The often-overlooked duties of directors: Why compliance is not just a buzzword - Palmers Solicitors

The often-overlooked duties of directors: Why compliance is not just a buzzword

The often-overlooked duties of directors: Why compliance is not just a buzzword

When it comes to running a company in the United Kingdom, the focus often falls squarely on profit margins, growth metrics, and market share. It is, after all, these KPIs that boards care about the most.

These are certainly critical aspects of running any successful business. However, equally important are the statutory obligations that come with being the director of a company in the UK.

Directors’ duties, while not the most glamorous part of business, are foundational to the ethical and efficient operation of a company, explains our Director, Matthew Johnson.

The importance of being aware and compliant cannot be overstated, especially when you consider the potential repercussions in certain situations such as insolvency.

What Are Directors’ Duties?

The Companies Act 2006 lays out seven fundamental duties of a company director:

  1. Duty to act within powers
  2. Duty to promote the success of the company
  3. Duty to exercise independent judgment
  4. Duty to exercise reasonable care, skill, and diligence
  5. Duty to avoid conflicts of interest
  6. Duty not to accept benefits from third parties
  7. Duty to declare interest in a proposed transaction or arrangement with the company

While these duties are quite well-defined, it’s easy to overlook the depth and breadth of their implications in day-to-day decision-making.

How are some of these duties sometimes overlooked?

With the busy lives that many of us live, it can be easy to sometimes be non-compliant with the key duties of directors. Being too busy or ignorant of the law, however, is not a sufficient defence.

Here are some examples of how companies and their directors fail to meet their duties:

Duty to exercise reasonable care, skill, and diligence

Many directors mistakenly believe that as long as they aren’t doing anything overtly illegal or negligent, they are fulfilling this duty.

However, this duty is not just about avoiding the wrong actions; it’s about taking the right ones as well.

For instance, are you staying updated with industry standards? Are you adequately supervising your subordinates? A lax approach could lead to significant repercussions, including personal liability.

Duty to avoid conflicts of interest

While this might seem straightforward, conflicts of interest aren’t always glaringly obvious. Something as simple as employing a family member could potentially be a conflict of interest if not properly managed and declared.

Risks in Insolvency

The gravity of directors’ duties is magnified manifold in situations of financial instability, such as impending insolvency.

A director must act in the best interest of creditors and take reasonable steps to minimise potential losses. Failure to do so can result in ‘wrongful trading’ or ‘fraudulent trading,’ both of which come with severe penalties, including personal liability for company debts.

As the company nears insolvency, the line between the company’s interest and the creditors’ interest can blur.

Directors might unknowingly cross legal boundaries in an attempt to save the company. This makes it essential to seek legal advice to navigate the complex landscape of insolvency law.

Why compliance matters

Non-compliance can result in civil and sometimes even criminal penalties. Moreover, a director can be disqualified from holding directorships for a certain period, severely hampering their professional future.

It’s not just about the penalties; it’s also about the reputational damage that non-compliance can inflict on both the individual and the company.

Time to act

Directors’ duties are not merely a checklist to be ticked off but a comprehensive guide to responsible and ethical business governance.

While they might not capture the limelight in board meetings, they are critical to the long-term health and reputation of a company.

As mentioned, ignorance is not a defence in the eyes of the law, making it imperative for directors to be vigilant and proactive in their understanding and execution of these duties, particularly during challenging times.

If you require advice on directors’ duties or find yourself in conflict with them, please speak to our experienced corporate solicitors today.