DIRECTORSDUTIESANDRESPONSIBILITIES.doc

7/27/2019 DIRECTORSDUTIESANDRESPONSIBILITIES.doc

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DIRECTORS DUTIES AND RESPONSIBILITIES

DIRECTORS

The Companies Act 2006 says that the term Director includes any person occupying the

position of Director regardless of title. The definition of Director includes any personoccupying the position of a Director, by whatever name called.

Directors of the company may therefore be trustees, governors, managers, officers etc., they

will have the legal status of a director if that is their function.

A person who has Director in his job title may, even if he does not perform the function of a

director within the organisation, may be held liable as a director.

Executive Directors should have a service contract with the company that sets out the terms of

their employment thus providing certainty to both the company and the director.

Non Executive Directors have the same duties and responsibilities as full time Executive

Directors and they must ensure that they remain fully aware of the position of the business.

There are no special rules for Non Executive Directors and accordingly they can attract the

same liability as the Executive Directors in the context of Insolvency.

A Shadow Director is a person in accordance with whose directions or instructions the

Directors of a company are accustomed to act (but a person is not deemed a Shadow Director by

reason only that the Directors act on advice given by him in a professional capacity).

Therefore advisers to the Company and the Directors do not normally fall within the definitionof Shadow Director but if the adviser seeks to impose management or executive decisions on

the Directors then the adviser is at risk of being considered a Shadow Director and thus

incurring the potential liabilities of a Director.

Anyone who is a Nominee Director or an Alternate Director can be subject to the full range of

liabilities of an Executive Director.

A parent company can be a Shadow Director of all or any of its subsidiaries and indeed that risk

can extend to one or more directors of the parent company.

Many of the insolvency remedies against a Director are not limited to those who have beenformally appointed as a Director.

GENERAL DIRECTORS DUTIES AND RESPONSIBILITIES

Prior to the Companies Act 2006 the duties and responsibilities of Directors came from an

accumulation of Statutes, case law etc.

The case law etc is still appropriate and relevant.


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What steps can be taken to minimise a Directors personal liability?

Seeking appropriate and relevant professional advice (and acting upon it) will help the company to

meet its legal requirements and also provide evidence that the Directors were aware of their

duties and obligations.

Directors should hold regular board and management meetings with accurate minutes being

recorded; those minutes can then be used as evidence of the Directors making all reasonable

efforts to limit the loss to creditors by discussing options available to the company. If a certain

decision is later questioned then a detailed record of how and why the decision was made can

assist the Director in avoiding personal liability.

Up to date management accounts and accurate financial information is vital, not only does it

provide an accurate and clear picture of the companys financial status at any time, but it will

also assist the Directors in making important decisions about future trading etc.

The companys name must also appear on all business letters including e-mails, notices, official

publications, orders, invoices, receipts, cheques etc in the event of any non payment then the

director who signs any such cheques etc would be personally liable.

COMPANIES ACT 2006 DIRECTORS DUTIES AND RESPONSIBILITIES

Codification of Directors Duties

The Companies Act 2006 for the first time codifies Directors general duties which are:

-to act within powers;-to promote the success of the company;

-to exercise independent judgement;

-to exercise reasonable care, skill and diligence;

-to avoid conflicts of interests;

-not to accept benefits from third parties;

-to declare interest in a proposed transaction or arrangement.

All of these 7 duties are now in effect, the latest introduced on 1 October 2008.

The duty to promote the success of the company has an interesting sub text.

A director of a company must act in the way he considers, in good faith, would be most likely to

promote the success of the company for the benefit of its members as a whole and in doing so

have regard (amongst other matters) to:

-the likely consequences of any decision in the longer term;

-the interests of the companys employees;

-the need to foster the companys business relationships with suppliers, customers and others;

-the impact of the companys operations on the community and the environment;

-the desirability of the company maintaining a reputation for high standards of business

conduct;

-the need to act fairly as between members of the company.


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This is a new general duty which replaces the common law duty to act in good faith and the best

interests of the company.

The new duty adds corporate social responsibility factors into issues which the directors must

consider when making decisions, the list of factors is not exhaustive, it simply highlights

particular areas to which the directors must have regard.

The Companies Act 2006 does not prescribe how Directors are expected to balance the

different factors that they are required to consider or what weight they should attach to them.

The Director owes a fiduciary duty not only to act in good faith and honesty but also to act in

the best interests of the company and without ulterior motive, in other words a Directors duty

is to the company above all else.

Once the company is insolvent then the interests of the companys creditors must become a

priority, even above those of the shareholders.

The Companies Act 2006 provisions on Directors Conflicts of Interest will have practical

implications for many companies and potentially for the Directors in the event of the demise and

formal insolvency of the company.

Insolvency Practitioners will undoubtedly look at the acts and dealings of the Directors and

where there has been a conflict of interest then there may be the basis of an action against the

Director.

Companies incorporated prior to 1 October 2008 may wish to review and amend their articles so

as to deal with the approvals of conflicts of interest and any indemnity provisions.

Table A under the Companies Act 2006 makes various changes to the need for Directors to

resign, retire etc and it may well be sensible to consider the adoption of the new Table A.

The Companies Act 2006 introduces a Statutory Statement of Directors Duties that replaces

many existing common law and equitable rules.

The Companies Act 2006 does not contain an exhaustive statement of duties and it expressly

states that the common law rules and equitable principles will remain relevant when interpreting

and applying the statutory duties.

Directors are entitled to rely on the opinions of others such as outside experts in making

decisions but such reliance will not absolve them of responsibility for their actions. A Director

is expected to exercise his own judgement as well as relying on the opinions of others.

The Companies Act 2006 retains the obligation of Directors to maintain accurate records of

shareholders, debenture holders, directors, secretaries, charges, directors interests etc within

the statutory books (whatever they are!).

Directors must ensure that the company displays its name on the outside of its registered office

and every office or place from which it trades, failure to do so makes the directors personally

liable to a fine.


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If a company in financial difficulties has to take on new creditors then those creditors should be

kept to a minimum with those invoices being paid as they fall due, if not earlier.

Directors are not automatically entitled to remuneration; there is often a remuneration provision

in the companys articles. A properly drawn up service contract will govern the Directors

conduct as an employee and will deal with employment matters such as salary, holidayentitlements, benefits etc.

Directors have authority to act as agents for the company and can enter into contracts on its

behalf although there may well be limits to this authority set out in the Articles or in the

Directors service contracts.

Directors must ensure that they do not exceed their authority and that any third parties are

aware that they act as agents for the company and not in a personal capacity. If third parties

are unaware that the Directors are acting as agents of the company then the Directors may

incur personal liability. If a Director exceeds his authority then the company may still be bound

by the commitment made by the director but the company may have a right of action against the

Director personally.

Accounts and AGM

As from 6 April 2008 it has no longer been necessary for a private company to have a Company

Secretary.

No longer any need for a Private Company to hold a General Meeting as its AGM even if there is

provision to the contrary in its Articles.

Directors of course can call a General Meeting of the Company and the requisite amount of

members can require the Directors to call such a meeting.

If the Company has adopted Table A prior to 1985 then there may well still be a requirement to

hold an AGM unless the Company has amended its articles so as to remove the requirement for

an AGM or has passed an elective resolution to dispense with the AGM. The CA 2006 new Table

A changes the 1985 version but not earlier versions

Section 423 of The Companies Act 2006 requires every company to send a copy of its annual

accounts and reports to every member, every debenture holder and every person entitled to

receive notice of General Meeting such as the auditor and non shareholder directors. There isan opportunity for companies with a number of members to take advantage of the provisions

which will allow the company to communicate with its members electronically or via a website.

Section 463 of The Companies Act 2006 provides for the personal liability of Directors for

false or misleading statements in the Directors Report, the Directors Remuneration Report and

the Summary Financial Statement, however liability is only for the loss caused to the Company,

there is no entitlement for a third party to recover any loss suffered as a result of the third

party relying on information contained in the relevant reports.

The liability of a Director arises where he knew of the untrue or misleading statement or where

he was reckless as to whether the statement was untrue or misleading or the report omitted

something required to be contained in it.


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Directors may wish to formally place the Director Statements before a board meeting and seek

the approval of the Board as a whole.

The ability of private companies to avoid regular board meetings and the provision of minutes

may, if the business later becomes insolvent, prove to be the wrong decision.

Reduction in Share Capital

Since 1 October 2008 a Private Company limited by shares can reduce its share capital by way of

a Special Resolution supported by a solvency statement made by its Directors, subject to any

prohibition or restriction in the Company Articles.

The Solvency Statement is very similar to that of a Declaration of Solvency in a Members

Voluntary Liquidation and there are serious consequences for those Directors who make a

Solvency Statement without reasonable grounds.

Also from 1 October 2008 the prohibition on private companies giving financial assistance for

the acquisition of shares in itself or another private company is repealed and removed so the

whitewash procedure ceases to be relevant.

Financial assistance by private companies is no longer prohibited and the whitewash procedure is

not required if the assistance is given on, or after, 1 October 2008.

Loans to Directors

The previous prohibition on loans to directors has been abolished and replaced with arequirement for shareholder approval for such loans subject to certain exceptions such as the

size of the loan, the purpose of the loan and the type of company.

There are civil penalties for breaching these provisions and the transaction may be voidable by

the company.

Directors who are involved in, or who authorise, any such transaction may be liable to account to

the company for any gain and to indemnity the company for any loss suffered by the company.

Many may well consider the removal of the prohibition on loans to directors is an unwise and

unsafe step.

Regardless of whether or not the loan is legal or illegal, approved or not approved, the fact of

course remains that in the event of the insolvency of the company any overdrawn loan account of

a director, or connected person, will be recoverable by the IP for the benefit of creditors.

There is no change to the tax on benefit aspect of overdrawn directors loan accounts as far as

we are aware.

Substantial property transactions

This deals with transactions of value between a company and its director or with a person

connected with a director.


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The transaction does not necessarily need to involve property but simply a non cash asset.

The approval of shareholders is required if a company disposes of, or acquires, from a director,

a non cash asset with a value of more than 100,000 or 10% of the companys net assets.

The rule also applies if the acquisition or disposal is to or from a person connected with the

director, that includes spouse, child, business partner or another company associated with the

director (note that the Companies Act 2006 extends the previous definition in the Companies

Act 1985).

There is an exception where the assets in question have a value of less than 5,000 and where

the transactions are between a wholly owned subsidiary and a holding company or another wholly

owned subsidiary.

A payment made to a director for loss of office or a payment under a provision in his service

contract are not property transactions for the purpose of this provision.

Directors liability Indemnity and Insurance Cover

Companies may not exempt directors from liability for breach of duty but may indemnify them

against liability to third parties.

Companies may pay the directors costs of defending civil or criminal cases subject to the

director being required to repay the costs if the defence fails, such a decision may be made by

the Directors, no need for shareholder approval.

Companies should check the Articles to see whether they should be amended to reflect

provisions for indemnity, insurance and loans for defence costs and whether individual indemnity

agreements for Directors are appropriate.

Indemnities must be disclosed in the Directors report

Individual Directors may wish to consider insuring against defence costs in criminal and

regulatory proceedings; however fines and penalties are unlikely to be covered by insurance.

Companies may obtain liability insurance for its Directors to protect them from loss on claims

made against them over the discharge of their duties.

However as with all insurance policies points to consider include activities covered (and not

covered), extent of cover and any financial limits, cover for legal costs, basis of the policy and

any exclusions.


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DIRECTORS PERSONAL LIABILITY-OFTEN ARISING AS A CONSEQUENCE OF THE

FAILURE AND INSOLVENCY OF THE COMPANY

One almost certain consequence of the insolvency of a private limited liability company is that

the directors (some perhaps all of them) will find themselves subject to personal liabilities of

one sort or another.

Frequently these liabilities are unexpected or, if expected, they are more significant and more

severe than originally anticipated.

These notes look at some but not all of the areas where directors of limited liability companies,

particularly SMEs, can find themselves with personal liability.

These notes are based upon actual situations which have arisen over the last 25 years or so.

These notes list some of the situations which may give rise to such personal liabilities.

1. Recession and Incorporation of Business

Consider the reasons for incorporation. Are they real or imaginary?

Are the benefits real and tangible benefits or illusory benefits?

Will the business be truly solvent on incorporation? Valuation of assets and liabilities

transferred to the company.

Do not forget the employees and their entitlements under TUPE.

Need for considerable advance planning and preparation.

Need to consult accountants and solicitors.

2. Insolvency Cashflow Test, Balance Sheet Test

There are two test of insolvency, the cashflow test and the balance sheet test.

The cashflow test is the inability of an individual or business to pay debts as and when

they fall due for payment.

The balance sheet test is that the liabilities of a business, including prospective and

contingent liabilities, exceeding the realisable value of assets.

Many businesses fail either or both tests but that is not necessarily the reason to head

for insolvency proceedings. However it is a warning about the future conduct of the

business.

3. Limited Liability Fact or Myth

Often there is no limited liability because directors quite simply get it wrong.

If the benefits and attractions of limited liability are one of the main reasons for the

incorporation of a company, with or without the transfer of an unincorporated business,

then you must make sure that you will benefit from such limited liability.


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4. Pre-Incorporation Contracts

This is a very dangerous area. Preferable always to set up the company first. HMRC

delays in set up of Newco. Companies can ratify and adopt pre-incorporation contracts.

Be clear that the contract is on behalf of the company that is about to be incorporatedand not a personal contract. Be aware of who is liable in the event of non payment of

that pre-incorporation contract or debt.

5. Transfer of Sole Trader/Partnership to a Limited Liability Company

Method of Transfer

Proper legal paper work or legal agreement dealing with the transfer of assets and

liabilities as appropriate. Evidence the transfer with the necessary entries in the books

and records.

Be clear as to what is transferred and what is not transferred. Some assets can be

transferred by physical delivery liabilities can only be transferred by agreement with

the creditors.

Make sure that the entries in the books and records of both the old business and the

new business clearly acknowledge the nature, extent and value of the assets and

liabilities so transferred.

Professional Advice

Lack of prior planning is common. Advice rarely taken but is vital. Often taken far too

late.General unwillingness to pay for good professional advice. Good advice up front is worth

its weight in gold.

Transfer Assets and/or Liabilities

Be clear as to exactly what assets and what liabilities are to be transferred. Deal

appropriately with the assets and the liabilities and obtain necessary agreements. Be

careful with assets subject to hire purchase, finance etc.

Valuations Especially Goodwill

Try not to transfer goodwill and other such intangible assets across to a limited

company, particularly if they carry significant values and particularly if those values

make the difference between the solvency and insolvency of the business.

Final Accounts / - as the sole trader / partnership

Often not available until many months after the transfer, if available at all. Often do

not reflect either the agreement or the reality as regard the transfer of assets and

liabilities.

Need to reflect the real value of assets and the true liabilities in both old business and

new business. Consider the tax implications.


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No Automatic Transfer of Liabilities

Liabilities can only be transferred by agreement with each individual creditor. Often

such an agreement is not forthcoming.

Often former proprietors will be obliged to give personal guarantees. Why not minute

the fact that the company has taken over responsibility for an HP agreement or leaseagreement or any similar liability.

Danger that any subsequent liquidator will consider the company to have paid off the

personal liabilities of the former proprietor.

Insolvent on Incorporation

Then the company will not benefit from limited liability status. Directors and

shareholders may then be personally liable for all of the Companys debts.

HP/Lease/Rental Agreements

They often refuse to allow a transfer. Often quote Consumer Credit Legislation. Will

probably want personal guarantees. Be clear about ownership.

Bank Security, Personal Guarantees

Dealt with in more detail later. Be clear, be careful and be aware. Understand the

relationship.

PAYE/NIC and VAT

Start up new Paye and VAT schemes in the name of the company. Do not transfer the

old registrations. Obtain new PAYE/NIC registration. Obtain new VAT registration.

Ensure proper cut off between the old business and the new business.

Registrations which remain in the former name results in personal liability.

Employees

Transfer of Undertaking (Protection of Employment) Regulations TUPE 2006.

All employee entitlements for arrears of pay, holiday, wages in lieu of notice and

redundancy will transfer from old business to the new business, other than those for the

proprietor of the old business as he was not an employee of the old unincorporatedbusiness.

Arrears of pay and holiday pay are actual liabilities. Wages in lieu of notice and

redundancy are contingent liabilities. Be aware that these liabilities are legally adopted

by the successor company under TUPE.

Landlords

Be aware of the terms of the lease. Capable of assignment or transfer to the company?.

Landlords right to refuse an assignment. Landlords need for a personal guarantee.

Terms of the lease, options, break clauses. May be an ongoing liability for the failure of

any subsequent assignee of the lease.


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Position of Owner/Manager Former Sole Trader or Partner

There is a difference between the owner/manager of the unincorporated business and

the director/shareholder of the limited company.

Be aware of, and clear about, those differences. Do not treat the company as a personal

business. Discontinue all drawings and all personal payments.

6. Duties and Responsibilities of the Director

Company-Owes a duty to the company itself in all its aspects.

Employee-Owes a duty to other employees. May also be an employee as well.

Directors-A duty of care to fellow Directors.

Shareholders-May also be a shareholder.

Directors may be employees and shareholders and perhaps creditors and must be aware

of the different responsibilities.

7. Directors as Shareholder/Employee/Director Three Separate Matters

As mentioned above individuals who are directors, shareholders and employees have

separate sets of responsibilities. They need to be aware and clear as to those

responsibilities. Often those responsibilities are in conflict with one another.

8. Directors Interest in Contracts, Transactions Disclosure/Approval Illegal

There are Company Law requirements about disclosure and approval of such transactions.

There are penalties for directors making secret profits. Transactions attract the

attention of Liquidators. Needs to be full disclosure. Evidenced by way of letters and

minutes.

9. Elective Regime No more Minutes, Resolutions Is That Dangerous?

Very dangerous. Better to have minutes and resolutions rather than no evidence.

However be careful with the wording of minutes, resolutions, correspondence etc.

10.Director

Sole Director- is that allowed?

Consult the Memorandum and Articles. Should M&A be changed in light of Companies

Act 2006, Table A from CA 2006.

Memorandum and Articles of Association Be aware of terms

What are the Memorandum and Articles? Many shareholders unaware. Where are they

with the auditors with the solicitors with the bank?


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What do they say be aware of the terms. They set out the duties and responsibilities

of both directors and shareholders. Adopt CA 2006 model Articles and Table A?

Contract of Employment Always Advisable

Directors should always have a written Contract of Employment which should set out notonly salary but also any benefits. Un-authorised benefits may be subject to attack by a

Liquidator. Contracts of Employment evidence not only the position as an employee, but

also an entitlement as an employee.

Employee Entitlements for Directors

May not exist under the Employment Rights Act 1996. Recent case law perhaps clarifies.

Can always appeal to an Employment Tribunal. Risk of no claim for arrears of pay,

holiday, wages in lieu of notice and redundancy if director not considered by DTI RPS to

be an employee.

Employment Rights Act 1996 Restrictions

Maximum wage under Act of 350 per week. Maximum of 6 weeks holiday pay and 8

weeks arrears of pay. Maximum of 1 week wages in lieu of notice for each week of

employment up to maximum of 12 weeks. Statutory redundancy per statutory limits.

ERA does not pay any entitlement beyond these limits. Perhaps reduce salary down to the

ERA limits.

Risk of rejection of claim by the DTI Redundancy Payments Service.

Shadow Director

Shadow directors are as responsible and as liable as full directors. Bankrupts and

disqualified directors often act as shadow directors. Severe penalties for acting as a

shadow director particularly if bankrupt or disqualified. Severe penalties for acting on

the instructions of a shadow director

De Facto Director

Someone who is stated to be a director, for example a sales director or marketing

director, but without the appropriate form filed with the Registrar of Companies.

May also be as responsible as a full director and as a shadow director.

Resignation Any Effect?

No-not for past misdemeanours. Resignation does not avoid responsibility for past

events. Resignation may not avoid responsibility for future events.

Consider staying with the company and arguing your case. Need good evidence in terms

of letters, minutes etc to support and defend position.

11.Shareholder Dividends

Legal or Illegal / Recoverable from Directors and Shareholders


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Make sure there is the proper paperwork to evidence the dividends for example dividend

letter. Be careful when paying dividends rather than salary. Dividends allowed only out

of distributable profits. Definition of distributable profits (see new Tech Bulletin).

Auditors responsibility and perhaps liability. How does one determine and calculate

distributable profits. Need for proper accounts above and beyond management accounts.

Illegal dividends are a common problem. Total dividend is recoverable from the directorsbecause they approved the dividend. Individual dividend recoverable from the

shareholders because they received the dividend.

Directors and shareholders may or may not be the same people-and not in same

proportion. Liquidators have two avenue of recovery but can only recover them once.

12.Emoluments

Directors Spouse/Family on Payroll/Fees, Bonus, Approved by AGM/Benefits

Be careful that the directors spouse is a real genuine employee. Salary and benefits

must be reasonable for the work done. Liquidators can recover excess wages. HMRC

often query such wages. Ensure only genuine employees on the payroll.

Fees and bonus not approved by shareholders, therefore not authorized, and therefore

recoverable from the directors.

Set out benefits in the Contract of Employment. Make sure that benefits and other

perks are reasonable and not excessive. Consider remuneration package i.e. salary and

benefits. Do not increase benefits just before the company goes into liquidation.

13.Pension Schemes

Funding/Trustees/Contributions Employer, Employee/Pensions Legislation/UnpaidContributions/Fraud

Be clear as to funding whether from employer or employee or a combination of both.

Trustees have a duty of care to the company and to the members of the scheme.

Perhaps the scheme should have an independent trustee. Deductions from employees

pay must be paid over; there are penalties for not doing so. There are many recent

changes to pension legislation which clarify responsibilities.

Dangerous audit area. Responsibility of the pension company is only to the Trustee

perhaps the company. Unpaid contributions of both employer and employee may, in the

event of insolvency, be covered by the Employment Rights Act 1996.

Failure to pay over pension contributions could amount to the fraud and make the matterof interest to the fraud squad. Areas of risk for breach of duty and breach of trust.

14.VAT

Registration/Criminal Offence Personal Liability/VAT Bad Debt Relief

Ensure new fresh VAT registration. Do not use the old VAT No. Need to avoid the

company becoming responsible for the old debt. Need to avoid the old proprietor being,

or remaining, responsible for the company debt. Ensure that VAT registration is in the

full and proper correct name of the company. Advise HMRC VAT of any changes in

name, status etc and complete the necessary forms.


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Personal liability of director for any criminal offence of the Company pay up or go to

jail.

Be aware of the VAT Bad Debt Relief Rules, avoid double claim.

15.PAYE/NIC

Registration/Personal Liability Own PAYE/NIC/Personal Liability

Make sure that the registration is in the full and proper correct name of the company.

Clearly avoid responsibility for any pre-incorporation debt. Do register in time for

PAYE/NIC.

Personal liability for own PAYE/NIC if deducted from wages but not paid across to

HMRC resulting in no credit given by HMRC in respect of the directors own tax affairs.

Other employees, ie non-directors, treated as fully paid up despite the actual non-

payment of PAYE/NIC to HMRC.

16.Company Credit Cards Personal Debts, Personal Guarantees

Is the company credit card a company card or a personal card. Consider the Amex

situation. Is there a personal guarantee, generally there is. Barclaycard is part of

Barclays Bank plc and the debt therefore falls under any Barclays guarantee or security

such as a debenture. Be careful before you use a company credit card as an alternative

to the overdraft.

17.Guarantees

Banks Overdraft, Loans, Guarantees, SFLG, Finance Company Termination,Consolidation/Landlords/Creditors

Be aware of the nature of the bank guarantee. Is it limited or unlimited. Is there more

than one such guarantee. Do not confuse the overdraft facility with the actual

overdraft and with the extent of the guarantee, these are probably 3 different

amounts.

Interest runs on a guarantee until the liability is settled either by the company or by the

guarantor, subject to any limit. There may well be additions for legal fees and

administration fees and other costs over and above the guarantee sum.

Does the guarantee cover just the overdraft or does it cover loans, credit card debts,

performance bonds and other such debts. No personal guarantee possible with a small

firm loan guarantee SFLG debt.

With finance companies be careful of termination of the agreement by default or by

action by the Company. Termination removes the companys rights to deal with the

assets or equipment subject to the agreement. Consolidation may well be applicable i.e.

all agreements looked at together. The combination of termination and consolidation can

remove equities, leave matters in the hand of the finance company and may result in

higher liabilities under personal guarantee. If guaranteeing a finance company then

ensure that you have and retain control over its destiny.


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Landlords guarantees normally for the full lease. This is not only rent but also service

charge, insurance and worse still dilapidations. Liability continues for the remainder of

the lease i.e. the remainder of the term or until break date. There may be an obligation

to take an assignment of the lease.

Other creditors are more frequently requesting guarantees e.g. solicitors andaccountants.

A guarantee may well be included in the application for a credit account with a supplier.

18.Disqualification of Directors

Insolvency/Health & Safety/Bankruptcy/Environmental/DTI Disqualification Hotline

Most Disqualification Orders arise as a result of an insolvency i.e. a liquidation or

administrative receivership or administration of a company undertakings between 2 and

15 years disqualification. Leave to act possible with approval of the Court.

Of about 15000 directors whose companies become insolvent each year about 600 are

subject to disqualification proceedings.

Every Insolvency Practitioner in liquidations and administrative receiverships and

administrations must submit a factual report to the DTI Disqualification Unit. The DTI

then decide whether or not to investigate and, in the light of those investigations,

whether to seek a disqualification order. The DTI Disqualification Unit have

considerably increased their resources in terms of staffing and are keen to increase the

number of disqualified directors. They apparently use some method of credit scoring

but will select companies both large and small.

There have also been several disqualifications arising from Health & Safety offences,

the orders made against the person responsible for the companys failure to adhere to

Health & Safety Regulations. The same applies with regard to environmental matters.

Bankrupts cannot be a director of a limited company nor can they be involved directly or

indirectly in the formation or management of a limited company whilst they remain

bankrupt without the leave of the Court.

The DTI Disqualification Hotline has had literally hundreds of calls, the DTI are very

keen to prosecute disqualified directors who contravene the terms of theDisqualification Order, the penalty is a custodial sentence.

19.Registered Office

Company Premises/Accountants or Solicitors/Directors Home Address/Bailiffs,

Sheriffs Officer, Petitions, Winding up Petitions, Credit Rating

The companys trading address is usually the best choice for registered office. If the

premises are vacated, or the company moves address, then remember to change the

registered office. What if the office is shared with other businesses. What do you do

when the company ceases to trade but does not go into liquidation?


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Accountants and solicitors may make their offices available but for a fee. However this

gives considerable responsibility upon the accountant or solicitor to deal with the

companys statutory affairs and with any legal paperwork served on the Company.

Insolvency Practitioners will almost always change the registered office to their own

office address.

The registered office is the address used by those issuing winding up proceedings and by

those wishing to visit the company, for example, enforcement officers, trading

standards, police, local authorities, data protection, consumer credit, etc. The same

problems apply if the director uses his home address particularly if then subject to a

visit by an enforcement officer risk of seizure of personal assets. Addresses other

than the companys trading address can give rise to problems with matters such as credit

ratings.

20.Wrongful Trading

Section 214 of the Insolvency Act 1986 deals with wrongful trading. There have been

few reported cases, but many without prejudice settlements. Wrongful trading actions

could attack bankers, accountants, solicitors, creditors. Be careful always to advise

directors, do not instruct directors. Wrongful trading where a Director allows a

company to continue to trade and incur liabilities when he knew or ought to have

concluded that there was no reasonable prospect that the company would avoid going into

insolvent liquidation then that Director may be required to contribute personally to the

assets of the company. In order to defend a claim, the Director must prove that he took

every step possible to minimise the loss to creditors at the relevant time.

Claims for wrongful trading do not infer any element of fraud; they are simply based onthe fact that the Director acted below the standard expected of a reasonable person

carrying out the same duties with the knowledge skill and experience of that Director.

One major concern for Directors whose businesses fail is the possibility of a claim for

wrongful trading. For companies who have full board meetings and who prepare minutes

of the meetings those Directors may be able to successfully defend a claim for wrongful

trading, if they can show that they gave matters sensible and reasoned consideration.

The commercial decisions of the Directors and any relevant advice given by professionals

with insolvency experience should be carefully minuted with copies of any key paperwork

attached to the minutes. Case law shows that Directors who seek advice about wrongfultrading and related issues help to protect themselves against such a claim-allegations at

the moment about the actions of the Directors of Woolworths.

It is however vitally important that Directors have up to date financial information and

that they are satisfied that it is reasonable to reply upon the information.

Directors must bear in mind their obligations not to enter into transactions at an

undervalue or as a preference and in particular Directors should think very carefully

before making payments or entering into transactions with connected persons or

disposing of assets outside the ordinary course of business without first obtaining

independent expert valuations.


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If a Director fails, despite his best efforts, to persuade his fellow directors that there

is no reasonable prospect of the company avoiding Insolvent Liquidation, then that

Director may consider it appropriate to resign in protest against the decision of the

remainder of the board to continue to trade. The Director would be well advised to seek

independent legal advice concerning that decision and to have his concerns expressed in

writing and noted in the board minutes.

21.Fraudulent Trading

Section 213 of the Insolvency Act 1986. Rare unless one can prove fraud or intend to

defraud. Fraudulent trading is more culpable than wrongful trading and more difficult

for a liquidator to prove. A ruling of fraudulent trading may be made against a director

if it is discovered during the liquidation that the business continued to trade with a

specific intention to defraud creditors or for any other fraudulent purpose.

A director found to be a party to the fraudulent trading will be ordered to make a

financial contribution to the companys assets for the benefit of creditors, the director

may also incur a criminal liability. Actions for fraudulent trading are rare.

22.Preferences

This is from Section 239 of the Insolvency Act 1986. A preference is given when the

company does anything that puts one creditor in a better position than it would

otherwise have been in the event of an insolvent liquidation. The transaction must have

taken place within 6 months of the insolvency of the company (or 2 years where the

preference is given to a connected party).

23.Undervalue and Voidable Transaction

This is from Section 238 of the Insolvency Act 1986. Insolvency Practitioners will look

for these transactions and, if found, will take steps to recover property, assets and

money from the relevant parties. Transactions at an undervalue a company enters into

such a transaction if it makes a gift to another person or enters into a transaction where

the value received is significantly less in money or monies worth than the value given.

The transaction must have occurred within 2 years of the companys winding up and at a

time when the company was insolvent or became insolvent due to the transaction. A

Director may defend this claim if he can show that the transaction was entered into in

good faith and for the purpose of carrying on the business of the company and thatthere were reasonable grounds for believing that the transaction would benefit the

company. Where the transaction is with a connected person then the period is 5 years

and the Director must show that the transaction was not at an undervalue.

24.Landlords

Leases/Assignees/Licence to Occupy/Dilapidations/Service Charges etc / Personal

Guarantees

Is there a lease or is there a licence to occupy there is a difference. Is lease in name

of Company? If a lease, then landlord can levy distress for outstanding rent i.e. seize

goods without warning? Claim is not only for rent but also insurance, service charge etc.


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Landlords may be able to go back to any previous tenants, previous assignees. Licence to

occupy is not a lease, the landlord has fewer powers. Dilapidations can be a very

significant liability and is generally difficult to dispute.

Personal guarantees will cover all the sums due under the terms of the lease i.e. not only

rent now and in the future, but also insurances, service charges and dilapidations.

Often there is service charge and insurance over and above the basic rent. Personal

guarantees relate to the whole lease and the whole debt both now and in the future.

There may be an obligation to take an assignment of the lease for the remainder of the

lease.

Often leases are still in the name if the former sole trader/partner and not in the name

of the company in which case of course, there is, and remains, personal liability.

25 Misfeasance

Often during the winding up of a company Directors become subject to a claim for

misfeasance or breach of duty.

Where it appears that a Director or person involved in the promotion, formation or

management of a company has either misapplied or retained or become accountable for

any money or other property of the Company, or being guilty of any misfeasance or

breach of fiduciary duty or other duty in relation to the Company then the Court can

examine the conduct of that person and order him to repay, restore or account for

money or property with interest or make a contribution to the companys assets by way

of compensation for losses arising from the misfeasance or breach of duty.

Whilst the application can be made to the Court by the Official Receiver, the Liquidator

or any creditor or shareholder, the Court can make such order as it thinks fit, but any

recovery will be available to the general body of creditors.

26 Orderly Wind Down of the Company

Often Directors try to arrange an orderly wind down of the companys business and

affairs in order to avoid a formal Liquidation, in our opinion such a proposal should be

treated with extreme caution. An orderly wind down can be an extremely risky process

without specialised insolvency advice both accounting and legal.

If the Directors embark on a process of paying off certain creditors only to find later

that the company runs out of cash and becomes insolvent then the Directors may have

been found to have made preference payments and may become personally liable for

the debts of the creditors who were not paid off.

27 Other Matters

Health & Safety/Insurance/Interest on Late Payment of Debts/Companies Act

Offences Director and Officer Insurance/Shareholder

Disputes/Invoices/Paperwork/Bad Instructions/Accounts and Annual

Returns/Dishonoured Cheques/Cheque Names/Breach of Trust/ Extortionate Credit


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Terms/Phoenix Company and Re-use of Name/Grants, Loans etc /

Dispositions/Purchase of Own Shares/Private/Non-Clearing Bank Debentures/ DTI

Bankruptcy Hotline/Directors Health Check/Legal Audit

Already mentioned Health & Safety, the possibility of prosecution, fines and

disqualification.

Directors have a responsibility, personally, to insure the assets of a company, if the

company is unable to do so, even at their own cost.

Interest on late payment of debts applies to all businesses. However it is subject to

Statue of Limitations and can therefore go back no more than 6 years. Insolvency

Practitioners could use this to recover additional sums due to a company subject to

insolvency. Directors failure to claim interest on late payment by its customers could

perhaps give rise to a personal liability for failure or breach of duty.

Many Companies Act 2006 offences resulting in a fine or custodial sentence or both.

However little used at the present time.

Is director and officer insurance effective, is it valid, what are the exclusions and

exemptions, will it pay up in the event of a claim.

Shareholder disputes can be minimized perhaps avoided by a shareholder agreement

which spells out how the shareholders have agreed to manage the company. How can

directors effectively manage the company if there is a dispute between the

shareholders, this is a frequent cause of the demise.

Invoices and paperwork often wrong, made out to individuals rather than to companies,

individuals then personally liable, recovery of input VAT perhaps also invalid, expense

perhaps not tax allowable. Poor instructions resulting in personal liabilities, i.e. unclear

whether company or individual.

Non-filing of accounts and annual returns resulting in fines and penalties, perhaps

prosecution, perhaps disqualification.

Personal liability in respect of dishonoured cheques, liability upon the signatory. Also

liable if the name on the cheque is not the correct name of the company.

Breach of trust covers a multitude of sins and problems.

Extortionate credit terms could apply to loans from directors and associates, Insolvency

Practitioners can use these terms to unscramble relationships between debtors and

creditors and perhaps make a creditor into a debtor (Section 244 of the Insolvency Act

1986).

Phoenix company and re-use of name contrary to Section 216 of the Insolvency Act

1986, severe penalties, personal liabilities for debts and criminal liability.

Terms of grants and loans, are they repayable, are they subject to clawback, are they

secured or unsecured, are they subject to personal guarantee.


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Dispositions gift of assets for less than face value or alternatively payments after the

presentation of a winding up petition. In both cases monies can be recovered for the

benefit of creditors generally.

Private and non-clearing bank debentures subject to HMRC attack. Invalid nowadays as

regards fixed charge on book debts. Problems with lack of registration. Do not usehome-made debentures.

DTI keen to identify bankrupts in breach of the Insolvency Act 1986 i.e. acting contrary

to the restrictions upon a bankrupt, DTI keen to prosecute.

Use of a directors healthcheck to identify areas of risk.

Use a legal audit to identify areas of legal risk also to review contracts of employment,

leases, guarantees, terms of conditions of sale, retention of title etc.

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