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I've formed my start up, what are my Directors responsibilities?

Appointment of directors

A private limited company must have at least one natural person as a director (as opposed to a corporate entity). 

The director must be at least 16, but she cannot be the company’s auditor, an undischarged bankrupt or have been previously disqualified from acting as a director by the courts.  There is no legal requirement for any particular qualification except in certain specific businesses (for example, investment companies).

Directors’ duties and liabilities

Every director has certain statutory duties imposed on her when acting as a director, which are owed to the company. These are:

  • the duty to promote the long-term success of the company as a whole (as opposed to, say, acting in the best interests of the majority shareholder);
  • the duty to act within the company’s constitution and powers (only do the things the company is able to do and which the directors are authorised to do);
  • the duty to exercise independent judgement;
  • the duty to exercise reasonable skill, care and diligence;
  • the duty to avoid “situational” conflicts of interest (ie where the director’s own other interests – whether as a director of another company or a personal interest - may conflict, directly or indirectly, with the company's);
  • the duty not to accept benefits from third parties that are offered because the offeree is a director; and
  • the duty to declare any direct or indirect personal interest in any proposed transaction or arrangement to be entered into by the company (referred to as a “transactional” conflict) to the other directors of the company.

Promoting the “success” of the company equates to promoting the long-term increase in value of the business.  It is for the directors to decide how they will operate the business and determine the necessary commercial path of the company, but companies legislation does give a (non-exhaustive) list of the various factors directors should take into account in order to show that they are properly acting to promote the long-term success of their company.  These include:

the likely consequences of any decision in the long term;

  • the interests of the employees of the company;
  • the need to build and maintain the company's business relationships with suppliers, customers and others;
  • the impact of the company's operations on the community and the environment;
  • the desire to maintain a reputation for high standards of business conduct; and
  • the need to act fairly in relation to the shareholders of the company

Generally, the directors will not be held personally liable in respect of their decisions taken as directors, unless there is a breach of duty or the presence of some malfeasance.  If the company is allowed to trade whilst insolvent (or when there is no reasonable prospect of avoiding insolvency), the directors could become personally liable to contribute to the debts of the company.

In extreme examples, such as fraudulent behaviour, directors may be fined or face criminal prosecution and disqualified as directors. 

A director will not usually be liable for the acts of other directors if she knew nothing about the matter and did not take part.  However, a failure to question or scrutinise the suspicious behaviour of another director could amount to a breach of duty.

Even if not officially appointed as a director, you will be treated as a director if you are effectively acting as one (a “de facto” director) or if you exert influence over the board (a “shadow” director).

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