibit generally certain types of people. If there is one, the shareholders’ agreement may also give stricter restrictions on exactly who can be appointed.
You don’t have to be UK resident to be a director. You could live abroad.
Corporate bodies such as other companies and limited liability partnerships can hold directorships. However, the board must also include at least one natural person (a human being).
Executive and non-executive roles
Executive directors are involved in the direct management of the business.
The role of a non-executive director is still to ensure that the board meets its objectives. He or she can bring experience from other areas of business life, and a viewpoint of someone not deep into the details of the business.
Companies are advised to appoint non-executive directors to bring balance to board decisions, although small companies are not obliged to have any. External equity investors will usually insist on having them.
Employment law rather than company law defines whether someone is an employee or not. It is not always clear whether someone is an employee or not. Generally, someone working only for the company, on the company’s terms will be an employee.
Since executive directors are those directors who do this, they will be employees and require an employment contract.
Non-executive directors tend not to be employees and are hired under a contract for services.
Executive and non-executive directors have the same duties in law. Duties are not diminished because the director does not work full time within the company.
It is therefore sometimes better not to be a director unless you need to be. With power comes responsibility, both for your own actions and those of fellow board members.
The duties of directors
Directors have responsibilities towards the company. If those responsibilities are neglected or broken, the company and/or the shareholders may suffer, and the director concerned may be liable to civil and criminal action.
The statutory duties are:
- to act within powers given by the constitution of the company and the shareholders and to exercise them only for the reasons that they were given
- to act in good faith to promote the success of the company for the shareholders as a whole body. A director must consider in his or her actions:
- the probable consequences of his or her decisions and actions
- the interests of the company’s employees
- the relationships the company has with third parties that are needed for long term success – suppliers, customers and other stakeholders
- the need to maintain the reputation of the company
- to exercise independent judgement. Advice can be sought, but decision making power cannot be allowed to be taken by someone else
- to exercise reasonable skill, care and diligence by being informed about the company and taking decisions that would be expected by someone with his or her qualifications and experience
- to avoid conflicts of interest between himself and herself and the company
- not to accept benefits as a result of position or action as a director from third parties
- to declare interests (direct and indirect) in proposed transactions and arrangements to the rest of the board
Stemming from these, directors are reasonably expected also:
- to maintain confidentiality about the company and future intentions of the company
- to consider and act in the interests of creditors as well as shareholders
A company also has legal responsibilities. These include duties under the Companies Act, and those under other laws (such as the Health and Safety Act). Because the company acts through the board of directors, the directors are also responsible for making sure that the company fulfils its duties. The most notable ones are requirements to keep accurate and complete accounting records and to file information with the Registrar of Companies, which include the financial statements.
If a director breaches a duty to the company, then the company (or in limited circumstances, the shareholders together) will be able to enforce a remedy.
Remedies might be:
- restoration of company property held by the director
- damages to make good the breach (but not to punish)
- an injunction to prevent further damage
- setting aside the actions of the director
If the company breaches it duties, all the directors together are liable for fines and/or (in serious cases) imprisonment. This could happen if the company:
- fails to file documents
- is, or about to become, insolvent
- breaks certain other laws (for example, criminal proceedings can be started against a director who breaks health and safety law)
Directors cannot be relieved of liability and cannot transfer it. However, companies often seek indemnity insurance for directors as a benefit in kind so that if a director did breach his duties, costs can be covered.