Guide to Directors' Duties and Responsibilities

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Guide to Directors' Duties and Responsibilities å INSOLVENCY Guide to Directors’ Duties and Responsibilities with specific emphasis on Business Survival www.onlineturnaroundguru.com v5 A Practical Guide for SMEs prepared by The Online Turnaround Guru version © The Online Turnaround Guru 2018 å INSOLVENCY The aim of this guide is to help you understand your duties and Contents responsibilities as the director of a company with particular emphasis on knowing if your company is Section Page insolvent and what to do if it is. 1. INTRODUCTION 3 If you have more pressing concerns 2. RESPONSIBILITIES 5 about your business than those covered by this guide then you should 3. WHO IS A DIRECTOR? 6 expect to find an appropriate solution 4. POWERS 10 or source of help on my website at www.onlineturnaroundguru.com. 5. DUTIES 11 6. LIABILITIES 13 7. INSOLVENCY 16 Insolvency 8. TRADING WHILE INSOLVENT 18 9. THINGS THAT DIRECTORS 21 SHOULD ALSO BE AWARE OF Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency INTRODUCTION They say that “when the going gets tough, the tough get going” and this is especially true if you are a director trying to steer your businesses through difficult times. 01. Sitting back and doing nothing although the directors remain is not an option if you are fighting responsible for the statutory for survival. Declining sales, obligations being carried out. increasing costs, bank repayments, HMRC arrears, lease and finance This Guide includes notes on obligations, redundancy costs and relevant legislation that you need a withdrawal of credit terms all to be aware of and as a director contribute to a shortage of funds need to ensure are complied with. and the problem of having to juggle For example, did you realise that cash to meet creditor demands. the law does not discriminate between directors and ‘non- executive’ directors who, contrary So, how can this to popular myth, are just as accountable, should the company Guide help you? get into financial difficulty? Did you also know that your executives and Directors’ Responsibilities advisers can also be held liable for and Duties their actions if ever the company gets into financial difficulties? The key to saving a business is being realistic and knowing You also need to be aware of the what you can and can’t do. You seven ‘codified duties’, as set out need to be aware of the rules in the Companies Act 2006 that and regulations you are bound came into effect in 2008. Failure to by and what your duties and comply with these broad duties can responsibilities as a director are. result in you as a director incurring civil and/ or criminal liability, leading This Guide therefore outlines to a fine, and/ or imprisonment these duties and responsibilities and/ or disqualification for up to and should be read in conjunction 15 years. The Insolvency Act 1986 with another, related guide goes further as it requires directors (Guide to Company Secretarial of insolvent companies to act in Duties). The Guide to Company the best interests of creditors. Secretarial Duties covers your However, directors who seek and statutory obligations which are follow appropriate professional normally carried out by a company advice can avoid personal liability secretary on behalf of the directors if they act upon that advice. CONTINUED 3 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency INTRODUCTION | CONTINUED The Test for Insolvency Key advice There are four primary tests to As a director you can risk determine whether your company everything you own if you fail is actually insolvent, which can be to seek advice when things get the case even if you still have a sticky. Despite the help provided strong balance sheet. The good in this Guide, are advised to news is that you can still trade while seek professional advice from a your company is insolvent providing solicitor, an insolvency practitioner that in doing so, you continue or a turnaround practitioner. to trade in the best interests of your company’s creditors. You might provide a copy of this Guide to your fellow directors as If your company is insolvent this part of their personal development Guide is intended to help you or their induction upon establish your objectives and appointment as a new director. offers guidelines in the form of continuance principles for you to follow if you do decide to trade while your company is insolvent. 4 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency RESPONSIBILITIES Governing legislation disqualification and/ or personal liability, including but not limited to: Directors’ duties are defined by: à Insolvency Acts 1986 02. à Common law; and 2000; à Specific legislation such as the à Enterprise Act 2002; codification contained within à Company Directors’ the Companies Act 2006; Disqualification Act 1986; à General Statutory à Corporate Manslaughter and compliance including but Corporate Homicide Act 2007. by no means limited to: The board of directors of a company • Companies Act 2006; is primarily responsible for: • Health & Safety at Work etc Act 1974 and its à determining the company’s subsequent Regulations; strategic objectives and policies; • Corporate Manslaughter à monitoring progress and Corporate towards achieving the Homicide Act 2007; objectives and policies; • Employment Act 2008 and à appointing senior management; its associated Regulations; à ensuring accounts are up to • Competition Act 1998; date and that they are aware of the financial position; • Supply and Sale of Goods Act 1994; à accounting for the company’s activities to relevant parties, • Data Protection Act including shareholders and 2018 and General Data filing with Companies House; Protection Regulations; à compliance with • Money Laundering relevant legislation; Regulations 2007; à statutory filings with • Anti-discrimination Companies House. legislation covered by Race and Framework Directives; The managing director/chief executive is responsible for the • Industry specific legislation. performance of the company, as In addition directors also need to be dictated by the board’s overall aware of a vast amount of legislation strategy. He/ she reports to the where breaches could lead to chairman or board of directors. 5 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency WHO IS A DIRECTOR? A director, by whatever title, is one who is in practice responsible for the management of a company’s affairs. There is no comprehensive definition of 03. a director in statute, the only guidance given being that the term ‘director’ includes any person occupying the position of director, by whatever name called (Companies Act 2006, section 250). For example, in some companies or corporate directors up to the management may be entrusted maximum number specified by the to ‘Executives’, ‘Governors’ or articles at an appropriate Board ‘Council Members’. Under this meeting. It should be noted that definition, they will be held to be unless the Articles require more, directors. Further, and separately, a limited liability company only the word director in some statutory needs to appoint one director provisions includes someone (subject to the proviso that that who is a de facto director or person is a natural person and shadow director, that is a person not a corporate director). who acts as a director without having been formally appointed. On appointment a new director is required by law to complete a Subject to certain exemptions form AP01 (or AP02 for corporate such as disqualification, directors) which requires certain bankruptcy or the company’s information to be filed and held auditor, anyone can be a director at Companies House along with provided they are over 16. his/ her signature on the form to signify consent to act as a director. Formal appointment Upon completion, the form should be filed with the Registrar of The first director(s) of a company Companies at Companies House. will be appointed at the time There are also provisions for filing of its registration. Subsequent these forms electronically by those appointments are governed by the companies who have registered company’s articles of association themselves for online filing. If there (Articles). Typically the Articles will is a share qualification specified in provide for the board of directors the Articles, then the director will (Board) to fill any vacancies or to also be required to acquire the appoint additional directors and/ appropriate number of shares. CONTINUED 6 Restructure + Reorganise + Refinance = Reinvent © K2 Partners Ltd 2018 Directors’ Duties and Responsibilities with specific emphasis on Business Survival Insolvency WHO IS A DIRECTOR? | CONTINUED Upon appointment the new director’s details should be entered in the Other types Register of Directors. of director The director is required to disclose Non-executive director any interests in shares, loans or debentures with the company; It is important to appreciate that these should be entered in the there is no difference in law Register of Directors Interests. between the duties of ‘executive’ In addition the director should and ‘non-executive’ directors. An give notice of any interests in ‘executive director’ is regarded contracts or relationships with the as a director who has
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