Directors' Duties - What Constitutes Misconduct Part 3
This is Part 3 of a series of booklets considering the general question of Directors’ duties and responsibilities and in particular, what conduct can ultimately constitute a finding of “unfitness” and possible disqualification as acting as a director.
This booklet deals with a directors’ Breach of Duty, misappropriation of Company Assets and similar unlawful conduct.
Unfitness is governed by section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”).
This series of booklets is intended to guide you through the general standard of behaviour expected by the Courts on either: (i) an objective basis – i.e. the standard expected of directors generally; and (ii) a subjective basis – i.e. the higher standard expected of directors having regard to their qualifications, skills and experience.
Although cases are always judged on their own individual facts, certain common threads can be determined from the various decisions made by the Courts when determining unfitness pursuant to Section 6 of the CDDA 1986.
1. What happens if a director acts in his own interest and not of the company? Will this result in him/her being banned as acting as a director?
This is a breach of a director’s duty to act in the “bona fide” interests of the company. This is misconduct and can lead to a finding of unfitness.
Under Section 172 of the Companies Act 2006 a director has a duty to promote the success of the company. Obviously removing assets or diminishing the company’s value can breach these duties.
Even more importantly, under Section 172(3) Companies Act 2006 and Section 214 of the Insolvency Act 1986, when the company is insolvent the directors must prioritise the interests of creditors of a company by not acting to reduce the value of a company’s net assets, not treating creditors differently, not increasing the value of creditors and not continuing to trade where s/he knew or ought to have known that insolvency was unavoidable.
2. What happens if a director conceals information? Does this lead to the making of a director disqualification order?
A director who conceals important information from other directors is likely to be disqualified for unfit conduct.
A director has a duty not to act for fraudulent purpose, not to prioritise his own interests over that of the company (and declare to other directors any such conflict) and also declare any interest he may have in any transactions to which a company becomes involved.
A director’s fiduciary duties are also owed to other directors and in the event any of the other directors become liable as a result of his/her actions, they can seek an order that s/he contributes to any such loss.
3. Is entering in to sham transaction misconduct by a director?
A director’s conduct in causing the company to enter into a sham or deceptive transaction may also contribute to a finding of unfitness, dependent on the nature of the transaction and the effect. In these circumstances, a director should refuse to get involved in the transactions at all.
4. What if a director makes false or misleading statements? Can this lead to director disqualification?
If a director makes false or misleading statements and as a result of these the company, its shareholders, any creditors or any member of the public suffers detriment whatsoever, this can lead to a finding of unfitness.
This also extends to “allowing” such false statements to be made on behalf of a company and directors are expected to have incorporated into the company such systems and processes so as to ensure that they are involved in any such decision to publish or provide such false statements. This usually extends to the hierarchy of management and reporting within a business.
Examples of such false or misleading statements can be misleading marketing materials published with the aim of attracting customers or allowing the company to make misleading representations to creditors or regulatory authorities.
Similarly, and more seriously, if a director personally makes a false or misleading statement (both internally within the company and externally to members of the public, suppliers, creditors etc) then this can have very serious consequences both in terms of disqualification but also in civil proceedings against them personally (for example the tort of deceit).
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 DISQUALIFICATION TEAM ON 020 7841 0390
5. How do the courts view the misuse of company property? What are my director responsibilities?
6. What if a director wrongly claims company assets are his own? Does this lead to an automatic ban as acting as a director?
7. What happens is a director causes a breach of a company’s regulatory requirements? Can this lead to director disqualification?
8. What if a director relied on external advice at the time? Is this a reason to avoid being banned as a director?
9. What if my conduct is found to be dishonest?Does this lead to an automatic ban as acting as a director?
10. What happens if a director leaves signed blank cheques for someone else to fill in? Does this lead to director disqualification?
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Should you require assistance with any concerns which relate to Director Disqualification proceedings or your personal risk generally as a director, then please contact Francis Wilks and Jones and we will be more than happy to discuss your concerns.
Each case we deal with is unique to the individual concerned. Our team of experts can provide you with the tailored expert advice you need.
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