Directors are defined by their responsibilities

By James Mound, Mills & Reeve In the eyes of the law a company exists as a person in its own right, capable of exercising its own powers, owning its own assets and suffering its own liabilities. In reality, however, a company can only act via human agents. The law refers to those individuals with the power to direct the company as ‘directors’, although in practice any other title might be used.

Published in Norfolk Director Magazine, Winter/Spring 2020
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Many company directors first take on that role as part of the natural progression of their own business. The reduced personal risk and the positive aesthetic of having a ‘Limited’ moniker chimes well with the aspiration of a growing business. But for all of the benefits, it is equally important to be aware of the responsibilities you are taking on when becoming a company director.

Many of these responsibilities are set down in statute. The Companies Act 2006 organised already existing common law and equitable duties of directors into seven ‘general duties’. The most prominent is a duty to act in the way which the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

A director’s statutory duties are principally owed to the company, and in most circumstances only the company can enforce them. The law does not distinguish between ‘executive’ and ‘non-executive’ directors, they are all subject to the legal duties placed upon directors.

As a result, directors must tread carefully before pursuing a course of action intended to benefit any particular stakeholder or group, and directors who are also shareholders or creditors of the company must be doubly careful to remember which hat they are wearing when conducting company business. If in doubt, take professional advice.

Elsewhere, company law is rife with other responsibilities that fall on the shoulders of the directors. One of the simplest examples is the requirement for directors to maintain company records. A legal requirement it may be, but the practical benefits and longer-term consequences far outweigh the likely ramifications of any short-term legal default.

If you fail to keep proper minutes of board meetings, you can be indicted for a breach of section 248 of the Companies Act, but the value of those minutes in proving that you acted reasonably and honestly as a director can make all the difference if things turn sour further down the line. A lack of company records can cause Insolvency Practitioners to start asking difficult questions of the directors.

On the upside, as your business grows and you seek new investment, or even an exit, having well-kept records can often be the difference between a smooth efficient transaction and a costly drawn-out battle to completion.

Directors are defined by their responsibilities 1

James Mound specialises in corporate transactions and business law and is an Associate at Mills & Reeve.
Contact James on E: james.mound@mills-reeve.com T: 01603 693365 For more information visit www.mills-reeve.com

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