Understanding the responsibilities of a company director
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.
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