Becoming a director of a company can be a significant milestone, but it also brings legal responsibilities. Whether you are setting up a new business, joining an established company or becoming a director of a family business, it is essential to understand what is expected of you from day one.
Here are five key things every new company director should know.
1. Understand your legal duties
Directors owe a number of statutory duties to the company under the Companies Act 2006. These include duties to:
- Act in accordance with the company’s constitution.
- Act in the company’s best interests, taking into account factors such as the long-term success of the business, its employees, customers, suppliers and shareholders.
- Exercise independent judgment.
- Exercise reasonable care, skill and diligence.
- Avoid conflicts of interest.
- Not accept benefits from third parties because of your position as a director.
- Declare any interest you have in an existing or proposed transaction involving the company.
These duties are designed to ensure directors act honestly, responsibly and in the best interests of the company. Breaching them can, in some circumstances, result in personal liability.
2. Make sure the company complies with its legal obligations
Although day-to-day administration may be delegated to employees or professional advisers, the directors remain ultimately responsible for ensuring the company complies with its statutory obligations.
This includes ensuring that:
- Annual accounts and confirmation statements are filed on time.
- Corporation Tax and other tax obligations are dealt with appropriately.
- Companies House is notified promptly of relevant changes, such as changes to directors or the registered office.
- Statutory registers and company records are properly maintained.
- Accounting records are kept in accordance with legal requirements.
Late filings and failures to comply with company law can result in financial penalties and, in serious cases, criminal liability or director disqualification.
3. Remember that limited liability is not absolute
One of the main advantages of trading through a limited company is that the company is a separate legal entity. In most cases, the company—not its directors—is responsible for its debts and liabilities.
However, there are circumstances where a director may become personally liable. For example, if you:
- Give a personal guarantee for a company loan or lease.
- Act outside your authority or enter into contracts in your own name.
- Breach your duties as a director.
- Engage in fraudulent or wrongful trading.
Understanding where the limits of limited liability lie is an important part of managing risk as a director.
4. Take action early if the company experiences financial difficulties
When a company is facing financial difficulties, a director’s responsibilities become even more important.
If you know, or ought reasonably to know, that the company has no reasonable prospect of avoiding insolvent liquidation or administration, continuing to trade without taking appropriate steps may expose you to personal liability.
If your company begins to experience financial difficulties, you should:
- Keep the company’s financial position under regular review.
- Hold and properly document board meetings and decisions.
- Seek professional legal and accounting advice at an early stage.
- Take appropriate steps to minimise potential losses to creditors.
Seeking advice early can often improve the options available to both the company and its directors.
5. Keep informed and ask questions
A director cannot simply leave important decisions to fellow directors or advisers without understanding what is happening within the business.
You should ensure you receive appropriate financial and management information, review board papers carefully, ask questions where necessary and keep yourself informed about the company’s affairs. Directors are generally entitled to access the company’s books and records where this is necessary to carry out their duties.
Being actively involved in the management of the company is one of the best ways to protect both the business and yourself.
How we can help
Taking on the role of company director can be rewarding, but understanding your legal obligations from the outset can help you avoid costly mistakes.
Whether you are establishing a new company, joining the board of an existing business or would simply like advice on your duties as a director, our Corporate team would be pleased to help.
For further information, please contact businessservicesteam_enquiries@wbw.co.uk.
Our Commercial Services Team
Our Commercial Services Team forms part of our wider Business Services Team, providing businesses with access to a comprehensive range of legal expertise. Alongside corporate and commercial law, we advise on commercial property, commercial disputes, employment law and HR support, tax advice and compliance, and Farms & Estates matters. By bringing these specialist services together, we provide joined-up legal support tailored to your business at every stage.
For further information or to make an appointment, please visit: https://www.wbw.co.uk/business-legal-services/
WBW Solicitors has offices in Axminster, Bovey Tracey, Brixham, Exeter, Exmouth, Honiton, Launceston, Newton Abbot, Paignton, Seaton, Sidmouth, and Torquay.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
