Director Disqualification Grounds - Failure to File Statutory Information & Company Documents

On what grounds can a director be disqualified? A guide to failure to file statutory information and maintaining company documentation and accounting records

This web page explores the different director disqualification offences relating to this particular area.

The court's approach to the filing of company documentation

The courts take the view that the filing of such documents is necessary to enable stakeholders in the company (creditors in particular) to understand the finances of a company to assist them in forming their views as regards their involvement in the company’s affairs.

Failure, for example, to file accounts when a company is in financial difficulty is viewed seriously. As a result, creditors and other third parties (including shareholders) are unable to properly review the financial position of a company and as a result are unaware of financial difficulties faced by the company at a time that they may decide to commit their own resources.

What are the director's statutory obligations?

There are various statutory obligations of directors pursuant to the Companies Act 2006, including the following:

a. Section 113 of the Companies Act 2006 (keeping a register of members);

b. Section 114 of the Companies Act 2006 (making the register to be kept available for inspection);

c. Section 162 of the Companies Act 2006 (keeping a register of directors);

d. Section 165 of the Companies Act 2006 (keeping a register of directors’ residential addresses);

e. Section 167 of the Companies Act 2006 (the duty to notify registrar of changes of directors);

f. Section 275 of the Companies Act 2006 (keeping a register of secretaries);

g. Section 276 of the Companies Act 2006 (the duty to notify registrar of changes of secretaries);

h. Section 386 of the Companies Act 2006 (the duty to keep accounting records);

i. Section 388 of the Companies Act 2006 (knowing where and for how long accounting records to be kept);

j. Section 441 of the Companies Act 2006 (duty to file annual accounts with the Registrar of Companies);

k. Section 854 of the Companies Act 2006 (the duty to make annual returns);

l. Section 860 of the Companies Act 2006 (the duty to register charges);

m. Section 878 of the Companies Act 2006 (the duty to register charges; companies registered in Scotland).

There are numerous other requirements in respect of the need to ensure that the company is registered at Companies House, the various director responsibilities to file financial accounts and audited accounts (where necessary) annually at Companies House, the requirement to keep accounting records for at least 6 years, the requirement to file an annual Company Tax Return (CT600) with Her Majesty’s Customs & Revenue (“HMRC”), the statutory requirement to register for VAT when turnover reaches a certain threshold (although the company may voluntarily register earlier to gain the ability to reclaim VAT paid) and the statutory duty to file returns on employee payments monthly and in respect of tax arising on profits annually.

It is recommended that at all times you seek professional advice to guide you through this minefield of regulations and statutory requirements, the breach of any of which could lead to severe director disqualification penalties.

However, in director disqualification proceedings, these types of allegation are rarely made out in isolation and will usually feature in addition to other director disqualification allegations.

What if a director consistently fails to file company documentation at companies house?

Failure to consistently file company documentation can be a director disqualification offence and lead to a finding of unfitness, particularly where loose “groups” of companies are formed by a single director and which in themselves appear to constitute some form of “phoenix” trading arrangement.

A total failure by a director to file any company documentation is likely to lead to director disqualification order.

Additionally, under Section 453 of the Companies Act 2006 a late filing penalty can be imposed on the company and this will be doubled if not paid within the required period. This duty exists regardless of whether the company is trading or is dormant.

Ultimately, if a company continuously fails to adhere to its statutory duties to prepare and file annual accounts and returns at Companies House, the Registrar of Companies can strike the company off the register. This can have a severe effect on the company and turns its business essentially into a sole trader or partnership operation, with the appropriate personal liability for the owner/partner arising from consequential business dealings.

Under Section 212 of the Insolvency Act 1986, a director can be liable for any loss to a company arising by virtue of his breach of any of his duties (including the responsibility to prepare and file annual accounts).

What if a director has delegated responsibility for this function to external providers who simply failed to do the task?

If responsibility for preparation and filing of company documentation has been delegated to third party providers (commonly a firm of accountants), then so long as the director had no reason to suspect the work would not be done, this should suffice to avoid a director disqualification order.

However, the director will have to show that the third party was suitably qualified and was furnished with all relevant documentation enabling the statutory documentation to be produced.

The director should also supervise their work (either directly or via senior management or internal accounting personnel appointed for this purpose) and ensure that the company’s accountants regularly report to the board on tax returns, payroll matters and accounting matters in accordance with their delegated duties.

What are the general principles relating to the failure to maintain and preserve accounting records?

The courts view these types of allegation seriously for two reasons:

  1. The on-going production of proper accounting records is important for the general health and well-being of any company. Failure to produce proper financial information such as management accounts means that directors cannot fully understand the true financial position of the company.
  2. If a company does enter into liquidation, it is vital that a liquidator can fully understand how the company traded and what transactions were carried out. A failure to maintain records, (or deliver them up on liquidation) can only hinder the job of an appointed Liquidator (or Administrator where relevant).

In modern life, there is little excuse for not maintaining proper accounting records. There are plenty of accounting software packages on the market which can be utilised. Equally, even if hard copy documents do not exist on liquidation, information should still be held on an accounting module on a server somewhere which can then be handed over.

An absence of both hard copies and any electronic records often raises suspicions. Even when directors have employed a bookkeeper to maintain the accounts, the onus is still on the directors to ensure the bookkeeper undertakes the tasks delegated to that person.

I am more focused on sales than finances - why can't I just leave this to someone else?

This is a regular issue which arises when director disqualification claims are made against directors for a failure to maintain accounts, file tax returns or Companies House returns.

All financial accounts filed at Companies House must be approved by directors and signed off. This is not something that should be done lightly as the approval of such accounts (the directors’ signature appears on publicly available documents) is indicative of knowledge of the contents and confirmation that these accounts represent a true and fair view of the company’s financial affairs.

This may be subject to any audit report filed with the accounts, which may be qualified as to whether the accounts are verifiable and/or accurate. However, in the absence of any such audit report, the assumption is that the directors are holding out this financial information to the public at large, creditors and shareholders and thus may have to personally bear any liability for reliance on such information.

Regardless of your role in the company, whilst it is acknowledged that sales are important without due diligence on the accounts the company and its owners may never benefit from any profit generated as a result of proceedings brought in respect of such failings.

What should I do to ensure such problems do not exist?

It is our recommendation that at all times the company should have regular legal and, most importantly, accounting advice extending to the internal form of the accounts, the maintenance of these accounts, the directors duties and the tax affairs of the company.

Accountants can often perform bookkeeping services, deal with tax returns, deal with payroll (and the PAYE/NIC aspects) and deal with the annual financial accounts and audit requirements.

Ideally a company should have a dedicated finance person with responsibility for overseeing this area. This should preferably be someone with accounting experience and ideally they should be a finance director, who can devote their entire role to managing the company’s finances. However, the use of a finance director will not alleviate the other directors from the responsibility to ensure that the finances of the company remain healthy.

What happens if I fall behind on my tax liabilities?

If you find yourself in arrears with HMRC, they are unlikely to wait very long before notifying you. HMRC will seek enforcement of any tax liabilities against a company and is the largest creditor responsible for presenting winding-up petitions.

However, if you realise there are tax arrears, then you need to act immediately. The longer you leave it, and the worse the arrears become due to HMRC, the higher the probability that the company will be subject to winding-up proceedings and the directors will be liable for trading whilst insolvent or trading to the detriment of HMRC (both of which can lead to a director being disqualified).

HMRC will be reasonable if approached at an early enough stage. It is important that all tax arrears are verifiable and reflected in the company’s records (just leaving HMRC to raise assessments, which may fall well below the true liability, is a breach of a director’s fiduciary duties and may undermine any negotiations).

They may agree to enter into a Time To Pay arrangement (“TTP”) to allow the company to repay arrears during the course of trading. However, the directors will have to reach a decision as to whether the company can afford to maintain any such commitments under an agreed TTP – it is a breach of their duties just to negotiate such an arrangement without any belief it can be honoured in the future (as current tax liabilities will have to be simultaneously remitted) and may be seen as just a delaying tactic (which could in the future lead to disqualification claims and other claims for compensation against directors personally).

What can HMRC do against me personally for a failure by the company to adhere to it's statutory duties in respect of tax returns?

HMRC have a great amount of powers under the various Tax and Finance Acts. We would recommend that advice from a tax expert is sought in respect of tax liabilities.

Where a company has unpaid National Insurance contributions, these sums can be sought from directors personally by way of Personal Liability Notices (“PLNs”) issued against them.

HMRC can also require directors of companies which have previously failed to pay security deposits in respect of any registration for VAT sought or required. This is particularly common where the previously failed company had a large indebtedness to HMRC for VAT or PAYE/NIC.

This can be quite a substantial sum (especially for a new start-up business) and a failure to pay any such security sought can result in criminal proceedings against a director personally, resulting in a fine of up to £5,000 per invoice issued in breach of the requirement for a security deposit. Where lots of invoices have been raised this can lead to severe financial problems for directors or even bankruptcy.

HMRC currently (as of October 2013) have an increased mandate not to offer excessively reasonable terms under TTPs and to enforce against non-tax paying companies and their directors more quickly. The Secretary of State in dealing with director disqualification claims also issues a majority of these against directors for mistreatment of HMRC as an unsecured creditor.

What if records are lost or destroyed? Do I suffer personally?

A director will only be liable for matters arising in a company which arise as a result of negligence or misconduct (whether intentional or unintentional). There will always be a defence that events were beyond his/her control, although the Court will generally look on this with a critical eye.

If, for example, a fire breaks out and accounting records are lost, it is essential that records are maintained as regards the fire report, any police report and any other documented reasons for the fire. The same considerations apply to flooding or any other natural event which may destroy company records. If records are stolen (for example on a laptop) it is essential that a police report is filed and the crime reference number taken.

However, company records should normally be preserved by a back-up located elsewhere and a failure to maintain any such back up may be a consideration in any future proceedings against a director.

Similarly with accountants who do not provide the services they were supposed to be providing, either in respect of filing/paying tax returns or preparing/filing returns at Companies House. If they are properly supervised and reports sought on a sufficiently regular basis, this may be sufficient for the Court to accept that a director performed his function of diligence sufficiently well in this respect. However, if a director just “leaves them to it” and blames the accountants when the house of cards topples, his/her failure to communicate and oversee the accountants’ role will be criticised and may lead to a finding of unfitness and/or personal liability.

Contact expert director disqualification solicitors now

Francis Wilks & Jones is the county’s leading firm of director disqualification solicitors. We are genuine experts in what we do with a combined experience of over 50 years in director disqualification claims. Contact one of our friendly expert director disqualification solicitors now for your consultation. 

 

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