Falling foul of the law can have serious consequences for Non-Executive Directors – here are 10 steps you can take to avoid it happening
The 2006 UK Companies Act, which sets out the legal duties and responsibilities of Company Directors, is one of the longest pieces of legislation ever written. Falling foul of the law can have serious consequences for directors including personal and potential criminal liability yet many directors, particularly NEDs, take on their roles in blissful ignorance of the law.
Before becoming a company director you should have a basic understanding of your legal duties and responsibilities and you should check for indemnity provisions in the company articles of association and your Directors’ and Officers’ (D&O) insurance arrangements.
Once in post, here are 10 things you can do to avoid the potential pitfalls:
- Remember that compliance is the responsibility of all directors – not just the Company Secretary, Chair, CEO or other Executives.
Whilst individual directors may have particular responsibility for the day-to-day mechanics of compliance, it is the board’s responsibility, collectively, to ensure that the statutory requirements are met. Filing annual returns and accounts may be the job of the Finance Director or Company Secretary but persistent failure to file on time can lead to penalties being imposed on all the other directors, including the NEDs. Make sure that the board receives regular assurance on compliance matters and do not assume it is being taken care of by the other directors.
- Check your status as a Company Director.
Many Non-Executives start working with boards as advisors or consultants before they are formally appointed as NEDs and assume that as they are not registered as a company director at Companies House then the law does not apply to them. If you actively take part in board meetings or hold yourself out to be a director then you run the risk of being classified as a “shadow’ or “de facto’ director and thus share the same legal duties, responsibilities and liabilities as the other board members. Make sure that your legal status and that of the other board attenders is clear.
- Keep accurate records of board meetings.
Every board meeting agenda should contain an item which gives directors the opportunity to review the minutes of the previous meeting. Make sure that you use this opportunity to make any corrections that are required to ensure that the minutes accurately record the discussions that took place together with any resolutions and actions. Pay particular attention to items where your personal contribution is mentioned. Keep your own copy of board minutes for at least six years after you have ceased to be a member of the board..
- Be aware of key statutory filing requirements.
Make sure that you know when key documents such as the annual accounts and annual returns need to be filed. You can use the Companies House web-check facility to check that the business is up to date with its filing requirements. Also be aware of other matters such as certain shareholders’ resolutions, allotments of shares and the appointment of new directors, which need to be notified to Companies House within specified time limits.
- Familiarise yourself with the Articles of Association and other constitutional documents.
One of the prime duties of a company director, as set out in the 2006 Companies Act, is to ‘act within powers’. These powers can be found in the company’s Articles of Association together with any shareholder agreements or contracts which form the constitutional documents for the business. As soon as you are appointed to a board you should read these documents and familiarise yourself with the specific requirements for the calling of a shareholders’ meeting or provisions relating to directors’ meetings and remuneration. The board should review the Articles on a regular basis to ensure that they are still relevant to the operation of the business
- Take all reasonable steps to avoid conflicts of interest.
‘Declaration of interest’ should be a standing agenda item for a board meeting, giving directors the opportunity to declare a personal interest in an item to be discussed at that meeting. There should also be a register of interests, reviewed annually, which records the external interests of board members and their immediate families. These are both particularly important for NEDs who are more likely to have external interests than the executives. However, simply declaring an interest is not necessarily all that a director has to do to avoid a conflict of interest. It may be appropriate to physically absent yourself from the board meeting for the duration of the discussion of a matter where you are conflicted and have this absence clearly recorded in the minutes. In some cases directors resign their posts and re-join the board once a conflicted matter has been resolved.
- Avoid accepting benefits from third parties.
Taking a bribe from a potential supplier is clearly wrong but what about corporate hospitality? As with conflicts of interest, many boards keep a register to record gifts or hospitality given to directors or senior managers, usually above a set amount. They also have specific policies and procedures that directors should adhere to. The best advice though is not to accept anything, even a sandwich or cup of coffee if it could be interpreted as an inducement by a third party.
- Watch out for insolvency.
After failing to file your statutory documents on time, the next most heinous crime a director can commit is ‘trading whilst insolvent’. A company is insolvent if it cannot pay its debts when they are due to be paid. Many businesses, especially start-ups or those with high growth can sail near to or actually become technically insolvent. They can then only continue to trade if they have a reasonable belief that they can trade out of their insolvent position. It is vital therefore, for the board to seek external advice from an insolvency practitioner as soon as possible in order that there is independent confirmation of the reasonableness of their position. Failure to act promptly and responsibly can leave directors open to unlimited personal liabilities.
- Speak out – do not ignore warning signs.
If you have concerns about any company decisions, or the content of any documents such as accounts or board papers, make your views known. It is your duty to act with reasonable skill, care and diligence. The 2006 Companies Act does not differentiate between executive and non-executive directors – as a board member you are jointly and severally liable for all board decisions and can become personally liable if the board knowingly does something illegal.
- Get trained to become a company director.
A Non-Executive Director appointment can be a very rewarding career move but it is not something that should be entered into lightly. In addition to performing due diligence on the business, a prospective NED should fully understand the duties and responsibilities of a company director.
Excellencia provide a 1-day course for prospective NEDs (How to become a Non-Executive Director) for £330 (ex VAT)