What you need to know as a Director

Conflicts of Interest: What They Are and How Directors Should Manage Them

Directors of small and micro companies often work closely with suppliers, customers, family members, and their own other businesses. This makes conflicts of interest more likely and more important to manage properly.

A conflict of interest is not automatically wrongdoing. The problem arises when a director fails to recognise, declare, or manage the conflict.

1. What Is a Conflict of Interest?

A conflict of interest occurs when a director’s personal interests, or their duties to another organisation, could influence their decisions for the company.

It doesn’t matter whether the director intends to act improperly. The issue is whether their judgement could reasonably be seen as compromised.

Types of conflicts

A. Financial conflicts Where the director (or someone close to them) could gain financially. Examples:

• Awarding a contract to a business you own

• Buying or selling assets to/from yourself or family

• Taking loans from the company

B. Personal or relational conflicts Where relationships could influence decisions. Examples:

• Hiring a friend or relative

• Giving favourable terms to a long‑standing associate

C. Conflicts of duty Where you owe obligations to another organisation. Examples:

• Being a director of two companies competing for the same contract

• Acting as a trustee or adviser to another party involved in a transaction

D. Use of company opportunities or information Where a director uses company information for personal benefit. Examples:

• Taking a business opportunity for yourself

• Using confidential information to benefit another business

2. Why Conflicts Matter

Directors have a legal duty to:

• Act in the company’s best interests

• Avoid conflicts of interest

• Declare any conflicts that arise

• Not profit from their position without approval

Failing to manage conflicts can lead to:

• Repayment of any personal gain

• Legal action from shareholders or creditors

• Disqualification as a director

• Loss of trust and reputational damage

For small companies, where roles overlap and relationships are close, the risk is higher and the scrutiny can be tougher if the company becomes insolvent.

3. How to Manage Conflicts of Interest

Identify the conflict early

Ask yourself:

• Could I (or someone close to me) benefit from this decision

• Could my judgement be influenced by another role or relationship

• Would this look questionable to an outsider

If the answer is “yes” or even “possibly”, treat it as a conflict.

Declare the conflict

Even if you’re the only director, you must formally record the conflict.

If there are other directors, you must:

• Declare the conflict to them

• Provide enough detail for them to understand the issue

• Step back from the decision if appropriate

Remove yourself from the decision

If more than one director exists:

• Do not vote on the matter

• Do not influence the discussion

• Allow the other directors to decide independently

If you are the sole director:

• Document the conflict

• Document why the decision is still in the company’s best interests

• Consider taking independent advice (e.g., accountant, solicitor)

Make sure everything is transparent

Good practice includes:

• Getting quotes from multiple suppliers

• Using written contracts

• Ensuring terms are fair and market‑based

• Keeping clear records of how decisions were made

Transparency protects you as much as the company.

4. How to Keep a Record of Conflicts and Declarations

Even small companies should keep a simple Register of Directors’ Interests and a Conflicts of Interest Log.

A. Register of Directors’ Interests

This is a standing document listing:

• Other directorships

• Shareholdings in relevant companies

• Close family members with business interests

• Any ongoing relationships that could create conflicts

Update it at least once a year or when anything obvious changes.

B. Conflicts of Interest Log

This records specific conflicts as they arise.

A simple entry should include:

• Date the conflict was identified

• Director(s) involved

• Nature of the conflict (e.g., “Director owns supplier company”)

• Details of the decision being made

• Steps taken (e.g., director withdrew from decision, independent quotes obtained)

• Outcome of the decision

• Approval (if required)

This log can be kept in:

• A dedicated notebook

• A digital file

• Board minutes (if meetings are held)

For sole directors, this record is especially important because it shows you acted responsibly and transparently.

5. Examples of Conflicts of Interest

Example 1: Awarding a Contract to Your Own Company

A director owns a separate IT consultancy. The company needs IT support. This is a conflict because the director stands to benefit financially.

Proper management: Declare the conflict, get independent quotes, document why the chosen supplier is best value.

Example 2: Hiring a Family Member

A director wants to hire their spouse as a bookkeeper. This is a personal conflict.

Proper management: Declare the conflict, make sure the role is necessary, document the selection process, and make sure pay is market‑rate.

Example 3: Competing Directorships

A director sits on the board of two companies bidding for the same contract. This is a conflict of duty.

Proper management: Declare the conflict to both boards, withdraw from discussions, and make sure you don’t access confidential information.

Example 4: Using Company Information for Personal Gain

A director learns the company is planning to buy land. They buy a neighbouring plot privately first.

Proper management: This is not a conflict that can be managed. It is a breach of duty. The director could be required to hand over the profit.

6. Key Takeaway

Conflicts of interest are normal and often unavoidable, especially in small companies. The problem is not the conflict itself but failing to declare and manage it properly.

If in doubt:

• Declare it

• Record it

• Manage it transparently

This protects you, the company, and its stakeholders.

Director Responsibilities for Small & Micro Companies

Being a director of a small or micro company is not a casual role. The law expects you to act responsibly, keep proper records, understand your finances, and get help when needed. Most directors who get into trouble do so not because of bad intentions, but because they didn’t realise what was required of them.

What you must do

Running a small company often means wearing many hats. But one role carries legal duties that can’t be delegated or ignored: being a company director. Even if you’re the only director, even if you’re also the owner, and even if the company is tiny, the law still expects you to meet the same core standards as directors of large organisations.

This sheet outlines your responsibilities and the common pitfalls that get small‑company directors into trouble.

1. Your Legal Duties as a Director

A. Act in the company’s best interests

You must make decisions that benefit the company, not yourself personally. This includes avoiding conflicts of interest and declaring them when they arise.

B. Use reasonable care, skill, and diligence

You’re expected to:

• Understand the company’s finances

• Keep proper records

• Make informed decisions

• Get advice when needed

Ignorance is not a defence.

C. Promote the success of the company

You must consider:

• Long‑term consequences

• Employees (if any)

• Suppliers and customers

• The environment and community

• Fair treatment of shareholders

D. Keep accurate financial records

You must ensure:

• Proper bookkeeping

• Annual accounts are prepared

• Confirmation statements are filed

• Corporation tax returns are submitted

E. Ensure the company is solvent

You must not allow the company to trade if it cannot pay its debts. If insolvency is likely, your duty shifts from shareholders to creditors.

F. Comply with laws and regulations

This includes:

• Employment law

• Health & safety

• Data protection (GDPR)

• Sector‑specific regulations

2. Where Small‑Company Directors Commonly Get Into Trouble

A. Poor financial oversight

Typical issues:

• Not checking cashflow

• Failing to file accounts or tax returns

• Mixing personal and company money

• Paying yourself when the company can’t afford it

Consequences: Fines, penalties, personal liability for debts, or disqualification.

B. Trading while insolvent

This is one of the biggest risks for small companies.

Warning signs:

• Can’t pay suppliers on time

• HMRC arrears

• Relying on new sales to pay old bills

Consequences: You may become personally liable for company debts or face director disqualification.

C. Not keeping proper records

Missing or incomplete records can lead to:

• HMRC investigations

• Inability to prove decisions were reasonable

• Problems during insolvency

Consequences: Fines, personal liability, or allegations of misconduct.

D. Conflicts of interest

Examples:

• Using company assets for personal benefit

• Awarding contracts to friends or family without transparency

• Taking opportunities that should belong to the company

Consequences: Repayment of profits, legal action, or disqualification.

E. Ignoring legal obligations

Small companies often overlook:

• GDPR compliance

• Health & safety duties (even with no employees)

• Employment law when hiring freelancers or casual staff

• Insurance requirements (e.g., employers’ liability)

Consequences: Fines, claims, or criminal liability in serious cases.

F. Not getting advice early

Directors often wait too long before speaking to:

• Accountants

• Lawyers

• Insolvency practitioners

Consequences: Problems escalate, and options narrow.

3. Practical Steps to Stay Out of Trouble

• Keep your accounts up to date monthly, not annually.

• Keep a separate business bank account.

• Document key decisions even if you’re the only director.

• Monitor cashflow weekly.

• File accounts and returns early, not at the deadline.

• Get professional advice when you’re unsure.

• If insolvency looks possible, stop trading and seek help immediately.

• Put basic governance in place (see below).

4. Governance for Companies Without Boards or NEDs

Even without a formal board, you can strengthen oversight by:

• Holding quarterly “director review meetings” with yourself or a trusted adviser

• Using an accountant as a sounding board

• Creating a simple risk register

• Setting financial thresholds that trigger external advice

• Keeping written notes of all decisions and rationale, and

• Keeping a note of any conflicts of interest and how they were managed

Good governance protects you as much as the company.

5. When Directors Become Personally Liable

You may be personally on the hook if you:

• Trade while insolvent

• Fail to keep proper records

• Commit fraud or wrongful trading

• Use company money for personal benefit

• Don’t pay taxes deducted from employees

• Ignore statutory duties and conflicts

Penalties can include:

• Personal financial liability

• Fines

• Disqualification (up to 15 years)

• In serious cases, criminal charges

 The law expects you to act responsibly, keep proper records, understand your finances, and get help when needed. Not knowing what your responsibilities are isn’t a defence. Protect yourself as well as the business.

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Wrongful Trading: What Directors of Small Companies Need to Know

Wrongful trading is one of the most common, and most misunderstood, risks for directors of small and micro companies. Many directors get into trouble not because they intended to do anything wrong, but because they didn’t realise when their legal duties changed.

1. What Is Wrongful Trading?

Wrongful trading happens when:

A director continues to trade when they knew, or ought to have known, that the company had no reasonable prospect of avoiding insolvency.

In other words, once it becomes clear the company is heading for collapse, you must stop making things worse for creditors.

Key points:

• It applies even if you’re the only director.

• It applies even if you’re also the owner.

• It doesn’t require dishonesty, just poor judgement.

• “Ought to have known” means you can’t claim ignorance if a reasonable director would have spotted the warning signs.

2. When Does the Duty Change?

Normally, directors must act in the best interests of the company and its shareholders.

But when insolvency becomes likely, your duty switches to protecting creditors (suppliers, HMRC, lenders, employees).

This is the moment many small‑company directors miss.

Warning signs include:

• You can’t pay bills as they fall due

• HMRC arrears are building up

• You’re relying on new sales to pay old debts

• Your bank has withdrawn or reduced facilities

• You’re juggling creditors or ignoring demands

• You can’t produce up‑to‑date financial information

If these apply, you must take action, not hope things improve.

3. What Directors Must Do to Avoid Wrongful Trading

Once insolvency is likely, you must:

• Stop taking on new credit you can’t repay

• Stop paying some creditors over others without proper justification

• Stop paying yourself dividends

• Seek professional advice immediately

• Keep detailed records of decisions and cashflow

• Consider ceasing trading if losses continue

Doing nothing is one of the biggest risks.

4. Penalties for Wrongful Trading

If a liquidator or administrator proves wrongful trading, the court can order the director to:

A. Pay money personally

You may be required to contribute to the company’s debts, sometimes tens or hundreds of thousands of pounds.

B. Be disqualified as a director

Disqualification can last 2 to 15 years, preventing you from:

• Acting as a director

• Influencing a company’s management

• Forming a new company

C. Face reputational damage

Liquidators must report misconduct to the Insolvency Service. This can affect:

• Future business opportunities

• Access to finance

• Professional standing

D. In serious cases: criminal penalties

This is rare, but possible where fraud or deliberate deception is involved.

5. Examples of Wrongful Trading

Example 1: The Optimistic Director

A small construction company loses a major contract. Cashflow collapses. The director keeps trading, hoping a new job will come in. He continues ordering materials on credit and pays himself a dividend.

Outcome: The company goes into liquidation. The liquidator argues he should have known insolvency was unavoidable. He is ordered to repay part of the creditor losses personally.

Example 2: The “Head in the Sand” Director

A retail business is months behind on VAT and PAYE. The director stops opening HMRC letters and continues trading. She pays suppliers who shout the loudest and ignores others.

Outcome: She is disqualified for 6 years for failing to act when insolvency was obvious.

Example 3: The Director Who Mixed Personal and Company Money

A director uses personal funds to keep the business afloat but doesn’t keep proper records. When the company fails, he can’t prove which payments were loans and which were dividends.

Outcome: The liquidator treats some payments as unlawful dividends and demands repayment.

Example 4: The “One Last Roll of the Dice”

A tech start‑up is insolvent but the director takes out a new loan to fund a marketing push. The campaign fails and the company collapses.

Outcome: The director is held personally liable for the new debt because he took it on when insolvency was already inevitable.

6. How to Protect Yourself

• Keep accurate, up‑to‑date financial records

• Review cashflow weekly

• Document decisions and the reasons behind them

• Seek advice early from an accountant or insolvency practitioner

• Stop trading immediately if you cannot meet debts

• Avoid taking on new credit when insolvency is likely

• Treat all creditors fairly

Good record‑keeping and early action are your best defences.

Wrongful trading isn’t about punishing directors for business failure. It’s about ensuring directors act responsibly when things start to go wrong. Most directors who get into trouble didn’t realise when the line was crossed.

If you’re unsure whether your company is approaching insolvency, get advice immediately. Start with an accountant or business adviser.