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What type of company is typically used in group structures?
In the UK, the most common type of company used in group structures is the private company limited by shares. This guide therefore focuses on the management of private limited companies.
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What is a "director"?
There is no complete definition of the term "director" in UK company law. Basically, the law regards someone who manages the affairs of a company on behalf of its shareholders as a director (whether they are called a director or not).
What are the different types of director?
Directors validly appointed as such are known as de jure directors and may be executive (usually employees, with an operational/executive role) or non-executive (usually not employees) - and may also be appointed to represent a particular shareholder (a nominee director). In addition, a de facto director is a person who acts as though they are a director but is not validly appointed as such and a "shadow director" is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. In general, however, UK company law does not differentiate between different types of director – all directors are subject to the same duties.
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Who can be a director?
A director must be at least 16 years old, but there are no nationality or residency restrictions. It is possible to have a corporate director, although at least one other director must be a natural person. There are proposals to implement a ban on corporate directors (which will be subject to certain limited exceptions), but no implementation date has yet been announced.
Minimum / maximum number of directors
A private company must have at least one director. There is no maximum. The company’s constitution may, however, specify a greater minimum number and/or specify a maximum.
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How are directors appointed?
Directors must consent to their appointment and can be appointed by the company’s shareholders (via a shareholders’ meeting or by written resolution) or, if the company’s constitution allows, by the other directors. In private subsidiary companies, the constitution commonly allows the parent company to appoint directors by a simple written notice to the company.
Details of the appointment must be filed at the companies register within 14 days of the appointment taking place. A director’s residential address and full date of birth are not included on the public record but must be supplied to the registrar of companies.
Under new laws to be introduced, new and existing directors will need to have their identity verified. Details of the verification process are not yet available, but it is expected to involve digital facial recognition using an approved form of ID such as a passport or driving licence. Alternative verification methods will be available for those who cannot access or use the digital service. It will be an offence for directors to act if their identity has not been verified.
How are directors removed?
Shareholders have a residual statutory power to remove directors by a majority resolution (subject to certain procedural requirements) which cannot be removed by the company's constitution. It is common for the constitution to confer additional powers of removal – for example, to enable the board to remove a director, or, in a subsidiary context, for the parent company to be able to remove a director by simple written notice to the company. A director may also resign at any time.
When a director leaves office, notice must be filed at the companies register within 14 days.
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Typical management structure
Boards of UK private companies are unitary structures made up of all the company's directors. Each director has the same obligations and accountability to the company. The directors are responsible (on a collective basis as a board) for the management and operations of the company and for ensuring that the company meets it statutory obligations.
How are decisions made by directors?
The manner in which directors can make decisions is set out in the company's constitution. In private companies, the constitution typically provides directors with flexibility to determine between themselves how decisions are made – whether by physical meeting, telephone meeting or a written resolution. Other than single director companies, the minimum quorum for board meetings is generally two directors (although notice must generally be given to all). Unless the constitution stipulates otherwise, voting at board meetings is on a simple majority basis. When decisions are made in writing, however, the unanimous agreement of all directors is usually required, although the constitution may specify otherwise.
Authority and powers
As far as third parties are concerned, directors are able to bind the company and enter into contracts on its behalf even if there are internal limits on their power to do so (eg in the company's constitution or in internal policies and protocols).
Normally, the company's constitution gives the directors wide powers to manage its business and affairs as they think fit (although the constitution may also provide that shareholders may give the board specific directions as to its conduct). Directors' powers are collective, meaning that directors should act together as a group on the company's behalf.
Delegation
If authorised by shareholders, or if permitted by the company's constitution, the board can delegate their powers to committees and others (eg executives). However, the board retains overall responsibility for the company's operations and management.
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Breach of general duties
Directors owe their duties to the company itself and not directly to the parent or other group companies, individual shareholders or creditors. Therefore, only the company can bring an action for breach of duty against a director.
However, shareholders are able to bring an action for breach of duty on behalf of the company (a derivative action) in certain circumstances. Broadly, a shareholder must first obtain the court's permission to proceed with a derivative action and the court will take into account a number of factors when deciding whether to grant this permission – including whether the shareholder is acting in good faith, the views of independent shareholders and whether the company is likely to ratify or authorise the act or omission giving rise to the claim.
A company may seek a range of remedies against a director for breach of duty including damages, recovery of misapplied property (including the payment of unlawful dividends), accounting for profit made in breach of duty, an injunction to prevent breach and rescission of a contract.
Liabilities on insolvency
Additional personal liabilities may arise for directors if the company is insolvent or nearing insolvency. Directors who knowingly or negligently allow a company to carry on trading when it is insolvent may be held liable for fraudulent or wrongful trading. These expose the director to liability to contribute to the company's assets on a winding up and, in the case of fraudulent trading, to criminal penalties. Liability for wrongful trading can be avoided if the director can satisfy the court that they took every step they ought to have taken to minimise the loss to creditors. In practice, this may limit the director's ability to resign when the company is insolvent or nearing insolvency.
Other key risks
Personal liability for directors may, in certain circumstances, arise under UK legislation including that relating to environmental and health and safety, employment, consumer protection and bribery/anti-corruption. In certain cases, criminal liability may arise.
A director may also be disqualified by the court from acting as a director or from taking part in the promotion, formation or management of a company. A disqualification order can be made for a variety of reasons (e.g. conviction for criminal offences relating to the running of a company, persistent breaches of statutory obligations such as filing documents with the companies register, being found liable for fraudulent or wrongful trading and generally for conduct which makes a director unfit to manage a company).
Failure to comply with company-related obligations, such as the preparation and filing of accounts, can also lead to fines for individual directors.
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How can directors be protected from liability?
- Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons). However, there are limits on what may be ratified (eg illegal acts cannot be ratified) and ratification by shareholders does not absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
- Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings. The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity. The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.
- Insurance. Directors' and officers' (D&O) insurance is common in the UK. It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention). Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.
What practical steps can directors take to avoid liability?
Directors should:
- Keep informed about the affairs of the company, particularly its financial position. Directors should have access to up to date financial information, prepare thoroughly for and regularly attend board meetings and familiarise themselves with key legislation affecting the business.
- Make full disclosures to the board and shareholders if they have outside positions or interests which may give rise to a conflict of interest and / or if they have a personal interest in any proposed or existing transaction or arrangement with the company.
- Keep records and take advice – directors should ensure that full written records of board proceedings are made reflecting the reasoning behind key decisions. This should include any alternative courses of action considered. Minutes should also record any disagreement amongst the board and the reasons for that. In addition, directors should ensure that returns and accounts are filed promptly and take professional advice for decisions based on areas outside their personal expertise, for example from legal professionals and accountants.
- Be aware of, and comply with, any group-wide governance policies. These may cover areas such as health and safety, ethics, bribery/anti-corruption, and human rights. Compliance with them is designed to help directors (and employees) fulfil their duties and obligations and minimise the risk of liability.
- Also in a group situation, keep in mind that directors must act in the best interest of their group company. Whilst group interests and that company's interests are usually aligned, this may not always be the case (eg when their group company's solvency is adversely impacted). It is important to keep communication and reporting lines as open and clear as possible between parent and subsidiary companies when issues may arise and seek appropriate advice.