Directors' responsibilities

1.1 The first directors (though there may be only one of them) are appointed by the shareholders who form the company.

• Directors are often shareholders or company employees, but do not have to be.

1.2Subsequent appointments must follow procedures set out in the Articles of Association. Usually, the board can appoint a new director (subject to any maximum number set in the Articles) or the shareholders can appoint a person who has been recommended by the board or proposed as a director in advance.

1.3 If you are a director but have no executive position within the company, you are classed as a non-executive.

• As a non-executive director, you may have nothing to do with the day-to-day running of the company. Even so, you still carry the same responsibilities as other directors.

1.4 Even if you have never been appointed a director, you could be classed as a shadow director (if the other directors are 'accustomed to act' under your instructions) or as a 'de facto' director if you act as if you were one - for example, if you resign but continue making decisions as a director.

• As a shadow director or de facto director you carry many of the legal responsibilities, and are subject to many of the penalties, of other directors.

1.5 Some people are debarred from becoming directors.

• Auditors may not be appointed directors of the companies for which they act.
• People who have been disqualified (see 6.3) may not be appointed.
• Undischarged bankrupts may not be appointed unless they have first obtained leave from court.
• Directors must be aged at least 16 or over.

1.6 The appointment, departure or change of particulars of any director must be reported to Companies House within 14 days, using the appropriate form.

2.1 Check if there are any restrictions  listed in the Articles of Association.

• Companies set up since 1 October 2009 are not restricted in their objectives ('objects') unless their Articles of Association say otherwise.
• Companies set up prior to 1 October 2009 listed their objectives in the Memorandum of Association. These are now deemed to be part of the Articles unless a resolution to remove them has been passed.
• If the directors act outside the company's objects, the company may be entitled to take legal action against them.
• You can only change the company's objectives by getting shareholder agreement.

2.2 You must act within the powers granted in the Articles of Association.

• The Articles of Association define the rules governing how the company is to be run, including what the directors' powers and responsibilities are. The Articles also set out how decisions are to be taken: for example, the procedures for calling a board meeting and how many directors are needed to vote on a proposal.

2.3 In exercising directors' powers, you are required to exhibit 'such a degree of skill as may reasonably be expected' from a person with your knowledge and experience.

• For example, a chartered accountant might be expected to know if the company was trading while insolvent.

2.4 You must also exercise a degree of care in your actions as a director.

• The test of an acceptable level of care is what a reasonable person would do in looking after their own affairs.
• You are generally not liable for the actions of your fellow directors, if you knew nothing about them and took no part in them, but you have a duty to make sure you are informed about the company's affairs. It is very dangerous to turn a blind eye.

3.1The company is a separate legal entity from its directors, shareholders and employees. The best interests of the company are not always the same as the best interests of the shareholders.

• You must always consider the interests of other stakeholders such as creditors and employees.
• You must consider the long-term prospects of the company and its reputation.

3.2 You must give equal consideration to all shareholders.

• Even if you hold most of the shares, or act as the nominee of the major shareholder, you must consider the interests of shareholders as a whole.
• In practice, it is very difficult for a minority shareholder to have a significant say in decisions made by majority shareholders.

3.3 You must not use your position to make private profits at the company's expense.

• If you are found to have secretly profited from a contract, you might be forced to hand those profits over to the company.

3.4 You are legally obliged to declare any actual or potential conflict of interest.

• For example, if you have interests in another company with which your company is planning to do business.
• The Articles may say you should not vote on such a deal and, if you do, your vote will be disregarded.

3.5 If you, or someone connected with you, such as a relative, personally plan to enter into substantial deals with the company, they must be approved by the shareholders.

3.6 Your contract of employment must be approved by the shareholders in a general meeting, if your term of employment is capable of exceeding two years.

4.1 You must make sure that the statutory returns are filed with the Registrar of Companies on time.

• These include the annual report and accounts, the annual return and notice of changes to directors and secretaries.
• Failure to deliver can result in fines for which you may be personally liable, disqualification or criminal conviction.

4.2 All companies have to file accounts with Companies House.

• In most cases small and medium-sized companies can submit abbreviated accounts. Small companies with a turnover of no more than £6.5 million, and fixed and current assets of no more than £3.26 million, do not generally need to have their accounts audited and as such are not required to appoint an auditor.
• Directors are required to sign a declaration acknowledging their responsibilities with respect to accounting records and the accounts in general.

4.3 Most private companies are no longer obliged to hold an AGM, although they must give adequate notice of and hold a general meeting if any director or 5 per cent of members request it.

• Private companies with traded shares must still hold an AGM.
• If you do hold a general meeting, you must give appropriate notice (usually 14 days) and ensure that minutes record all decisions taken. This could protect you if you face legal action later (see 6).

4.4 You are no longer required to circulate copies of the annual accounts for approval at a general meeting. However, members must be sent a copy before they are filed with the Registrar of Companies.

• A director must sign the balance sheet and approve and sign off the directors' report.

4.5 You must ensure that all the company's business stationery carries its name, registered number, country of registration and registered address. These details must also appear on your company website, emails and order forms.

5.1 You must comply with employment law in dealings with employees.

• You (personally) can be sued for unfair dismissal, discrimination or unfair work practices, such as unequal pay.
• Act quickly to ensure the company complies with any new employment laws.

5.2 You must take reasonable care to ensure the health and safety of your employees.

• You can be prosecuted for dangerous practices started or continued with your consent, or illness or accidents attributable to your negligence.
• You must undertake a risk assessment. If you have five or more employees, you must record this in writing and have a written health and safety policy.

5.3 You must ensure that the correct amounts of tax, VAT and National Insurance are paid on time.

5.4 Watch out for legal pitfalls in other areas.

• These include data protection, defamation, libel and providing misleading information.

6.1 Even in a limited liability company, you could be held personally liable for losses resulting from some acts or omissions.

• These include illegal acts and acts beyond your powers or undertaken with insufficient skill and care (see 2).
• You could be liable to contribute for company debts incurred through wrongful or fraudulent trading.

6.2 Directors can be jointly and severally liable for the consequences if they act collectively in breach of their responsibilities.

• Liability could be unlimited, so you could be made bankrupt as a result of decisions of the other directors, even in a limited liability company.
• If you disagree with the decisions being made, have it noted in the minutes, including your reasons for disagreeing.

6.3 You could be disqualified from acting as a director for some types of conduct.

• They include continuing to trade when the company is insolvent, failure to keep proper accounting records, failure to pay tax and failure to co-operate with the official receiver.
• Disqualification lasts from 2 to 15 years.

6.4 Some actions could result in criminal convictions.

• They include failure to keep proper accounting records, fraudulent trading, health and safety shortcomings and misappropriation of company funds.

7.1Monitor the financial situation of the company continuously, whether or not you are the financial director.

7.2 Take steps to minimise losses to creditors if the company is in, or seems likely to face, financial difficulties.

• Ask an insolvency practitioner to advise the board. Take detailed minutes of the meeting.

7.3 Make sure that minutes of directors' meetings are maintained in any event.

• They could protect you against future legal action, particularly where there have been boardroom disagreements.

7.4 Keep in mind the requirements of your employment contract and powers granted under the Articles.

7.5 Whenever possible, avoid giving personal guarantees of the company's debts.

• Always negotiate to limit the extent of any guarantee (eg by limiting its duration).

7.6 Ensure the company considers directors' and officers' liability insurance. The company may also be able to indemnify directors.

• These will pay for legal expenses, and sometimes, damages awarded against you, if you are sued for negligence or breach of duty. But they may not protect you against actions for dishonesty, or company failure.