Director information hub: Misconceptions about being a director

Introduction

Sometimes there are ‘misconceptions’ about how director responsibilities work. This means people do things that they think may be legal but are not and this can lead to serious consequences.

Always seek professional advice from a qualified accountant, lawyer or insolvency practitioner if you are unsure.

Here are some examples of common misconceptions relating to acting as a director you should be aware of.

Resigning or selling your company does not end your liability

You remain responsible for decisions and actions taken while you were a director. This applies even after you resign or sell the company.

If misconduct is identified, you still may face:

• investigation
• recovery action
• civil or criminal penalties

For example, the Insolvency Service can investigate the conduct of all directors involved in an insolvent or dissolved company, including those who have resigned.

You can be liable for a company’s actions even if you are not formally appointed

Most legal responsibilities apply to anyone performing the role of a director. This is based on what you do, not just your job title.

A director includes people who:

• act as directors without formal appointment
• influence or control company decisions
• conceal their involvement behind appointed directors (shadow directors)

If you make decisions or act on behalf of a company:

• understand whether your role makes you responsible as a director
• do not act as a director unless you are willing to meet the legal consequences

All directors are accountable, including inactive and non‑executive directors

Doing nothing or lack of knowledge is not an excuse.

All directors share responsibility for the company, even if they are not involved in the day to day running of the company. You cannot avoid accountability by:

• not taking part in decisions
• having a limited or advisory role
• claiming lack of awareness

Directors must:

• take an active interest in the company’s affairs
• monitor performance and risks
• intervene when necessary

A lack of financial knowledge is no defence

All directors are responsible for understanding and monitoring the company’s finances.

This includes:

• tracking cash flow
• reviewing accounts
• identifying early signs of financial difficulty

You do not need to be a financial expert. However, you must understand the basics and seek professional advice where needed.

Acting as a director on behalf of someone else always carries risk

You take on full legal responsibility for a company’s actions when you become a director, whether or not actively involved.

Before accepting the role, you should:

• understand why you are being asked
• check whether the individual is disqualified or restricted
• assess the risks involved

For example, you could be prosecuted if you agree to act on behalf of someone who is not allowed to be a director.

You must treat creditors fairly if your company is insolvent

If your company cannot pay all its debts, you must treat creditors equally.

You must not:

• prioritise yourself or connected parties such as family members
• favour specific suppliers
• repay personally guaranteed debts ahead of others

Creditors have equal rights to repayment.

If you prioritise certain creditors:

• payments may be recovered by an administrator or liquidator
• you may be disqualified as a director

For example, paying off a main supplier whilst ignoring HMRC debts may seem a good idea if your company is insolvent and you want to start again. This could, however, lead to an insolvency practitioner recovering the payment, director disqualification and HMRC requesting securities from any the new company.