business protection Archives

Becoming an SME (Small and Medium-sized Enterprise) in today’s world can be incredibly exciting! The idea of starting a business and watching it blossom into something successful, knowing you’ve curated the business you want is fulfilling. But with success comes great responsibility.

Why Directors duties matter

One of the most important yet often overlooked responsibilities when operating as a UK limited company, is understanding directors’ duties. While the term might sound like a corporate “buzzword”, it is far from it. Running a small or medium-sized enterprise at times can be overwhelming particularly having to wear so many different hats -which is generally the life of an SME business owner, and so understanding your directors’ duties is crucial to running a healthy and sustainable business.

Whether you’re an individual business owner or a team of directors, once you step into the role of directorship you owe legal and fiduciary duties to your company which are set out in law under the Companies Act 2006.

The 7 general (formally referred to as statutory duties) duties of a director

Duty to act within powers: a director must act in accordance with its company’s constitution and governance documents and only exercise powers for the purposes for which they are conferred.
Duty to promote the success of the company: a director must act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, but they are also obliged to pay attention to the interests of the company’s employees, the need to foster business relations, the long-term consequences of the company’s actions, the impact on the community and the environment, the desirability for maintaining a reputation for high standards and in certain circumstances the interests of its creditors.
Duty to exercise independent judgment: a director must make decisions independently, without subordinating their powers or being influenced by others.
Duty to exercise reasonable care, skill, and diligence: a director must perform their role to the standard of a reasonably diligent person with the same level of skill and knowledge of that expected from the role.
Duty to avoid conflicts of interest: a director must not place themselves in a position where there is a conflict between the duties they owe to the company, and either their personal interest or third-party interests (unless the company consents).
Duty to declare interest in a proposed transaction: a director must declare to the board if they have any personal interest in a company transaction.
Duty not to accept benefits from third parties: a director must not accept gifts or personal benefits that could compromise their impartiality.

In addition to the above:

The duty to promote the success of the company is subject to any enactment or rule of law which requires directors to consider or act in the interests of its creditors (“creditor duty”) which is important to consider in the context of insolvency. If a company becomes insolvent a director has a fiduciary duty to act in the best interest of its creditors.
Directors have other administrative statutory duties to the company such as the obligation to keep the statutory books updated and to file accounts and annual returns. A company’s constitutional document can go further to extend certain obligations and also modify certain rules, therefore it is important that a director understands these and how they influence their duties.

What is the impact of not complying?

Legal: directors can be held personally liable and despite being a small company and even under resourced this is no exception. Unlike larger corporates, SMEs most likely do not have dedicated departments such as HR, legal, or compliance to prevent poor decision-making, making it even more critical for the business owner to be mindful of their legal responsibilities.
Growth: director’s fiduciary duties to the company are fundamental to ensuring that the company operates properly. Investors and banks will want assurance that their investments are being managed with good governance that contribute to long-term success.
Reputation: upholding directors duties sets a standard to its employees, clients and stakeholders which demonstrates that the business is reliable, trustworthy and a company that carries out its business with ethical decision-making.

Consequences for breaching?

Personal liability: a director could be held personally liable for any losses suffered by the company.
Disqualification: a breach could result in a director being disqualified from acting.
Criminal charges: a breach involving fraud, dishonesty, or trading while insolvent could lead to a director facing criminal prosecution.
Reputational damage: a breach could damage a director’s professional reputation and the company reputation that they have spent time to build.

Can you be protected against liability?

Generally, there is no exemption for a director from liability for negligence, default, breach of duty or breach of trust in relation to the company, neither can a director be indemnified for such claims. Insurance on the other hand is permitted to be taken out to help cover legal costs and potential damages arising from certain claims related to their role.

What can you do now?

It is important for directors to have a clear understanding of their roles and responsibilities as this is fundamental to the operation and longevity of a company. Typically, directors of SME’s are often the key decision makers and do not have the large corporate structure to mitigate poor decision-making, therefore making it essential that directors have a thorough understanding of their duties.

A good starting point is understanding the company’s constitutional documents, including the articles of association, and being fully aware of both legal and financial obligations. Additionally, maintaining detailed records of decision-making including board meetings and resolutions, helps demonstrate governance practices and provides accountability. Directors must also ensure that personal and company interests remain separate, maintaining transparency at all times. In areas of uncertainty we would always recommend seeking legal advice.

Businesses across many different sectors are slowly getting back on their feet as the economy continues to improve following the pandemic. This crisis has shown that in times of great challenge, your employees – their skills, knowledge and understanding of how your business ticks – are essential to keeping your business running.

So looking after your employees and your business go hand in hand. In a recent survey, 35% of businesses said one of the top three risks to their business would be an owner becoming critically ill and being unable to work. 52% said they would cease trading within one year were they to lose such a key person, and yet, surprisingly, only 18% had considered cover for the illness or death of a key person. (Source: Legal & General’s State of the Nation Report 2021). That’s very curious but the message of this article is: don’t be that business! There are two key groups of insurance that can help protect your business and employees from financial losses resulting from illness and death.

Policies that protect your business against financial losses resulting from the death or illness of a key staff member or business partner, and
Insurance that provides financial assistance to employees and their families in the event of their death or inability to work.

Protecting your business

When might I need shareholder/partnership protection insurance?

Shareholder or partnership protection cover insures a business against the loss of a shareholder or key business partner, which would likely leave the remaining business owners in a precarious position. With limited companies or partnerships, the main risk is that the deceased owner’s share in the business will be passed on to a family member, who may have little interest in taking over their role.

Essentially, shareholder or partnership protection insurance is a life insurance policy that pays out to the surviving business owners, based on an agreement that they will use the money to purchase the deceased’s outstanding shares in the business.

The cover you take out will depend on your business structure:

Shareholder protection is designed for limited companies, with the life insurance taken out on the lives of the company’s shareholders.

Partnership protection is designed for partnerships and limited liability partnerships, with the life insurance taken out on the lives of the business partners.

The policy might also include critical illness cover, in the event that a partner or shareholder does not wish to continue their involvement in running the business following their treatment or recovery from a serious illness.

Is key person insurance appropriate for my business?

Key person insurance protects businesses against the financial losses incurred if a ‘key’ employee becomes ill or dies while working for the company. This could be a CEO, business partner or senior employee considered essential to the successful running of the business. A payout from this kind of insurance can keep a business trading while recruiting for a replacement or undergoing reorganisation.

Some types of business insurance, such as employers’ liability, are legally required to run a business. Key person insurance is not one of them, but the loss of a key employee could affect the business in many ways.

Clients may react negatively or lose confidence in the business, shareholder confidence could plummet, and the skill, knowledge and experience of the key employee may be difficult, or even impossible, to replace.

Particularly for small businesses, losing a director or head of department could result in the company’s collapse, which is why the financial assistance provided by key person insurance could prove to be a lifeline.

Protecting your employees

How do my employees benefit from death in service insurance?

Also known as relevant life assurance, death in service is a type of insurance that pays out a tax-free lump sum to an employee’s beneficiaries if they die whilst working for your company. They don’t have to be at work or performing a work-related activity to receive the benefit; they simply have to be on the payroll of your company when they die or are diagnosed with a terminal illness.

This type of insurance is the second most valued employment benefit after private medical insurance, as can help your employee’s beneficiaries with costs such as funeral arrangements and living expenses at a very difficult time. The lump sum paid out is usually between two and four times the employee’s basic salary.

How will group private medical insurance benefit my business?

As mentioned above, group private medical insurance is one of the most popular employee benefits a business can offer, and provides your employees (and often their families) with access to private healthcare services.

While it is one of the more expensive employee benefits, private healthcare can offer immeasurable advantages –not only to your employees, but to you as a business. Employees will not be forced to take days off to access healthcare appointments, as private facilities usually offer appointments out of hours. They won’t face lengthy waits for appointments or treatment, so they can get better sooner and return to work more quickly.

The Coronavirus crisis has made us all too aware of the strain and pressure under which the NHS has been placed – there is now a huge backlog of patients waiting for treatments and routine surgical procedures. Offering your employees access to private healthcare is therefore a bigger draw than ever and could greatly help you to attract and retain the best talent.

Is permanent health insurance a good option to protect my employees?

Arranging permanent health insurance (or PHI) on behalf of your employees provides protection for them in the event of an injury or long-term illness that renders them unable to work.

PHI is another name for income protection insurance, but the premiums are paid by the business rather than the individual. The usual payout is between 50% and 75% of an employee’s full salary, potentially until they retire, and it can help your employees continue to pay for key outgoings such as mortgage and childcare costs until they are able to return to work. As such it is often considered by employees to be a more valuable benefit than private medical insurance.

The benefits usually start after a ‘waiting period’ of up to 52 weeks, typically after work-related sickness pay comes to an end.

The wording of PHI polices from different providers can vary greatly in terms of what exactly they cover, so it’s always best to check the fine print. As an employer, they can benefit you by incentivising your employee to return to work as soon as they are ready, in order to regain 100% of their salary.

What benefits your employees, benefits your business

Insuring your business and employees against financial loss, illness and death may be an added expense, but it could be the move that helps your business stay afloat during uncertain times. At Tees, we’re here to discuss your business insurance needs and advise you on which type of policy could deliver the greatest benefits to your organisation.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Tees is a trading name of Tees Financial Limited which is regulated and authorised by the Financial Conduct Authority. Registered number 211314.

Tees Financial Limited is registered in England and Wales. Registered number 4342506.