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The top 5 things directors do wrong – including the consequences The top 5 things directors do wrong – including the consequences

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Feb 24

The top 5 things directors do wrong – including the consequences

Written by Jonathan Mortimer

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

A guide for directors: what you should know before accepting the appointment.

This is article 2 from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths.  The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors.  It is not a substitute for taking specific legal advice on a particular set of circumstances.

2. The top 5 things directors do wrong – including the consequences

The office of director comes with numerous responsibilities and legal consequences.

Here are five examples of traps which it is easy for a director to fall into even when acting with the best of intentions.

It is wrong to assume that directors can make all the decisions concerning the company.

There are numerous statutory provisions which require not only the approval of the directors but also the shareholders.  If you fail to get that approval, then the decisions may be declared invalid and have to be reversed.  For example, if a director has a personal interest in a transaction or it is decided to provide a director with a loan then generally speaking the shareholders must agree.

Similar principles apply concerning the appointment of a director.   Any service contract which lasts for more than 2 years must be approved by the shareholders.

If the intention is to later dispense with the director then the shareholders are required to agree to the removal and also to approve any compensation payment to the director concerned.

Not fully understanding the relationship between the company and the director.

A director will usually also be an employee of the company.  As a result, if you have insufficient grounds to dismiss the director, you could be faced with an unfair dismissal claim.

If you just terminate the contract of employment, the individual could remain a director and a shareholder unless you have you paperwork in order to cover this eventuality.

Directors must avoid declaring unlawful dividends.

Some directors can be too keen to declare dividends for shareholders when turnover seems high or incorrectly declare dividends as a form of remuneration for themselves in an attempt to be tax efficient.

Directors frequently go wrong by declaring dividends when there is insufficient available profit to distribute and also not paying the dividends fairly to all shareholders leaving the directors exposed to having to repay the unlawful dividends paid.

Moving assets of the company to third parties or another company within the same group at no cost or lower than its true value.

This is known as a transaction at an undervalue and can potentially have serious repercussions for the director who may be seen as purposely diverting assets away from creditors.

As a result, a director, usually in the event of insolvency, can become personally liable for the company’s debts, receive a fine and even face a criminal prosecution.  Whichever party received the asset in question may also need to hand it back.

Directors need to deal with creditors fairly and not prefer one from another.

If cash flow is tough and insolvency a possibility, creditors within the same class must be treated the same.  If for example a director prefers to repay a loan to a family member, pay a particular lender to avoid personal liability on a guarantee or prefer to pay a creditor to secure an ongoing business relationship following insolvency the director may be in trouble.

Directors can face personal liability for the company’s debts and the party who was preferred can be made to return the advantage received.


A guide for directors: What you should know before accepting the appointment.

Links to other articles in the full series can be found here when they are published:

  1. You have been appointed – but what kind of director are you?
  2. The top 5 things directors do wrong – including the consequences
  3. The Board of Directors cannot agree anything
  4. Shareholders – the director’s ultimate master
  5. Directors’ loan accounts – the best overdraft you can get?
  6. Personal liability – so much for limited liability
  7. Becoming a non-executive director – the risk free option?
  8. Wrongful trading – the risks facing directors when the company is insolvent
  9. The wound-up company – it’s not all over yet for directors
  10. The phoenix that rises from the ashes – the company which refuses to die

Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide.   Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666

Published on 8 February 2024

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