I’m writing this piece as a layperson, reflecting on the position of Directors of all sizes of companies incorporated in the UK. I don’t hold myself out as a legal expert, nor do I sell Directors insurance, but I do come across Directors every day in the work I deliver, to help companies deliver their intended strategy and convert ideas and vision into practical actions for success.
It has long been a bean of an idea that to form a limited company online for £20, to provide a business card title of Managing Director seems to be an anathema. Suddenly an individual finds themselves elevated in status, with automatic authority over those who then chose to work for them. Just as bad is the promotion to Director status from a previous management role, and so my observations cover pretty much the majority of directors of smaller and medium sized businesses. I perhaps don’t extend this to the larger multinational businesses, as they often have systems, and required IOD qualifications, to be a board member.
The legality of being a director is of course “perfectly well” explained – in an inch thick Companies Act which can be bought and read!!.
But who has read it? I mean really read it, understood it, and embraced it?
The answer is probably 1% if that. A few more percent may attend a one day course on “How to be a director” The rest, (vast majority) don’t bother, and simply rely on good legal advice when it looks a bit dodgy, or when things have already gone wrong. By then it can be too late.
Most directors reading this article may have the belief that limited liability that comes with incorporated companies exonerate or protect them from individual claims against them. But they are misled. The limited liability extends to shareholders and not to directors.
Whilst it can be true that the limited company is the first target of any prosecution or fine, it is then perfectly possible to extend such action to all of the directors of a company as individual people whether or not you think it’s your fault or not.
There are a myriad of potential issues and personal claims to be made against any director who, for reasons of intent or simple mistake, falls foul of a growing number of Acts. These acts include Health and Safety, Data Protection, Environment, Financial Conduct Authority, and may more. The list grows by the year and there are requirements for all businesses no matter how big or small you are, to comply.
Falling foul of these Acts can result in personal fines (your limited company is restricted as to what it can cover for each director) and even extend to imprisonment for more serious breaches.
I would hope that every director has “Directors and Officers Insurance” in place, that will cover the costs of legal defense, discovery or even just the costs of an investigation that is later dropped. (remember I don’t sell insurance!) I know from experience that this is often not in place for many directors, or can be of an insufficient cover.
But the legal traps are baited with complexity, and insurance will not pay your fines, and the policy issuers will not do time in jail for you.
So back to my title.
If I were to be sold a product (A limited company in this case) and I was not told of the terms and conditions in clear English to allow me to gain a reasonable informed decision about my purchase, then who is in fact liable for the subsequent fallout?
The formality of directorships can be learned of course, and disciplines applied to reduce and mitigate the personal risks. If we buy a car, we have to hold a valid license, obtained after a rigorous test (theory and practice) Our cars are worth £10-50,000, and they are comprehensively insured, enforced by the police.
Our Companies are worth many times that of our car and hold the economic lives of many people, yet our ability to “drive” the company is never tested, save for when it goes wrong.
Are “directorships” therefore being mis-sold to us? Is this the next “PPI” claim waiting to happen?
In summary, I think this is a problem that grows with each new piece of legislation or new Act Each one is a new opportunity to get it wrong in our increasingly litigious society in which we operate.
The opportunity maybe, is to move to a “directors license” that becomes a pre-requisite for holding the position. This could be done online for speed and efficiency, with a certified outcome after a test is completed.
I know some readers will respond that this is just more paperwork and administration, but the alternative is to carry on blind, as most do, until things go pear-shaped.
Happy to have a dialogue about this subject, so feel free to comment