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What key responsibilities do company directors have?

There are about 1.9m limited companies in the UK, making up about a third of the total business population. On behalf of shareholders, company directors run limited companies, with most owning shares in the company. Every private limited company must have at least one company director, appointed by the shareholders who form the company.

There are two types of company director – executive and non-executive. Non-executive directors are not involved in the day-to-day running of the business; they normally sit on the company board and input at a higher strategic level, on a paid part-time basis. An executive is registered at Companies House as a director, while a “non-exec” isn’t. Non-execs still have the same legal responsibilities as execs.

The board appoints a managing director, who has overall responsibility for steering, managing and safeguarding the company. As explained on the Law Donut website, the appointment, exit or change of particulars of any director must be reported to Companies House within 14 days.

Can anyone be a company director?

You’re not required by law (or otherwise) to have any formal qualifications, skills or experience to become a company director. However, you must be able to perform certain duties (set out further on).

To become a company director, you must be older than 16 and be discharged from bankruptcy (if relevant). If you haven’t been discharged from bankruptcy, by law, you cannot manage, form or promote a limited company without explicit permission from the court. And you can’t be a company director if you have a Debt Relief Order (they also normally last for 12 months).

What if I’m disqualified?

Obviously, you cannot be a company director if a court has disqualified you from being a company director. This can happen if you’ve previously failed to meet your legal responsibilities as a company director.

You can be disqualified for up to 15 years, during which time you cannot be a director of a company registered in the UK or an overseas company with UK connections, nether can you form, market or run a company. As explained on GOV.UK, you can be sent to prison for up to two years if you break the terms of your disqualification.

Anyone can report a company director’s conduct as being “unfit” for many reasons, including:

allowing a company to trade when it can’t pay its debts
not maintaining proper company accounting records
failure to send accounts and returns to Companies House
not paying tax owed by the company to HMRC and
using company money or assets for personal benefit.

Company director general duties

As the IoD website makes clear, when a person becomes a registered company director they’re subject to legal obligations.

The new director must provide their personal details to Companies House, and will thereafter be the point of contact between the company and the UK state.

The Companies Act 2006 sets out general duties for directors. As a company director you must:

Promote the success of the company
Exercise independent judgement
Exercise reasonable care, skill, and diligence
Avoid conflicts of interest
Not accept benefits from third parties
Declare any interest in proposed transaction or arrangement.

As explained on GOV.UK, directors of a limited company must:

follow the company’s rules, shown in its articles of association
keep company records and report changes
file company accounts and Company Tax returns
let other shareholders know if you might personally benefit from a transaction the company makes
pay Corporation Tax.

You can, of course, employ or pay an accountant to take care of some of the above duties, however, you – as the/a director – are still legally responsible for your company’s records, accounts, and performance. And, just to make the crucial point again:

You may be fined, prosecuted or disqualified if you do not meet your responsibilities as a director.

Company director pay and loans

As a director, you pay yourself salary via the company’s payroll (PAYE) scheme, with the necessary income tax and National Insurance contributions deducted and paid to HMRC. If you’re a company shareholder, you can also receive dividend payments, which (after allowances) are subject to tax, as are any benefits in kind you receive.

A “director’s loan” is made when you take more money out of a company than you’ve put in, without it being salary or dividend. This is allowed, as long as you keep detailed records of these loans and pay any tax due on them. In other cases, directors lend money to their companies.

What if the company fails?

Directors are not normally liable for the limited company’s debts if it fails. However, as explained on the IoD website:

“Directors are personally liable if they allow a company to continue to trade when, to their knowledge, there is no reasonable prospect of debts being paid, either when they are due or shortly after.
“This is viewed as fraudulent trading, because it amounts to an intention to defraud creditors. Anyone knowingly party to the fraud is liable for the debts of the company without any limit. It is also a criminal offence punishable by up to seven years in prison.”

A liquidator may force a director to repay money owed to the company through a director’s loan. Failure to do so can lead to legal action and even bankruptcy for the former director.

What other legal responsibilities do I have?

Directors must not misuse their company’s property or make personal profit at the company’s expense, while due confidentiality regarding the company’s affairs must be observed. And, according to Law Donut: “Directors can be jointly and severally liable if [they] act collectively in breach of [their] responsibilities.”

Directors can be liable following serious breaches of health and safety legislation. And, as explained on GOV.UK: “You must not allow other people to control your powers as a director. You can accept advice, but you must use your own independent judgement to make final decisions.” Ultimately – the buck stops with you.