Common Allegations of Misconduct
Directors of companies in the UK benefit from a quasi-immunity from any personal liability for the debts of their businesses. A limited company is a separate legal entity from the person whose business it is, and anyone owed debts by this business are owed debts by the company – not its owners or directors.
The reason for the existence of a company is to enable entrepreneurs to engage in business free of the risk that would otherwise come, in the event such a business failed and debts accrued (which, outside of a limited company or limited liability partnership, would be debts owed by the business owner).
Limited Liability Partnerships operate in a similar fashion, with the same limited liability protection whilst being run and owned by its partners, who jointly manage its affairs.
Abuse of Limited Liability
However, the benefit offered by this limited liability status is open to abuse – most obviously by individuals setting-up companies and committing frauds akin to theft, miss selling and generally operating without any concern for the need to ensure that the economic marketplace is a fair trading environment (which would act as a disincentive for investment in the UK).
Common ways to combat such abuse is to seek personal guarantees or a security over either the company’s assets or a director’s personal assets (most commonly his/her home).
However, outside of these commercial solutions, the only remaining option for the state to disqualify a director is via Director Disqualification proceedings or, in the worst case scenario, by prosecution of the director (often resulting in committal to prison).
Types of Misconduct
A Director Disqualification claim will only be brought where a company has been placed into an insolvency process and there is evidence of misconduct by one or more of its directors.
Directors can be disqualified in other types of proceedings, including where s/he has been declared bankrupt, where the company has been wound-up in the public interest, in criminal proceedings (including those brought under the Companies Acts), where there is a failure to comply with Companies House filing requirements and in circumstances of fraud. However, we do not propose to address those here.
Where a company insolvency has occurred, a director’s misconduct need not be criminal or fraudulent behaviour, and can extend to the equal manner of the company’s treatment of its unsecured records or even the adequacy of the internal books and records of the company.
As a Director Disqualification claim is issued purely to protect the public (rather than punish the wrongdoer) there is no consideration of any contract or trust arrangement, or indeed any loss suffered, but it exists purely on policy grounds to ensure the integrity of the business in the UK and prevent such behaviour being repeated.
There are many types of misconduct meriting disqualification, although we address some of the most prevalent and common areas below:
- Non-payment of HMRC
- Acting whilst disqualified
- Abuse of Directors Loan account
- Acting contrary to the Public Interest
- Drawing Illegal Dividends
- Acting in breaches of Financial Services Regulations
The above list is not exhaustive and there is an unending list of types of circumstance that may lead to a director being considered unfit and an allegation of misconduct being made by the Insolvency Service.
At Francis Wilks & Jones we deal with Director disqualification matters, both pre-insolvency and also pre-issue of disqualification, post issue or even after having been disqualified (where leave may be sought).
Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.