An offer of employment as a director or a promotion to the position of director in a company is, of course, usually viewed as positive news. As well as a change in job title or status, it also usually involves a pay rise and other additional benefits being offered to the individual.
However, as with most things in life, the additional perks that are granted in becoming a director of a company also come with additional duties, responsibilities and potential liabilities. Some people may simply accept the role without taking legal advice and therefore are not fully aware of what additional responsibilities and potential liabilities they are taking on.
The legal status of a director is an office holder who owes statutory and common law duties to the company. A director is not automatically an employee of the company, although they can also be an employee if they enter into a contract of employment (express or implied).
Executive directors (who usually work full or part-time in the company) are usually employees of the company, while non-executive directors (who usually act in an advisory role) are more likely to be self-employed.
In either case, The Companies Act 2006 is the key piece of legislation that directors should be aware of. This sets out the general duties that are owed by company directors, which are:
- To act within their powers.
- To promote the success of the company – note that this does not mean they have to guarantee the success of the company.
- To exercise independent judgment.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties
- To declare any interests in a proposed transaction or arrangement the company is entering into.
Directors also have a fiduciary duty towards the company to act honestly and in good faith in the best interests of the company, and to use the powers granted to them for the purposes for which they were given. This includes a duty to take proper care of the assets of the company; not to make a personal profit (unless permitted in the articles of association or approved by the company); and to avoid conflicts with the company and not to compete with the company.
The directors’ fiduciary and general duties are owed to the company, so shareholders or third parties will normally only have a right of action against the company, not against individual directors, if things go wrong.
However, directors may also incur liabilities to shareholders and third parties where they act in a way which creates a personal obligation. This is not lightly implied, but could be assumed, for example, by an express representation by a director accepting a personal obligation to the shareholder or third party
Rights of executive directors
An executive director who is an employee or worker may benefit from various employment rights. These include:
- To be provided with a written statement of certain particulars of employment.
- To receive a statutory minimum notice period should the contract be terminated.
- To be paid at least the national minimum wage.
- A limit on the number of hours which may be worked each week and entitlement to a minimum amount of paid holiday.
- To be paid statutory sick pay (SSP) for periods of illness or incapacity.
- To not be unfairly dismissed (after two years’ qualifying service).
- To a statutory redundancy payment (after two years’ qualifying service).
- Protection from discrimination.
- The right to receive equal pay for equal work performed by a member of the opposite sex in the same employment.
- To maternity leave and pay, shared parental leave and pay, paternity leave and pay, adoption leave and pay, unpaid parental leave and time off for dependants.
- To request flexible working.
Given the importance of the role of a director (both to the individual and to the company), it is always advisable to have a Director’s Service Agreement in place setting out the obligations, duties and expectations at the outset, so that both parties are clear.
If you would like us to provide you with a Director’s Service Agreement or wish to discuss the potential legal implications of not having one in place, please do nothesitate to contact Natasha Smith on email: email@example.com or Joseph Oates on email: firstname.lastname@example.org or tel: 01892 515022.