Companies, directors and company law
An understanding of companies, directors and the legal landscape puts directors' responsibilities into context.
This section gives background information essential to an understanding of ICAEW’s guide on the responsibilities of company directors:
What is a company?
A company is a type of artificial person. It can, for instance, own property, employ people, buy and sell goods and services and enter into contracts generally and owe money. It can sue and be sued. It is legally separate from its owners (usually referred to as its “members” or where applicable “shareholders”). A company has a constitution that sets out rules that directors and other officers must follow when running the company. A company can operate only through living individuals (eg, its directors or their delegates).
The general duties that apply to directors of a private company limited by shares also apply to certain other types of company, but there may be important differences. For instance, a public limited company may offer shares to the public and a private unlimited company may not need to file its accounts at Companies House.
CA2006 provides for the formation (registration) of a variety of companies. Broadly speaking, they fall into the following main categories:
- private company limited by shares;
- private company limited by guarantee;
- public limited company; and
- community interest company.
There are other forms of company, including:
- UK companies incorporated by Royal Charter (such as ICAEW);
- UK companies incorporated under other legislation;
- UK corporate bodies, such as limited liability partnerships or charitable incorporated organisations; and
- companies incorporated outside the UK (which may carry on business in the UK through an establishment or branch).
By far the most common form of company in the UK is the private company limited by shares and this guide is designed primarily for directors of these companies. While the owners of these companies are usually referred to as “shareholders” (as they hold the shares in the company), company law sometimes uses the more generic term “member” and we use both terms in this guide, depending upon the context.
Directors’ responsibilities may vary depending upon the size (as well as type) of the company, based on measures such as number of employees, turnover and/or balance sheet. Requirements are becoming increasingly fragmented, with different measurements of size applied in different contexts. The following are two examples for illustration.
- Accounting regulations provide for four size categories: micro-entities, small company, medium-sized company, and large company.
- From January 2019, with some exceptions, companies that have more than 2000 employees or both a turnover of more than £200 million, and a balance sheet total of more than £2 billion are required to include in their directors’ report a statement concerning their corporate governance.
Directors’ responsibilities may also vary depending upon other characteristics of the company, for instance:
- whether the company carries on regulated activity (eg, regulatory capital regimes for companies that carry out insurance or banking activity); or
- whether it is part of a group of companies (parent companies may be required to produce consolidated or group accounts).
What is a director?
There is no comprehensive definition of a director in statute, but, in essence, it means a person who (together with the other directors who form the board of directors) is responsible for the management of a company. The term “director” includes any person occupying the position of director, by whatever name called. For example, in some companies, management may be entrusted to “Governors” or “Council Members”, but they will be treated as directors for company law purposes. Directors of charitable companies (eg, companies limited by guarantee) are typically referred to as “trustees”, but are subject to company law as directors (as well as to charity law and regulation).
Calling someone a “director” does not make them a director for company law purposes, but may be relevant in determining whether or not they are, in fact, a director. A person may be appointed as a director in accordance with provisions in company law (an appointed director), may be a director through acting as one (a de facto director) or may be treated under company law as a director if exercising the requisite influence over the board (a shadow director).
Any person may be a director except the following:
- any person under 16 years of age;
- an undischarged bankrupt or person subject to a bankruptcy restrictions order;
- a person subject to a disqualification order or who has given a disqualification undertaking; or
- a person who is the company’s auditor (if any).
A private company must have at least one director. At least one director must be a natural person (as opposed to another company, known as a “corporate director”).
A director may resign from office by giving notice to the company and a company may remove a director by resolution of the shareholders.
Distinctions are sometimes made between executive and non-executive directors, but company law on directors applies similarly to all directors (see generally - CA2006 s154-169).
What is company law and a company's constitution?
CA2006 is the primary source of company law in the UK. It enables companies to be created, provides a framework for their constitution and contains various requirements, including for responsibilities of shareholders and directors. In addition to this:
- certain other statutes are relevant, including IA1986 (concerning insolvency of companies) and CDDA1986 (concerning disqualification of directors);
- statutory instruments (or “regulations”) made under statutory powers supplement statutory provisions. A large number of statutory instruments supplement CA2006, including on accounting matters; and
- aspects of company law are determined by common law (ie, resulting from decisions of the courts). In particular, the statutory provisions on general duties of directors owed to the company largely codified (or "consolidated") earlier common law provisions and are to be interpreted with regard to relevant common law.
The constitution of a company is comprised of its “articles of association” (often referred to simply as “the articles”) and resolutions or agreements affecting them. Older companies also have a further constitutional document called a memorandum of association, which sets out some of the core features of the company, including its objects. Most provisions in an old-style memorandum are now treated as part of the company’s articles. By contrast, the modern memorandum of association is a very short document required on formation and has little ongoing significance, constitutional or otherwise. There are standard (or “model”) forms of articles for the main types of UK company, but their use is not mandatory and changes may be made to the model when the company is formed (or afterwards, for instance, by resolution of the shareholders). The model form articles provide the following.
- The directors are generally responsible for the management of the company’s business and may exercise all the powers of the company.
- The shareholders may, by special resolution, direct the directors to take (or not take) specified action.
The model form articles cover many other issues relevant to this guidance, including: powers of delegation, decision making by directors, administrative matters, conflicts of interest, records of decisions, number of directors, appointment and termination of directors, directors’ remuneration, directors’ expenses, dividends and other distributions, capitalisation of profits and insurance.
For other sections of this guide, please see below: