Un­der­stand­ing the re­spon­si­bil­i­ties of a com­pany di­rec­tor

Bray People - - OPINION -

Q . My brother is set­ting up a com­pany and has asked me to be a di­rec­tor. He says it doesn’t in­volve much, but, while I want to sup­port him, I am a bit wor­ried about it. What are the re­spon­si­bil­i­ties of a di­rec­tor? A . This is a good ques­tion be­cause many peo­ple don’t un­der­stand that be­ing a com­pany di­rec­tor does in fact in­volve se­ri­ous re­spon­si­bil­i­ties. It is great news that your brother is get­ting started in busi­ness and that you are happy to sup­port him. Ev­ery com­pany must have at least two direc­tors and I imag­ine in this case your brother will be one di­rec­tor and has asked you to be the sec­ond.

Be­fore you de­cide whether or not to be­come a com­pany di­rec­tor, think about the fol­low­ing to help you make a de­ci­sion that is based on fact rather than a feel­ing of fam­ily obli­ga­tion or a de­sire to help out. You could share the in­for­ma­tion with your brother and talk it through to­gether. I also ad­vise that you get pro­fes­sional ad­vice be­fore pro­ceed­ing.

UN­DER­STAND THE DU­TIES OF A COM­PANY DI­REC­TOR

The pur­pose of a di­rec­tor is to man­age the af­fairs of a com­pany. There are five dif­fer­ent types of direc­tors (ex­ec­u­tive, non-ex­ec­u­tive, al­ter­nate, de facto and shadow) and each has dif­fer­ent roles and re­spon­si­bil­i­ties. It sounds like you may be con­sid­er­ing be­ing a non-ex­ec­u­tive di­rec­tor – one that is not in­volved in the man­age­ment of the com­pany - in which case the du­ties are the same as for an ex­ec­u­tive di­rec­tor who is in­volved in man­ag­ing the com­pany (e.g. as man­ag­ing di­rec­tor or sales di­rec­tor).

Direc­tors have com­mon law du­ties (cre­ated by the courts) as well as statu­tory du­ties (cre­ated by leg­is­la­tion).They are re­spon­si­ble for en­sur­ing that proper books and records are main­tained by the com­pany, that an­nual fi­nan­cial state­ments are pre­pared, that cer­tain reg­is­ters are main­tained (such as reg­is­ter of direc­tors, reg­is­ter of trans­fers, reg­is­ter of mort­gages and deben­tures, etc.), that re­turns are made to the Com­pa­nies Reg­is­tra­tion Of­fice, and that they as direc­tors be­have in the best in­ter­ests of the com­pany, its share­hold­ers and its cred­i­tors.

Be aware of the ex­tent of the penal­ties. There are se­ri­ous penal­ties for of­fences com­mit­ted by com­pany direc­tors. These in­clude fi­nan­cial penal­ties, as well as prison sen­tences or be­ing dis­qual­i­fied or re­stricted in some cir­cum­stances. For ex­am­ple, a ‘sum­mary of­fence’ could lead to a fine of €1,900 and/or 12 months im­pris­on­ment. If you are not in­volved in the day to day run­ning of the busi­ness, you need to be happy that your brother is go­ing to meet the legal obli­ga­tions of the com­pany, as you could po­ten­tially be re­spon­si­ble and held civilly (reck­less­ness) or crim­i­nally (fraud­u­lent) li­able un­der the Com­pa­nies Act.

TALK ABOUT PER­SONAL GUAR­AN­TEES

Direc­tors of com­pa­nies are of­ten asked to sign a per­sonal guar­an­tee on be­half of the com­pany, for ex­am­ple, by a fi­nan­cial in­sti­tu­tion in re­la­tion to a mort­gage, loan or over­draft, or by a land­lord or ma­jor sup­plier of goods or ser­vices. This makes the di­rec­tor who acts as a guar­an­tor vul­ner­a­ble should the com­pany de­fault on its re­spon­si­bil­i­ties. If you do sign up as a di­rec­tor, it is ad­vis­able to dis­cuss your views on per­sonal guar­an­tees with your brother early on. If this is a no-go area, say so from the start to avoid dif­fi­cult con­ver­sa­tions fur­ther down the line.

THINK ABOUT THE WORST CASE SCE­NARIO

While it is im­por­tant for your brother to start his busi­ness on a pos­i­tive note, this is the time for you both to dis­cuss in­sol­vency be­cause this is when the duty of be­ing a com­pany di­rec­tor – acting in the best in­ter­est of the com­pany, its share­hold­ers and its cred­i­tors – can be­come very tricky.

Tough trad­ing times can lead to poor de­ci­sion mak­ing and if you are not play­ing an ac­tive role in the com­pany you will need to en­sure that you are kept up-to-date on per­for­mance and re­lated de­ci­sions, and that you have a chance to con­trib­ute. Direc­tors of­ten fear tak­ing ac­tion when trad­ing is dif­fi­cult, in case they come un­der crit­i­cism from a liq­uida­tor or court or the Of­fice of the Di­rec­tor of Cor­po­rate En­force­ment (www.odce.ie). How­ever, not tak­ing ac­tion is not an ac­cept­able so­lu­tion ei­ther.

One of the most dif­fi­cult de­ci­sions direc­tors may have to make is whether it is pos­si­ble to trade out of in­sol­vency or if a com­pany needs to be wound up. De­ci­sions should be sup­ported by doc­u­men­ta­tion that show the direc­tors acted re­spon­si­bly and ac­cord­ing to their du­ties.

Jim Doyle ACMA QFA is a part­ner in RDA Ac­coun­tants of­fer­ing full ac­coun­tancy, busi­ness ad­vi­sory, tax ad­vi­sory and fi­nan­cial ser­vices.

RDA Ac­coun­tants | 5 Up­per Ge­orge Street, Wex­ford | Louisville House, Wa­ter­ford Road, Kilkenny | 053 91 70507 | www.rda.ie

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