The Companies Act 2006 - Duties & Responsibilities of Directors
It is important to note that becoming a Director or Secretary has real responsibilities, duties (a fiduciary duty in law) and penalties under the current UK Companies Act 2006. When accepting such a post it is important to note that it is the company that you owe a duty of care to, which includes the shareholders, if different from the director(s)/secretary. In layman’s terms, it basically means doing all you can to protect the interests of the company (shareholders), keeping within the law and, in particular, not using any information garnered from holding such a position for one’s own or a 3rd party’s personal interests.
With effect from the 1st of October 2007, the duties of a Director(s) of a UK company are:
- S.171 of the Companies Act 2006: The duty to act within the powers prescribed by Statute and the said company’s memorandum (which basically states what a company can do) whilst the articles of association deal with how a company should be administered, the rights of all parties involved with the company namely the director(s), secretary and shareholders. The articles will also provide information on how basic and special resolutions must be held, the rights of shareholders including the rights that are ascribed to particular types of shares including ‘ordinary’ shares and ‘preference’ shares which might have special powers relating to voting or give extra or less rights to distributed dividends;
- S.172 of the Companies Act 2006: Under this section it is clear that directors have an absolute obligation to act in the best interests of the company. Within this section there are 6 separate factors to consider including, but not limited to, the consideration of the company’s employees, the long-term consequences of a decision, the equity or fairness to shareholders of a particular decision and finally the impact of the decision upon the community and environment at large;
- S.173 of the Companies Act 2006: Under this section it is clear that directors must exercise independent judgment and cannot act as mere nominees for others no matter how or by whom they have received their position;
- S.174 of the Companies Act 2006: This section expresses what, in effect, was the old fiduciary duty of a director but extends such duties to take all necessary care, diligence and exercise objective reasonable skill to non-executive and/or nominee directors;
- S.175 of the Companies Act 2006: The deals with the requirement of directors to try and avoid ‘conflicts of interest’ especially where family members are concerned;
- S.176 of the Companies Act 2006: This requires directors not to accept benefits (direct or indirect) from 3rd parties; and finally
- S.177 of the Companies Act 2006: This again seeks to keep all company transactions transparent and declare any interest in transactions or arrangements involving the company.
With effect from April 2008, the duties of a Secretary (if appointed) of a UK company are:
With effect from April 2008, the Companies Act 2006 eliminated the requirement for a limited company to appoint a company secretary but where appointed their duties are mainly administrative in nature and may well include the following:
- Arranging and organizing company meetings, ordinary and extraordinary resolution meetings and annual general meetings
- Maintaining the company combined register
- Taking responsibility for submitting, mostly electronically today, all Companies House annual return and company amendment documents
- Arranging the annual general meeting (AGM) for shareholders if required
- Signing off the annual accounts for submission to the Inland Revenue and Companies House
Shareholder Rights & Obligations
Shareholder(s)/Subscriber(s): Under UK law there need only be one initial shareholder/subscriber although it is common to have two or more after the registration of a company by the company registration agents
Nominal, issued, transferred and allotted share capital: The nominal share capital of a company is the potential amount of shares that a company has available for future distribution. The issued share capital is literally the amount of shares that a company has issued out of its potential nominal share capital. In the case of most domestic UK companies the company registration agent will initially issue the minimum number of shares, normally one or two, with an individual nominal value of normally £1.00 each. After the receipt of the company documentation the permanent company secretary will normally lodge the stock transfer form(s) to officially transfer the shares issued by the company registration agent to the permanent shareholders. This being done, at a nominal charge, by submitting a stock transfer form for stamping with the Stamping Office. Allotted shares are literally those shares that the permanent board of directors has decided to issue over and above those initially issued by the company registration agent. They are referred to as allotted because they are being issued for the first time and therefore are not being transferred from one party to another
The types of shares: In general there are two types of shares "ordinary" and "preference". Preference shares as the name suggests provide a benefit over and above those available to those holding ordinary shares. In most cases, the preference will relate to either voting rights and/or payment of company dividends depending on the provisions of the Articles of Association
Legal Documentation, Meetings & Resolutions
Memorandum & Articles of Association: The Memorandum of Association of a company aims to set out what the company may do which traditionally was very extensive to allow for future flexibility. However, with the recent introduction of Standard Industrial Classification (SIC) Codes it now seems that the flexibility hitherto enjoyed by UK companies may be indirectly compromised. The Articles of Association literally lay down how a company is to be governed normally by choosing a standard set of Articles provided within the Companies Act 2006 with appropriate amendments/alterations. Most English & Welsh private limited companies are governed by Table "A" Articles there being a choice between "A-F"
Annual & Extraordinary General Meetings: These are meetings held by the shareholders to either review the performance of the board of directors (if different from themselves) or assist them take major decisions. In simple terms, all companies have Annual General Meetings (AGM's) to review such things as a company's annual accounts and related matters. Extraordinary General Meetings (EGM's) as the name suggests, can be called at any time of the year when there is a matter of sufficient gravity. It should be remembered that at all times the ultimate control will vest in the shareholders but unless they/it is/are the same as the director’s day to day executive decisions remain the domain of the board of directors
"Special" and "Ordinary" resolutions: As stated above, all companies are bound by their Memorandum and Articles of Association. However, where it is deemed desirable changes can be made and/or meetings called by the shareholder(s) provided the applicable majority exists. In the case, of "ordinary" resolutions, which generally deal with day to day and/or matters of lesser importance, a simple majority is all that is normally required. In the case of "special" resolutions, which tend to deal with structural and matters of greater importance, majorities of either two thirds or three quarters are the norm depending on the particular Memorandum and Articles of Association used.
The Registered Office Address (ROA): This is the address where a company is officially located and where all service of process/official documents arrive. It does not have to be the address where the business is actually carried out and in is fact very often the address of a company's solicitor/accountant or company registration agent. Who provides your registered office address is very important since they will receive all documents from HMRC and Companies House in Cardiff and should be capable of advising and or dealing with such official correspondence. In addition, a copy of a company's official books must always be kept at the ROA for the benefit of both shareholders and other interested parties. Finally, the ROA is where all documents relating to a legal action should first be submitted.
Powers of attorney (POA): Powers of attorney are documents granted by the board of directors in favour of third parties, known as attorneys-in-fact, in order to allow them to carry out functions deemed desirable by the board of directors. In general terms there are two main types of attorney, a General Power of Attorney (GP0A) and a Special Power of Attorney (SPOA). The first can give a wide range of powers to an attorney-in-fact whilst the second, tends to be very specific and time delimited. When looking at any POA it must always be remembered that no matter what terminology may be used in the document (i.e. such as irrevocable) all POA's General or Specific can be cancelled/abrogated at any point in time by the grantors, the board of directors
For more information on UK Company Formation services, please speak to a tax planning consultant