Director Disqualification Grounds - Misappropriation of Company Assets

On what grounds can a director be disqualified? A guide to misappropriation of assets and similar offences

Unfitness is governed by section 6 of the Company Director Disqualification Act 1986. One of the areas relates to director disqualification of directors for misappropriation of company assets and other similar director disqualification offences.

1. What happens if a director acts in his own interest and not of the company?

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 and the making of a director disqualification order.

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?

A director who conceals important information from other directors is likely to be subject to director disqualification for unfit conduct. It is likely to be a director disqualification breach.

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 director disqualification offence, 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 or he/she as it could be a director disqualification offence.

4. What if a director makes false or misleading statements?

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 for a director disqualification breach as it could be seen as a director disqualification offence.

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.

Director disqualification 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 director disqualification but also in civil proceedings against them personally (for example the tort of deceit).

5. How do the courts view the misuse of company property?

Directors are viewed as “trustees” of company property.  Any misuse or misappropriation of that company property is highly likely to lead to director disqualification as it is seen as a key director disqualification offence. 

Transactions which bear no relation to the company’s activities or which favour a specific entity (be that the director(s) personally or an associate) are often closely scrutinised following liquidation of the company. Director disqualification examples include

  • Payments to family members;
  • Payments to specific creditors or categories of creditor;
  • Assets sold at less than their market value;
  • Assets disposed of once a director is on notice of proceedings against the company;
  • Payments towards the upkeep or redevelopment of a director’s private residence (see our comments in Part 2 on excessive remuneration and Benefits in Kind);
  • Using the company bank account as a private bank account.  Some directors have been known to use company money to meet mortgage liabilities, make payments to HMRC for personal tax liabilities, pay or make loans to other companies of which the director has an interest, withdraw cash for personal use, pay for beauty treatments, make payments to former spouses, pay of taxis to take directors’ children to school, pay of school fees and pay for. foreign travel not connected to the business.  All of these sums can be potentially reclaimed (subject to the expiry of any relevant statutory limitation period).

6. What if a director wrongly claims company assets are his own?

If a director wrongly asserts that the assets belong to him rather than the company, this can constitute misconduct and lead to a finding of unfitness. It can be seen as a director disqualification offence by the courts.

This can also lead to misfeasance proceedings for the loss of any such assets, and a director may be liable for not only this loss but also the damage to the company, legal costs and interest.

7. What happens is a director causes a breach of a company’s regulatory requirements?  Can this lead to disqualification?

The answer is Yes

A director who causes a company to act in breach of its regulatory requirements can find him / herself subject to a finding of misconduct leading to unfitness and a director disqualification penalty.

The director is the controlling mind of the company and in accordance with his fiduciary duties and statutory obligations must ensure that the company acts within the law and all associated regulations, including in respect of any regulated business or authorisation it may be subject to.

This relates to the wider public interest associated to such regulatory matters. 

As the director is the last point at which compliance with such regulations can be ensured, if s/he fails to ensure such compliance then he is in breach of his duties and may be subject to legal proceedings personally (for breach of fiduciary duties or, after an insolvent event, misfeasance).

8. What if a director relied on external advice at the time?

This can, in some circumstances, assist a director.  If a director acts in accordance with external advice, the court may consider that his conduct does not merit director disqualification, even if that advice was shown to be wrong.  However, the key is that the advice must be independent.

It is also a requirement of Section 173(4) of the Companies Act 2006 that a director must exercise independent judgment and cannot defer to professional advice in defence of any decision made.  Accordingly, where a director receives independent external advice (for example, from an accountant or solicitor) s/he must independently consider it in terms of appropriateness and relevance and any other aspects as the situation requires. Not to do so can be a director disqualification offence.

9. What happens if a director leaves signed blank cheques for someone else to fill in?

If a director who is required to be away from the office for considerable periods of time signs blank cheques and leaves them to someone else to fill in (and they later bounce), the court may look to see whether the person given the cheques to fill out was capable of dealing with such responsibility.

However, it should be noted that leaving of signed blank cheques in the office for someone else to fill in may in itself, be evidence of improper financial control and thus misconduct which could lead to a director disqualification penalty.  However this will largely depend on the practices and procedures implemented within the company to ensure that there are proper safeguards to ensure that this risk is minimised.

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