Directors serve at the helm of limited companies and act on behalf of the shareholder body, to which they are ultimately accountable. All limited companies, regardless of size, must appoint at least one director. What duties and liabilities a director is subject to depends on their level of participation in corporate governance and whether they have a contractual employment relationship with a company.
Categories of director
There are two general categories of director: executive and non-executive directors. An executive director will usually be committed on a full-time basis to the day-to-day operations of the company, and statutory duties will apply to them.
A non-executive director on the other hand will offer an arms-length, consultative role in a specific field of expertise. If a board of directors appears to be acting on received instruction as orders, that individual may instead be considered a shadow director of the company, which will entail similar duties to an executive director.
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Employment status of directors
Typically, a director is not treated legally as an employee, rather, they will be regarded as an office holder. A director is ordinarily appointed to office via ordinary shareholder resolution. The company’s Articles of Association may also grant power to the board of directors to appoint directors.
Employee
If a service contract exists between the director and the company, they will be legally considered an employee. Service contracts must be approved by an ordinary shareholder resolution. The terms of directors’ service contracts are set out in the Companies Act 2006.
Some employer companies may insist on heightened obligations upon their employees. These can include restrictive covenants in the form of non-compete, non-poaching and non-dealing clauses.
A restrictive covenant is challengeable in a court of law if found to be unreasonable in light of the employer’s objective of protecting their legitimate interests. A covenant cannot be too broad in application or have an excessive length of duration. The burden of showing whether an objective is a legitimate business one rests on the employer.
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Restrictions on who can be a director
Directorship is not subject to competency tests for appointment, but they must meet statutory and common law duties of care in the course of business. The person appointed must be at least 16 years of age. A company may place its own restrictions on directorship in its Articles of Association, such as a requirement to own a certain number of shares.
Disqualifications and removal
Directors can be removed via ordinary resolution, notwithstanding any contracts of employment that exist between the director and company.
As a rule, whenever insolvency proceedings are instigated, the actions of all directors are subject to investigation by the Department of Business, Innovation and Skills. If a director resumes trading in violation of this duty and liquidation becomes inevitable as a result of their transactions, the director can be held personally liable for debts or subject to sanctions, including a ban from future directorship for up to 15 years.
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At Lewis Nedas, our Employment Lawyers have over 40 years ’ experience in employment law for national and international companies. To discuss your matter one of our Directorship Specialists, please call us on 020 7387 2032 or complete our online enquiry form.
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