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Should Directors Be Required To Sit A Test To Form Their First Company Overview

Should Directors Be Required To Sit A Test To Form Their First Company? The answer is probably not but it might be a close run thing when considering the consequences on both Directors and creditors arising from an insolvent company going into Liquidation.

Why should such a burden be imposed on a company Director? 

Why should there be any more additional hurdles to vault for an aspiring business person from trading a Limited Liability Company

If you want to drive a car and be in control of a machine that when driven incorrectly risks causing death and destruction you have to take a driving test to demonstrate competence. 

If you want to be a lawyer or an auditor you generally have to pass various exams to participate in certain specialist activities such as reserved legal activities in the case of lawyers or being a statutory auditor. If you want to sell alcohol you need an appropriate qualification. 

However, there are many activities that do not require the passing of exams that are specialist activities. For example, a person can call themselves an accountant without having taken any exams. So on such a basis why should a Director have to pass an exam to accept an appointment as a company officer?

There are many regulated areas of business activity that do not require the passing of exams but where regulations need to be complied with. And yet there are many areas that require somebody to do more than pay £12 online to register a company and voila they can be a Director within 24 to 48 hours. 

Should Directors Be Required To Sit A Test To Form Their First Company?

Directors’ Duties

There are various functions of a Director that require such a person to comply with statutory duties known as Directors’ duties that need to be understood. It is not unknown for a Director to not fully grasp the fact that a company is a separate legal person to themselves and as a result, they may consider the company’s money as their own money when it is simply not the case.

The whole basis of Directors’ duties has its underpinnings in the separation of a company from its Directors (Salomon v A Salomon and Co Ltd [1897] AC 22) with at its core that a Director has to act under a duty of loyalty in the best interests of the company, not themselves personally. Failure to do so can risk them being in breach of the Creditor Duty and expose them to personal liability for the loss they cause.

Directors’ duties are backed by personal risk for a Director financially. They have an interest to ensure they understand their role and responsibilities otherwise they are in for a rude awakening.

The argument could be made that a Director can cause loss to creditors if they don’t understand their duties. On the other hand, the law provides that Directors who breach their duties or who act improperly in an unfit manner can be called upon to compensate for loss they cause to the company or its creditors. 

To protect the business community there is a Directors’ disqualification regime that takes Directors out of the running of Limited companies for up to 15 years if they have acted in an unfit manner.

Taking Money Out Of A Company

Directors ought to be aware of the ways that they might be rewarded by a company and that a failure to do so within the scope of dividends or salary has consequences for them personally in the form of an Overdrawn Director’s Loan Account.

This is the sort of area of company law that advice perhaps should be sought from a qualified professional. Indeed a Director could be said to have a personal interest in doing so.

Annual Accounts

Directors need to sign accounts that show a true and fair view. Part of the problem with this is some Directors may not understand accounts. 

In cross-examination in the Court of a Director, who the writer sued in his capacity as Liquidator many years ago, the Director was asked by the writer’s instructed barrister about the company in Liquidation’s accounting position and he said:

… I am not an accountant I am an engineer.

This is perhaps not an uncommon perspective.

Understanding accounts is not the same as being able to prepare them through the deployment of double-entry bookkeeping techniques. Without training or experience, it is not easy to prepare a set of accounts that comply with the relevant accounting standards and company law such as under the Companies Act 2006.

However, each year a company’s Director(s) are required to sign off the annual statutory accounts and file them at Companies House. Those accounts require various declarations to be filed such as an acknowledgement that proper books and records have been kept and that the accounts are materially accurate – ‘true and fair’. 

What Are True And Fair Accounts?

True and fair accounts are accounts prepared using various accounting policies, which are appropriate, consistently applied and adequately disclosed.

The problem might be a Director for example operating as a one-man band company who does not understand the accounts; how can they sign off them as being true and fair?

They can rely upon a professional to do the job for them. Is that sufficient?

A Good Accountant

Directors plainly in many instances need a good accountant who will look after the compliance and crucially provide professional advice. However, many Directors instruct an accountant to do just the annual accounts and corporation tax returns

The risk is Directors who do not grasp the need to go further in understanding the financials of a company. However, that is their duty. Does an exam change that? Does an exam mean the mistakes will not be made in the same way and volumes as currently is the case?

People Of Commerce

Directors are not treated as consumers but as people of commerce. They are deemed to be sufficiently sophisticated to either take proper advice or ensure they make themselves aware of their obligations.

Cash Is King

Cash is king so a Director needs usually to consider a company’s bank account balance, amounts receivable from customers and payable to creditors so that they understand the key underlying financial position.

Arguably this is a basic level of financial stewardship that is a fundamental skillset of a Director with or without any testing.

Too Many Areas Of Regulation To Test

Running a Limited company involved overseeing many issues. The financials is just one area.

There are many areas associated with the regulation of companies such as employment rights, tax rules, data protection, money laundering and so on. It would be difficult to design a test that might be fair unless conceivably we expect all Directors to be both lawyers and accountants. Many Directors are more than capable of operating Companies successfully, taking advice without the need to take any test or exam prior to doing so. 

Company failures will always arise and no Director test will necessarily prevent this from happening. Companies go into insolvency for reasons outside of the general control of a Director.

Oliver Elliot Comment

Oliver Elliot Comment !

There will always be the prospect of Directors who do not understand their duties properly and who cause loss but for the majority is there a need to add to the existing burdens by introducing a test when there is no guarantee it will overall benefit the business community? 

Will it simply drive more trading towards the unincorporated business model?

At least with the current system, there appears an incentive to use professional advisers who can look to keep Directors on the straight and narrow. Cutting people out of being Directors may just risk limiting the advice taken because of the lack of structure it might create.

On balance, the status quo appears reasonable but as mentioned at the start of this article it is a close run thing. If in doubt take professional advice at the earliest juncture.

GET IN TOUCH FOR HELP

For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.

We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.

Author: Elliot Green
Last Updated: May 20, 2024

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Disclaimer: Should Directors Be Required To Sit A Test To Form Their First Company?

This page Should Directors Be Required To Sit A Test To Form Their First Company? is not legal advice and is not to be relied upon as such. This article Should Directors Be Required To Sit A Test To Form Their First Company? is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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