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Directors disqualification proceedings on the rise

January 11, 2012

The arrival of 2012 brings with it many questions for some company directors, perhaps the most poignant one being: Did they do the right thing by ‘clinging on’ hoping that trading over the festive period would fix things for the company? If it didn’t, then is it too late to seek legal advice to protect my own position? One of the consequences when a company becomes insolvent is action being taken against its directors by a liquidator. This could take the form of direct action by a liquidator such as misfeasance proceedings or wrongful trading proceedings, or action by the Secretary of State following receipt of an adverse report by the company’s liquidator, relating to the conduct of directors prior to the company entering liquidation.

If wrongful trading is proven, then the directors can be made personally liable for the company’s debts from the time they knew the company could not avoid going into insolvent liquidation.

If serious enough, this could result in the loss of your home and even bankruptcy. Action by the Secretary of State usually takes the form of disqualification proceedings under the Company Directors Disqualification Act 1986 (CDDA), aimed at preventing a former director (who is alleged to have acted in a manner in contravention of his fiduciary duties, which includes wrongful trading, to the company or its creditors) from being able to act as a director of a limited company for a period up to 15 years.

Some examples of conduct which may lead to directors disqualification proceedings include:

  • Continuing to trade to the detriment of creditors at a time when the company was insolvent
  • Failing to keep proper accounting records
  • Failure to prepare and file accounts or make returns to the Companies House
  • Failure to submit tax returns or pay over to the Crown tax or other money due
  • Excessive salaries or drawings when the company was insolvent
  • Writing company cheques knowing they will be dishonoured
  • Directors allowing the company to use a prohibited name
  • Failing to co-operate with liquidator or administrator of the company

If any of the above apply to your situation then you could be at RISK! Beware:

The Insolvency Service considers the specific involvement of each director when considering prosecutions. Directors who fail to react to misconduct by fellow directors and those who take no part in the management of the company are also liable to prosecution. It is not permissible to claim you were a passive bystander while other directors ran the company.

Remedy It is possible to defend disqualification proceedings, particularly if the director can prove that the insolvency of the company resulted from unforeseeable misfortune outside the director’s control, an unexpected loss of key staff, sudden loss of a profitable contract or commercial misjudgement, rather than negligence or incompetence on their part. It is also possible to argue the director could see “a light at the end of the tunnel” and that the directors reasonably believed the company could trade out of its difficulties. Directors should be aware this defence may fail because a court may find it was not reasonable to expect it to trade out. From the minute they realise the company is in difficulties directors should take advice on what to do and heed that advice.

The sooner they seek advice, the better their position is likely to be. Defending disqualification proceedings can be very expensive.  Directors have to make a decision about whether to spend the money contesting the disqualification or accept an undertaking. It is well known that the Secretary of State does not instigate disqualification proceedings lightly and will only proceed in cases where he feels there is a significant chance of success. An alternative to a full defence is to negotiate an undertaking not to act as a director or be involved in the running of a business with the Secretary of State. Even though a director is disqualified by Order or undertaking, it is possible in some circumstances to obtain permission from the court to act as a director of a company. This will always be subject to conditions aimed at satisfying the Secretary of State that the director will not be able to act in contravention of his obligations. Directors should be aware that liquidators are able to use the fact of a disqualification or undertaking to justify a claim to have the director personally pay money to the company for the benefit of its creditors. An undertaking should never be given without bearing this in mind. What might seem like a small concession in giving an undertaking may be a significant factor in a later claim for wrongful trading. Directors also have an obligation to assist a liquidator with their enquiries after the company goes into liquidation.

It is important that this is done carefully. What may seem a harmless process can prove to be a minefield for directors and a misunderstanding can lead to claims against the director. stevensdrake can support directors through this process. What next? 1.Act promptly, as further delay may lead to greater liability for you as directors 2. Contactstevensdrake for an initial consultation. stevensdrake specialise in advising directors faced with disqualification proceedings or inquiries under the CDDA. Remember:

Doing nothing or delaying can add significantly to the costs which you may eventually have to pay and make it harder for you to successfully defend any proceedings. Even if you are disqualified, or are advised to give a disqualification undertaking because of the case against you, there are options available to directors to allow them to continue working. Members of the stevensdrake team have extensive experience in pursuing Directors Disqualification and misfeasance proceedings and are in a unique position to defend directors in such proceedings and to negotiate the best possible settlement where disqualification is inevitable. We will advise on the merits of the allegations made against director, the length of the disqualification period and assist directors in applying for leave to act as directors of companies following disqualification. Published - March 2012This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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