Director DisqualificationFebruary 22, 2019
This article considers the risk of disqualification for directors and former directors of insolvent companies, and the considerations that directors should give to their position in general and in light of Brexit
According to a recent press release from the Department for the Economy, in November 2018 a local Belfast Director agreed to a Disqualification Undertaking (DU) for a period of 9 years. This was in respect of his conduct whilst a director of a company which had been placed into Administration.
The Company Directors Disqualification (Northern Ireland) Order 2002 (“the Order”) sets out the grounds upon which a director can be disqualified when a company becomes insolvent. The Order applies to individuals registered as directors at Companies House, but also to shadow directors and any individuals who are holding themselves out to be directors i.e. de facto directors. The Court can grant a Disqualification Order (DO) or alternatively the director can agree to a DU. A breach of a DO or DU is a criminal offence.
The main purpose behind the Order is protection of the public. Its aim is to ensure that individuals, who have engaged in conduct that renders them “unfit” to be a director, are not allowed to continue to act as a director, take part in the promotion, formation or management of a company altogether, or, without leave of the High Court (which may impose certain conditions on them in future).
The grounds for Director Disqualification include:
- Allowing the company to continue to trade when the director knew, or should have known, that the company was insolvent i.e. Wrongful trading;
- Breaching the requirements of the Companies Acts i.e. failure to file accounts and Annual Reports with Companies House;
- Unfit conduct where the director has been a director of an insolvent company; and
- Committing a breach of competition law.
When a company becomes insolvent i.e. a Compulsory or Voluntary Liquidation, Administration or if an Administrative Receiver is appointed, the office holder has a duty to investigate the conduct of the directors. The investigations cover current directors, but also any directors in the 3 years preceding the onset of insolvency. So a last minute resignation will be no use to someone seeking to escape investigation! The office holder prepares a report to the Department, and the latter will then decide whether to issue Disqualification Proceedings.
In determining whether or not a DO should be granted, the Court will consider factors including but not limited to, whether:-
- the director entered into any transactions with creditors or third parties that could be deemed a Transaction at an Undervalue or a Preference;
- the director failed to pay monies due to the Crown and/or submit tax returns;
- the director entered into transactions defrauding creditors; and/or
- the director has breached his fiduciary duty to the Company as set out in the Companies Act.
The legislation states that when a director’s conduct is found to be unfit, a disqualification order must be granted for any period between 2-15 years, a sliding scale dependant on the seriousness of the offence/s, with the maximum bracket of 10 years and over reserved for extremely serious cases.
The length of the DU sought and given in this recent case represents the seriousness of the directors’ unfit conduct and according to the press release, was based on various offences including:
- a failure to account for £600,000 invested in the company by a third party;
- submitting false and misleading accounts in respect of the company;
- failing to maintain and/or deliver up accounting records and statutory books and records; and
- failing to co-operate with the Administrator.
Failure to co-operate with office holders and continued trading at the expense of the Crown are two grounds that can almost guarantee some period of disqualification, particularly if they are in addition to other examples of unfit conduct. The periods of disqualification being sought by the Department appear to be getting higher, demonstrating the fact that the Department and the Courts are taking a much more robust approach to preventing, or restricting further unfit conduct.
As Brexit D-day approaches, directors should strongly consider their position and take advice on the potential risk of DD proceedings if they have concerns about the solvency of the company/companies that they are directors of. If a DO or DU is in place it may severely impact an individual’s ability to become involved in another company in future and may prevent employment in certain capacities.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. If you are a director of a company and have concerns, then please contact our Business Restructuring and Insolvency team at Cleaver Fulton Rankin.