Monday, 16 March 2015

Director Responsibilities and Duties - Part 4

This is Part 4 of a series of articles considering the general question of Directors’ duties and responsibilities and in particular, what conduct can ultimately constitute a finding of “unfitness” and possible disqualification as acting as a director.
This article deals with failure to file statutory information, including tax returns and Companies House documentation, and the failure to maintain or preserve company documentation and accounting records.
Unfitness is governed by section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”).
1. The Court’s approach to the filing of company documentation
The courts take the view that the filing of such documents is absolutely necessary. This is to enable stakeholders in the company (creditors in particular) to understand the financial position of a company to assist them in deciding whether to get involved or not with the company itself.
For example, failure to file accounts when a company is in financial difficulty is viewed seriously by the courtsThis is because creditors and other third parties (including shareholders) will not be able to properly review and understand the financial position of the company and as a result may be unaware of financial difficulties faced by the company at a time that they may decide to commit their own resources either by way of trading with the company or investing in it as a shareholder.
2. What are a director’s statutory obligations on the filing of statutory information?
There are numerous statutory obligations of directors pursuant to the Companies Act 2006, including the following:-
a. Section 113 (keeping a register of members);
b. Section 114 (making the register to be kept available for inspection);
c. Section 162 (keeping a register of directors);
d. Section 165 (keeping a register of directors’ residential addresses);
e. Section 167 (the duty to notify registrar of changes of directors);
f. Section 275 (keeping a register of secretaries);
g. Section 276 (the duty to notify registrar of changes of secretaries);
h. Section 386 (the duty to keep accounting records);
i. Section 388 (knowing where and for how long accounting records to be kept);
j. Section 441 (duty to file annual accounts with the Registrar of Companies);
k. Section 854 (the duty to make annual returns);
l. Section 860 (the duty to register charges);
m. Section 878 (the duty to register charges; companies registered in Scotland).
In addition to the above, there are numerous other requirements to be adhered to such as;
The need by a director to ensure that the company is registered at Companies House
That the various director responsibilities to file financial accounts and audited accounts (where necessary) annually at Companies House are undertaken;
That the requirement to keep accounting records for at least 6 years are undertaken;
That the requirement to file an annual Company Tax Return (CT600) with Her Majesty’s Customs & Revenue (“HMRC”) is fulfilled;
That the statutory requirement to register for VAT when turnover reaches a certain threshold (although the company may voluntarily register earlier to gain the ability to reclaim VAT paid); and
The statutory duty to file returns on employee payments monthly and in respect of tax arising on profits annually.
The obligations on directors are onerous.
It is recommended that at all times you seek professional advice to guide you through this minefield of regulations and statutory requirements, the breach of any of which could lead to severe consequences.
However, in disqualification proceedings, these types of allegation are rarely made out in isolation and will usually feature in addition to other allegations .
3. What happens if a director consistently fails to file company documentationat Companies House?
In these circumstances, the following may happen:
  1. Failure to consistently file company documentation can lead to a finding of unfitness, particularly where loose “groups” of companies are formed by a singledirector and which in themselves appear to constitute some form of “phoenix” trading arrangement.
  2. A total failure by a director to file any company documentation is likely to lead to disqualification.
  3. Under Section 453 of the Companies Act 2006 a late filing penalty can be imposed on the company and this will be doubled if not paid within the required period. This duty exists regardless of whether the company is trading or is dormant.
  4. Ultimately, if a company continuously fails to adhere to its statutory duties to prepare and file annual accounts and returns at Companies House, the Registrar of Companies can strike the company off the register. This can have a severe effect on the company and turns its business essentially into a sole trader or partnership operation, with the appropriate personal liability for the owner/partner arising from consequential business dealings.
  5. Finally, under Section 212 of the Insolvency Act 1986, a director can be liable for any loss to a company arising by virtue of his breach of any of his duties (including the responsibility to prepare and file annual accounts).
4. What if a director has delegated responsibility for this function to external providers who simply failed to do the task?
This is a commonly asked questions by directors, especially of smaller businesses when things go wrong.
If responsibility for preparation and filing of company documentation has been delegated to third party providers (commonly a firm of accountants), then so long as the director had no reason to suspect the work would not be done, this should suffice to avoid disqualification.
However, the director will have to show that the third party was suitably qualified and was furnished with all relevant documentation enabling the statutory documentation to be produced. Ideally the director should check that the accountant is qualified and registered with the appropriate professional body. The same goes for solicitors and other third party professionals.
The director should also supervise their work (either directly or via senior management or internal accounting personnel appointed for this purpose) and ensure for example that the company’s accountants regularly report to the board on tax returns, payroll matters and accounting matters in accordance with their delegated duties.
The golden rule is that simply delegating tasks and then failing to take any interest or supervision in what is being done is not acceptable.
5. What are the general principles relating to the failure to maintain and preserve accounting records?
The courts view these types of allegation seriously for two reasons:
The on-going production of proper accounting records is important for the general health and well-being of any company. Failure to produce proper financial information such as management accounts means that directors cannot fully understand the true financial position of the company – something vital for its wellbeing.
If a company does later enter into liquidation, it is vital that a liquidator can fully understand how the company traded and what transactions were carried out. A failure to maintain records, (or deliver them up on liquidation) can only hinder the job of an appointed Liquidator (or Administrator where relevant).
In modern life, however busy a director maybe, the courts take the view that there is little excuse for not maintaining proper accounting records.
There are plenty of accounting software packages on the market which can be utilised. Equally, even if hard copy documents do not exist on liquidation, information should still be held on an accounting module on a server somewhere which can then be handed over.
An absence of both hard copies and any electronic records often raises suspicions(even if unfounded). Even when directors have employed a bookkeeper to maintain the accounts, the onus is still on the directors to ensure the bookkeeper undertakes the tasks delegated to that person.
6. What if a director is more focused on sales than finances – how do the courts approach this in terms of misconduct?
This is a regular issue which arises when claims are made against directors for a failure to maintain accounts, file tax returns or Companies House returns.
All financial accounts filed at Companies House must be approved by directors and signed off. This is not something that should be done lightly as the approval of such accounts (the directors’ signature appears on publicly available documents) is indicative of a knowledge of the contents and confirmation that these accounts represent a true and fair view of the company’s financial affairs.
All too common busy directors will sign off financial documents prepared by accountants or a fiancé director without fully understanding what they mean. Over reliance or misplaced trust is no defence to allegations of misconduct.
Accounts may be subject to any audit report filed with the accounts, which may be qualified as to whether the accounts are verifiable and/or accurate. However, in the absence of any such audit report, the assumption is that the directors are holding out this financial information to the public at large, creditors and shareholders and thus may have to personally bear any liability for reliance on such information.
Regardless of a director’s role in company, whilst it is acknowledged that sales are important it is also true that without due diligence on the accounts the company and its owners may never benefit from any profit generated as a result of proceedings brought in respect of such failings.
7. What should a director do to ensure such problems do not exist?
It is our recommendation that at all times the company should have regular legal and, most importantly, proper accounting advice extending to the internal form of the accounts, the maintenance of these accounts, the directors duties and the tax affairs of the company.
Accountants can often perform bookkeeping services, deal with tax returns, deal with payroll (and the PAYE/NIC aspects) and deal with the annual financial accounts and audit requirements.
Ideally a company should have a dedicated finance person with responsibility for overseeing this area. This should preferably be someone with accounting experience and ideally they should be a finance director, who can devote their entire role to managing the company’s finances. However, the use of a finance director will not alleviate the other directors from the responsibility to ensure that the finances of the company remain healthy.
8. What happens if a company falls behind on my tax liabilities? Can this affect a director personally?
If a director find him / herself in arrears with HMRC, the Revenue are unlikely to wait very long before notifying the director of this. HMRC will seek enforcement of any tax liabilities against a company and is the largest creditor responsible for presenting winding-up petitions.
However, if a director realises that there are tax arrears, then he/she need to act immediately.
The longer the issue is left and the worse the arrears become due to HMRC, the higher the probability that the company will be subject to winding-up proceedings and the directors could easily find themselves liable for other offences such as trading whilst insolvent or trading to the detriment of HMRC (both of which can lead to a director being disqualified).
Despite adverse publicity, HMRC can be reasonable if approached at an early enough stage. After all, they are interested in recovering tax, even if it might take longer than normal.
It is important that all tax arrears are verifiable and reflected in the company’s records. Simply leaving HMRC to raise assessments, which may fall well below the true liability, is a breach of a director’s fiduciary duties and may undermine any future negotiations.
HMRC may agree to enter into a Time To Pay arrangement (“TTP”) to allow the company to repay arrears during the course of trading. However, the directors will have to reach a decision as to whether the company can afford to maintain any such commitments under an agreed TTP – it is a breach of their duties just to negotiate such an arrangement without any belief it can be honoured in the future (as current tax liabilities will have to be simultaneously remitted) and may be seen as just a delaying tactic (which could in the future lead to disqualification claims and other claims for compensation against directors personally).
9. What can HMRC do against directors personally for a failure by the company to adhere to its statutory duties in respect of tax returns?
HMRC have a great amount of powers under the various Tax and Finance Acts. We would recommend that advice from a tax expert is sought in respect of tax liabilities at an early stage.
For example, where a company has unpaid National Insurance contributions, these sums can be sought from directors or managers of a business personally by way of Personal Liability Notices (“PLNs”) issued against them.
HMRC can also require directors of companies which have previously failed to pay security deposits in respect of any registration for VAT sought or required. This is particularly common where the previously failed company had a large indebtedness to HMRC for VAT or PAYE/NIC. These can be quite a substantial sums (especially for a new start-up business) and a failure to pay any such security sought can result in criminal proceedings against a director personally, resulting in a fine of up to £5,000 per invoice issued in breach of the requirement for a security deposit. Where lots of invoices have been raised this can lead to severe financial problems for directors or event bankruptcy.
As of October 2013 HMRC have an increased mandate not to offer excessively reasonable terms under TTPs and to enforce against non-tax paying companies and their directors more quickly. The Secretary of State in dealing with disqualification claims also issues a majority of these against directors for mistreatment of HMRC as an unsecured creditor.
If a director does find him /herself in difficulties with regard to paying tax, the key is to take early advice. Simply buying ones head in the sand can lead to the company being wound up and may also lead to personal liability for repayment as well as disqualification.
10. What if records are lost or destroyed? Can directors suffer personally as a result of this?
A director will only be liable for matters arising in a company which arise as a result of negligence or misconduct (whether intentional or unintentional). There will always be a defence that events were beyond his/her control, although the Court will generally look on this with a critical eye.
If, for example, a fire breaks out and accounting records are lost, it is essential that records are maintained as regards the fire report, any police report and any other documented reasons for the fire. The same considerations apply to flooding or any other natural event which may destroy company records. If records are stolen (for example on a laptop) it is essential that a police report is filed and the crime reference number taken.
However, company records should normally be preserved by a back-up located elsewhere and a failure to maintain any such back up may be a consideration in any future proceedings against a director.
The existence of cloud based technology makes it increasingly difficult for directors to argue that it simply wasn’t possible to properly back up accounting records.
The same applies to accountants who do not provide the services they were supposed to be providing, either in respect of filing/paying tax returns or preparing/filing returns at Companies House.
If they are properly supervised and reports sought on a sufficiently regular basis, this may be sufficient for the Court to accept that a director performed his/her function of diligence sufficiently well in this respect. However, if a director just “leaves them to it” and blames the accountants when the house of cards topples, his/her failure to communicate and oversee the accountants’ role will be criticised and may lead to a finding of unfitness and/or personal liability.
Should you require assistance with any concerns which relate to your Director Disqualification proceedings or your personal risk generally as a director, then please contact Francis Wilks and Jones LLP and we will be more than happy to discuss your concerns on an initial free no obligation basis.
Each case we deal with is unique to the individual concerned. Our team of experts can provide you with the tailored expert advice you need.
Call us now on 0207 841 0390 for your free consultation.