Top Mistakes Directors Make (and How to Avoid Them)

Why directors fall into avoidable traps, and the real legal and commercial consequences when they do.

Directors today are operating in one of the most regulated periods in modern corporate history. Between the Companies Act 2006, evolving Companies House reforms under the Economic Crime and Corporate Transparency Act 2023, GDPR, AML rules, and an increasingly litigious business environment, the margin for error is shrinking rapidly. Yet many directors make the same preventable mistakes that expose both the business and themselves personally.

At Lyon Croft, we regularly advise directors, founders, board members, and shareholders across a range of industries. What we see, consistently, is that the greatest risks come not from bad intentions, but from oversight: assumptions, rushed decisions, and the failure to put proper governance in place. Below are the most common mistakes directors make, why they are so damaging, and how they can be avoided with practical, commercially intelligent steps.

Not Understanding the Scope of Director’s Duties

One of the most persistent issues is a fundamental misunderstanding of the statutory duties imposed by the Companies Act 2006, particularly sections 171-177. These duties are not theoretical guidelines; they are legal obligations that can give rise to personal liability if breached.

When directors act outside their constitutional powers, fail to promote the success of the company, ignore the duty to exercise reasonable care and skill, or neglect their obligation to avoid conflicts of interest, they create a trail of decisions that can be challenged by shareholders, creditors, and liquidators.

A breach of duty can result in directors being ordered to personally compensate the company, unwind transactions, or face disqualification for up to 15 years. In distress scenarios, these lapses are precisely what liquidators investigate. A director’s best protection is a deep, working understanding of their duties, properly documented decision-making, and access to regular legal advice before key decisions are taken.

Making Decisions Without Records or Board Minutes

Many SMEs still operate informally, relying on messages, verbal conversations, or quick emails between directors. But when decisions later become contentious, for example in a dispute, an insolvency, an investor or a regulatory review, the absence of appropriate minutes becomes a serious vulnerability.

Poor record-keeping undermines the director’s ability to prove that they assessed risks, considered alternatives, obtained professional advice, declared conflicts, or acted reasonably. The legal system places enormous weight on minutes as an objective record of a director’s rationale. Without them, directors are left to rely on memory, which rarely holds up under scrutiny.

This can translate into increased personal exposure, difficulty defending claims under the Companies Act, and even findings of misfeasance in insolvency. Properly drafted minutes, structured board packs, and a disciplined governance process are some of the most effective forms of director protection available.

Continuing to Trade When Insolvency Risks are Present

One of the most serious mistakes directors make is failing to recognise when their duty shifts from shareholders to creditors. Under section 214 of the Insolvency Act 1986, wrongful trading occurs when directors continue operating when they knew or ought to have known that insolvency was unavoidable. Similarly, transactions at undervalue, preferences, and misfeasance claims frequently arise from directors trying to keep the business going without understanding the legal consequences.

The personal exposure here is substantial. Directors can be held personally liable for the company’s losses, face disqualification, and have transactions reversed. Many directors believe insolvency risk begins only when the business cannot pay its debts, but the law applies much earlier, often when cashflow declines, creditor pressure increases, or forecasts indicate an inability to meet future liabilities.

Early legal and financial advice is essential. A director who documents their decision-making and engages experts early is in a significantly stronger legal position than one who waits until the business collapses.

Relying on Weak Contracts or Informal Agreements

Poor contract management remains one of the most common root causes of disputes. Directors often sign agreements without negotiation, rely on templates from unknown sources, or enter significant commercial arrangements verbally. When something goes wrong, delays, scope changes, non-payment, supply failures etc, the business finds itself without enforceable protections.

The consequences can be serve. Litigation risk increases, damages claims escalate, and directors may face allegations of failing to exercise reasonable care and skill under section 174 CA 2006 if they entered into unreasonable or unclear contractual arrangements. Intellectual property can be lost, liability caps can be absent, and termination rights can be unusable.

A structured legal review process nad properly drafted templates significantly reduce commercial risk and are hallmark of well-run companies.

Failing Behind on Regulatory and Compliance Obligations

The UK regulatory landscape is evolving constantly. Directors who fail to keep pace with developments, whether under the Companies Act, ECCTA 2023, GDPR, Money Laundering Regulations, employment law or industry specific regulations, expose their companies to penalties and themselves to scrutiny.

Non-compliance can lead to regulatory fines, compulsory filings being rejected, restrictions on trading, and in serious cases, criminal liability. The introduction of identity verification for directors, new requirements for PSCs, and enhanced reporting obligations under ECCTA reflect a shift towards greater accountability.

Directors must ensure they have a compliance framework that evolves with legislation, not one that relies on outdated practices.

Ignoring Early Signs of Disputes

Disputes rarely appear suddenly. They begin as small cracks. Directors often delay addressing concerns due to reluctance to engage lawyers or fear of escalating the situation. Unfortunately, delay is what causes escalation. By the time a dispute reaches a solicitor, options may be limited and the company may have already weakened its legal position.

The consequences include substantial legal costs, reputation damage, operational disruption, and weakened negotiation leverage. Courts assess a director’s conduct holistically.

Directors should adopt a proactive approach, with early legal assessment, preservation of evidence, and strategic communication with the counterparty.

How Lyon Croft Supports Directors

Lyon Croft provides directors with governance, regulatory, and commercial advisory support grounded in experience, risk awareness, and strategic insight. From director duties training to contract reviews, dispute management, compliance frameworks, and board-level advisory, we help directors operate with clarity and confidence, reducing risk while strengthening commercial outcomes.

Speak to a Solicitor today

If you require any assistance or would like to find out your options in relation to Director’s Duties or Disqualification, please contact us by sending an email to info@lyoncroft.co.uk, calling us on 020 3576 7170, or complete a contact-us form. Our offices are in Park Royal, London and you can find our address at the bottom of the page.

This article has been authored by Abdullah Suker, Managing Director of Lyon Croft Law.