Directors
INTRODUCTION
These notes are intended to be a brief introduction to the background
of limited companies in the UK. They are certainly not comprehensive;
there is a huge amount of legislation covering company law, employee
taxes, company taxation and employment legislation.
THE RESPONSIBILITY OF THE DIRECTORS
The directors are responsible for running the company, although they
can delegate to a committee or individual directors. The major decisions
of the company are made in board meetings and must be minuted.
The directors are in a position of trust, looking after the assets
of another person, even though it is an artificial person. They are
also responsible to the company for the interests of the company's
employees. This is so, even if they own all of the shares in the
company. If they act dishonestly or negligently or make secret profits
from the activities of the company, they will be liable for the company's
losses.
Legal actions against the directors must, in most cases, be brought
by the company, i.e. with the consent of the majority of the shareholders.
If the directors control the company, whether legally or in practice, then
in certain circumstances a minority shareholder may bring an action
against them on behalf of the company.
A director's service contract must not exceed five years without the
possibility of revocation by the company unless approved by the company
in general meeting.
The directors have a duty to ensure that the Annual Returns, Accounts,
Notices and other documents that should be registered are delivered to
the Registrar of Companies at Companies House by the required dates. A
court has the power to disqualify any person from becoming a director,
if he is concerned in the management or is a
director of a company that persistently defaults in making these returns.
If a director buys any shares in the company, directly or indirectly,
e.g. through a nominee, the director must inform the company.
ACCOUNTS
It is important for the protection of the shareholders and creditors
that the financial position of the company can be ascertained at anytime.
Proper accounts and books are therefore essential. The directors must
ensure that proper books are kept, recording such items as money received
and spent, assets and liabilities of the company, stock, sales and purchases.
If the company is wound up and proper books of account have not been
kept, the liquidator may be unable to determine the assets and liabilities
of the company, in which case the directors can become personally liable.
They will certainly be subject to severe criticism.
Heavy penalties can be imposed on the officers of any company that does
not keep adequate books.
COMPANY REPORT AND ANNUAL RETURN
Each year the company must hold a general meeting and put before its
shareholders the accounts of the company for the previous year, the
Auditors Report on the Accounts and the Directors Report on the progress
of the company and its activities. It is the directors' responsibility
to ensure that the Accounts and Directors Report give information
required by law. Any auditors would need to qualify their Audit Report
if any information is not given.
The Accounts, whether laid before a general meeting or not, must be
filed with the Registrar of Companies at Companies House, together
with the Auditors Report. Normally, a private company must now file its accounts
within 10 months of its accounting date.
In addition, the company must file an Annual Return at Companies House.
Companies House now operates a shuttle system whereby the company is
sent a copy of the last Annual Return and the company need only affirm
that the information is still correct or must make such amendments as
required.
WRONGFUL TRADING
Every director who knows, or ought to know, that the company cannot
avoid insolvency, must take every reasonable step to minimise potential
losses to the company creditors. Any director who fails to do this
can be made liable by the court to make a contribution to the
company's assets. The amount is determined by the court. The court
may also make a disqualification order against that director. This
applies to all past and present directors, and also to shadow
directors. In practice, this will replace fraudulent trading as
a means of making directors personally liable for insolvency, since
no intent to defraud need be shown.
REPORTS ON THE CONDUCT OF DIRECTORS
The liquidator or receiver of an insolvent company must submit a
report to the Secretary of State on the director's conduct. The
report will include details of remuneration voted together with
the cash expenses and benefits in kind. It will also include
details of other companies with which the directors are associated
and generally any matters which should be considered. If on an
application by the Secretary of State, the court considered that
the conduct of a director is such that he ought to be disqualified,
he may be so disqualified for up to 15 years.
CONCLUSION
No summary can deal in any depth with a subject as complex and
wide ranging as company law. There will be many points of detail
on which directors will need professional advice from their
accountants. Apart from highlighting some of those areas, it
is hoped this summary will assist in familiarising those responsible
for the running of companies with some of the more important
requirements of company law.
Please remember that the website has been written in very general terms.
You should always obtain individual advice based on your own particular
circumstances. Why not take advantage of a free initial discussion?
© Majors, Chartered Accountants, 2001; Updated 24 November 2001; Reviewed 25 April 2002