Directors' Responsibilities and Penalties

Directors' Responsibilities and Penalties

Being a company director is a big responsibility to look after company affairs of all kinds, failure to do so can result in financial penalties, criminal proceedings, and disqualification for being a director. It is very important that any director(s) should have a sound understanding of matters listed below as a minimum.

A Quick Summary

  • Management of their company
  • Act for the benefit of shareholders
  • Act for the benefit of company employees
  • Must act within the powers granted in the Articles of Association
  • legally obliged to declare any actual or potential conflict of interest
  • Must make sure that the statutory returns are filed with the Registrar of Companies on time. These include the annual report and accounts, the annual return, and notice of changes to directors and secretaries. (Failure to deliver can result in fines for which you may be personally liable, disqualification, or criminal conviction.)
  • Most private companies are no longer obliged to hold an AGM, although they must give adequate notice of and hold a general meeting if any director or 5 percent of members request it.
  • A director must sign the balance sheet and approve and sign off the directors’ report.
  • Must comply with employment law in dealings with employees.
  • Must take reasonable care to ensure the health and safety law for your employees.
  • It also must undertake a risk assessment. If a company has five or more employees, it is a must to record this in writing and has a written health and safety policy.
  • Must ensure that the correct amounts of tax, VAT, and National Insurance are paid on time.
  • Watch out for legal pitfalls in other areas

The 2006 Act sets out seven statutory duties being:

  • duty to act within powers;
  • duty to promote the success of the company;
  • duty to exercise independent judgment;
  • duty to use reasonable care, skill, and diligence;
  • duty to avoid conflicts of interest;
  • duty not to accept benefits from third parties;
  • duty to declare an interest in a proposed transaction or arrangement with the company


Managerial and Statutory Responsibilities

Accounting Records

  • The 2006 Act and other legislation require proper Accounting records to be kept. The directors are responsible for the maintenance of those records and must ensure that they:
  • show and explain the company's transactions and its financial position of the company;
  • contain entries of all receipts and payments and a record of the company's assets and liabilities;
  • give details of all sales and purchases of goods and, except in the case of retail sales, identify the buyers and sellers;
  • show the stock held at the end of each period; are kept at the company's registered office, or such other place as the directors think fit; and are retained for a period of three years in relation to private companies and six years in relation to public companies.
  • Failure to keep proper accounting records is a Criminal offense punishable by imprisonment of up to two years and/or a fine.

Statutory Books

The directors are also responsible for the maintenance of various statutory books which must be kept at the company's registered office, or some other appropriate place. They consist of a register of members; a register of directors and secretaries; a register of mortgages and charges; a register of debenture holders and a register of directors' interests, all of which the public is allowed to inspect. In addition, minutes of shareholders' meetings must also be maintained. These may only be inspected by members.

Changes in certain statutory information must be notified to the Registrar of Companies on the standard forms within the time limits laid down by the 2006 Act.

In addition, directors must make an annual return to the Registrar of Companies within 28 days of the anniversary of the date of the company's previous annual return, or of its incorporation.

Failure to maintain the records or submit a return renders the directors liable to a fine and, for persistent failure, disqualification, and the company liable to being struck off by the Registrar (therefore ceasing to exist).

In the 1994 VAT Act, which contains VAT penalties, directors are specifically named as responsible for compliance with VAT regulations. If a company is liable to a civil penalty for VAT evasion and dishonest conduct can be attributed to a director, a notice can be served on that director by HM Revenue & Customs. The notice specifies the penalty and the proportion to be recovered from the director. There is no appeal against such a notice and the penalty is an amount equal to the tax evaded.

The tax law imposes many duties on companies and provides penalties for non-compliance. If an offense has been committed, the Board of directors must take responsibility.

Penalties for not being a responsible director

Directors can face serious penalties if they abuse those powers or use them irresponsibly. Even in a limited liability company, the director could be held personally liable for losses resulting from some acts or omissions.

If the directors act outside the company’s objectives, the company may be entitled to take legal action against them.

You will be guilty of wrongful (or fraudulent) trading if you allow the business to carry on and incur debts when you know there is no reasonable prospect of repaying them. If you do, you could be held personally liable for the company’s debts if it subsequently becomes insolvent.

Directors can be prosecuted for dangerous practices started or continued with your consent, or illness or accidents attributable to their negligence on health and safety laws.

It could be liable to contribute to company debts incurred through wrongful or fraudulent trading.

Liability could be unlimited, so you could be made bankrupt as a result of the decisions of the other directors, even in a limited liability company.

Could be disqualified from acting as a director for some types of conduct.

They include continuing to trade when the company is insolvent, failing to keep proper accounting records, failing to pay taxes, and co-operating with the official receiver.

Disqualification lasts from 2 to 15 years.

Some actions could result in criminal convictions. They include failure to keep proper accounting records, fraudulent trading, health and safety shortcomings, and misappropriation of company funds.

The 2006 Act provides that a breach of the general statutory duties will carry the same penalty as a breach of the corresponding common law or equitable principle applied. This means that if a director is in breach of duty he will be required to reimburse the company for any loss it has experienced or to repay an amount equivalent to any profit made.

The following are further examples of those occasions where directors can incur personal liability:

if an evasion of VAT involves dishonesty;

under the Income Tax (Pay As You Earn) Regulations 2003, which enforce collection of unpaid PAYE from directors on their own remuneration drawn (if HM Revenue & Customs can recover the tax directly from the directors); in respect of security contributions where failure to pay is attributable to the fraud or neglect of the directors;

Upon reuse of a company name in defiance of the restriction imposed by the Insolvency Act; if such an offense is committed any director concerned suffers personal liability for the company's debts incurred during the period he was involved in the management of the company; the director is also liable to be imprisoned, fined, or both; if the director, without the leave of the court, knowingly acts on the instructions of a disqualified person or undischarged bankrupt; following a company's insolvency if a liquidator establishes before the court that a director has been guilty of fraudulent or wrongful trading.

if a director knowingly or recklessly makes a statement to the company's auditors in relation to their audit activities that is materially false, misleading, or deceptive, he commits a criminal offense; in relation to a public company, if a company acquires its own shares or provides financial assistance for their purchase unless the acquisition or financial assistance was in accordance with the 2006 Act (the prohibition on the giving of financial assistance by a private company has now been abolished).

The criminal penalties for fraudulent trading include up to 10 years imprisonment and/or an unlimited fine.

Last but not least very important matters to consider when it comes to taking money from the company in the form of a director's loan.


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