Retail company directors: key duties to avoid risks

Retail company directors: key duties to avoid risks

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The recent crisis at Patisserie Valerie, which has now been placed into administration, provides a timely reminder that directors must carefully consider their duties under the Companies Act 2006 (the Act). Although the on-going investigations into Patisserie Valerie focus on the discovery of accounting irregularities, directors should also pause to remind themselves of the scope and nature of their duties to avoid any inadvertent pitfalls or traps.

The seven duties of directors are set out in sections 171 to 177 of the Act, although it should be noted that a company’s articles of association may place more onerous requirements on its directors than those set out in the Act.

Duty to promote success of company

One of those seven duties, the duty to promote the success of the company for the benefit of its members as a whole (section 172 of the Act), requires that a director have regard to a number of factors, including the likely long-term consequence of any decision and the interests of the company’s employees.

In light of the squeeze on the average consumer’s income and rising overheads currently faced on the high street, directors should carefully consider how best to create a long-term increase in value for the company. Whereas, at one time, the focus might have been on increasing store numbers, certain sectors are seeing a greater emphasis on customer experience and online visibility.

Further and particularly for companies with overseas operations, directors should carefully consider any contingency planning and business strategies to help prepare for the possible consequences of Brexit.  In particular, directors of businesses reliant on supplies of goods to and from the EU should stay informed of relevant VAT and customs rules and reporting as the final “form” of Brexit becomes settled, and prepare their businesses accordingly.

Duty to exercise reasonable care, skill and diligence

Another important duty, the duty to exercise reasonable care, skill and diligence (section 174 of the Act), includes both an objective, and subjective test. Under the objective test, broadly speaking, the director must exercise the care, skill and diligence exercised by a reasonably diligent person, with the general knowledge, skill and experience expected of a person carrying out that function. The subjective test requires that a director exercise the care, skill and diligence exercised by a reasonably diligent person with the general knowledge, skill and experience that the director actually has.

As an example, under the objective test, an operations director at a large retail chain might be expected to have the skill set to develop and implement a business strategy, and control costs at regional level. However, if the director has a particular expertise in, say, inventory analysis and stock forecasting, or is a very experienced operations director, a higher level of care, skill and diligence is likely to be required under the subjective test.

In light of the changing consumer landscape and recent high street casualties, such as Evans Cycles and Maplin, this duty has only grown in relevance. It is arguable that such events have increased the burden on directors to consider and where appropriate, implement strategies to pre-empt or otherwise counter identifiable risk areas. 

Whilst arguably at the more extreme end of the spectrum, the reports regarding Patisserie Valerie should remind directors of potential risks arising from within their business operations in addition to those from the wider market. In particular, recent years have seen an increasing focus on general business compliance, introducing new areas of financial and reputational risk on which reasonably diligent directors should continue to stay abreast and act as necessary.  For instance, legislation was introduced in September 2017 that can impose an unlimited fine on a business that fails to prevent the “facilitation of tax evasion”.  While largely targeting the financial services/advisory sector, the rules apply to all businesses set up as companies (and some others too).  By using the “stick” of financial penalty, the legislation strongly encourages businesses to assess the risk of employees, agents and other persons “associated” with them assisting third parties to evade tax, and to then put in place reasonable prevention procedures to counter the risks identified.  Businesses in the retail sector may want to specifically consider any risks around payment flows (particularly transactions conducted in cash) and other interactions with third parties.    

In other workforce-related matters, the continued prevalence of the “gig economy” and reliance on casual labour in the retail sector should also prompt directors to ensure that their business distinguishes correctly between “employees” and “self-employed” contractors for tax purposes, and is therefore operating PAYE appropriately. 

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