Directors’ disqualification orders
The number of directors’ disqualifications has increased substantially in the last decade. Ross Brymer explains the importance of complying with directors’ duties.
Conduct worthy of disqualification
In the past, the Insolvency Service has been accused of being slow to take action against directors who have breached regulations, been guilty of theft or fraud, or of running insolvent businesses, but now it is not only major breaches which are drawing attention to directors of insolvent companies.
An insolvency practitioner handling a company’s insolvency is obliged to report certain forms of misconduct by the directors to the Insolvency Service who then decide what action, if any, to take against the directors in question.
There are a variety of factors which the court may take into account in determining whether disqualification is appropriate including:
- misuse of company funds;
- the extent of the director’s responsibility for any failure by the company to keep or retain accounting records, submit annual returns or maintain the statutory records of the company;
- the director’s responsibility for the company’s insolvency;
- whether the director let the company enter into transactions to defraud its creditors;
- the extent to which the director failed to comply with his duty to cooperate with the insolvency practitioner.
The effects of disqualification
A disqualification order prevents an individual from:
- acting as a company director (whether appointed as a director or on the facts being a director despite not being formally appointed);
- being involved with the formation, marketing or management of any company; or
- acting as a receiver of a company’s property.
The period of disqualification can be anywhere between two and 15 years, depending on the seriousness of the misconduct.
Once imposed, acting in contravention of a disqualification order is a criminal offence which can lead to imprisonment for a maximum of two years or an unlimited fine or both. The director in question may also be made personally liable for the debts of the company concerned.
The message to draw from the latest statistics for directors of companies is the importance of seeking professional advice at the first sign of trouble.
In the event of wrongdoing, the court is likely to take into account any relevant mitigating factors, a key one of which is taking professional advice and acting upon it. Directors should also bear in mind that where a company is insolvent or on the verge of insolvency, the directors duties switch to ensure that the company acts in the best interests of the creditors. The interests of the creditors rather than the shareholders are then paramount.
But acting honestly and reasonably, taking your duties and responsibilities as a director seriously and taking professional advice at the earliest stage possible will go a long way to keeping you on the right track.