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Things you should know as a self-employed company director
- 10 Aug 2023
As a self-employed business owner, whether you employ staff or not, you immediately take on responsibilities that that you might not have encountered in any previous role as an employee.
It’s crucial to educate yourself about your new role and the responsibilities that it brings to ensure you don’t make any mistakes that might cost you or your business money.
As a company director, your job title has legal implications and should not depend on your personal view and how comfortable you are with a certain title. Therefore, you should not overrate your position. If you are a sole trader, you should call yourself “the owner,” if you are a limited company business owner, then you should call yourself “a director” (1).
The Companies Act 2006 imposes general duties on a director of a UK limited company, including the following:
- Duty to promote the success of the company for the benefit of its shareholders, whilst considering the impact on employees, suppliers, customers, communities, and the environment.
- Duty to exercise independent judgement when making decisions for the good of the business.
- Duty to exercise reasonable care, skill, and diligence.
- Duty to avoid conflicts of interest.
- Duty to not accept benefits from third parties.
- Duty to declare interest in a proposed transaction/arrangement (2).
Who is a company director responsible to?
As a company director, you are responsible for your general duties to the company, individual shareholders, and even to other companies.
It is the company itself which can act against the director if there has been a breach of duty.
Proceedings against a director are usually made by the board but can be made by a liquidator if the company is in an insolvency situation. Proceedings can also be made by shareholders, which is known as a derivative action.
What penalties can a director face for a breach of general duties?
Company directors are responsible for keeping up-to-date records and there are restrictions on certain transactions, such as securing a loan from the company. Any breach of a directors’ duties can result in a director being held liable as an individual and/or liable with their company. This can place both the company, and the director personally, at risk of a penalty.
There are options available to the company for a breach of general duties by a director.
These include:
- An injunction.
- Damages.
- Compensation.
- Criminal fine.
If a director finds that he/she has acted in a way that breaches general duties, they may be entitled to help, such as:
- The breach may be ratified by resolution of the company’s shareholders.
- The court may grant relief if the director acted honestly and reasonably.
- The company may have business insurance for its directors.
- The company might offer to indemnify the director against costs incurred in successfully defending a claim.
Can a company director be personally liable for a company’s debts?
In short, yes. A company director can be held personally liable for a company’s debt due to the following:
Fraudulent accumulation of debts
Accepting payment for goods or services which the director is fully aware will not be delivered, or obtaining finance using inaccurate information, are two examples of a fraudulent accumulation of debt for which a director can be personally liable.
Personal guarantees
Personal guarantees to secure funding can make a director personally liable if the company is unable to pay any loan payments.
In the worst-case scenario, this can result in the lender can claim against a director’s assets and property.
Shareholder agreements
In certain cases, shareholders agreements can stipulate that a director provides financial security for the debt.
Pension schemes
A company director can be held personally liable for debts due under section 75 of the Pensions Act 1995. This is regarding the winding up of a pension scheme whereby the director has been served with a contribution notice by the Pensions Regulator.
Overdrawn directors current account
As a company director you can take advantage of favourable tax rates on dividend payments. But if your company struggles financially and you continue to draw dividends, the tax rate increases. As a result, because too little tax has been paid, you as the director become liable to HMRC for an overdrawn director’s account.
Understanding how the directors’ current account work can be tricky, especially if you’re new to being a company director. Ask your accountant to explain it to you from the outset so you understand it and so you’re able to mitigate any avoidable tax liability.
Legal action against a company director
Even if you are the most conscientious of directors, you can still find yourself on the receiving end of a legal proceeding, simply by virtue of your position. This can occur if an employee under your supervision has made a mistake that causes a monetary loss.
It’s important to be aware that if a person who has suffered a financials loss makes a claim against a company, and their claim fails. They can then make a claim against the director personally for the loss (3).
This scenario can occur if the company is no longer trading or if the claimant has a personal grievance against the director in question.
How can a company director protect themselves against a claim?
The protection given to directors and officers by limited company status is often less valuable than you may think.
Directors and officers insurance covers your legal liability as a director or officers of the company, as well as your legal costs and expenses such as:
- The defence of any legal action seeking your disqualification as a director
- Official investigations
- Extradition proceedings (including appeals)
- PR crisis management service costs to deal with adverse press, publicity, or media attention.
Directors and officers insurance can cover a range of scenarios, from the legal costs and damages where actionable mistakes have been made, to arranging and paying for legal representation throughout official investigations.
The policy can even respond to help arrange legal representation at a Police Station in the event of a director's arrest.
Personal protection for all company officers
It’s important to note the legal definition of an officer is vague, which can allow claims to be issued against people in almost any managerial position.
While you may be confident that all your company directors are aware of their legal responsibilities, it isn’t something that you should take for granted. It’s crucial to understand that problems can be caused inadvertently by individuals from any level of an organisation, so ongoing internal education of your management team is vital to mitigate problems and potential claims.
To find out more about what is expected of you as a director in the eyes of the law, it’s advisable to familiarise yourself with the Companies Act 2006, Chapter 2: General duties of directors
Sources:
- https://smallbusiness.co.uk/which-job-title-is-right-for-you-19679/
- Companies Act 2006, Chapter 2: General duties of directors – https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2
- https://www.alanboswell.com/news/liabilities-of-company-directors/
https://www.gov.uk/guidance/being-a-company-director
https://www.caunceohara.co.uk/knowledge-centre/understanding-your-responsibilities-as-a-company-director/
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