As with other
sections in this website, the easiest method of imparting
information is by answering questions often posed:
Who
is a director?
Anyone
who is registered as a director but also anyone occupying
the role of a director, regardless of his title within the
company. This could include a person not formally appointed
to the board eg a de facto director, but under whose directions,
staff, suppliers, etc are accustomed to act.
If
the board is accustomed to acting upon a person's directions,
such person may be considered to be a shadow director, even
if there is no apparent connection with the company in terms
of a formal appointment.
All
classes of director are subject to the terms of the companies
act 1985, and as such, are vulnerable should the company
become subject to formal insolvency proceedings.
Return to Top
Company
Directors Disqualification Act 1986: will it affect me and
why?
Following
the formal insolvency of a company, one of the duties of
the insolvency practitioner is to lodge a privileged submission
to the department of trade, director disqualification unit
in Edinburgh on the conduct of all directors within 6 months
of his appointment. Some areas on unfit conduct which may
be considered include:
-
did
the company maintain sufficient/appropriate accounting
records for its business?
-
did
the company maintain sufficient statutory records, i.e.
register of directors, secretaries and members?
-
has
the company submitted annual returns timeously?
-
have
the directors complied with the companies act with regard
to signing and filing audited accounts?
-
have any deposits been taken from customers when it
was known that the company could not fulfil the order
request?
-
have
the directors disposed of any company assets for undervalue?
-
has
there been fraudulent trading?
-
is
there any evidence of misfeasance or breach of the directors'
fiduciary duty?
-
have the directors caused the company a material loss
by the sale, assignment or other disposal of company
assets, other than in the normal course of business?
-
are
the crown creditors, i.e. for PAYE, NIC and VAT, disproportionately
high compared to the overall deficiency?
-
have the directors paid themselves unduly large salaries
or enjoyed extravagant lifestyle using company monies?
-
has there been wrongful trading?
One
of these matters on their own may not be sufficient to warrant
disqualification but the more matters identified the higher
the cumulative effect becomes and hence, the more likely
it is that the director disqualification unit may wish to
instigate proceedings.
What
is wrongful trading?
Wrongful
trading arises when a company is insolvent and the reported
director knew or ought to have known that there was no reasonable
prospect of the company avoiding insolvency proceedings.
The general knowledge, skill and expertise of a reasonably
diligent person is expected and this is compared with the
director's position. Therefore, a person with a professional
qualification would be expected to act with a higher degree
of care and expertise than a director with no specific training.
If
found guilty of wrongful trading, a director may be liable
to contribute to the company's assets from personal resources.
However,
a director may not be held liable if he can show that he
took every reasonable step in order to minimise the overall
loss to creditors. It is not a valid defence to state that
a director was not involved in financial matters.
Return to Top
How
long will disqualification last?
Any period from
two to fifteen years depending upon the seriousness of the
misconduct.
Will
anyone find out?
A disqualification
order or undertaking is filed with the register of companies,
Edinburgh who retains it on public record for the duration
of the applicable period. Notice is published in The
Edinburgh Gazette. A press release is issued by media
publication.
Can
I still act as a director?
Not normally whilst
a disqualification order or undertaking is in force. However,
there are steps which can be considered in order to obtain
court approval to act. This matter requires specialist advice
from a solicitor experienced in insolvency matters and/or
an insolvency practitioner.
Must
I be disqualified?
No, it will only
be a possibility if an adverse report is submitted to the
director disqualification unit and they elect to raise proceedings.
Such proceedings tend to be raised in the court of session
but can be raised in a sheriff court, and can be defended.
There is a body of case law being developed as cases are
heard by the courts. Each case is judged on its individual
merits and it is vital that any director wishing to defend
an action, or wanting to know if there are valid reasons
to mount a sustainable defence, should seek advice from
a experienced insolvency practitioner without delay.
Return to Top
Is
disqualification the only option?
No, the Insolvency
Act 2000 introduced the concept of an undertaking. If a
director accepts that there has been limited misconduct
but does not wish to speculate on defending expensive court
proceedings, he can negotiate with the director disqualification
unit to sign an undertaking. The process is quicker than
the court route and less expensive, but still requires admission
of some, or all, of the allegations raised by the director
disqualification unit.
Phoenix
companies
A person who has
acted as a director of a company in the twelve month period
prior to insolvency may only re-use the company name, its
trading name, or a similar name, with the approval of court.
Failure to comply with this provision may result in a fine
or imprisonment.
How
do I find out more?
These guidance
notes should not be relied upon as a definitive guide to
your circumstances and the methods of dealing with them.
Please contact
us on insolvency@mestonreid.com
to arrange confidential consultation.
Return to Top
