Ten Risks that Directors Face

Here you can download our 10 Risks That Directors Face booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

Directors of Limited Companies are under increasing pressure to be transparent and accountable for their actions. Recent legislation increases the personal risks that Directors face both whilst a company trades and, more commonly, where it is placed into some type of insolvency proceeding.

Quite often Companies fail because of new technologies, a change in demand, a change in fashions and trends, changes in regulations and laws or because of financial mismanagement. These factors are often beyond a Director’s control, particularly where s/he is one of several Directors, some of whom may have different roles and responsibilities or more experience.

However, when it comes to accountability, the legal position rarely distinguishes between these subjective considerations and, generally, Directors are judged according to a high threshold of expectation, which may comprise a responsibility for matters which, in reality, they may have a limited practical ability to control. our booklets entitled “Breaches of a Director’s Fiduciary Duties” and “Directors in the Twilight Zone” address how a Director should act generally and in circumstances where his/her conduct may be examined more closely at a later date.

Below we present some of the main risks that a Director faces and we make some suggestions how to best mitigate such risks.

1. Prosecution For Failing to File Accounts Or Returns

Under the Companies Act 2006 all Directors of a Company can be subject to criminal proceedings for failing to file Annual Financial Accounts and/or Annual Returns in accordance with the statutory deadlines. The requirements in respect of Annual Returns have changed slightly as a result of recent changes in the law, but the threat of prosecution remains.

These prosecutions are increasingly common and often lead to fines which can be quite serious for a small Company.

Whilst the fee for filing such accounts and returns is approximately £25, a failure to comply with this duty can land a Director with a personal liability of several thousand pounds in the Criminal Courts.

This will also mean that the Director (or Directors) will have a criminal record as a result of such proceedings and this may jeopardise the Company’s business, either directly in terms of the sector it engages in, or indirectly in terms of credit referencing etc.

2. Disqualification For Consecutive Prosecutions

As described by the last point, a Director can be prosecuted in the Criminal Courts for a failure to deal with Companies House filings.

If a Director does this in consecutive years, and is prosecuted on more than one occasion, then when bringing such proceedings the Registrar of Companies may also cite the previous convictions in support of the charge and may additionally seek the Director’s disqualification for a period of between 1 to 5 years.

The Disqualification Order will not normally be made at the first hearing and the Director will have an opportunity to attend or be represented at a further hearing. However, if the Magistrates decide that disqualification is appropriate, then this may in some circumstances commence immediately.

A failure to immediately resign as a Director and cease acting as a Director may constitute a further criminal offence with far more serious penalties.

The effect of disqualification will have a serious effect on the ability of a Director to maintain his/her livelihood, especially if the current Company (including connected Companies) are his/her sole source of income. The disqualification also prevents a Director from participating in any way in the Company and often Directors who seek to manage a Company as an “employee” can be subject to the criminal consequences of breaching a Disqualification Order (which are indictable and far more serious than the original offence).

Please see our booklet entitled “Prosecutions by Companies House” for more information on this subject.

3. Guarantee Liabilities

It is not uncommon for a trading Company, dependant on its business, to require financial support to promote growth into new areas or to expand its current business.

This can come as funding in various forms, including straightforward loans, more complicated banking facilities and/or loan facility agreements, which may be secured against the assets of the Company.

Sometimes, dependent on the nature of a Company’s business, it may be appropriate to seek a bank facility which enables a drawdown of funds between raising an invoice and getting paid. This type of finance is known a factoring or invoice discounting (dependent on the services provided by the financier).

Regardless of the type of finance sought, many Companies will have an uncertain credit record or no fixed assets and therefore this presents a risk to the finance provider. Accordingly, Personal Guarantees will often be sought from Directors and sometimes even security over their own homes or any other personal property assets.

The effectiveness of these guarantees will depend on the circumstances they were entered into, but what cannot be ignored is that following the execution of any such guarantee then the prosperity of the Directors is inextricably tied up with that of the Company.

If the Company fails or falls on hard times, then inevitably the bank may call in its security and thereafter the Personal Guarantee, which could result in a Director losing their home and even, in a worst case scenario, being declared Bankrupt.

4. Unfair Prejudice Claims

Under Section 994 of the Companies Act 2006 a Shareholder can bring a claim against a co-Shareholder for any loss (i.e. prejudice) they have suffered as a result of the other Shareholder’s actions.

This is commonly used in small to medium-sized Companies where the Shareholders and Directors are similar groups of individual and where an imbalance develops, beyond what the original parties’ “reasonable expectations” were.

An Unfair Prejudice claim is quite easily confused with a Company claim by Shareholders (usually referred to as a Derivative Claim – see below) and it must be remembered that an Unfair Prejudice claim is appropriate for claims for losses by a Shareholder or specific group of Shareholders. it cannot be used as a ground to commence proceedings brought for losses to the Company as a whole, which is a matter for the Company to deal with via its appointed Directors.

Please see our booklet entitled “How to Protect Minority Shareholder Interests” which provides more detail on these remedies in relation to Minority Shareholders.

it is not uncommon for a Shareholder to petition for the just and equitable Winding-Up of a Company and for this petition to be accompanied by an Unfair Prejudice Petition. in these circumstances, it is possible that the Court may order the Company to buy that Shareholder’s shares (if they agree), or alternatively Order that one Shareholder (or group of Shareholders) buys the others out.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. Statutory Derivative Claims

6. Liability For Breaches of Fiduciary Duties / Misfeasance

7. Liabilities Arising In Insolvency

8. Director Disqualification

9. Personal Liability Notices

10. Compensation Orders

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.