Recent changes to directors’ conduct within the Small Business, Enterprise and Employment Act 2015 could have important consequences for the directors of insolvent liquidated, or failed companies. Now, even company directors at the helm three years prior to the insolvency could face an investigation into their conduct. Although outlined in the Small Business, Enterprise and Employment Act, the changes will apply to businesses large and small.
Section 107 of the Small Business, Enterprise and Employment Act amends the current Company Directors Disqualification Act. The changes will be of particular interest to the official receivers, administrators, liquidators and insolvency practitioners acting in insolvency cases. They will now have to prepare a report into the conduct of any person who was a director at the time a company enters into insolvency, or during the three years prior to that date.
The changes extend to shadow directors
As well as the previous directors of a company, those operating as ‘shadow directors’ also need to be aware that their conduct could come under scrutiny. A shadow director is a person whose directions are regularly complied with by the employees and the directors of the company. In regard to the new rules, it is essential those involved in the management of a business must be careful not to act as shadow directors if they do not want their conduct to be investigated.
The extension of the directors’ duties under sections 170-177 of the Companies Act to shadow directors means senior managers and office holders need to be aware of the regulatory framework which governs how they act.
Extension of the ‘look-back’ period
The extension of the look-back period from two to three years will undoubtedly have an effect on the workloads of insolvency practitioners. The additional year that will now be investigated could shift the focus onto previous company or shadow directors, so gathering the necessary evidence will take time.
The report on the directors’ conduct must be filled by the insolvency practitioner within three months of the onset of the company insolvency, unless this period is extended. This will significantly add to the insolvency practitioners’ workload, potentially increasing their fees and reducing the return for the creditors.
What are the repercussions for directors?
In real terms, the extension of the look-back period and the inclusion of shadow directors in the misconduct reports is likely to increase the number of punishments handed out. Currently, directors who fall short of the standards expected of them can be disqualified from acting as a director for up to 15 years. They can also be fined and/or imprisoned depending on the severity of the misconduct.
Examples of director misconduct including everything from deliberate dishonesty and failing to keep proper accounts and records to trading while insolvent and making transactions to the detriment of the company.
However, there are also instances where wrongful trading is identified and directors can be required to make good any losses suffered by the company as a result of their actions. In this case, the extension of the look-back period and the inclusion of shadow directors in the misconduct reports could increase the recoveries made for the benefit of the creditors.
Understanding your obligations
These recent changes are another reason why it is so important company directors and office holders understand the consequences of their actions and the regulatory requirements they are bound by. Anyone involved in the running of a business must make sure they act responsibly. That includes managing its finances and commercial status properly and seeking professional advice when it’s required.
If you have concerns about director misconduct or accusations of wrongful trading, or need advice on personal matters arising out of an insolvent company situation, please call 0800 074 6757 or email today.