Becoming a directorBeing a director of a limited company can be a fulfilling and prestigious role. It is also of course a position of responsibility and trust. As a result, there is a range of rules and duties you need to follow.

Of course, as with rules and duties affecting many walks of life, there can be legal consequences if you operate outside them. Our guide looks at the role and responsibilities of directors of limited companies, and will help you to make sure you keep within the law.

This guide looks at: Who can be a director? Duties of a director. Legal duties of directors. A director's liabilities. Resigning as a director.

Who can be a director?Anyone can become a director, with a few exceptions:

Anyone disqualified by the company's own Articles of Association (the rules relating to the running of the company).

An undischarged bankrupt. Someone disqualified by a court order. The company's auditor.

Directors don't have to be shareholders or even employees of the company. However, if you do work full or part-time for the company you may need to have a director's service contract. You may need to register this, and keep a copy for inspection at the company's registered office.

It's also important to be aware that if someone effectively acts as a director, even if they don't actually have that title, they may still legally be regarded as a director. For example, this applies to someone, other than an expert specialist adviser such as a lawyer or accountant, who advises a company's directors and whose guidance the directors usually take. The adviser may be viewed as a 'shadow' director.

Duties of a directorDirectors hold a position of trust on behalf of shareholders, and they are called directors because they direct the company's operations on the shareholders' behalf. They act through the board, which usually controls company business.

The extent of the directors' authority depends on the company's Articles of Association. Before you become a director, take legal guidance on the extent of your obligations.

As a director, you have several duties. Some of these may be specific to you, but there are a number that apply to all directors:

To act within your powers and make sure the company follows its constitution as set out in the Memorandum and Articles of Association.

To act in good faith to promote the success of the company for the benefit of its members. You must also take into consideration employees, suppliers, customers, the environment and the community.

To carry out your duties with reasonable care and skill. Higher standards may be expected from executive directors who are responsible for an area in which they have specialist knowledge or a professional qualification.

To exercise independent judgement. To make sure that there is no conflict of interest and duty. To disclose to the company any personal interests you do have. You must not divert

business opportunities to yourself that ought to be available to the whole company. To make a declaration of interest where appropriate. You may not be allowed to vote on

matters if there is a conflict of interests. Not to benefit from a third party by reason of your being a director, or by doing or not

doing something. Not to take bribes. Not to act fraudulently, including with the intention of defrauding creditors. Not to engage in wrongful trading. Wrongful trading is allowing the company to carry on

trading when you know (or ought to know) that it is insolvent. This can lead to personal liability.

To carry out the statutory obligations set out in the Companies Act 2006 and other legislation.

The law makes directors personally liable for certain actions they may take while fulfilling their duties. These laws include:

the Insolvency Act 1986 which can lead to personal liability where directors allow the company to trade wrongfully or fraudulently

the Health and Safety at Work Act 1974 laws relating to the control and disposal of hazardous waste.

Non-executive directors

Some directors take a less active role in the management of a company and are known as non-executive directors. The law, however, makes no distinction between non-executive and executive directors, and all have the same duties. So if you are a non-executive director, it's vital that you know what your fellow directors are doing and what the real state of the business is.

Position of trust

Directors must be extremely careful if they want to take advantage of an opportunity for private profit in an area of activity similar to that of the company - even if the company has rejected the particular proposition. For example, you should always take guidance before buying or selling any assets from or to the company. Shareholders' approval is needed before a director, or someone connected with the director, may acquire a substantial company asset, or vice versa.

If a director profits personally from his or her position, even if the company itself hasn't suffered because of their action, a court can order him or her to pass on any profits made to the company.

Legal duties of directorsIn a company, you may have several roles - as well as acting as a director, you may also own shares, lend the company money and guarantee loans. When there is a conflict of interests between your various roles, the courts will usually support you if you can show you have acted honestly and reasonably.

The law also requires you to provide Companies House with information about shareholders and directors and, of course, to file your accounts. If you don't do this, you could be fined.

Before forming an incorporated company

Be very careful when negotiating contracts with outside parties on behalf of a company that is yet to be formed, as you may be personally liable for anything you negotiate. Indeed, unless the other party agrees to the contrary, the deal will actually be seen as one entered into by the would-be director acting on their own behalf.

Company stationery

Make sure that the company's full name is displayed at the registered office and on cheques. All company letterheads must show the registered office and business address, if this is different, along with the company number. You must put all or none of the directors' names on letterheads.

Company accounts

You have a statutory duty to prepare accounts, which are usually presented at the annual general meeting of shareholders. You should be able to interpret these because you are responsible for either producing them, or for providing accurate information to an auditor so that they can be prepared. You also have to sign to confirm that they are accurate. Copies of these accounts must be submitted to the Registrar of Companies within ten months of your year-end or you will be fined.

Accounts have to be independently audited, although small and medium-sized companies may be able to file abbreviated accounts at Companies House, and very small or dormant companies may be exempt from audit altogether. Your accountant will be able to give you details about the

type of accounts which you need to prepare. You must keep all paperwork safe. Legally, you must keep:

petty cash records, bank paying-in counterfoils, goods in and out records, and all company records, including personnel records, for six years

annual earnings summaries for 12 years registers of directors and secretaries, applications for share documents, pension fund

investment details, corporate balance sheets and minutes of general meetings permanently.

The company may not pay for goods and services which you receive personally.

Other disclosure requirements

The Memorandum of Association, filed at Companies House, should contain the company's name, registered office and objectives. The Articles of Association outline the rules about how the company will be managed. These can be the standard ones set out in the Companies Act 1985, or the board can set out its own.

Professional advisers often recommend you adapt the standard Articles so that they suit the requirements of your company in relation to issues such as the circumstances in which (and the parties to whom) shares can be sold.

Directors must inform Companies House of changes in the company's registered address, directors and secretary, along with the annual returns and certain specified resolutions.

Issuing shares

When you issue shares, you must comply with the Companies Act 1985,the Financial Services and Markets Act 2000 and the company's Articles of Association.

Holding meetings

Unless a company opts out of the obligation to hold annual general meetings for the shareholders, it's necessary to hold those meetings every year. You are not legally required to hold board meetings for directors, although it is good practice to do so. Make sure that all directors are given reasonable notice to attend board meetings.

You should always appoint someone to take minutes. These need to be published at the next board meeting and approved.

Directors often attend meetings in two capacities: as a manager and as a board member. The emphasis of the meetings must be on directing rather than managing.

If you disagree with a point raised at the meeting, be sure that it is recorded in the minutes, even if your motion is not carried.

A director's liabilitiesAlthough directors are responsible for making sure the company complies with the law, you could become personally liable if there is fraud, or in some cases, negligence.

Directors can be found individually liable if they act negligently or in breach of trust. You can get insurance which will protect you against the financial consequences of such a finding, but make sure you double-check any exclusions on the policy.

A company's directors are often asked to give personal guarantees for loans, overdrafts and other financial liabilities. Think through the implications of this carefully - if your guarantee is secured by a mortgage on your house, for example, you could lose your home if things go wrong. Always seek professional guidance first.

Liability for the company's debts

Companies have limited liability. This protects directors and shareholders, except when they may have undertaken to contribute capital to the company, or can be called upon to do so - for example, with partly paid shares.

If the company gets into financial difficulties, seek professional guidance immediately. While directors normally have no personal liability for the company's debts, there are situations where it may be possible for creditors to claim from them personally.

Directors and borrowing

There are strict statutory limits on how much directors can borrow from the company, though loans by directors to their companies are legal and quite common. You should speak to your accountant about the tax implications of borrowing from the company.

Handling capital issues

Directors can only distribute the company's profits after tax by way of taxable dividends according to the rules laid down in the Articles of Association.

If you believe that the company is at risk of becoming insolvent, don't put creditors or guarantors at a disadvantage in terms of recovering their debts from your company, by increasing the company's liabilities or transferring or selling the company's assets.

Also, be careful when selling company assets - you shouldn't sell them for less than they are worth and, in certain circumstances, you will need to seek shareholders' agreement first.

Wrongful trading

If a company finds itself in financial trouble and carries on trading to the detriment of its creditors (a practice known as wrongful trading), any director who should have concluded the "point of no return" before it had been reached, can be held personally liable for the debts if the company then goes into liquidation. Directors must therefore be aware of the company's financial status and ensure that someone competent monitors its solvency.

However, a director can be cleared of this liability if a court is satisfied that when the director realised that the company was not able to recover, he or she took reasonable steps to minimise potential losses to creditors.

Other factors that may help convince a court that you acted properly include making sure that:

the board was properly constituted board meetings took place with detailed agendas of what was to be discussed board meetings were properly minuted proper management information was provided and records kept.

If a director is successfully sued for damages, he or she may claim a contribution from anyone else who is also found to be responsible. However, a court can lift this liability wholly or partially if it is satisfied that you acted honestly and reasonably and, on balance, ought fairly to be excused.

Resigning as a directorAs a company reaches the "point of no return", directors may feel tempted to resign. However, this does not necessarily free them from their obligations and liabilities:

Directors must be seen to have taken positive steps to do everything they could to ensure that the magnitude of a company's problems - or their perception of them - is brought to the attention of the full board of directors.

Directors should also try to make sure that the company takes all the steps necessary, including seeking professional guidance, to try to recover.

Directors are not automatically disqualified from being directors of other companies because one company they worked for went into liquidation. Only a court can order disqualification.

- See more at: http://businesshelp.lloydsbankbusiness.com/managing/growing/director/#sthash.tXIATD0J.dpuf

The Role of the Board of DirectorsFile C5-71Written September, 2009

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The board of directors, including the general manager or CEO (chief executive officer), has very defined roles and responsibilities within the business organization. Essentially it is the role of the board of directors to hire the CEO or general manager of the business and assess the overall direction and strategy of the business. The CEO or general manager is responsible for hiring all of the other employees and overseeing the day-to-day operation of the business. Problems usually arise when these guidelines are not followed. Conflict occurs when the directors begin to meddle in the day-to-day operation of the business. Conversely, management is not responsible for the overall policy decisions of the business.

The board of directors selects officers for the board.  The major office is the president or chair of the board. Next there is a vice-president of vice-chair who serves in the absence of the president. These positions are filled by board members. Next you usually have a secretary and treasurer or combined secretary/treasurer. These positions focus on very specific activities and may be filled by electing someone who is serving on the board of directors or appointing someone who is not a member of the board of directors. The selection process is often based on who is willing and who is the most qualified, although seniority may come into play. Each board may have their own ways of handling those issues.

The seven points below outline the major responsibilities of the board of directors.

1)  Recruit, supervise, retain, evaluate and compensate the manager. Recruiting, supervising, retaining, evaluating and compensating the CEO or general manager are probably the most important functions of the board of directors. Value-added business boards need to aggressively search for the best possible candidate for this position.  Actively searching within your industry can lead to the identification of very capable people. Don’t fall into the trap of hiring someone to manage the business because he/she is out of work and needs a job. Another major error of value-added businesses is under-compensating the manager. Managerial compensation can provide a good financial payoff in terms of attracting top candidates who will bring financial success to the value-added business.

2)  Provide direction for the organization. The board has a strategic function in providing the vision, mission and goals of the organization. These are often determined in combination with the CEO or general manager of the business.

3)  Establish a policy based governance system. The board has the responsibility of developing a governance system for the business. The articles of governance provide a framework but the board develops a series of policies. This refers to the board as a group and focuses on defining the rules of the group and how it will function. In a sense, it’s no different than a club. The rules that the board establishes for the company should be policy based. In other words, the board develops policies to guide it own actions and the actions of the manager. The policies should be broad and not rigidly defined as to allow the board and manager leeway in achieving the goals of the business. 

4)  Govern the organization and the relationship with the CEO. Another responsibility of the board is to develop a governance system. The governance system involves how the board interacts with the general manager or CEO. Periodically the board interacts with the CEO during meetings of the board of directors. Typically that is done with a monthly board meeting, although some boards have switched to meetings three to four times a year, or maybe eight times a year. In the interim between these meetings, the board is kept informed through phone conferences or postal mail.

5)  Fiduciary duty to protect the organization’s assets and member’s investment. The board has a fiduciary responsibility to represent and protect the member’s/investor’s interest in the company. So the board has to make sure the assets of the company are kept in good order. This includes the company’s plant, equipment and facilities, including the human capital (people who work for the company.)

6)  Monitor and control function. The board of directors has a monitoring and control function.  The board is in charge of the auditing process and hires the auditor. It is in charge of making sure the audit is done in a timely manner each year.