Post Office Scandal Stresses Key Directors Duties Lessons

Company directors are bound by specific legal obligations outlined in the Companies Act 2006.

The importance of complying with these duties and the consequences of the failure to do so have been recently highlighted following the investigations into the Post Office scandal, one of the biggest miscarriages of justice in English legal history.

It is hard to believe that the decisions to prosecute over 700 people would not, at some point, have been raised with the directors of the company.

This is particularly so given that, prior to the installation of the fatally error-strewn Horizon IT system, the available figures in from 1993 to 1998 — the six years leading up to the introduction of Horizon — show that the average number of prosecutions of postmasters per year was no more than 3.5. From 1999 to 2004, in the six years after Horizon was in widespread use, this figure rose to an average of 26.[1]

By staying silent in the face of corporate wrongdoing on an industrial scale, which became apparent over a period of two decades — even if some information was only known to individual or groups of directors on the board of the Post Office — it is clear that the duties that they owed as directors were not a priority for them.

This article is an overview of the key issues that the law requires from a director as a member of a board in the context and with the backdrop of the Post Office scandal.

Not all matters will be relevant to every company. By way of example, a large public company may have extra levels of compliance. However, the core responsibilities and duties of the directors remain the same.

The Law

Directors are personally subject to statutory duties in their capacity as directors of the company under the act, and a breach of these duties can result in removal from office, a fine or even a criminal conviction. These duties are interpreted by the courts in accordance with previous case law and, therefore, cannot be seen in isolation, but rather as subject to a range of regulations and case law.

There are seven general duties that a director must comply with. These include the duty for directors to act within their powers under the company’s constitution, and to exercise their own independent judgment.

They also include a duty to avoid conflicts of interests, and to inform other directors if they personally benefit from a company transaction. A director should not accept benefits from third parties that are given as a result of being a director, as this could be a potential threat to a director’s objectivity.

While all these duties are of equal importance, the below duties are most relevant to consider in the context of the Post Office scandal.

Under Section 172 of the U.K. Companies Act 2006, a director must act in a way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members — shareholders — as a whole. This is an overriding obligation.

However, in making a decision, a director must also consider:

• The likely consequences of any decision in the long term;
• The interests of the company’s employees;
• The need to foster the company’s business relationships;
• The impact of the company’s operations on the community and the environment;
• The desirability of the company maintaining a reputation for high standards of business conduct; and
• The need to act fairly as between members of the company.

Under Section 174 of the act, a director must exercise reasonable skill, care and diligence in their role. The benchmark for this is that of a reasonably diligent person with the general knowledge, skill and experience that could be reasonably expected from a person carrying out the director’s functions.

However, directors with specific professional training or skills, such as lawyers or accountants, are held to a higher standard in related issues.

The Post Office Scandal

Having established the specific statutory duties with which a director is required to comply, we can see how blatantly the directors of the Post Office have failed in these duties.

A short background on how we got here: Back in 1999, the Post Office began to experience unexplained financial losses after the introduction of the Horizon IT system.

The Post Office blamed this on the subpostmasters and subpostmistresses, wrongly accusing individuals of theft and false accounting. It handed out over 700 criminal convictions between 2000 and 2014.

In reality, the unexplained losses were in fact for the large part caused by bugs and errors in the Horizon system.

Ultimately, the responsibility for the Post Office scandal lies with the board of directors, and there has been a consistent lack of reasonable care, skill and diligence on their part. As discussed above, to act diligently involves directors keeping themselves informed about the company’s affairs.

Records available at Companies House show that, between 2000 and 2023, the Post Office had more than 80 directors. This raises questions whether such a high turnover would have been in the best interests of the company or its shareholder — in this case its sole shareholder, the U.K. government.

One would also hope that some of these individuals would at least have had an understanding of the governance principles associated with being a company director.

That said, the Post Office accused over 900 subpostmasters of numerous crimes, despite evidential and other issues having been raised at a very early stage, and there seems to have been a collective case of looking the other way when it comes to the board of the Post Office that amounted to a clear failure to exercise reasonable care, skill and diligence.

Ironically, it seems that this collective failure came about as a result of wanting to maintain — almost at any cost — the previously good name of the Post Office.

That mission seems to have blinded board members to the facts and the actual evidence that was brought to their attention at different times, and while there are many other factors at play, the board must largely take the blame for this.

The directors have also clearly failed in their duty to promote the success of the company for the benefit of its members as a whole.

When considered from a purely practical perspective, which is hard to stand behind considering the emotional and human tragedy of this scandal, the Post Office’s reputation has been severely damaged, and it is arguable that this is a direct consequence of the detrimental decisions made by the Post Office’s directors for a period of over 20 years.

The undercurrent of these general duties is fiduciary in nature, meaning it is a relationship of trust. While silence in the face of wrongdoing may not constitute an explicit breach, directors are placed in a position of custodial power within a company.

Those sitting on the board of the Post Office are and have been lawyers, CEOs and people at the top of the financial services industry. With the wealth of knowledge and expertise of those individuals involved, it is deeply shocking that no one spoke up to protect the subpostmasters or the confidence of the general public in this national institution.

Despite the obvious failures to fulfil their duties, it was established that bonus payments amounting to £1.6 million ($2.03 million) had been awarded to the board of the Post Office. Even more problematic is the fact that the Horizon inquiry was a metric on which the bonus payments were paid.

Chief Executive of the Post Office Nick Read was paid £54,400 for merely cooperating with the Horizon Inquiry. He reluctantly agreed to pay £13,600 of this back in May 2023, having initially offered to pay back around £3,000.

This came after the Post Office recognized its error in awarding bonus payments on such metrics, followed by paying the remaining amount after repeated pressure from politicians, those campaigning on behalf of the subpostmasters and subpostmistresses, and from the inquiry itself.

If the people in power cannot keep a company in check and were willing to receive bonuses for complying with an inquiry attempting to rectify their mistakes, what hope was there in ever protecting the subpostmasters in the first place?

It is also interesting to compare and contrast the level of inquiry and detail applied to calculating board bonuses against the lack of attention in relation to the massive uptake of apparent theft and fraud on the part of subpostmasters, which, in fact, had nothing to do with them, but, in practice, was the epic failure of the company’s computer system.

Well-funded parties, such as the Post Office, will typically instruct the most expensive law firms to ensure that they secure a favorable outcome by outspending their opponents. Considering the Post Office’s annual accounts, this is exactly what came to pass in their defense of the group action led by Alan Bates and brought by the 555 subpostmasters.

The Post Office has spent £298 million on external lawyer fees between 2017 and March 2023, including on the defense of the Horizon system.

In 2022-2023 alone, the Post Office spent £92 million on lawyers. At the current rate of spending, the Post Office will have incurred an estimate of £390 million on legal fees by April, more than double the £169 million that has been paid in compensation to victims of the scandal.

While the legal fees incurred by the Post Office increase at an alarming rate, 1,900 victims of the scandal are still waiting for compensation.

Concluding Thoughts

The tragic nature of the Post Office scandal cannot be understated, and neither can the life-changing impact that this scandal has had on the individual subpostmasters, subpostmistresses and families who were directly affected.

There is also a clear lesson here for company directors on the magnitude of the impact that a failure to fulfil their duties can have.

The consequences that the directors of the Post Office will face will be unearthed as the Post Office inquiry progresses, and there is a public clamour for those directors who have failed in their statutory duties to be duly sanctioned.

Whether or not that will actually happen remains to be seen, as historically, senior directors appear to have got off relatively lightly when being held to account for failures in the provision of their services as directors.