Understanding the wide range of director duties - including public interest duties - is vital for any director. Failure to do so can lead to unexpected consequences. Our brilliant team is here to help.
Directors are subject to various fiduciary and non-fiduciary duties when acting as a director of a company. Most of these duties are quite specific and relate to decision making and the general management of a company by a director, whether as a shadow, de facto or registered director.
Breach of these duties can lead to personal liability for the director via proceedings brought either by other directors, shareholders, relevant persons, or an office holder following an insolvency event. Proceedings brought against a director in these circumstances might be taken either to prevent them from doing something (by injuncting them), or to provide recompense to the company for losses occurred following a breach of duty.
Breach of public interest duties
All directors are also subject to duties to act in the public interest.
The term ‘public interest’ covers many areas of corporate law, and within the UK public interest proceedings may be brought for a variety of different reasons (see below). The overall theme behind public interest proceedings is to protect the public from risks that individuals or companies pose to the public. For example, if a company or an individual commits financial fraud, then public interest proceedings may be necessary to stop the fraud in order to protect the general public as customers or potential customers of that company, both now and in the future.
Public interest winding up
If a complaint is made about a company by a member of the public to the Secretary of State for Business Energy and Industrial Strategy, then the Insolvency Service may start an investigation into the company to see whether the complaint is founded. They are specifically looking to see whether the company is trading contrary to the public interest. The Secretary of State could then issue a public interest winding up petition.
Who takes these proceedings and investigates?
The Secretary of State for Business Energy and Industrial Strategy via the Insolvency Service will appoint an inspector from the company investigations team to investigate allegations made about the company or individual.
- these inspectors have very wide powers to require cooperation by any relevant person, including the directors, shareholders and employees of the company;
- the inspectors can request information and verbal meetings with relevant parties and if any parties fail to co-operate with an inspector’s demands, then they could be found in contempt of court, the penalties of which are a fine or committal to prison. Companies Investigations are very serious.
The exception to this is that there is no requirement to provide information that has no relevance to the company’s dealings, or which has legal professional privilege protection.
What happens following a report?
If the inspector finds that public interest has been breached, then the Secretary of State may commence legal proceedings against the company to be wound up in the public interest. See: Winding up petitions/orders. A director may also be subject to disqualification for their part in the misconduct.
Directors’ disqualification proceedings
A consequence of a negative finding by inspectors is that a director may be personally prosecuted for disqualification based on misconduct.
All director disqualification proceedings are brought in the public interests for the purpose of protecting the public, providing a deterrent and preventing further misconduct.
The list of what is defined as ‘misconduct’ from a public interest and disqualification prosecution point of view is non-exhaustive. Whilst there are examples of misconduct set out under the company directors’ disqualification legislation, these are deliberately kept wide so that specific misconduct may be alleged where appropriate. For more information see: Common allegations of misconduct.
- non-payment of taxes;
- failure to maintain and/or to file adequate accounting records.
- trading with knowledge of insolvency;
- fraudulent trading;
- Misuse of director’s loan account;
- acting whilst disqualified;
- drawing illegal dividends.
This is only a small sample of the types of misconduct that can be alleged in directors’ disqualification proceedings.
Recent changes in the law mean that if a director is found guilty of misconduct in directors’ disqualification proceedings, they now may also face the risk of being subject to a compensation order. This may mean that they will have to personally provide monetary recompense to the company (for the benefit of the creditors) for the misconduct found.
As can be seen from the above, the consequences of breach of public interest can be severe both for a company and its directors. At Francis Wilks & Jones we have extensive experience in these matters and can advise and assist if you are facing a threat of either public interest winding up proceedings or directors’ disqualification proceedings. If you are concerned about any of these issues or would like further information, contact our friendly team of experts today.