Key Legislation Changes in 2020 | Webinar
Five Tips for New Company Directors
Congratulations you’ve just been made a director! Now whether it’s the next step on the promotion ladder of a large corporate firm, a sole trader newly incorporated, or part of your family business expansion there are some things you need to know.
Your new responsibilities
As a company director – no matter how large or small – you must uphold your duties as set out in the Companies Act 2006 which can be narrowed down to these key principles:
- Act within your powers
- Promote company success
- Exercise independent judgment
- Exercise reasonable care, skill and diligence in the company’s management
- Avoid conflicts or possible conflicts of interest
- Not accept benefits from third parties
- Declare any interest in a proposed or existing transaction or arrangement with the company
A good director is looking out for the best interests of their company and exercising reasonable care and skill in their management of it, which should not be that different to what you naturally do in many job roles.
The trickier part comes with the new accounting rules and procedures companies must follow as Director, including keeping and filing accurate accounts at Companies House. The bigger the company, the more crucial it will be to have a firm of accountants guiding you through this.
As a director, you speak for the company – for example you can now instruct professional legal advisers or accountants and bind the company to contracts, and decide the company’s direction including day-to-day management and big expansion decisions. You must acknowledge the concerns of the shareholders and fulfil any shareholder resolutions but ultimately it is the directors who run the company.
It is also the director who protects a company. As a director you have the right to commence legal action on behalf of the company to protect its rights, everything from breach of suppliers’ agreements to other directors who breach their duties.
It is important to remember that as a director, you have the right to access all a company’s financial information. In fact, it is vital that you do in order to comply with your responsibility to keep and file accurate accounts. As a director you are also entitled to be paid for your work, this is particularly relevant if you do not have a contract of employment with the company – not all directors are employees.
You are entitled to dividends
Many directors, particularly in small and medium sized companies, are shareholders as well, making them entitled to dividends. It is tempting for director-shareholders to take their renumeration in the form of dividends, taking advantage of the lower tax band, instead of a salary.
The first thing to note is that there is nothing inherently wrong with this, and it’s perfectly acceptable. However, there is a process that must be followed, otherwise all dividend payments are automatically declared unlawful.
Nail the process
The process is simple and there are several things the Board of Directors must do, including:
- review the interim or final accounts and consider whether the company is making a profit
- decide whether there are sufficient distributable reserves – money which has not been or should have been allocated to other purposes
- decide the size of the dividend and formally declare and record it in meeting minutes. Dividends made by reference to interim accounts must be finalised and ratified in reference to final year end accounts
If the above process is not followed, if a company is not making a profit, or there are insufficient distributable reserves, any dividends declared are automatically deemed unlawful. In these circumstances the dividend payment is reclassified as a loan from the company to the director and placed against their director’s loan account to be repaid.
So, while director-shareholders may take dividends as renumeration, this is only acceptable when the company is turning enough of a profit to support the dividend payments. By contrast, it’s always acceptable for a director to draw a salary if the company remains solvent.
Get the right support
As with everything, getting the right support is key, whether it’s professional accountancy advice or legal advice for concerns over the way fellow directors are acting or help with your supplier network. Being a director means being in the driving seat for the company, which is a lot of responsibility but remember, you can always ask for directions!
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