Company Directors

“Director” is often a loosely applied term. It is common for senior employees to have the job title “director”, when in fact they are not a true director in the legal sense and are not entered on the Company Register as a director. Such an employee would not be considered a director in law and would not be subject to the law as it applies to company directors.

Similarly, it is possible for a person to exercise such control over the activities of a company that he would be seen in the eyes of the law as a director, even though he has never been formally appointed director, and does not appear on the Company Register. Such a person is referred to as a “shadow director” and is subject to the same laws as a person who is validly registered as a director.

Large shareholders of companies, who use their shareholding to exert influence on or take decisions on behalf of the board of directors of a company, are particularly vulnerable to being deemed shadow directors.

Company directors are largely governed by the Companies Acts 1985 and 2006. Every company must have at least one director. At present, all of a company’s directors can be other companies, but from 1 October 2008 there will be a requirement that every company have at least one real person among its directors.

The law imposes certain duties on directors. Chief among these are:

• Duty to act in accordance with the powers conferred on him by the company’s memorandum and articles of association, the law and the shareholders
• Duty to promote the success of the company
• Duty to exercise independent judgement
• Duty to exercise reasonable care, skill and diligence

Certain dealings between a company and its directors must be approved by the shareholders, specifically service contracts lasting more than two years, property transactions where the value of the property in question is more than £100,000 or 10% of the company’s turnover, loans to directors and payments for loss of the director’s position.

Although directors may be liable to the company and its shareholders for their own acts of wrongdoing, directors are not generally personally liable for the obligations of the company to third parties. There are exceptions to this, and in certain circumstances a director can be personally liable for the company’s liabilities. The most commonly arising such circumstance is where the director has allowed the company to continue to incur liabilities when the director knows that the company is insolvent and has no realistic prospect of meeting those liabilities (usually called “wrongful trading”).

Because of the duties and liabilities imposed on a company director, accepting an appointment as director should not be undertaken lightly. The law presumes that a director is fully aware of the activities of a company and ignorance of those activities is no defence in a claim against a director for breach of his duties.

We have extensive experience and expertise in providing practical and commercially realistic advice on the law relating to company directors, including in connection with their appointment, removal and day-to-day proceedings.