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Being the Director of a Limited company can be a position of great importance, but with that title comes a great deal of responsibility. The protections afforded Company Directors are balanced by the standards of conduct expected of them. As Licensed Insolvency Practitioners, we know full well that this is particularly so when it comes to business finance and insolvency.
One of the man advantages of being a Director of a Limited company versus the owner of a sole trader business, is that the business’s finances are entirely separate from that of its bosses. Under normal circumstances, one cannot be pursued for the debts the other. To prevent this arrangement from being abused, there are a number of duties expected of Directors.
Company Directors have a Duty to Their Company and its Shareholders
It might go without saying that a Company Director is expected to promote the best interests of their company.
This is a legal obligation and Directors are expected to act in a way which promotes the future success of their business.
Directors Must Avoid Conflicts of Interest
The duty to act in the best interest of the company means that conflicts of interest must be avoided.
Conflicts of interest can take many forms. These could come up if a Director of multiple companies finds one directly competing with another; if a person accepts benefits of any kind which are offered simply because of their position; or if the Director is involved in personal transactions with their own company. At all times, the Director must be able to demonstrate their probity.
Directors must not exceed their powers
While theposition of company director is a position of power, that power is not limitless. A Limited Company will have a constitution set out in its memorandum and articles of association which, amongst other things, spells out what the powers of the directors are.
Directors should be aware of their powers and take care not to exceed them, or use them outside the purposes for which they were granted.
Directors must exercise reasonable care skill and diligence
Company Directors must be able to demonstrate that the decisions they’ve made on behalf of their company were made with due consideration and that they made an honest attempt to do the right thing. Making a bad decision isn’t automatically against this rule, so long as the decision wasn’t made carelessly or recklessly.
Directors should Make Decisions Independently
The decisions a Director makes should be his or her own, not those of someone else. While it’s perfectly reasonable, and in many cases shows sound judgement, to seekindependent advice from experts, it’s the responsibly of the Director to choose to follow it based on their own judgement.
What Are The Responsibilities of Company Directors During Insolvency?
If a limited company becomes insolvent, the general duties of the company directors remain. They are still required to behave properly and with the best interests of the company and its shareholders in mind. However, in the case of insolvency, they must also act in the interests of the company’s creditors, which take precedence if there is a conflict.
This means that, for instance, if a business is looking to be in trouble financially, Directors must not ignore this problem, continue trading while insolvent, or extract assets from the business.
Following liquidation, there will be an investigation into what caused the liquidation and the conduct of the Directors. Directors must cooperate with this investigation as much as is reasonable and behave honestly at all times.
So long as the Directors can demonstrate that they behaved in accordance with their responsibilities, they are unlikely to face any further sanctions.
My Limited Company is Insolvent, What Should I do?
If you become aware that your limited company is in financial trouble or is already insolvent, it’s important to take action.
In the first instance, contact us for a free consultation so that we may provide advice on where to go next. Speaking to a Licensed Insolvency Practitioner such as Lines Henry demonstrates clearly that you’re taking your duties seriously and are acting in accordance with your role as Director.
Should your company end up closing, this will count in your favour, but equally, if you speak to us early, there may be a chance to avoid liquidation entirely, allowing your business to survive.