What obligations does a director have?
Other statutory requirements and restrictions
Shareholders’ consent to be obtained for substantial property transactions
A director is required to obtain the consent of the shareholders of the company to any substantial property transactions between the company and the director or any person connected with the director (section 190 of the Act). The section applies to transactions involving ‘non-cash assets’ of a value exceeding (a) £100,000 or (b) 10% of the company's net assets at the time the arrangement is entered into (whichever is less). Transactions involving assets with a value of less than £5,000 are exempted from this provision.
A private company may not make a loan to a director (or director of its holding company) or provide any guarantee or security for such a loan, without prior shareholder approval (section 197 of the Act). If the director is also a director of the holding company, approval is also required from the shareholders of the company. No approval is required from the shareholders of a wholly owned subsidiary or of an overseas company. An arrangement in breach of this provision is voidable by the company, save for certain exceptions including:
- loans not exceeding a total of £10,000; and
- the provision of funds to enable a director to perform his or her duties; for example the making of an advance to meet business expenses.
(A private company which is the subsidiary of a public company is subject to some further restrictions.)
Accounting records and duty to register documents
Directors are required to keep accounting and other records which show with reasonable accuracy the financial position of the company. The directors must prepare annual accounts including a balance sheet, a profit and loss account and a directors' report showing a true and fair view of the state of affairs of the company as at the end of the financial year.
Once approved by the directors the accounts must be sent to all shareholders. There is no longer and statutory requirement to lay accounts for approval at a general meeting.
The accounts must be filed with the Registrar of Companies within nine months of the end of each financial year. (Separate rules apply where the first accounting period ends more than 12 months after the date of incorporation of the company.)
The directors are also required to file an annual return each year, setting out details of the directors, secretary (if any), registered office, business activities and issued share capital of the company. The annual return must be filed within 28 days of the date to which it is made up (generally the anniversary of the date of incorporation).
In addition, the directors are required to file numerous other documents including details of any change in the identity or details of the directors, secretary, registered office, issued share capital, special resolutions and certain other types of resolutions. There are prescribed time limits for each filing. Failure to comply with these time limits results in fines but does not of itself invalidate the underlying event.
The directors are also responsible for ensuring that the company maintains its statutory books namely the register of directors, the register of secretaries, the register of members, the minute books, and the register of charges. Failure to do so may result in a fine, daily default fines and in severe cases, imprisonment.
In addition to the circumstances set out above in which a director may be required to account for monies received or to indemnify the company against losses incurred, a director may be personally liable:
- to a fine if the company does not comply with any of the requirements in The Companies (Trading Disclosures) Regulations 2008 and fails to make the trading disclosures required under those Regulations (Regulation 10 of The Companies (Trading Disclosures) Regulations 2008);
- on contracts signed by him purportedly on behalf of the company before its incorporation (section 51 of the Act);
- if he acts in the management of the company while disqualified or acts on the instructions of someone whom he knows to be disqualified (section 15 of the Company Directors Disqualification Act 1986);
- if he has previously been director of a company which has gone into insolvent liquidation and is then concerned in the carrying on by another company of business under a name which is the same as or similar to the name used by the insolvent company within 12 months before it went into liquidation (section 217 of the Insolvency Act 1986);
- if he has been served with a contribution notice by The Pensions Regulator on the grounds that he has been party to, or knowingly assisted in, an act or failure to act one of the main purposes of which was to remove or reduce the requirement or ability of an employer to pay a debt due under section 75 of the Pensions Act 1995 on the winding up of a pension scheme;
- for damages if he makes a fraudulent or negligent misrepresentation in the course of negotiating a contract between the company and the third party;
- under the criminal offence of making a false statement as to the affairs of the company with the intent of deceiving shareholders or creditors of a company (section 19 of the Theft Act 1968);
- under the criminal offences under the Fraud Act 2006 of dishonestly making a representation which is untrue or misleading where the person making it knows that it is, or might be, untrue or misleading and dishonestly failing to disclose to another person information which he is under a legal duty to disclose, both offences requiring the intention of making a gain or causing loss or risk of loss to another person (sections 2 and 3 of the Fraud Act 2006);
- for imprisonment (up to 10 years) or a fine if he is knowingly party to the company carrying on its business with intent to defraud creditors of the company or of another person or for any fraudulent purpose (section 993 of the Act );
- under a contract if he fails to make it clear that he is contracting as an agent of the company and not personally;
- to a third party for damages for breach of an implied warranty of authority if he concludes a contract on behalf of the company but exceeds his authority in so doing and the company is therefore able to set the contract aside; or
- in relation to wrongful trading or fraudulent trading by the company under the Insolvency Act 1986 (see Insolvency).
A number of statutes contain provisions stating that if a company commits a criminal offence, a director is also guilty of the offence if it is proved to have been committed with the consent or connivance of, or to have been attributable to any neglect on the part of, the director. In this context, ‘consent’ means being aware of what is going on and agreeing to it; and ‘connivance’ means knowledge together with a negligent failure to prevent. ‘Neglect’ implies that there is no need for knowledge of the matters amounting to the offence, instead, there merely is a failure to act when under a duty to do so.
Bribery Act 2010
The Bribery Act 2010 ("BA 2010") came into force on 1 July 2011. It extends the crime of bribery to cover all private sector transactions (previously, bribery offences were confined to transactions involving public officials and their agents).
The BA 2010 creates four separate offences:
- a general offence of offering, promising or giving a bribe (section 1);
- a general offence of requesting, agreeing to receive or accepting a bribe (section 2);
- a distinct offence of bribing a foreign public official to obtain or retain business (section 6); and
- a strict liability offence for commercial organisations that fail to prevent bribery by those acting on their behalf, where the bribery was intended to obtain or retain a business advantage for the commercial organisation (section 7).
Potential liability of directors: offences under sections 1, 2 and 6
Where a company (and not merely individuals acting on its behalf) is convicted of an offence under sections 1, 2 or 6 (offering, or receiving a bribe, or bribing a foreign public official), its directors can be held liable with the company. This is if it can be shown that they "consented" to or "connived" in the bribery. Whilst "consent" and "connivance" are not defined, it is thought these could mean, for example, being aware that there is a good chance that bribery is going on and doing nothing to investigate or put a stop to it.
To be held liable, the director must have a close connection to the UK e.g. be a British citizen, an individual ordinarily resident in the UK or a British Overseas citizen.
A director found guilty of any of these offences could face a maximum penalty of 10 years imprisonment and/or an unlimited fine. A director convicted of bribery could also face disqualification from holding a director position for up to 15 years.
Potential liability of the company: section 7 offence
The company will commit an offence if a person associated with it bribes another person for that company's benefit, subject to the "adequate procedures" defence described below. Whether a person is "associated" with the company will be construed widely. A person will be "associated" with the company if it performs services for or on behalf of the company, regardless of the capacity in which they do so. This could therefore cover agents, employees, subsidiaries, intermediaries, joint venture partners and suppliers, all of whom could potentially render the company (and its group) guilty of this offence.
Furthermore, this is a strict liability offence. This means that there is no need to prove a motive. The company can receive an unlimited fine if it is found that it is in breach of this section.
The company has a defence if it can prove it had "adequate procedures" in place to prevent bribery. "Adequate procedures" are not defined in the BA 2010 but the Ministry of Justice has published guidance ("Guidance") on what adequate procedures might involve. This guidance sets out six principles for companies to follow, which are designed to help businesses understand the sorts of procedures they might put in place to prevent bribery occurring within the company. These are:
- Proportionate procedures
- Top – level commitment
- Risk assessment
- Due diligence
- Communication (including training)
- Monitoring and review
Whilst this offence relates to the company rather than directors individually, the board needs to be happy with the company's overall approach to preventing bribery. As well as a general risk assessment of the company's business, it is likely that a review of the company's current procedures, alongside the Guidance, will be necessary in order to implement measures that mean that the company is satisfied that it does have "adequate procedures" in place to prevent bribery.
"A director found guilty of any of these offences could face a maximum penalty of 10 years imprisonment and/or an unlimited fine. A director convicted of bribery could also face disqualification from holding a director position for up to 15 years."
"Directors are required to keep accounting and other records which show with reasonable accuracy the financial position of the company."