Disqualifications of directors have been increasingly brought to our attention over the past few years through the use of social media and other outlets. Of course, Companies House keeps a database of disqualified directors, but your ‘average Joe’ is more likely to be surfing Twitter and LinkedIn than searching through Companies House. I thought it would be useful to have a look at some of the causes of disqualification and what it means for the directors involved.
If we start at the basics, a director has a legal and a fiduciary duty to the company. The statutory duties for directors are set out in Section 171-177 of the Companies Act 1986:
· To act within the powers granted in a company’s articles of association.
· To act in good faith to promote the success of a company.
· To exercise independent judgment.
· To exercise reasonable care, skill and diligence.
· To avoid or declare any conflicts of interest.
· Not to accept benefits from third parties or use their position to make private profits.
· To declare an interest in any proposed transaction or arrangement with the company prior to the company entering into such a transaction.
Unfortunately, too many people dive head first into being a company director without actually knowing what their responsibilities are. Directors are expected to be competent and experienced enough to carry out their duties. If they fall short of their responsibilities, there can be consequences.
In insolvent Liquidations and Administrations, the appointed Insolvency Practitioner (IP) is required to investigate and produce a report on the conduct of directors. An IP will look at the causes of insolvency, the conduct of the directors and any other issues which come to his attention. The list is not exhaustive, but the Disqualification Unit attaches particular importance to the following:
· attempted concealment of assets or cases where assets have disappeared or a deficiency is unexplained;
· appropriation of assets to other companies for no consideration, at an undervalue, or on the basis of unreasonable charges for services;
· personal benefits obtained by directors;
· overvaluing assets in accounts for the purpose of obtaining loans, or other financial accommodation, or to mislead creditors;
· loans to directors in making share purchases;
· dishonoured cheques;
· use of delaying tactics;
· non payment of Crown debts to finance trading;
· phoenix operations;
· misconduct in relation to operation of a factoring account;
· taking of deposits for goods or services ultimately not supplied; and
· cases where criminal convictions have resulted.
In addition, a director can be described as ‘unfit’ if he or she:
· allows a company to continue trading when it can’t pay its debts
· does not keeping proper company accounting records
· does not sending accounts and returns to Companies House
· uses company money or assets for personal benefit
If a director is found guilty of one or a number of offences, a disqualification order may be made. This can result in a director being disqualified for a period between 2 and 15 years. If you are disqualified as a director, you will not be able to be a director of any company registered in the UK or an overseas company that has connections with the UK, or be involved in forming, marketing or running a company. Further restrictions include not being able to sit on the board of a charity, school or police authority; not be a solicitor, barrister or accountant; or be a pension trustee.
Directors should note that it is a criminal offence to act in contravention of a disqualification order and could result in a fine and/or a prison term of up to 2 years.
If your company is struggling financially it is important that directors take early professional advice. An Insolvency Practitioner is well placed to assist directors in making the correct decisions for the benefit of the company and therefore mitigate the personal risk to directors.
If you would like to discuss any of the issues in this article or have any general insolvency queries, please contact Jon Mitchell on 01392 288555 or by email: firstname.lastname@example.org
Jon Mitchell is a Licenced Insolvency Practitioner at Thomas Westcott Business Recovery LLP and highly experienced in business rescue, restructuring and insolvency solutions.
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