UK: Memorandum On The Maintenance Of A UK Company And The Duties Of Directors Of UK Companies

Last Updated: 7 June 2001
Article by Andrew Evans

1. Introduction

This memorandum sets out some of the main company law requirements for the maintenance of a UK company and the duties and responsibilities of the directors of the company. Whist this memorandum is concerned with private companies and not public companies the procedures and responsibilities and duties of directors are largely the same for both types of company. Some of the main similarities and differences between private, public and listed public companies are considered in section 4 of this memorandum. This memorandum is not intended to be a substitute for legal advice, but is intended to give some general guidance as to certain aspects of UK company law which you should be aware of when planning to run a UK company.

2. Maintaining A UK Company

2.1 General Obligations

Every company incorporated in England or Wales must have a registered office in England or Wales to which all correspondence can be sent. This is often the company’s main place of business or the address of its solicitors or auditors. The address of the company’s registered office together with the full name of the company and its number must be stated legibly on all business letters and order forms.

The company must have at least one director and a secretary. A sole director cannot also be the secretary but if there is more than one director a director can also be the secretary. The minimum number of shareholders required is one and the shareholder(s) need not be UK national or resident.

Every company is obliged to have a memorandum of association ("Memorandum") and a set of articles of association ("Articles") which comprise the company’s constitution. The Memorandum is concerned with the company’s relationship with and dealings with outsiders, whereas the Articles govern the internal workings of the company. These, together with any changes to them need to be filed with the UK Companies Registry. The UK Companies Registry also requires the company to file details of the company’s directors, secretary, share capital, auditors, registered office and any charges or mortgages over the company’s assets and to file details of any change to any of them. Under English law, a company has a duty to keep the company's registration with the UK Companies Registry up-to-date. A company will have to comply with the following obligations:

2.1.1 Annual Shareholders Meeting

In each year within fifteen months of the last one, a company must hold an Annual General Meeting (AGM) of shareholders.

At the AGM of the shareholders, the following matters are normally resolved by a simple majority:-

  1. acceptance of the accounts and dividends contained in them;
  2. re-election of directors (if re-election is required under the Articles); and
  3. appointment or re-appointment of auditors.

The Companies Act 1989 introduced the concept of an elective resolution with a view to reducing the procedures for small private companies. It allows a private company to pass elective resolutions (unanimous resolution – 21 days notice – capable of being revoked by Ordinary Resolution) for the following:

  1. dispensing with the need to appoint auditors each year;
  2. dispensing with the need to hold AGMs and lay accounts before a general meeting; and
  3. granting the directors authority to allot up to the authorised share capital of the company for an unlimited period of time.

2.1.2 Annual Return

Once in every year ending 31st December a company must deliver a form called an Annual Return to the UK Companies Registry. This form shows the share capital and the names of the directors and company secretary and shareholders at a date fourteen days after the AGM (or 31st December if no AGM was held in that year) and signed by a director or company secretary. It is a public document. A fee of £15 is payable on delivery of the form.

2.1.3 Filing Of Accounts

The Balance Sheet, Profit and Loss Account and Directors' Report on the company must be approved by the Board of Directors, accepted at the shareholders meeting and delivered to the UK Companies Registrar within ten months of the end of the company's financial year (known as the accounting reference date). The accounts delivered to the Companies Registrar must be signed by two directors (or one director if there is only one) and by the Auditors. All the signatures must be originals. There are financial penalties for delay, and the company can be threatened with winding up if there is a serious delay.

2.1.4 Records Required By The Companies Act 1985

The company secretary is required to keep all the official records listed below which are contained in the company's statutory books:-

  1. Register of Members.
  2. Register of Debenture holders (if any).
  3. Register of Applications and Allotments.
  4. Register of Share Transfers.
  5. Register of Directors and Secretary.
  6. Register of Interests of Directors (and their families) in the shares and debentures of the company, and certain related companies, e.g. parent company.
  7. Register of Charges or security interests granted by the company.
  8. Minutes of proceedings of General Meetings of shareholders and Directors Meetings.

2.2 What Are The Other Issues To Be Covered?

It is important to bear in mind that shareholders' meetings may be needed from time to time, although under most Articles, the Board of Directors are given full authority to manage the company.

2.2.1 What Are The Issues Needed To Be Discussed In Shareholders' Meetings?

  1. increase of authorised share capital of the company, and the issue of new shares unless they are issued to existing shareholders in the same percentage as they own the existing share capital.
  2. any change in the Memorandum or Articles (75% majority required).
  3. change of name of the company (subject to the approval of the Companies Registry).
  4. certain directors' service agreements (e.g. if they are to run for over 5 years) and employee share option schemes.

2.2.2 What Matters Require Directors' Resolutions?

  1. (i) to issue new shares which have been authorised by the shareholders;
  2. (ii) to refuse to register the transfer of existing shares not being fully paid up shares and to refuse to register the transfer of shares on which the company has a lien (i.e. a right to withhold the shares or the rights attaching to them from the holder of such shares);
  3. (iii) to appoint anyone to be an agent of the company;
  4. (iv) to appoint new directors to fill a casual vacancy or as an addition to the existing directors provided the new number of directors does not exceed the maximum number of directors fixed by the Articles;
  5. (v) to approve Annual Accounts and the Directors' Report;
  6. (vi) to resolve what, if any, dividend should be paid each year by the company. The shareholders can only accept or reject the amount so decided;
  7. (vii) to appoint all company officers (Chairman, Managing Director, and Company Secretary);
  8. (viii) to authorise the use of the company seal which is used for the execution by the Company of certain formed documents; and
  9. (ix) to approve any change in the registered office of the company.

2.3 Share Capital

Once shareholders have paid for their shares, the money produced constitutes the company’s capital. A company’s capital is, in principle, a permanent fund available to creditors of the company. Accordingly, one of the basic principles of English company law is that the capital of a company should be maintained and provisions exist under the Companies Act 1985 to ensure the maintenance of share capital of companies. The impact of this on shareholders is that, having bought their shares in the company, they cannot normally hand back their share certificate to the company in exchange for the consideration they originally provided. If they want to realise their investment, they must sell their shares. There are exceptional situations where a company is permitted to reduce its share capital with the approval of the shareholders by special resolution and with the consent of the court.

A company is also prohibited by section 151 of the Companies Act 1985 from giving financial assistance to a prospective shareholder to enable him to purchase shares in the company or to discharge a liability relating to that purchase. The assistance is prohibited whether it is made directly or indirectly and if the prohibition is breached it can result in criminal liability for the company’s directors and professional advisers involved. There are limited exceptions to this general rule. However, the provisions of the Companies Act 1985 relating to financial assistance are complicated and any share purchase should be analysed carefully to ensure compliance.

3. Duties Of Directors

The directors of a company are the people who manage the company. They take business decisions and make trading contracts on the company’s behalf. The office of a director of a UK company can be an onerous one, similar in many ways to the position of a trustee.

There is no statute which exhaustively sets out the duties and responsibilities of a director. The law relating to directors’ duties is to be found not only in the Companies Act 1985 but also in an extensive body of case law. The duties can be divided into three categories, namely:

  • duties of honesty and good faith, known as "fiduciary" duties;
  • duties of skill and care; and
  • statutory duties.

Each of these is discussed below.

3.1 To Whom Are These Duties Owed?

The general rule is that directors’ duties are owed to the company, which means to the present and future shareholders of the company and not to any shareholder individually.

Directors also have a duty to have regard to the interest of the company’s employees. However, this is a general duty and the obligation cannot be enforced by any particular employee.

In certain circumstances, directors also owe a duty to the creditors of the company (see 3.5 below).

3.2 Fiduciary Duties

3.2.1 Duty To Act In Good Faith In The Interests Of The Company

A director must exercise his or her powers in good faith and in what he or she considers to be in the interests of the company. The test of good faith is subjective, so if a director honestly believes that he or she is exercising his or her powers in the best interests of the company the court will not consider his or her duties broken merely because the court takes a different view of the interests of the company.

3.2.2 Duty To Use Powers For A Proper Purpose

Directors must exercise their powers only for the purpose for which they were given, and not for some unauthorised purpose (such as to enable them to keep control of the company). This is so even if they are acting honestly, believing that what they are doing is in the best interests of the company.

3.2.3 Duty Not To Exceed Powers

Directors must not carry out any act which is unlawful, outside the company’s powers or outside the powers conferred on the directors by the company’s Memorandum and Articles.

3.2.4 Conflict Of Interest And Duty

A director must not take advantage of his or her position. He or she has a general duty to ensure that personal interests are not brought into conflict with those of the company, and to act in the best interests of the company if a conflict occurs.

3.3 Duties Of Skill And Care

3.3.1 The Test

The standard of skill required of directors is judged on a subjective basis. A director must exercise the degree of skill that may reasonably be expected by a person of his or her knowledge and experience.

The standard of care required of directors is judged on an objective basis. They are required to exercise the degree of care which a reasonable person would exercise on his or her own behalf.

In other words, the degree of skill and care to be expected of a director is judged subjectively by looking at his or her particular qualifications and objectively by looking at the position he or she occupies. The objective test is likely to be particularly important in the case of directors who hold executive positions, such as a managing director or finance director. A person occupying the position of finance director who has no experience of accounts would not be liable under a subjective test but would fall foul of the objective test.

3.3.2 Attendance At Board Meetings

A director is not bound to give continuous attention to the affairs of the company. All that directors are obliged to do is to attend board meetings and to vote on the proposed resolutions when they are reasonably able to do so. A greater duty can be imposed by express or implied agreement between the director and the company, as would normally be the case with an executive director who are likely to owe further duties of skill and care under his or her service contract.

3.3.3 Delegation

A director is entitled to trust an official to perform such duties as can properly be entrusted to him or her in accordance with the company’s Articles. A director may delegate those of his or her duties normally carried out by employees or agents of the company provided he or she ensures that the relevant persons are suitably qualified but, in the absence of authority from the company, directors must act as a board and have no general right to delegate their powers. It is usual, however, for the Articles of a company to allow the directors to delegate their powers to a managing or other executive director or to a committee of directors.

3.4 Statutory Duties

Various duties are also imposed on the directors of a company by statute. Directors are responsible for ensuring that the company:

    • complies with various laws such as health and safety, environmental protection, compliance with statutory and voting requirements;
    • prepares and produces audited accounts and sends a copy to the members and the registrar of companies within ten months (seven months in the case of a public company) of the company’s year;
    • prepares and submits to the UK Companies Registry the annual return within 28 days of the company’s return date; and
    • maintains statutory books including the register of members and the register of directors’ interests.

In addition, the Companies Act 1985 includes various provisions which are designed to protect the company from particular abuses. For example:

    • directors may not generally allot securities in the company unless they have been authorised by the company in general meeting or by its Articles
    • a director may not acquire from or transfer to the company a non-cash asset except in certain limited circumstances or with the approval of shareholders;
    • loans in excess of £5,000 generally cannot be made by the company to any of its directors;
    • directors’ service contracts must be available for inspection by shareholders;
    • directors’ service contracts must not exceed five years unless approved by members in general meeting; and
    • directors’ remuneration may not be paid on an after tax basis.

Breach of these obligations and restrictions may result in criminal or civil liability. In addition, a person may be disqualified for up to 15 years from acting as director in various circumstances. These include where the director has:

    • a conviction in connection with a company liquidation, administration or receivership;
    • persistently defaulted in making filings and returns to Companies House;
    • been found guilty of wrongful or fraudulent trading (see 3.5 below); or
    • been found guilty by DTI inspectors of conduct making him or her unfit to be concerned in the management of a company.

3.5 Insolvency

Additional duties arise in the context of insolvency and directors should consider taking advice from an insolvency practitioner should the company enter into financial difficulties.

3.5.1 Fraudulent Trading

Fraudulent trading occurs when a director allows the business of a company to continue with an intention to defraud creditors. Where a director allows a company to trade and incur debts at a time when there is, to the knowledge of that director, no reasonable prospect of those debts being paid either at the time they are due or shortly afterwards, fraudulent trading will usually be inferred. If, in the course of winding up the company, fraudulent trading is proved, any persons who were knowingly party to the fraud can be required to contribute to the assets of the company, without limit on their liability. Any person guilty of fraudulent trading also commits a criminal offence punishable by seven years imprisonment or a fine of an unlimited amount or both. The criminal penalties apply whether or not the company has been or is being wound up.

3.5.2 Wrongful Trading

Wrongful trading occurs when a director of an insolvent company knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation and, from that point, failed to take every step to minimise the loss. Unlike fraudulent trading, dishonesty on the part of the director is not necessary. A director can be liable for wrongful trading where he or she ought to have known the situation even if he or she in fact did not. The standard against which a director’s conduct will be judged is the general knowledge, skill and experience which he or she has and which a person carrying out the function which he or she carried out could be expected to have.

It is the responsibility of the liquidator to bring an action for wrongful trading, which he may do whether the liquidation is voluntary (i.e. following a special resolution by the shareholder of the company) or compulsory (that the company is unable to pay its debts). If a director is found guilty of wrongful trading, the court can make the director personally liable to contribute to the assets of the company which are then available for distribution to the creditors.

3.5.3 Preferences And Transactions At An Undervalue

A liquidator will also have the power to set aside transactions which benefit certain creditors of the company over others. These are known as "preferences" and the liquidator can set these aside if they were made within six months prior to the commencement of winding up. If the preference was made in favour of a person connected with the company (e.g. a director or close relative of a director) within two years prior to the commencement of winding up it can be set aside. Liquidators can also set aside transactions at any undervalue which are made within two years prior to the commencement of winding up. A transaction is at an undervalue if it is one in which a company receives no consideration or receives significantly less consideration than it is providing. This type of transaction will not be set aside if the court is satisfied that the directors of the company were acting in good faith for the benefit of the company.

3.6 Liability For Breaches Of Duty By Other Directors

A director is not generally liable for the acts of any other directors and is under no duty to supervise their conduct. However, a director who knows of the conduct in question and who has participated in such conduct to some degree (even if only slightly) or a director who fails to supervise or enquire when there are suspicious circumstances, may be liable to the company.

3.7 Liability For Contracts And Wrongs Of The Company

The principle of limited liability generally means that directors are not liable for debts of the company or for any of its other acts or omissions. The company is regarded as a legal person in its own right separate from its shareholders and directors. However, this rule is subject to exceptions, and in certain circumstances the director may be personally liable to third parties. These include fraudulent and wrongful trading (see 3.5 above) and the fines imposed by the Companies Act 1985 for failure by directors to maintain company records. Other examples include:

(a) Personal Guarantees

A lender will often require the directors of an insubstantial company to give personal guarantees in respect of its borrowings.

(b) Acting While Disqualified

If a person who has been disqualified as a director by the court acts in breach of that order, he or she thereby incurs personal liability for any debts incurred by the company during the period in which he or she illegally acted as director.

(c) Contracts

Where a director enters into a contract on behalf of the company with proper authority to do so, he or she will not be liable to the other party since he or she is merely acting as the company’s agent. However, if by entering into the contract, a director exceeds his or her actual authority and the company successfully repudiates the contract, the director will be liable to the third party personally. In certain circumstances, the company will be bound even though the director has exceeded his or her authority. If this is the case, the director concerned will not be liable to the third party, but may be liable to the company unless it ratifies his or her actions. Such ratification is not possible where the contract is beyond the powers of the company itself.

A director may also incur personal liability:

    • if he or she permits the company to act outside the objects contained in its Memorandum;
    • if he or she signs a document on which the company’s name is not properly stated, unless the company agrees to honour the document;
    • if he or she purports to act on behalf of a company not yet formed;
    • if he or she fails to ensure the company makes proper tax returns or participates in tax evasion by the company; or
    • if the company commits an offence under health and safety legislation with his or her consent or attributable to his or her neglect.

3.8 Relief From Liability

A director’s breach of duty may be ratified by the shareholders either by ordinary resolution at a general meeting or by their unanimous approval (whether at a meeting or not). Certain breaches of duty, however, cannot be ratified. These are where:

    • the director has been guilty of fraud or dishonesty;
    • the act is outside the powers of the company itself or is illegal;
    • personal rights of members have been infringed (for example, the improper refusal to register a transfer of a share); or
    • the breach of duty involves the majority of the shareholders depriving the company of money, property or business opportunities at the expense of the minority.

Even if a director is found to be in breach or otherwise in default, the court has power to relieve him or her from personal liability if the court decides he or she has acted honestly and reasonably and ought fairly to be excused.

A company is generally prohibited from indemnifying its directors against their breach of duty. However, it may purchase directors’ and officers’ insurance for the benefit of its directors if so permitted by its articles of association.

4. Public Companies, Listed Companies And Corporate Governance

While this memorandum is not primarily concerned with public companies it is worth noting the main similarities and distinctions between private, public and listed public companies. As can be seen from the earlier paragraphs, a private company and its directors are subject to considerable regulation. Public companies and their directors are subject to the same regulation but theirs is a stricter regime with an additional layer of statutory control. Listed public companies and their directors, whilst being subject to the same obligations and constraints which are applicable to unlisted public companies, must submit to still further regulatory control.

4.1 Private To Public

The main distinction between private and public companies is that only public companies can offer their shares or debentures to the public. A private company commits an offence if it offers any shares or debentures of the company to the public. This is the main incentive for a private company to become public as it enables a company to raise finance from the public. It is because of this ability to offer shares and debentures to the public that many additional obligations are imposed on public companies to improve investor protection.

A public company must have a minimum share capital of £50,000 of which a quarter must be fully paid up. Private companies can confer an indefinite authority on their directors to issue shares whereas public companies cannot. When issuing shares in exchange for non-cash consideration public companies must obtain a valuer’s report. A private company may give financial assistance for the acquisition of its own shares in circumstances not available to a public company.

Public companies must have at least two directors, private companies need only one. Unless a director of a public company obtains shareholder approval to remain, he must vacate his office at the end of the AGM following his seventieth birthday and a person cannot be appointed as a director of a public company if he is over 70. These restrictions do not apply to private companies, unless they are subsidiaries of public companies. Restrictions on public companies making loans to their directors are far more stringent than for private companies.

Public companies must have at least two shareholders, private companies need have only one. Obligations on shareholders by ss 198-220 of the Companies Act 1985 to notify the company of certain interests in the company’s shares apply only to the shareholders of public companies.

Private companies must file their accounts with the Registrar of Companies 10 months after the end of the relevant accounting period. Public companies must do so within 7 months.

4.2 Public To Listed

When a public company seeks a listing it becomes subject to the listing rules drawn up by The Stock Exchange under the Financial Services Act 1986. The listing rules set out the procedures for listing and the obligations to which the company and its directors will be subject once the securities are listed.

4.3 Corporate Governance

As companies progress from private to public and then to listed public the obligations on them become more onerous. As the directors run the company their obligations increase with the company’s as they are responsible for ensuring that the company fulfils its stricter obligations. The potential for the shareholder base to expand increases the need for investor protection.

Three committees were established to report on various aspects of corporate governance. The first was the Committee on the Financial Aspects of Corporate Governance chaired by Sir Adrian Cadbury which reported in 1992 (the "Cadbury Report") and the second was the Committee on Directors’ Remuneration chaired by Sir Richard Greenbury which reported in 1995 (the "Greenbury Report"). These reports were later consolidated into one report by the Hampel Committee in 1998. Following a period of consultation, the London Stock Exchange published the "Hampel Committee Principles of Good Governance and Code of Best Practice (the Combined Code)".

The Combined Code outlines principles and guidelines relating to the proceedings of directors, the composition of the board of directors, the level of and procedures relating to the remuneration of directors and the accountability and auditing procedures (internal and external) which should be followed by the directors.

The listing rules include a requirement for listed companies to include in their annual report a two part statement on compliance with the Combined Code. The first part is a narrative statement of how, not just whether, the principles of the Combined Code have been applied. The second is a statement as to whether the company has complied with the specifics of the Combined Code throughout the accounting period justifying any significant variations. The second part of the statement should be reviewed by the auditors of the company.

Although compliance with the Combined Code is only enforced in relation to listed companies through the listing rules, it has been advocated that as many companies as possible should comply with its provisions and companies may well come under pressure from their shareholders to report on compliance with the Combined Code.

5. Conclusion

When maintaining a UK company, care will need to be taken to ensure that the various requirements set out above are complied with. The company must maintain a complete and up-to-date set of statutory books at the company’s registered office or at another address in the UK specified to the UK Companies Registry.

The company’s directors must be more than just honest. They must take a proper part and have a proper understanding of the affairs of the company. To do so, they should:

  • ensure their function is clearly defined so as to avoid any misunderstandings;
  • keep themselves fully informed of the company’s cash and trading position;
  • not be party to any attempt to place any assets beyond the reach of creditors;
  • ensure the company complies with its record keeping and other statutory requirements; and
  • take professional advice if the company enters into any financial difficulty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.