Monday, 9 March 2015

Director Responsibilities and Duties - Part 3

This is Part 3 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 a directors Breach of Duty, misappropriation of Company Assets and similar unlawful conduct.
Unfitness is governed by section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”).
Although cases are always judged on their own individual facts, certain common threads can be determined from the various decisions made by the Courts when determining unfitness pursuant to Section 6 of the CDDA 1986. This article addresses the most common questions and issues asked in this topic area.
1. What are the consequences if a director acts in his/her own interest and not of the company?
The simple answer is that this constitutes a breach of a director’s duty to act in the “bona fide” interests of the company. This is seen as misconduct and can lead to a finding of unfitness.
Pursuant to Section 172 of the Companies Act 2006 a director has a duty to promote the success of the company. Matters such as removing assets or diminishing the company’s value can breach these important duties.
Even more importantly are sections 172(3) Companies Act 2006 and Section 214 of the Insolvency Act 1986. When the company is insolvent the directors must prioritise the interests of creditors of a company by
  1. Not acting to reduce the value of a company’s net assets;
  2. Not treating creditors differently, not increasing the value of creditors; and
  3. Not continuing to trade where s/he knew or ought to have known that insolvency was unavoidable.
2. What happens if a director deliberately conceals information from other directors?
A director who conceals important information from other directors is likely to be disqualified for unfit conduct.
Any director has a duty;
  1. Not to act for fraudulent purposes
  2. Not to prioritise his/her own interests over that of the company (and declare to other directors any such conflict);
  3. Declare any interest s/he may have in any transactions to which a company becomes involved.
director’s fiduciary duties are also owed to other directors. This is important as in the event any of the other directors become liable as a result of his/her actions, they can seek an order that s/he contributes to any such loss.
3. Can entering in to sham transaction be misconduct by a director?
The simple answer is yes.
A director’s conduct in causing the company to enter into a sham or deceptive transaction can lead to a finding of unfitness although this is dependent on the nature of the transaction and its effectPractically, a director should refuse to get involved in the transactions at all.
4. What happens if a director makes false or misleading statements?
If a director makes false or misleading statements this can lead to a finding of unfitness if they are made to the company, its shareholders, any creditors or any member of the public and any of them suffers detriment as a result.
This also extends to “allowing” such false statements to be made on behalf of a company. Directors need to be aware that they are expected to have incorporated into the company such systems and processes to ensure that they are involved in any decision which will lead them to realise that they could be publishing or providing false statements. This normally extends to the hierarchy of management and reporting within a business.
Examples of such false or misleading statements can be:
  1. Misleading marketing materials published with the aim of attracting customers; or
  2. Allowing the company to make misleading representations to creditors or regulatory authorities.
Similarly, and more seriously, if a director personally makes a false or misleading statement (both internally within the company and externally to members of the public, suppliers, creditors etc) then this can have very serious consequences both in terms of disqualification but also in civil proceedings against them personally (for example the tort of deceit).
5. How do the courts view the misuse of company property?
All directors are viewed as trustees of company property. Any misuse or misappropriation of that company property is highly likely to lead to disqualification.
Transactions which bear no relation to the company’s activities or which favour a specific entity (be that the director(s) personally or an associate) are often closely scrutinised following liquidation of the company. Common examples include;
  1. Payments to family members;
  2. Payments to specific creditors or categories of creditor;
  3. Assets sold at less than their market value;
  4. Assets disposed of once a director is on notice of proceedings against the company;
  5. Payments towards the upkeep or redevelopment of a director’s private residence(see our comments in Part 2 on excessive remuneration and Benefits in Kind);
  6. Using the company bank account as a private bank account. Some directors have been known to use company money to;
  • meet mortgage liabilities;
  • make payments to HMRC for personal tax liabilities;
  • pay or make loans to other companies of which the director has an interest;
  • withdraw cash for personal use;
  • pay for beauty treatments;
  • make payments to former spouses;
  • pay of taxis to take directors’ children to school;
  • pay of school fees; and
  • pay for foreign travel not connected to the business.
All of these sums can be potentially reclaimed (subject to the expiry of any relevant statutory limitation period).
6. What if a director wrongly claims company assets are his own?
If a director wrongly asserts that the assets belong to him rather than the company, this can constitute misconduct and lead to a finding of unfitness.
This can also lead to what are known as misfeasance proceedings – essentially a claim for the loss of any such assets. In these circumstances a director may be liable for not only this loss but also the damage to the company, legal costs and interest.
7. What happens is a director causes a breach of a company’s regulatory requirements? Can this lead to a finding of misconduct?
The answer is Yes.
A director who causes a company to act in breach of its regulatory requirements can find him / herself subject to a finding of misconduct leading to unfitness.
director is the controlling mind of the company and in accordance with his / herfiduciary duties and statutory obligations must ensure that the company acts within the law and all associated regulations, including in respect of any regulated business or authorisation it may be subject to.
This relates to the wider public interest associated to such regulatory matters.
As the director is the last point at which compliance with such regulations can be ensured, if s/he fails to ensure such compliance then s/he is in breach of his /her duties and may be subject to legal proceedings personally (for breach of fiduciary duties or, after an insolvent event, misfeasance).
8. Does the position change is a director relied on external advice at the time?
This can, in some circumstances, assist a director.
If a director acts in accordance with external advice, the court may consider that his/herconduct does not merit disqualification, even if that advice was shown to be wrong.
However, the vital key is that the advice must be independent.
It is also a requirement of Section 173(4) of the Companies Act 2006 that a director must exercise independent judgement and cannot imply defer to professional advice in defence of any decision made.
As such, where a director receives independent external advice (more commonly from an accountant or solicitor) s/he must independently consider it in terms of appropriateness and relevance and any other aspects as the situation requires. Many directors, especially of smaller business will delegate financial tasks to external accountants without properly understanding what they are being told. Whilst understandable when the director is under pressure to run different aspects of the business at any one time, it is not a defence to a claim of misconduct.
9. What if a director’s conduct is found to be dishonest?
If a directors’ conduct is found to be dishonest, then it is highly likely that the person will be subject to a lengthy period of disqualification. A single allegation of dishonesty will suffice for disqualification purposes.
disqualification order can also be made in criminal proceedings by the Court in addition to any fine or order for committal. This will normally relates to allegations of fraud or money laundering/proceeds of crime prosecutions.
If the person had a previously unblemished character, that can be taken into account in terms of mitigation but will not amount to a defence to a claim for disqualification.
There are numerous examples of dishonest conduct ranging from;
  1. The sale of property without the knowledge or consent of the owner;
  2. Depriving individuals or businesses of assets by intentionally misleading them or making false misrepresentations; or
  3. Issuing cheque payments where it is known that no funds exist to satisfy such payments.
Although proceedings for disqualification of a director, or in respect of any proceedings brought against a director personally for compensation on behalf of the company or a creditor, are generally issued in civil courts, allegations of fraud or dishonesty will require a higher level of proof in support. Accordingly such allegations are often not issued lightly as the claimant must reach a higher bar in proving its case.
When considering evidence in response to allegations of dishonesty involving “deals” which have gone wrong, the court will look at a variety of matters including:
  1. Whether the deal in question was simply “too good to be true”.
  2. Whether it was simply implausible for the director to believe that what was happening was as result of shear good fortune or hard work within such a short period of time. The court will consider what a reasonable director in such circumstances would have thought about the deal.
  3. Did the director put any difficult and awkward questions out of his/her mind in pursuit of the deal?
10. What happens if a director leaves signed blank cheques for someone else to fill in?
This can commonly occur in a smaller business where the director may be out the office a lot, for example trying to win new business.
If a director who is required to be away from the office for considerable periods of time signs blank cheques and leaves them to someone else to fill in (and they later bounce), the court may look to see whether the person given the cheques to fill out was capable of dealing with such responsibility.
However, it should be noted that leaving of signed blank cheques in the office for someone else to fill in may in itself, be evidence of improper financial control and thus misconduct which could lead to a finding of unfitness.
However this will largely depend on the practices and procedures implemented within the company to ensure that there are proper safeguards to ensure that this risk is minimised.
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 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.