What is a director?

08 Aug 2024

In our Back to Basics series, our new apprentice, Joseph McDaid explains the fundamental principles of corporate and tax services from the perspective of someone completely new to the industry.

It is our hope that this short series which will delve into a fresh key topic each week, will provide others like Joe, who are starting out in the industry, with bite size, easy to digest information to save, study and explore as they continue to expand their knowledge of corporate and tax services.

This week Joe explores the concept of a director; what they are, the different types of director, and what responsibilities they hold.

No need to fear because Joe is here!

What is a director?

While there is no single definition a company director, generally it is a ‘person or persons chosen to control or govern the affairs of a company and are responsible for its management and day to day operations.’

Directors are legally responsible for managing the affairs of the company and can be held accountable for its actions. Directors of companies are usually appointed to the board following a formal process, and they are then registered with the companies office.

What types of directors are there?

While anyone designated as a director will have the same duties, liabilities and responsibilities, there are different types of directors. Two key types include executive and non-executive directors. The main difference between the two being that a non-executive director does not participate in the day-to-day operations of the company, whereas executive directors (usually given titles such as managing director, finance director, operations director etc) are often employed by the company and mange daily business.

Other types of directors include: alternative, de facto and shadow directors.

What is the differences between de-facto and shadow directors?

A de-facto director means a ‘director in fact or in reality’. This is a person who acts as a director and holds themselves out to third parties as a director without having been formally appointed into the position.  They generally carry out the same duties as a properly appointed director (also known as a de-jure director). De facto directors carry exactly the same risks as a properly appointed director and can be held personally liable for breaches in their duties. Should a breach be found, they could face disqualification from acting as a director and could tarnish the reputation of the organisation they work for.

A shadow director by contrast is someone who does not claim to be or assume the role of a director however their instructions and directions influence a company’s affairs. A shadow director is defined in the Companies Act 2006, as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’. It refers to any appointed individual (aside from professional advisors) who have influence over a company’s operations, strategy and decisions.

A shadow director carries the same risk as de-facto directors; the lack of formal appointment does not offer protection from penalties should they be seen to breach director responsibilities.

What are the duties of a director?

A company is a separate legal entity (see last weeks article) and the directors are responsible for ensuring that the company complies to its statutory duties outlined by law. The duties and responsibilities of directors are found not just in statute (such as the Companies Act 2006) but also in common law. There are also a wide range of regulations and legislations including the Insolvency Act 1986, the Company Directors’ Disqualification Act 1986, the Health and Safety at Work etc Act 1974 and the Corporate Manslaughter and Corporate Homicide Act 2007 which set out rules for directors.

Core duties include:

• to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred
• to promote the success of the company for the benefit of its members
• to exercise independent judgement
• to exercise reasonable care, skill and diligence
• to avoid conflicts of interest
• not to accept benefits from third parties
• to declare an interest in a proposed transaction or arrangement

Overall, being a director is not a role to take on lightly! Directors have a responsibility to the company and must always act in the best intentions of the company. Directors must exercise independent judgement & reasonable care, skill and diligence. Statutory and fiduciary duties must always be completed to the letter of the law. Failing to comply with their obligations as a director could have implications for both themselves and the company, resulting in criminal proceedings which, if found guilty could lead to heavy fines or even serving a prison sentence.

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