Starting a new company or becoming a director of an existing company is an exciting step. The new role comes with many advantages, however, there are some issues you should take into consideration before accepting your new role.
Who do you owe a duty to?
As a director you have a duty to the company and its members and future members, to promote its successes. However, in your articles of association, more specific obligations will be detailed. Know what you’re getting into before getting into it!
What does duty of loyalty mean for you?
As a director you must act in good faith and this means avoiding conflict of interest. You must prioritise the company’s benefit and not act for your own gain for example by taking bribes. Thus, where there may be a conflict between the two you MUST disclose the extent and nature of your interest to the rest of the board of directors. Failing to do this is a breach of duty and the rest of your colleagues may pursue to hold you liable.
Duty of reasonable care, skill and diligence. What is reasonable?
You may need to prove that your actions were reasonable in skill, care and diligence. Acting reasonably basically means acting as someone else with your business knowledge and means. Have you taken the steps required to act in the best possible for your company? If you have limited understanding you may want to seek professional advice to gain a more detailed knowledge of the company’s position and future prospects. Furthermore, you may choose to delegate functions to others however, you are still expected to supervise and have some level of responsibility for them.
The ‘proper’ purpose for which you were given your powers will be set out in the company’s articles of association and you must exercise your powers for this purpose. If some of your actions are deemed not for this purpose you maybe in breach of duty even if you believed that you were acting in good faith.
From the above it is clear that there is always a risk that someone may accuse you of not acting reasonably. As long as you can prove that you did in fact act reasonably, this is not a problem.
Should you be held in breach, you become personally liable. Often, directors are asked to give personal guarantees such as security through a mortgage on their house.
Resignation does not mean relief from liability or obligation
If your company goes into liquidation, this does not automatically disqualify you as a director. It still needs to be seen that you did the best you reasonably could to attempt to recover the company such as monitoring and trying to control its debt and cash flow.
The filing and reports of accounts and annual returns may not be your job however, as a director you may be the one to sign them to be sent off so you will need to ensure their accuracy.