Founders: Know Your Duties And Your Risk

Linkilaw Business News

Every director, when founding a business, wants to grow their business into a successful and stable enterprise. To achieve this, a strong legal foundation should be put in place, which includes knowing your duties as a director. Director duties outline obligations owed by members of the board of directors to the corporation that employs them. It is an essential part of making directors accountable to the company they work for and regulates their control in the corporation. For UK directors, duties are established in statute, but most jurisdictions expect the same responsibilities from directors:

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  • Try to make the company a success, using your skills, experience and judgement;
  • Follow the company’s rules, shown in its articles of association;
  • Make decisions for the benefit of the company, not yourself;
  • Disclose to other shareholders if you might personally benefit from a transaction the company makes;
  • Keep company records and report changes to Companies House and HM Revenue and Customs;
  • Make sure the company’s accounts are a ‘true and fair view’ of the business’ finances;
  • File your accounts with Companies House and your Company Tax Return with HMRC;
  • Pay Corporation Tax;
  • Register for Self Assessment and send a personal Self Assessment tax return every year.

Companies Act 2006

In sections 171-177, the Companies Act 2006 codifies the seven key duties owed by members of a board of directors to the corporation. The remedies for breach of duty are not codified in the Act, but follow general common law remedies of compensation for losses, restitution of illegitimate gains and specific performance or injunctions.

Section 171: Duty to act within powers

Under this duty, directors have a responsibility to follow a company’s rules and not go beyond the terms for which they were given this power.

Section 172: Duty to promote the success of the company

This section states that decisions should be taken in the interests of the members, with regard to long term consequences and after considering employees, suppliers, the environment, the general community and creditors. The exact wording in the statute is for the director to do what “they consider, in good faith, would be most likely to promote the success of the company.” Therefore, decisions should only be reached after acknowledging what would best promote the success of the company.

Section 173: Duty to exercise independent judgement

As a director, you must not be influenced by other business dealings outside of the company’s interests. Rather, every decision made influencing the corporation should be a decision made independently or after consulting the board, thereby ensuring that no external factors influence important business decisions.

Section 174: Duty to exercise reasonable care, skill and diligence

This requires that directors display the care, skill and competence reasonable for someone responsible for the functions of an office. Additionally, if a director has any special qualifications, an even higher standard will be expected. S1157 specifies that if directors are negligent, but acted honestly and with no intention for the functions of the office to deteriorate, directors are excused from paying compensation.

Section 175: Duty to avoid conflicts of interest

Directors must not act on any potential conflicts of interest without informing the board or seeking approval from shareholders. For example, directors cannot approach business opportunities for the company without approval from the board.

Section 176: Duty not to accept benefits from third parties

The law prohibits directors from accepting benefits from third parties, as well as requiring directors to carry out their tasks as if their own interest is at stake.

Section 177: Duty to declare interest in proposed transaction or arrangement  

When a director is party to both sides of a proposed contract, it is a statutory requirement for that director to disclose their interest to the board, so that the disinterested members of the board can approve or decline the contract. If this ‘self-dealing’ contract has already taken place, directors still have a duty to disclose this interest. Failure to do so is a criminal offence and such an action is subject to a £5000 fine.

Shareholder approval is requirement for transactions involving directors where the amount of money is either over £5000 or exceeds 10% of the company’s assets.

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Knowing all these duties is essential when starting a business and failure to do so could result in the board threatening legal action. To ensure that you are aware of your duties and responsibilities as a founder, contact Linkilaw to obtain all the necessary legal documents and knowledge necessary to start growing a successful and fair business.