Remembering what it means to be a director in a limited company - Rashmi Dube

Setting up a limited company is relatively straightforward in England and Wales – in fact in most of Europe, England and Wales are seen as the easiest places to set up a company. It can be done pretty much within seven days, if not sooner. Other than choosing a company name that does not already exist, and as long as the director is not disqualified, very little thought sometimes goes into the rest of the process. Once set up at Companies House, the business is up and running and over the years, will grow until there is an issue with either one of the co-directors or a shareholder, which is when the business owners are forced to look at the company and its documents.

Understand the company. No matter how old it is, the company is always the baby or a child – the parents are in fact the shareholders (not the directors). The directors are the guardians – ensuring due process is followed, along with the company Articles (a document overlooked on many occasions), which is the rule book of how the company can operate and conduct itself.

The articles of the company set out the purpose of the board (or director alone) and the company. It should be clear about its purpose. This document will also cover such things as:

Directors’ powers and responsibilities;

Decision-making procedures of directors (e.g. how decisions should be taken, quorum for and chairing of directors’ meetings);

Appointment of directors (including termination, remuneration and expenses);

Shares and distributions (e.g. issuing, transferring shares and payment of dividends);

Decision making by shareholders.

The Articles should always be aligned to any shareholders’ agreement. A lot of company directors that fall within the small-medium enterprise category fail to look at the Articles, let alone amend them. However, what is overlooked can come back to rear its head during difficult times. All directors of a company must act in accordance with their director’s duties set out in the Companies Act, one of which is to ‘act in accordance with the company’s constitution’ and this includes the Articles.

So what happens if the Articles are breached inadvertently? There are, in some instances, ways to rectify this, but not always. A common breach is often where the Articles allows for two directors at any one time and third or fourth are appointed.

The voice of the everyday director running a business is going to say: “I have not done this yet and cannot see any real consequences if there is a possibility of a breach so why should I bother?” The Articles act as a source of power for the directors, defining their remit and boundaries (the rules) combined with their general duties such as:

To promote the success of the company for the benefit of its shareholders as a whole

To exercise independent judgement

■ To exercise reasonable care, skill and diligence

■ To avoid conflicts of interest

■ To not accept benefits from third parties

■ To declare an interest in proposed or existing transactions or arrangements

The consequences can be detrimental for a director in breach of their duties and for acting outside their remit. Consequences can include:

The shareholders or members may take legal action against the director;

The director can have criminal legal action taken against them;

A complaint to companies house.

If the company becomes insolvent the insolvency practitioners may take action to disqualify the director.

What happens if you are a director with other directors on a board and you believe there is a breach that needs rectifying or suggest a much needed procedure or policy but are voted down? At this point, the board minutes are the only documents that can possible assist you. It is important to always ensure that there are some board minutes and that your position is documented. In small businesses often this is often forgotten about as the meeting is often an informal discussion. However, even then it should be documented so it shows the conversation and your position.

It is also important to remember who has actual power of authority. That will always be the shareholders/members, then the board, and then the executive management. If you are the shareholder and director, you must remember that you wear two hats and that the company is NOT you.