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Legal types - implications of being made a company director?

rachel anne, 10 July, 2009 at 10:11 Posted on Off Topic Posts 0 6

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Hello everyone, I don't often post on OT but I would really appreciate your help if you have a few moments.

I work for a small company of less than 10 employees and basically the owner has decided that he wants to take a bit of a back seat and wants to make a couple of us directors and run the company in his absence. I will happily admit that I am not business minded at all (creative type) and I am pretty clueless about business matters but I would be interested to know what the financial implications of becoming a company director would be. The industry is manufacturing and the business is quite honestly run very,very badly at the moment and I know it would be a really great opportunity.

I apprecaiate that I I'm being a bit vague and don't have much more information to give you as this is at the very preliminary stages of discussions, but the question I would really like to know that answer to is will I be personally liable for company debts if the business was to get in trouble/goes under? I really would have to think long and hard if my house and family life would be in jepardy.

Many thanks for your help in advance.

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Latest activity by rachel anne, 10 July, 2009 at 11:15

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Ginger · 10 July, 2009 at 10:16
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I know very little except that when the company that my sister was made a director of when tits up and handed to the administrators due to the owner being shifty with money, my sister was also then liable for the debt. not a great time inher life.
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rachel anne · 10 July, 2009 at 10:25
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That's what I was worried about. I hope your sister managed to get through it OK.
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Knownowt · 10 July, 2009 at 10:29
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General rule is that companies have limited liability- ie shareholders and directors aren't responsible for the company's debts. HOWEVER, directors can be personally liable where the company has been trading while insolvent. Directors can also be personally liable to the company where they breach their duties as director (eg to exercise reasonable skill and care)- so if your actions as director fall beneath that standard and the company suffers a loss as a result, you could be obliged to make up the loss.

There's a lot of information on directors' duties online, eg https://corporate-responsibility.org/module_images/directors_guidance_final.pdf (page 11 on skill and care definitely worth a read, esp if you're uncertain about your business skills).

I would think long and hard before accepting a directorship. Also, what's in it for you? Would you be getting a decent payrise?
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rachel anne · 10 July, 2009 at 10:45
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Thanks Knownowt, I'll read through that now.

I won't be getting a payrise to start off, it will be a profit share. The company made near enough £100k profit last year but is running at a slight loss so far this year. A lot of that is due to the recession but also the owner has managed to pee off most of our customers as well as he's totally lost interest which has contributed to the loss.

And there would be the option to buy him out in few years time.
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Knownowt · 10 July, 2009 at 11:04
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I would definitely give this a lot of thought and take proper advice. Profit share on a loss-making company isn't that great a deal, obv ? so you'd be taking on a lot of work and risk with no guarantee of any reward unless things turn around, while he's risking nothing. This might be a chance you're willing to take- depends on the business, your situation etc- but in your position I'd want to see that reflected in the terms, with your share of the profits higher than it would otherwise be. I'd also negotiate hard on the terms of your option to buy him out and how the price would be determined.
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Knownowt · 10 July, 2009 at 11:10
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Also look into directors' liability insurance, which would cover certain risks- I think it's quite expensive but maybe the cost is something to discuss in your negotiations.
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