Definition

• A Director is one who is in practice responsible for the management of a company’s affairs. There is no comprehensive definition of a director in statute.
• A private company must have a minimum of one director. The method of appointment will generally be governed by the company’s articles of association.

Status

• A Director is an officer of the company but is not necessarily an employee. The status of an employee is governed by the contract under which he serves the company
• A Director is entrusted with powers by the articles of association: he is both an agent of his company and also a trustee of its assets.

Duties and Responsibilities

• The duties and responsibilities of a director arise both out of common law and out of statute and are –

1. A fiduciary duty to act honestly and in good faith
2. A duty to exercise skill and care
3. A statutory duty

Fiduciary Duty

• A Director –

1. Must act in good faith in what he believes to be the best interests of the company
2. Must exercise his powers only for the purposes for which they were granted
3. Must not place himself in a position where there may be a conflict between his duties to the company and his personal interests
4. Must not fetter his discretion

Skill and Care

• A Director –

1. Must take reasonable steps to ensure that the company’s assets are properly collected, safeguarded and insured and that all payments are supported by proper documentation
2. Must exhibit such a degree of skill as may reasonably be expected from a person with his knowledge and experience
3. Must take such care as an ordinary person might be expected to take on his own behalf

Statutory Duty

• Company law places a number of duties on a director, of which two specific duties are –

1. A duty of care to employees – that is, in dealing with the management of the company’s affairs, a director must pay due regard to employment law.
2. The statutory right of auditors cannot be restricted in any way and a director must ensure that an auditor has adequate information for the performance of his duties: typically, this covers access to the company’s books, accounts and vouchers and any information necessary for the performance of their duties.

In recent years, audit requirements for small limited companies have been relaxed substantially but this does not remove the need to maintain comprehensive accounting records in accordance with the requirements of Section 221 of the Companies Act 1985.

Particular (and commonly experienced) Difficulties

Director’s relationship with his company

• A Director stands in a fiduciary relationship to his company. Accordingly –

1. Where a director is directly or indirectly interested in a contract or a proposed contract with the company, he must declare his interest.
2. With certain exceptions, no company may make a loan to any of its directors and any such loan (whether or not prohibited) must be declared in the company’s accounts

Director’s Responsibilities.

• A Director, as a person involved in the carrying out of the company’s business, will be responsible, should the company trade with intent to defraud creditors if they are knowingly party to such conduct.
• Where, in the course of winding up, it becomes clear that a director knew – or ought reasonably to have known – that there was no reasonable prospect of a company not going into insolvent liquidation, it may be argued that a director has thereby attracted personal liability for wrongful trading. In such circumstances, the statutory requirement to maintain minutes of all meetings becomes of particular importance.

November 2000