Directors of limited companies, both executive and non-executive, have a fiduciary duty and a duty of care to the company and its stakeholders. Directors who fail to meet these legal obligations and subsequently insolvently liquidate or are compulsory liquidated could be made personally liable for their company’s business liabilities, and be fined, prosecuted and or disqualified as a company director.

The statutory and general duties of a company director are set out in the Companies Act 2006; directors must:

• Act in accordance with the company’s rules, as set out in the articles of association;
• Try to make the company a success, using their skills, experience and judgement, for the benefit of its members;
• Make decisions for the benefit of the company, not themselves;
• Exercise reasonable care, skill and diligence;
• Avoid conflicts of interest;
• Not accept benefits from third parties;
• Keep company records and report changes to Companies House and HMRC;
• Make sure the company’s accounts are a ‘true and fair’ reflection of the business’s finances;
• File a company tax return and pay corporation tax;
• Register for self assessment and send a personal self assessment tax return every year.

Anyone can report a company director’s conduct as being ‘unfit’. The Insolvency Service will then decide whether the complaint is serious enough to investigate or may pass onto Companies House or the Serious Fraud Office.

If the Insolvency Service investigates your company or you personally as a director, it will tell you in writing if they think you haven’t followed your legal responsibilities. This will include:

• The actions that have made you unfit to be a director;
• Details of its intention to start the disqualification process;
• How you can respond.

You can then either wait for the case to go to court, where you will have the opportunity to defend yourself, or give The Insolvency Service a ‘disqualification undertaking’, which means you voluntarily disqualify yourself as a director and the legal action ends.

Director misconduct statistics

For the second quarter of 2015 (April-June), 309 UK directors were disqualified for unfit conduct, with an average disqualification period of 6 years. The most common reason for director disqualifications during this period was the unfair treatment of HMRC when compared to other creditors, which goes to show just how important it is to resolve HMRC tax problems at your earliest opportunity. There was also a 4 percent rise in the number of directors receiving the highest tariff disqualification of 10-15 years when compared to the same period last year.

Changes to director conduct reports

The Insolvency Service’s Summer 2015 newsletter has announced changes to the way company director conduct will be reported in insolvent company cases. Starting in 2016, the current director conduct report issued during insolvency proceedings will be replaced by a single online form to be submitted directly to the Secretary of State.

The current director conduct reports used by insolvency practitioners (IPs) will be scrapped to make way for the new streamlined report, which will not ask IPs to confirm whether a director appears to be ‘unfit’. Instead, this will be decided by a ‘rules engine’, which will be created specifically for use with the new system. This will then decide whether a company requires further investigation.

There will also be changes to the length of time insolvency practitioners will have to submit the report. Instead of the 6 months currently allowed, IPs will have to submit the online report within 3 months of a company’s insolvency date.

Protecting yourself from a director disqualification

Director disqualifications might be on the rise, but acting in the proper way in the period leading up to and during the insolvency process can help to avoid this serious form of legal recourse. At Company Debt. we help directors liquidate their insolvent companies in the right way, helping to avoid disqualifications and personal liability for company debts. Get in touch for a free, no-obligation consultation today. Call 0800 074 6757 or use the Live Support on the bottom right hand side of the screen.

Written by: Mike Smith