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  • Director's Guide to Duties, A

Director's Guide to Duties, A


The role of the company director, written in a question answer format, for the layperson.

Paperback i

Book printed softcover

A Director's Guide to DutiesListen to the podcast by Mike Griffiths

Whether you set up your own company, join a board from outside or reach director level via an internal promotion you will need to be aware of the legal implications that attach to your role as a company director. These are known as directors’ duties, some of which are codified in the Companies Act 2006. However, these codified duties are merely the tip of the legal iceberg of which directors have to be aware. There are numerous other duties ranging from maintaining proper accounts, making returns to the Registrar of Companies, and not trading the company after the point where an insolvent liquidation beckons. The book distils the rules into layman's language by looking at the role of the company director using a question and answer format such as:

"I've just been appointed as a director, what legal formalities do I need to comply with?"

"I want to borrow £20,000 from my company to buy myself a new car. Can I do this and, if so, how?"

“I want to defer my dividend, how do I do this?”

This book is written for company directorsincluding Managing Directors, Financial Directors and Operational Directors. Itwill be useful for sole directors of newly formed or recently set up companiesand also of interest to advisers to company directors, solicitors andaccountants who may wish to offer a copy of the book to their clients. 
Appointmentand Formalities
PeopleWho Cannot Be Directors
TheContract of Employment
Terminationof a Directorship
TheCapitalisation of the Company
Articlesand Shareholder Agreements
Effective Management
WhatDoes the Board Do?
The Role of the Members
Rights of Members
Directors’Dealings with Their Companies
TheCodified Duties of Directors
Corporate Governance
Other Directors' Duties
This book takes the form of an extended case study which is based on the following
scenario. It is structured around a series of questions which might be asked by
people involved in the running of a company. The book is essentially aimed at the
layman. For this reason technical references in the text are deliberately avoided.

The scenario

Happy Families (Hairbands) Ltd is a long established family company engaged in
the manufacture of hairbands. It was established twenty-five years ago by Mr and
Mrs Parent who remain still active within the company, although they are now
approaching retirement age and intend to cease work altogether in five years’ time.
The company has a nominal share capital of 5,000 £1 shares of which 4,000 shares
have been issued. Mr and Mrs Parent each holds 1,000 shares within the company
and they are both directors. Two of their unmarried adult children, known within
the company as Mr Son and Miss Daughter, work full time for the company, are
also directors, and again each owns 1,000 shares. Mr Outsider has worked for the
company for five years. He gets on extremely well with the family and has recently
been invited to become the company’s fifth director. On joining the board,
Mr Outsider will buy 1,000 shares in the company for a total price of £10,000.

Mr and Mrs Parent have a third child, known within the company as Mr Third. He
is 19 years old and, having suffered from learning difficulties since birth, is
incapable of participating in the running of Happy Families (Hairbands) Ltd, still
less being a director. He is, however, extremely good at servicing and repairing
small lawnmowers. With the help of Miss Daughter he runs a small business from
a shed located on the premises of Happy Families (Hairbands) Ltd.

Happy Families (Hairbands) Ltd owns the premises from which it trades. The
value of these premises is about £100,000 freehold.

The company name used is a fictional company and is used only as an illustrative
example for the purposes of the Guide.

Mike Griffiths
November 2014
It is unusual for a foreword of book having two authors to be written merely by one
of them, but it is hoped that the reason will soon become apparent.

When I was asked by Jordan Publishing to write a book addressed to the layman
about directors and their duties, I was delighted. However, while it is not difficult
for a lawyer to write a text which is designed to be read by other lawyers or other
similar professionals such as accountants and company secretaries, it is not quite so
easy when the reader is likely to have no legal background knowledge. After all
lawyers, just like the members of any other trade or profession, have their own
idiosyncratic language, into which it is too easy to lapse.

It did not take me long to realise my shortcomings in this department, and so I
asked my son, Matthew, if he would collaborate with me. I was delighted when he
agreed. He is by training a social scientist and modern historian and by career
something to do with research and development in computers and computer
security (he has tried to explain to me what he does but the language of that
business is beyond me). It has been invaluable to have an intelligent onlooker
constantly asking what was meant by one expression or another and pointing out
that something could be the better expressed if only different language were used,
though corrections to my use of grammar might not have been quite as well
received by me. Any clarity which the text may have must be substantially due to
my son’s help and suggestions and even re-writing. Any errors of law must lie
clearly at my feet.

We must acknowledge the help and encouragement throughout from Mary Kenny
and Kate Hather of Jordan Publishing and also, in the later stages of production,
from Tracy Robinson of Letterpart Ltd. We are also grateful to Mrs Lucy
Campbell for her assistance, particularly with the glossary.

Mike Griffiths
November 2014

If being a director is so onerous, surely there should be some formal qualification required before they can be appointed, just like a doctor, solicitor or a chartered secretary has to be qualified?

This is a very good question. Being a director is an extremely onerous task. However, there is no formal qualification which they have to hold before being appointed. Indeed there is not even a requirement that they should be able to read and write, though clearly such illiteracy would severely disadvantage them.

Perhaps a thought mightbe dropped in here. Notwithstanding the requirement that, say, doctors andsolicitors require a formal qualification, some of them, a very small minority,do sometimes go off the rails and do things which clearly they should not.Sometimes directors likewise, being human, also depart from what might bedescribed as the straight and narrow. However, the proportion of directors whodo wrong is significantly higher than is the case with qualified professionals.It may well be that this is because of the absence of any requirement for theholding of a formal qualification before a person can be appointed as adirector. The significance of a formal qualification may be that, in the caseof professionals such as doctors and solicitors, they are backed by theprofessional rules of the organisation to which they belong, and any failure tocomply with those rules is likely to be monitored by the professional body.

It should perhaps beadded that there is a professional body known as the Institute of Directors towhich some directors belong. However, the proportion of directors who do belongto the organisation is relatively small and, while it does significant work totry to ensure the quality of directors, the fact that membership is voluntaryis reflected in the number of directors who choose not to be members.

Right, so let’s have a look at the codified duties of directors. Can we take them one by one?

Certainly, fire away.

What is meant by directors having to know their powers and how do they discover these powers?

The exact wording of the statutory provision is that directors must act in accordance with the company’s constitution and only exercise their powers for the purposes for which they are conferred. Thus it is important that directors are aware of what powers both they and their companies enjoy. As was said earlier in this book, companies formed prior to 1 October 2009 have a memorandum of association which contains an objects clause and which sets out in detail what the company can do. Companies formed on or after that date are deemed to be able to do anything lawful which the directors wish, though this is subject to any restriction which might be imposed by a special provision within the company’s articles. For example a charitable company must be restricted as to what it can do if it is to obtain charitable status from the Charity Commissioners.

In addition to what the company may and may not do, there may also be restrictions as to what the directors may do without the consent of the members generally. Usually, the directors are given free rein to run the company, but sometimes their powers might be limited. It used to be quite common for companies to provide that if the directors wished to borrow on behalf of their company more than a certain amount, they needed the consent of the members. Such a provision is rarely to be found with modern companies, but it is often to be found in some older ones.

As an example, we recently came across a company which had been formed in 1904 and which still had its articles as they had been drafted in that year. One special article provided that if the directors wanted to incur credit of more than £100 they needed to obtain the consent of the members. Of course, in 1904 £100 possessed some value. Today some people own cars which cost more than that to fill with petrol. Such an article clearly needed bringing up to date or deleting completely.

Directors owe a duty to promote the success of the company for the benefit of its members; do they need to consider the interests of anyone else?

Well, this is almost legislating by cliché. Ask almost any director about the reason he runs his company, and he will say it is to make money. Put into rather more legal and politically acceptable language, he should promote the company for the benefit of the members.

However, one of the big themes of corporate governance today is corporate social responsibility; and so, having stated that the directors must promote the success of the company for the benefit of the members, the duty, as codified, then states that other interest groups must be considered. These are:

  • the long term interests of the company;
  • the employees;
  • the suppliers;
  • the customers;
  • the environment;
  • the community;
  • the business reputation of the company; and
  • the need to act fairly as between the shareholders.
That’s a bit of a mouthful; just how significant is this list?

That’s an extremely perceptive question. Directors’ duties are owed to their company. One way of looking at a duty is that it is only as good as it is enforceable. If, for whatever reason, a duty cannot be enforced then it really is a semantic nonsense that it should be called a duty.

Consider, for example, speed limits on the roads. Not that many years ago, speed limits were almost a joke; very few motorists observed them. Then the Treasury invented those little yellow boxes which sit at the side of roads ready to photograph motorists who infringe speed limits. This resulted in an almost overnight improvement in driving behaviour. A duty is only as good as it is enforceable. The duty to observe a speed limit can only be viewed as a duty if there is a risk to the motorist who infringes it of retribution of some kind which can be meted out against him.

Directors’ duties are owed to their company. If a director infringes one of his duties he is liable to be sued by the company. This means that the members of the company might collectively decide in a general meeting to take action against a director. However, in many small companies, the people who are the directors are also the members of the company. So this considerably reduces the risk of a director’s being sued. Alternatively, he might be sued by the board of directors, which is responsible for running the company. However, it will be appreciated that a director has to do something very serious to get his fellow board members to decide to take action against him.

It is to be observed that none of the varied interest groups referred to above has the right to sue a director who disregards his duty to them. Thus for the law to suggest that there is a duty owed to them has little meaning in practice. Ask most directors what their primary duty is and they will probably say that they are there to make money through the company.

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