According to the Companies Act 2006 a “director” includes any person who occupies the position of a director, by whatever name it may be called. The Companies Act 2006 does not impose an upper limit on the number of directors a company may have, although the company articles may specify a maximum.
There are, however, minimum requirements: A private company must have at least one director and a public company must have at least two directors. If there is only one director in the company then that director must be a natural person, in other words an individual and not another company, body or other entity. If there is more than one director then at least one of these must be a natural person.
A director is a key person since she-or-he acts on behalf of the company. Directors are responsible for managing the company’s business, for which purpose they may exercise all powers of the company including – but not confined to – signing contracts, hiring employees, giving binding instructions etc.
Who can be a company director?
The requirements for being a director are stated in the Companies Act of 2006. Any person more than 16 years old can be appointed as a director and there is no maximum age limit. The Companies Act 2006 specifies no restrictions with regard to a director’s nationality or residency.
NOTE: A person whom a court has disqualified from being a director (although an appeal may be made against such a ruling) or a person who is an undischarged bankrupt (unless it is allowed by the court) may not be a company director. A director may be disqualified by a court or by the Secretary of State for Business, Innovation and Skills for up to up to 15 years. Breaching such a disqualification order is a criminal offence.
There are no requirements with regard to particular qualifications or experience in order to be a director. The Companies Act 2006 stipulates only that the director should exercise reasonable care, skill and diligence.
One is allowed to be a director in more than just one company although, in such a case, a director must perform the same duties and obligations in every company that he manages. Such a director kust ensure also that there is no conflict of interests in managing the companies in which she-or-he is a director. There are some exceptions of this rule, however; for example some officers of the company – such as solicitors or auditors of the company – may not be appointed as its directors.
The company’s articles of association may contain special provisions regarding the personal status of a director. For example, the articles may impose residency requirements upon a director in order to define the company’s tax status. Regarding any conflict of interest, the articles may state how many members of a single family may be represented among the directors.
Procedure of appointment
The only formal requirement regarding the appointment of a first company director is the notification to the Registrar of Companies upon the formation of the company. Nevertheless, the articles may set particular rules for the appointment of a director of the company.
According to the UK Corporate Governance Code 2018, appointments to the board of directors should be subject to a formal, rigorous and transparent procedure and an effective succession plan should be maintained for the board and other senior management. Both appointments and succession plans should be based on merit and objective criteria.
The way in which a director is usually appointed is by ballot at the Annual General Meeting (AGM) of shareholders, whose votes are counted in terms of how many shares each of them holds. A resolution to appoint a particular person as a director should be put to the vote and the decision should be made in accordance with the majority of shares thus counted. The shareholders may delegate a right to appoint a new director to the board of existing directors if this is specified or allowed in the company’s constitution.
Once directors have been appointed the company must keep a register of them. This register must be available for inspection at the company’s registered office or whatever place is specified by the regulations of the Secretary of State for Business, Innovation and Skills. The company must notify Companies House of each new appointment within 14 days after it is made. The most convenient way to do this is by filling in the form AP01 or AP02 online through the CH WebFiling service. Alternatively, these forms can, instead, be completed and submitted on paper.
A director is generally entitled to remuneration, particularly as an executive director, for which purpose she-or-he is an employee who enters into a director’s service contract with the company.
On the other hand, she-or-he may choose to act gratuitously (in other words work for free), usually as a non-executive director. A non-executive director may not be an employee of the company, so her-or-his service contract is at the discretion of the company.
A company may, by ordinary resolution at a meeting, remove a director before the expiration of his period of office, notwithstanding anything in any agreement between the director and the company.
A director may also resign from his office by giving notice to the company in writing. The resignation takes effect from the date on which the notice is received by the company or later if specified in the notice.
The articles of association usually provide for the automatic termination of appointement as a director in the following cases:
- the bankruptcy of the director;
- physical or mental incapability of the director;
- voluntary resignation;
- a person ceases to be a director by virtue of any provision of the Companies Act 2006 or is prohibited from being a director by law.
Even after a director has resigned she-or-he remains liable for offences which occurred during her-or-his tenure.
Every director should use his power not for her-or-his own benefit but to promote the company’s success and profitability.
Here are universal statutory duties of a director as set out in the Companies Act 2006:
- the duty to act within her-or-his powers according to the company’s constitution;
- the duty to promote the success of the company;
- the duty to exercise independent judgement;
- the duty to exercise reasonable care, skill and diligence;
- the duty to avoid conflicts of interest;
- the duty not to accept benefits from third parties;
- the duty to declare an interest in proposed transactions with the company.
The Government’s Explanatory Notes to the Companies Act 2006 state: “The statutory duties do not cover all the duties that a director may owe to a company. Many duties are imposed elsewhere in legislation. Other duties remain uncodified”. Further duties can also be stated in the company’s articles and in the director service contract.
All of these duties are owed by all classes of director: de jure, de facto and shadow.
Classes of a Director
There are differences between de jure, de facto and shadow directors.
A de jure director is one who has been duly appointed according to the Companies Act 2006 and the company articles. This category includes executive, non-executive and nominal directors. De jure directors must be represented in the register of directors and Companies House must be notified of the appointment, change or removal of any de jure director.
A de facto director is someone who actually manages a company even though she-or-he may not have been formally appointed as a director. For example, a person may be qualified as a de facto director if the company has not appointed him or her as a de jure director and yet she-or-he undertakes the functions of a director.
A shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act. Generally, a shadow director is a person who exercises control over company management, finances and business decisions without any legal appointment to this role. Just like a de jure or de facto director, however, such a shadow director is nonetheless bound by the same statutory duties that are laid out in the Companies Act 2006.