Director Disqualification Claims
Directors are granted the privilege of being able to trade via a company without having any personal liability for the indebtedness of the underlying business, should matters go wrong. A company is a separate legal entity to both its directors and the shareholders (who own it) and this separation enables the company to trade in the open market more freely without fear of the consequences of failure (in theory).
However, this freedom is open to abuse and accordingly it is important for the UK and its economy that sanctions exist to limit or prevent such abuse by Directors of their positions, whether intentional or not.
A Director owes fiduciary duties to the company and, in certain circumstances, third parties. The Director’s fiduciary duties were codified under Sections 170 – 177 of the Companies Act 2006 and please click here for more information on this topic.
A Director of a failed company can also face difficulties with HMRC in respect of his/her successor companies in terms of VAT security requirements, where unpaid VAT existed within a failed company, and s/he can be subject to a Personal Liability Notice for PAYE/NIC arrears s/he personally contributed to.
A Director (or even a previous Director) of an insolvent company may also be liable to the company (in liquidation) for a breach of his/her fiduciary duties or for various liabilities arising under the Insolvency Act 1986 which are often claimed by the company’s Liquidator.
Public Interest Concerns
Whilst the above remedies seek a fiscal recover from Directors, they do little to prevent the risk to the general public (including creditors other than HMRC).
From a general public interest perspective, Directors liable for misconduct - whether in breach of their duty of trust and confidence (i.e. their fiduciary duties) or in breach of their general public interest duties (e.g. to all creditors, to the public for fraud etc.) – should not be permitted to take up an identical position and continue to act as a director of another company and repeat the same behaviour.
Accordingly the Company Directors Disqualification Act 1986 (as since amended) was brought in to enable the Disqualification of Directors from acting as Directors or in the promotion, formation or management of a company.
Process of Disqualification
Following the commencement of a company’s insolvency the appointed liquidator (be that an Insolvency Practitioner or the Official Receiver) is required to report on the conduct of all directors of the company who were appointed within the three year period prior to the commencement of insolvency.
Upon receipt of this report, the Secretary of State (acting via the Insolvency Service) may commence investigations which may ultimately lead to a Disqualification Order being made against the Director or, should s/he wish to avoid legal costs, a Disqualification Undertaking being offered and accepted (although this then risks a more costly Compensation Order).
Please review our webpage here which goes into greater detail on Director Disqualification. From October 2015, Directors may also face a Compensation Order immediately following the provision of a Disqualification Undertaking or the making of a Disqualification Order.
Period of Disqualification
“Misconduct” and Director Disqualification are not limited to acts of fraud. The legislation is intended to protect the public interest and therefore the fraudulent, negligent, reckless and even, dare we say it, disorganised all face disqualification if they failed to act with commercial probity or in accordance with a Company’s legal requirements.
Where a company has been placed into insolvency proceedings, the period of disqualification is between 2 – 15 years dependent on the severity of the misconduct, with the higher periods preserved for circumstances of fraud or criminal behaviour.
Allegations of Misconduct
The allegations of misconduct are too numerous to list here, but please review our webpage on Director Disqualification here which addresses some of these areas.
However, by far the most common allegation of misconduct is a mistreatment of HMRC (as opposed to other creditors) by not paying HMRC whilst other unsecured or trade creditors are paid. Effectively, the company was using tax receipts to extend its trading life.
These allegations are not always reflective of the truth and do not always reflect the commercial reality of a trading company. However, without specialised legal advice on such allegations they can appear at first glance impregnable and, worse still, any attempt to limit legal costs (by signing a Disqualification Undertaking) will almost certainly leave you liable for a Compensation Order (which may then be difficult to defend and is almost certain to be more costly than the legal costs of defending a Disqualification Claim).
At Francis Wilks & Jones we are specialised in dealing with Director Disqualification claims and have comprehensive experience of defending Directors facing misconduct allegations for discriminating against HMRC or for any other ground of misconduct.
Please call any member of our Tax Disputes Team for your consultation now on 0207 841 0390. Alternatively email us with your query at firstname.lastname@example.org and we will call you back at a time convenient for you