Q: As a director of a small limited company I want to know: where other than deposit accounts can I invest company money? Can the company buy shares, bonds, etc? I know I have a duty, as a director, to maximise the earnings of the company. At the moment excess cash that will not be needed in the business is earning 4.7 per cent with Standard Life.
Apr 22 2006
Answered by: Clive Lewis Ask a question
You must first check the Memorandum and Articles of Association of your company. These are the rules which govern what the company can and cannot do. Most Memorandum and Articles give the directors wide powers over the company’s assets but it is wise to check before taking any action.
The Company Law Bill currently passing through parliament states that a director has a ‘duty to promote the success of the company’ as well as ‘to exercise reasonable care, skill and diligence’. I suggest that this means that a director should prepare a plan of the company’s cash flow, decide if there are ‘surplus funds’ and consider how long these funds will be surplus.
Armed with this information, a director should consider what investments would be appropriate. For example, it would probably not be reasonable to invest money in publicly quoted shares when the cash flow forecast suggests the surplus is only available for a short period of say three or six months as it would not be possible to guarantee that the shares would increase in value over such a short period.
Money invested in a deposit account is immediately available should the company require it at short notice. If the cash flow forecast suggests the money is available longer-term it might be appropriate to consider increasing the dividend to shareholders or contemplating a return of capital to the shareholders.
It is for the directors to make a considered decision after taking appropriate advice in the light of all the available information.
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