According to Department of Trade and Industry figures, in the period from 1 April 1997 to 31 March 1998, 1,267 UK company directors were disqualified. In almost all these cases it was because they did not know what their duties were and consequently disregarded the interests of the company's creditors. Records don't show how many were dealers, but it's a fair bet some IT entrepreneurs could be on thin ice - perhaps it's time to consider a director's role in a private company. WHAT POWERS DOES A DIRECTOR HOLD? These are summarised in the company's memorandum and articles of association - the company's constitution. Generally, the firm will be entrusted to the board of directors so the power a director holds is normally shared. Powers entrusted to the director are to be exercised in the way and for the purpose for which they were intended. Directors should have a duty to act in good faith. That means acting in what are considered the best interests of the company. This includes the interests of shareholders and employees. If the company is or could be insolvent, the interests of the company's creditors should be put before the interests of shareholders. Directors are expected to exercise a certain degree of skill and care in carrying out powers and duties. Any failure in this respect and a director may well be found guilty of negligence in court. Non-executive directors may not need to attend every board meeting, and many are not involved in the day-to-day running of the company, but they should be aware of the reasons behind any big transactions. Non-executive directors also need to be aware of the financial position of the company. For executive directors, this should be given continuous attention. Even if directors delegate some of their duties, they must be supervised. COMPANY CONTRACTS - DO DIRECTORS HAVE AN INTEREST? The general rule is that a director must not put, or seem to put, himself into a position where there is a conflict between his personal interests and his duty to the company. In particular, a director may not have an interest in a contract to which the company is a party. This restriction applies whether the interest is direct, where the director is a party to the contract, or indirect, for example where a director is a shareholder in a company which is party to the contract. This general restriction is often modified by a company's articles of association which may provide that a director can retain an interest in a transaction involving the company if the director discloses his interests to the board of directors. If the interest is material, it must be disclosed in the company's accounts. Prior approval by shareholders of any substantial transaction with a director, or in which a director is interested, is also required. Directors should also check the articles of association for restrictions which may preclude them from voting or forming part of a quorum in respect of a resolution in which he has an interest. CAN A DIRECTOR MAKE A PROFIT FROM THEIR POSITION? Directors may receive a fee or reimbursement of expenses from the company for carrying out his duties. An executive director will also be entitled to these as well as a salary. A director's rights or obligations as an employee will be set out in the contract of employment or service agreement. Directors may not take a personal profit from any opportunities that result from their directorship. This restriction also prevents directors from taking advantage of an opportunity which has been gained through their position. Any profit should be paid to the company. This general rule is often modified by a company's articles of association which may state that a director, having disclosed an interest in a contract or arrangement with the company, will not be liable for any benefit he receives from it. Directors have an obligation to make good any loss to the company in cases where the company's assets have been misapplied either by the director or with the director's approval. Misapplication may arise where the directors have disposed of assets at less than their market value or used a company's funds for the wrong purposes. CAN DIRECTORS HAVE MORE THAN ONE JOB? Restrictions may be imposed on a director in his service agreement. The most common is to stop the director doing other work. If a director does not have a service contract, or if it does not contain such a restraint, directors should bear in mind they have a duty to act in the best interests of the firm. If any other job creates a conflict of interest, or prevents a director from fulfiling his role, they should think carefully whether to give up the directorship or other employment. Some restraints contained in the service agreement will apply after employment has ended. The most common is a prohibition against soliciting customers or employees of the company, or against setting up in direct competition with the company. These restraints will be void unless they are reasonable. WHAT ARE A DIRECTOR'S DUTIES IN RELATION TO THE ACCOUNTS? A company must keep accounting records that are sufficient to show and explain the company's transactions, and the financial position of the company at any time. If a company fails to do this, every officer who is in default is guilty of an offense unless the director can show he acted honestly and that the default was excusable. The company's accounts must be approved by the board of directors. It will be assumed that a director is a party to this approval unless a director can show he took every step possible to prevent the accounts being approved. Therefore, if a director disagrees with the accounts, he should act on it, and if a director does not understand them he should get them explained - an ignorance of or lack of interest in the company's financial position is unlikely to excuse an offense. WHAT ARE THE COMMON OFFENSES COMMITTED BY DIRECTORS? Most arise from carelessness or ignorance. Mis-statements - be careful not to make any false or misleading statements either written or verbal - or to permit the inclusion of a false or misleading statement in any documents issued by the company. If a director allows such a statement, he is committing a crime. He may also face civil proceedings for misrepresentation if a third party has suffered loss. Unauthorised payments - payments by a company which are fraudulent - carry a criminal penalty. Other types of payments by the firm are also prohibited, such as tax-free payments to directors or payments for loss of office made without shareholders' consent. There is a general restriction on loans to directors or to persons connected with them. Restrictions also apply to a company guaranteeing loans made by third parties to directors. This ban applies to directors both of the firm and its holding company. However, loans by a holding company to a director of its subsidiary are permitted. The Companies Act of 1985 and the Financial Services Act of 1986 contain a wide variety of statutory requirements. Some that a director may come across fairly frequently are that a company must display legibly its registered name on the outside of every office or place of business in a conspicuous position; a company's name must also appear on all business letters, notices, cheques and invoices; directors of a company must, for each financial year, prepare a report for to include a business review and a statement concerning the payment of a dividend; or that a company's accounts must disclose details of directors' emoluments, gains made on the exercise of share options or under long-term incentive schemes, pensions or compensation for loss of office. Directors of a company must send the registrar of companies a copy of its annual accounts together with the directors' and auditors' reports. Failure to do this within the time limit means every director of that company is guilty of an offense and liable to a fine which increases for every day of default. There are a number of areas in which a director of a company may be personally liable if his organisation commits a crime. Successful prosecution of an individual director will usually require proof of positive consent, specific knowledge or neglect on the part of the individual. The main areas of liability are where the company fails to ensure the health and safety of its employees; is liable for the costs of cleaning up contaminated land or water under the Environmental Protection Act of 1990; knowingly infringes trade marks or copyright, or commits a breach of its obligations. WHAT HAPPENS IF A DIRECTOR COMMITS AN OFFENSE? Where a director has breached his duties, in some circumstances the shareholders of the company may, by ordinary resolution, ratify these breaches of duty. But a court may decide the shareholders cannot ratify certain breaches. In particular, a director's actions cannot be ratified where fraud or dishonesty is involved; the transaction which they have carried out or given their approval to is unlawful; there is an infringement of the personal rights of the shareholders or where the transaction should have followed a procedure or needed the sanction of a special resolution. A company will be considered to have been trading fraudulently where it appears in the course of its winding-up that business has been carried on for fraudulent purposes, or with intent to defraud creditors. In these circumstances, the court may declare that any directors who were knowingly parties to carrying on the business in that manner have personal unlimited liability. Fraudulent trading is also a criminal offense and the directors may be punishable by a fine, imprisonment, or both. The criminal offense applies whether or not the company has been, or is in the course of, being wound up. A director could also be disqualified from taking part directly or indirectly in the management of a company for up to of 15 years. A director may be made personally liable if the company has gone into insolvent liquidation. This arises where, some time before the commencement of the winding-up of the company, the director knew or ought to have concluded there was no reasonable prospect that the company would avoid insolvency. Directors are unlikely to be liable if they have taken every step possible to minimise the potential loss of the company's creditors. A director cannot avoid this responsibility by resigning. A director can be personally liable where he has signed a cheque on behalf of the company which does not mention the company's name in the event of wrongful or fraudulent trading. Other examples of personal liability are where public company directors have traded with third parties before the Registrar of Companies has issued a certificate allowing the company to do business; where it appears in the course of the liquidation of a company that a director or a manager of that company has, among other acts, misapplied company property or been guilty of any breach of duty to the company; where a company has redeemed or repurchased part of its share capital out of capital and goes into insolvent liquidation within 12 months of the director having made a declaration that, in his opinion, the firm will remain solvent for the next 12 months. One of the ultimate sanctions is to disqualify a director from his directorship or from being involved in the management of a company for a period of time. A court may make a disqualification order where a director has been convicted of an imprisonable offense in connection with the promotion, formation, management or liquidation of a firm up to 15 years. And where a director has been persistently in default in relation to the provisions of the companies legislation for up to five years; if it appears that in the course of the winding up of a company, a director has been guilty of the criminal offense of fraudulent trading, or guilty of any fraud or breach of duty in relation to the company for up to 15 years; if a court has made a declaration that a director must contribute to the assets of the company as a result of fraudulent or wrongful trading for up to 15 years; if, as a result of report into the affairs of the company, the Secretary of State feels it is in the public interest to have a director disqualified for up to 15 years. In determining whether a person's conduct makes him unfit, the court will consider any wrong-doing by that director or any breach of duty. Any misapplication of funds or retention of property of the company by that director will obviously be held against him. The court will also consider the extent of the director's responsibility for any failure by the company to comply with the provisions of company legislation, and the extent of the director's responsibility for the company entering into any transaction likely to be set aside under the Insolvency Act 1986 as a transaction defrauding creditors. Where a company is actually insolvent, the court will consider the extent of the director's responsibility for the causes of insolvency, his responsibilities for the firm entering into transactions at an undervalue, and his responsibility for the failure by the company to supply any goods or services which have been paid for. CAN YOU INSURE AGAINST LIABILITIES? It is possible to obtain insurance which will provide a director with an indemnity against damages and out-of-court settlements, as well as legal expenses he may incur in defending any civil or criminal proceedings. However, most will not cover actions brought against a director as a result of dishonest, fraudulent or criminal conduct. Nor will policies usually protect a director from claims brought against them by other directors, or for self-incurred fines or penalties. Such insurance policies normally cover all members of the board of directors. However, individual insurance is also important, particularly for a non-executive director who may be a director of a number of companies. There are tailored packages to meet such directors' requirements. It is usual to have two policies, a director's and officer's policy and a company reimbursement policy. The latter will cover the company where directors and other officers are entitled to an indemnity from the company. SHARES IN THE COMPANY - WHAT ARE A DIRECTOR'S OBLIGATIONS? Within five days of appointment, a director must notify the company in writing of any interest he may have in shares and debentures of the company and other companies within the group. Any subsequent change in these interests must also be notified to the company within five days. If a director fails to notify the firm within the time-scale, he will be guilty of a criminal offense. A director is taken to be interested in any shares in which his spouse or child are interested. He is also taken to be interested in any shares held by a company which he effectively controls. WHAT IS INSIDER DEALING? Inside information relates to particular securities or to a particular issuer; is specific or precise; has not been made public and, if it were made public, would be likely to have a significant effect on the price of any securities. It is an offense to communicate inside information to someone else other than in the proper performance of one's employment or office, or encourage others to deal in those securities while in possession of inside information. The law has become tougher on directors and is designed to protect shareholders and the public from breaches of duties and responsibilities, whether a one-off event or a persistent default. If you do decide to become a director, then we suggest you follow these three rules. Use your common sense. Be aware of, and take an active interest in, your company's activities - especially its financial and trading position. If you are ever unsure about any matter relating to the company or your duties and responsibilities, seek advice. THE LOWDOWN FROM THOSE IN THE KNOW Greg Bryan, managing director of reseller Lattis Enterprise Management, says when his company started, he attended a course at the Institute of Directors on the role of a managing director. "This gave me a good understanding, along the lines of leadership for the company, ensuring that people within the company were representing the company in the appropriate way and not making statements that are wrongful or harmful to the company. "In a small company like ours, you have to lead by example and people follow that example that you set. I also understand that one of my main roles is my responsibility to the board. We have a monthly board meeting which I run, and I report on various parts of the company - sales reports, technical reports, marketing reports where I call in the relevant managers. I produce an annual financial report for the chairman, associated with the previous month's performance. "From a legal point of view, there are two types of managing director - one who is a shareholder and one who isn't. Regardless of which it is, their roles and responsibilities are similar, except the one who isn't a shareholder is probably going to have a different package and be bonused, rather than have dividends associated with success and profit. "The managing director role is a lot looser when you are smaller because you are the one who is signing everything, making all the promises and giving out all the information with your name on it. When you grow bigger, things go out with other people's names on them, and it is your responsibility to ensure that you are representing the company in a proper way." Kevin Doorley, managing director of Softline Distributors, which is based in Epsom, adds: "One of the fundamentals of running a business from the distributor point of view is the relationship with the suppliers and customers, keeping clean lines of supply at one end and exerting tight control of the credit to people you supply to. Too many people ride roughshod over the rules and regulations. They run up huge lines of credit with suppliers and disappear, only to spring up six months later and do it again."
New Vikendi map adds snow, snowmobiles and new aural and visual twists
Faults and bad weather ground SpaceX, Blue Origin, Arianespace and United Alliance
New regulation expected to cut greenhouse gas emissions by about 17 million metric tonnes between 2020 and 2050
Molybdenum ditelluride is a two-dimensional material that can be easily stacked into multiple layers to create a memory cell