11.05 – Becoming A Good Director / CEO
If you decide to trade as a limited liability company, you will likely become a director of the business. Whether you are the sole director or one among several, this role carries significant responsibilities alongside its status.
Director's Duties and Responsibilities
As a director, your key duties include:
- Acting in good faith in the interests of the company, carrying out duties diligently and honestly.
- Ensuring the company does not operate with intent to defraud creditors or for any fraudulent purpose.
- Avoiding trading while the company is insolvent, as directors may be personally liable for debts incurred during such periods.
- Ensuring no deception of shareholders.
- Considering the interests of employees.
- Complying with the requirements of the Companies Acts, such as maintaining proper accounting records and filing accounts.
In essence, a director’s responsibilities are similar to those of a sole trader or partner but include more technical and legal requirements. For example, directors must understand the balance sheet, profit and loss account, and key performance ratios. Directors must also ensure accounts are sent to Companies House, not just sign them.
Directors' Insurance
Directors can insure against risks through directors’ insurance, covering negligent performance of duties and breaches of the Companies Acts, particularly the Insolvency Act, which can hold directors personally liable to a company’s creditors. The company usually bears the insurance cost as directors act on its behalf.
Areas of High Risk for Directors
Certain actions can lead to disqualification and personal liability:
Trading While Insolvent Occurs
This occurs when a company’s liabilities exceed its assets, eliminating shareholders’ equity and putting directors at risk. Directors owe a duty of care to creditors and should seek prompt advice from an insolvency practitioner if nearing insolvency. Proper actions by directors can avoid penalties.
Wrongful Trading
This applies if, after a company goes into insolvent liquidation, the liquidator believes directors should have realized earlier that the company had no realistic chance of survival. Courts can make directors personally liable for the company’s debts in such cases.
Fraudulent Trading
More serious than wrongful trading, this involves directors knowingly participating in fraud against creditors. The protection of limited liability can be removed in these circumstances.
Former directors of insolvent companies can be banned from holding office as company directors for up to 15 years due to fraud, fraudulent trading, wrongful trading, or failure to comply with company law.
Checking Disqualified Directors
If you are concerned about someone you are going to do business with and believe they are or have been a company director, you can check the Disqualified Directors Register on the Companies House website at www.gov.uk/search-the-register-of-disqualified-company-directors.
Defining a Additional Tips for Aspiring Directors
- Continuous Learning: Stay updated on business laws and regulations. Regular training and courses on corporate governance can be highly beneficial.
- Transparent Communication: Maintain open lines of communication with stakeholders, including shareholders, employees, and creditors.
- Ethical Practices: Uphold high ethical standards in all business dealings to build trust and credibility.
- Strategic Planning: Regularly review and adapt the company’s strategic plan to meet changing market conditions and business goals.
- Risk Management: Implement robust risk management processes to identify, assess, and mitigate potential risks to the business.
By understanding and fulfilling these responsibilities, you can effectively navigate the complexities of being a director and steer your company towards sustained success.
