This article outlines the Top 10 Legal and Compliance Issues that directors must navigate, highlighting common pitfalls and offering guidance on best practices. By understanding and addressing these key issues, directors can uphold their duties, safeguard their organisations, and ensure adherence to regulatory frameworks such as The Companies Act 2006.
Here’s our overview of 10 key issues which we often come across when advising start-ups, SMEs and family-owned businesses.
1 – Understanding legal duties
Serving as a director of a private company in the UK is a position of trust and responsibility, demanding a careful balance between strategic leadership and legal compliance.
Under the Companies Act 2006, directors must act in the company’s best interests, thinking about the long-term impact of their decisions on everything from shareholders to the environment.
If the company hits financial trouble, directors’ duties shift to protecting creditors.
Official guidance and advice on being a UK director can be found on the Companies House website at Being a company director – GOV.UK.
2 – Keeping up to date with paperwork
One key responsibility for directors is to ensure company filings to Companies House are made on time. Miss the deadline, and the company could face fines, and the directors could face criminal charges.
Even without prosecution, late filings can be seen as a breach of duty. If shareholders catch wind of frequent defaults, they may have grounds to push for a director’s removal.
3 – Restrictions on a director’s powers
As well as the Act, directors should be familiar with their company’s articles of association and any other restrictions on their powers, whether under a shareholders’ agreement and/ or a service agreement.
A company’s articles of association will generally give authority to the company’s directors to exercise all powers of the company. This includes entering into contracts. It should be noted that those powers are given to the directors as a group, rather than a single director. To mitigate risk, companies should have policies in place that directors may only sign agreements/ incur expenditure when they have clear authority to do so.
4 – Employment status
Director’s duties in a company may be set out in their service (employment) agreement. Directors (and even appointed family members) will generally count as employees under UK law, so they need a written statement of their terms when they start. Failure to have written evidence of employment will result in delays during the due diligence process in the event of a sale of the company, as the buyer seeks to clarify the basis upon which payments have been made.
It’s also wise to have an employment handbook. While not legally required, it can help clarify policies and avoid disputes.
(We can help with policies on data protection, email and social media use, holiday and sick leave entitlements, and flexible and remote working arrangements).
5 – Ongoing compliance with regulations
Directors need to be aware of their health and safety obligations, as well as employment and data protection laws. A written health and safety policy is a legal must that is often overlooked.
Websites also need to be compliant with equality, e-commerce and consumer legislation. Care should be taken with the use of images and text which may be protected elsewhere. All websites should contain a privacy policy, cookies policy and terms and conditions, as well as displaying specific business information (our corporate team draft and update these for companies – large and small – on a regular basis).
There is a wealth of information available to help directors on official government websites like these:
Information Commissioner’s Office (data protection advice): www.ico.org.uk
Health and Safety Executive: Health and safety basics for your business
ACAS (an independent public body offering employment advice): www.acas.org.uk
6 – Maintaining board minutes and accurate records
The point about ongoing compliance brings us neatly onto a director’s duty to ensure the company maintains proper and accurate financial records, as well as keeping minutes of meetings. Under the Act, as well as in the standard Model Articles (which are adopted by many UK companies on incorporation), every company is required to take minutes of all proceedings of its directors, which must then be retained for 10 years from the date of the meeting.
It is also recommended to maintain full copies of all agreements entered into by the company. Of course, these days many agreements are executed electronically, so documents may be filed within an IT system. Being organised will assist the management in the due diligence process in the event a company is being sold (and also help you ascertain your rights if there is a dispute!). Don’t forget to check that agreements have been properly executed and dated, before filing them.
7 – Statutory documents
A company’s statutory records include key corporate documentation such as share transfer forms, shareholders’ agreements, directors’ service agreements, statutory accounts, as well as the company’s certificate of incorporation, board minutes, shareholder resolutions and articles of association, all of which should ideally be stored with the company’s statutory registers.
Smaller companies often overlook this, but missing or messy records can cause major delays in a sale.
Defects in the statutory books will usually need to be rectified and this can be a somewhat onerous task– especially if there have been lots of changes to directors and shareholders.
Under the Act, a company must maintain:
- a register of directors and their residential addresses
- a register of secretaries
- a register of persons with significant control
- a register of charges (if the company was incorporated prior to 6 April 2013)
- a register of members
Failure by companies to hold these registers is a criminal offence by the directors of the company and the company itself.
8 – Avoiding conflicts of interest
UK directors have a duty to steer clear of conflicts of interest. This means:
- Avoiding situations that could lead to a conflict
- Declaring any personal interest in company transactions
- Not accepting perks from third parties linked to their role
Conflicts can crop up in all sorts of ways, like being on the board of a competitor, holding a large number of shares, advising the company, or taking up opportunities the company passed on. If a director stands to profit from their role, that’s a potential red flag.
Declaring a personal interest in a deal is fine (no approval needed usually), but accepting gifts or benefits is trickier. It’s only okay if it clearly won’t influence decision-making.
To stay on the safe side, directors should understand these duties and companies should consider having conflict policies and updating their articles of association to manage tricky situations.
9 – Intellectual Property protection
Protecting intellectual property (IP) is key to safeguarding business assets and staying competitive. But it’s often overlooked, especially when work is done by contractors or employees without clear agreements on who owns what. This can cause problems if someone leaves and sets up in competition.
Here are a few IP basics to get right:
Copyright protects original creative work like writing or videos.
Trademarks cover your brand name and logo, and it’s worth registering early to avoid clashes or wasted costs.
Trade secrets like internal know-how should be protected through NDAs and solid employment contracts.
Contracts and licensing should clearly spell out who owns the IP and how it can be used.
Having a clear IP strategy not only protects your business now, it also makes you more attractive to buyers and investors later. We’re happy to help review what you’ve got in place and suggest improvements.
10 – Timely professional advice
Directors should seek legal and tax advice early to avoid future disputes and ensure timely filings. For example, if directors (or other employees) are issued shares, they should consider making a “section 431 election” with HMRC within 14 days to avoid unexpected income tax charges. This is often overlooked, especially in start-ups when getting advice may not seem necessary.
If a company is facing financial difficulties, directors should also seek advice from solicitors, accountants, and insolvency practitioners. While recommending professional advice may sound self-serving coming from a law firm, case law supports the idea that directors should exercise reasonable skill and care, which includes seeking expert advice.
Navigating compliance as a director can be complicated and staying ahead of regulatory and legal requirements is essential for safeguarding your business. If you are a director of a private limited company in the UK and you would like further information or advice on any of the issues discussed in this note, please contact Harender Branch, Head of the Corporate Team at Branch Austin McCormick by email at hkb@branchaustinmccormick.com or by phone at (+44) 207 851 0100.
