May 24

The wound-up company – it’s not all over yet for directors

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

A guide for directors: what you should know before accepting the appointment.

This is article 9 from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths.  The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors.  It is not a substitute for taking specific legal advice on a particular set of circumstances.

9. The wound-up company – it’s not all over yet for directors

An appointment as a director should be regarded as a privilege and not something to be abused.  Unfortunately, there are a minority of directors who do not follow the rules, who acted irresponsibly and even fraudulently at the expense of all of us.

There is a system in place to disqualify individuals from being appointed as a director again.  Recent statistics reveal that over 1000 individuals are disqualified from standing again as a director each year.

Liquidators and administrators are required within six months of their appointment to submit reports about the conduct of the directors of a failed company to the Secretary of State for Business, Energy and Industrial Strategy.  If the Secretary of State believes that the conduct is such that the director is unfit to be involved in the management of a company, then disqualification proceedings may be commenced.

But what amounts to sufficiently poor conduct to start such a process?

Here are five examples:

• Fraudulent trading – where a director has purposely run a business to defraud customers or creditors.
• Misfeasance – where a director has retained or misapplied monies, which really belong to the company.
• Been a party to wrongful trading – in effect allowing the company to trade while insolvent and thereby increasing the loss to creditors.
• Failing to keep up with the paperwork – perhaps not keeping proper accounts or keeping Companies House up-to-date.
• Failing to ensure the company’s tax bill is paid – indeed last year, 43% of all disqualifications involved some element of non-payment of tax.

Importantly, the Secretary of State will not only take into account recent events but any problems which may have been encountered with other connected companies, in effect looking for an unacceptable pattern of conduct.

Once the grounds are made out, disqualification proceedings may be instigated or, alternatively, the Government may accept an undertaking from the director not to stand as a director for an agreed period.  The minimum period of a disqualification is two years and the maximum is 15 years for extreme cases.  The average period of disqualification is just under 6 years.

The Secretary of State is now able to ask the Court to make a compensation order against the individual, requiring the offending director to pay compensation to creditors who have lost out.  Sadly some former directors still continue to have involvement with the management of a company despite the disqualification.

The law still has teeth to hold such former directors to account since such a person can then be the subject of a criminal prosecution and be held personally liable for the debts of a company which he or she may be managing.

A guide for directors: What you should know before accepting the appointment.

Links to other articles in the full series can be found here when they are published:

1. You have been appointed – but what kind of director are you?
2. The top 5 things directors do wrong – including the consequences
3. The Board of Directors cannot agree anything
4. Shareholders – the director’s ultimate master
5. Directors’ loan accounts – the best overdraft you can get?
6. Personal liability – so much for limited liability
7. Becoming a non-executive director – the risk free option?
8. Wrongful trading – the risks facing directors when the company is insolvent
9. The wound-up company – it’s not all over yet for directors
10. The phoenix that rises from the ashes – the company which refuses to die

Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide.   Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666. Raworths is based in Harrogate, North Yorkshire.

Published on 14 May 2024