Technology &
Internet Law
Briefing Note - Avoiding Directors' Disqualification Proceedings -
Company Directors Disqualification Act 1986
Directors often take on the leadership of a company and the concomitant
directors' responsibilities without fully considering or realising the extent of the duties and liabilities required of company directors under the Companies Act 1985 UK.
An appointment as a director of a company that may be struggling well can be extremely onerous - and a costly mistake for both one's reputation and finances.
Pointers
We have taken a moment to suggest some practicalities to avoid disqualification proceedings by the Department of Trade and Industry...
- Do not hesitate to say no when you are invited to be a director. Should you not completely trust the other directors - and in SMEs the shareholders - do not take the position until any concerns are satisfied, to avoid assertions of suspect conduct arising from passing the buck from other directors or company officers.
Documentation
- No legal documentation is going to protect you completely. If you do not know people but have no reason to distrust them, it may be appropriate to go into business with them but document everyone’s responsibility to avoid misunderstandings. A contemporaneous note of a meeting or important discussion, whether by email or left in the filing cabinet may be a career and reputation saving document. Never delegate responsibility for your Director’s duties (see below).
- Take directors' responsibilities seriously. Novices may even consider reading a nutshell guide.
Keep Informed
- Make it your business to be informed on all financial matters at all times. Diligence is key. Insist on seeing management accounts regularly, learn what they mean or at least have a qualified professional either advise or interpret them. Seeking training may be appropriate depending on the sophistication of the books or the industry the company is involved. Learn to spot trends.
- Liability does not stop with an appointed financial officer. Make sure you attend regular meetings with your auditors and ask them to confirm anything that concerns them in writing.
- Remember that auditors are appointed simply to prepare the accounts and not to advise you on their implications or anything that is untoward. Carefully check the letter of instruction to the auditors, make sure that you understand the limitations of the audit and find out what it is necessary to do in order to obtain full and proper advice on the financial circumstances of the company so that you are properly informed.
- If your advisors or auditors tell you that anything is not as it should be, no matter how seemingly unimportant it is, probe deeper and ask for specific advice.
Proper Records
- Make sure you keep proper records of all actions you take as a Director. Keep records of all emails and memos (to and from you) regarding key aspects of your duties as a Director, particularly keeping yourself informed about financial matters and querying anything you are unhappy with. Do not treat this as a “backside protection” exercise along and undertake it thoroughly and conscientiously so that you are properly informed.
- Do not sign accounts unless you understand them or have been fully explained to you by somebody with suitable experience. Ensure that you are satisfied that they do not show any irregularities or anything which would cause concern. If you are not a financial director, question why the financial director does not sign off the accounts. The financial director should take responsibility for signing the accounts. Advice from a co-director is difficult to rely on, as they may innocently or otherwise mislead you or simply not know enough to advise you properly.
Financial Difficulties and Wrongful Trading
- If the company is getting into financial difficulties, take advice at an early stage to avoid wrongful trading (trading while the company is insolvent which exposes you to personal liability) and make sure that you do so on a regular basis until the company is out of danger. You should normally rely on advice of the company’s auditors at this stage.
- Directors have an inalienable and non-delegatable duty to act in the best interests of the company. When the company is insolvent the responsibility is owed to the creditors.
- Ignorance of financial affairs of the company will not protect you in the event of disqualification proceedings being brought under the Company Directors Disqualification Act 1986.
- If all else fails, resign. If you have taken up a directorship and are uncomfortable with the decisions of your fellow members of the board and are not able to influence them into taking the right action to behave appropriately, your only recourse is to resign. And you must. Appreciate that you have no further ability to influence decisions, however there are circumstances in which simply resigning may either be inappropriate or too late. You should consider taking advice before resigning if the seriousness of the circumstances demand. Act promptly. Bear in mind your inability to influence day to day decisions once you resign as a director – this is especially important to directors who are also shareholders. We take the view that the expectation that one simply resign in circumstances where one is also a shareholder is somewhat idealistic but nevertheless something which must seriously be considered if you are to avoid disqualification proceedings. The Secretary of State for Trade and Industry takes a very robust view of statutory and general law directors' duties who do not resign when they become aware of matters which should cause concern.
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