The most common company formation in the UK and Ireland is a private company limited by shares. In order to form such a company, two separate roles must be filled, the director and the shareholder. For a company to run smoothly and effectively it is vital that a person filling either role understands their responsibilities and rights.In this blog, we will introduce the key roles and responsibilities of a company director, which will apply to most companies. Individual companies may amend the roles to be fulfilled by directors and shareholders in their constitution or articles but the below information is relevant to the standard company articles (in accordance with the UK Companies Act 2006 and the Irish Companies Act 2014).
The Role Of The Company Director
In the majority of jurisdictions, companies are allowed to operate with a sole director (In Ireland sole director companies must have a separate secretary, a secretary is not required in the UK) and there is no upper limit on the number of directors allowed. When a director is appointed, the director’s personal details (name and address) are added to the register of directors, which is normally maintained by the company’s secretary. The relevant Registrar of Companies must also be notified.
A director is appointed by the shareholders by way of an ordinary resolution. It is also possible for directors to appoint additional directors; however in most cases directors can only fill “casual vacancies” and the new appointment is ratified by the shareholders at the next general meeting. The ability of directors to appoint/remove directors would be listed in the company’s articles.
The role of a director is to manage the day to day operations of the company. This includes the following:
- To open and operate bank accounts
- To bind the company by entering into deals and contracts
- To execute documents on behalf of the company
- To appoint agents and employ staff
When exercising these powers, directors operate as a board as no individual director can make decisions on behalf of the company (unless they are a sole director) and such decisions must be discussed and voted on at board meetings.
The company’s articles may allow for one director to be empowered to make any and all decisions affecting the day to day activities of the company, this individual is known as the managing director (MD). It should be noted that the MD must still discuss more important decisions (company strategy and/or large contracts and purchases) with the other members of the board.
A board meeting is considered valid if a quorum is present (usually two, however this can be amended in the articles). At the meeting, every director has one vote and resolutions are passed by a simple majority. In cases were the votes for and against are equal, the articles may allow the chairperson to have a casting vote. If this is not accounted for in the articles then no casting vote is allowed and the resolution is defeated.
When all directors are known to agree with a certain business decision, a written resolution can be prepared instead of holding a board meeting. This resolution must be signed by all the directors.
A signed copy of all resolutions and board meeting minutes should be placed on the company’s minute book.
A director owes a fiduciary duty to the company, this means they must always act in the best interest of the company and should not:
- Use their position to make personal gains
- Use company assets for a non corporate purpose
- Allow conflicts of interest
- Buy property from or sell property to the company
When there is a potential for conflicts or self dealing the transaction can still take place. If the company’s articles permit it and the conflicted director(s) are not the sole director, they can explain the issue to their fellow directors at a board meeting and then remove themselves from the discussion, after which the independent directors can decide whether or not the transaction is approved. If the director is a sole director, the transaction should only take place with shareholder’s approval.
Directors also have a duty of care when acting on behalf of the company and must act with reasonable and appropriate care and skill. If the acts of a director, either negligent or deliberate, cause the company to make a loss, the director can be held liable (misfeasance). Likewise the directors are also liable if the fail to act when a reasonable person would have acted (non-feasance).
All of the above breaches can be rendered lawful if the director obtains approval from the shareholders either in advance or retrospectively.
The above is a brief introduction to the how a company director should act, however it should be noted that not all companies are identical and some may have amended their own rules by preparing bespoke articles, therefore it is vital that any individual acting as a director is aware of each individual company’s articles before making any decisions or acting on them.
If you still have doubt after reviewing the articles, you should seek professional advice.