Directors Duties and Responsibilities

Focus on directors duties and responsibilities

Directors of limited companies can generally rely on limited liability status to protect them from personal liability issues. The law is designed to protect directors as well as creditors so it does apply sanctions if directors overstep the mark and disregard their responsibilities.

Once a company is in a position where the directors cannot reasonably expect the business to survive and it is or will be,insolvent the directors must take action.

If not they not only risk the company’s position getting worse but they also run the risk of personal liability issues in relation to the Wrongful Trading provisions of the Insolvency Act 1986, not to mention the prospect of committing any offences under criminal law. In addition the directors conduct will generally be investigated and reported upon (depending on the proceedings) and disqualification proceedings could be commenced against them.

It is therefore vital that directors seek advice early. This does not narrow the directors options, it actually opens them up. Sometimes we hear a client suggest they delayed seeking advice because they were worried that they may be told they are insolvent and then they would be in trouble.

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First of all a company is legally defined as “insolvent” when it cannot meet it liabilities as and when they fall due and/or its liabilities exceed its assets. Taken together with the fact that directors have to maintain accounting records to show the financial position of the company at any time it is clear that it is never an excuse for someone to say they didn’t realise the company was insolvent because they were not told by someone else. The director is deemed to know.

Secondly, directors get into more trouble because of the delays in seeking advice. They do not get into trouble just because the company is insolvent. Insolvency is a natural part of the UK economic cycle of business; they are expected and they are accommodated. The legal system is designed to help businesses to recover by various “business rescue” schemes. Directors who don’t find out about these procedures could miss out on vital protection.

There are various things a director can do whilst trying to resolve the financial problems of the business. We can advise the directors accordingly so that they do things “properly” and in an orderly manner.

Most directors facing the prospect of legal action by the Secretary of State for Business, Innovation & Skills soon realise that as well as defending their position they have another major headache to worry about and that is COSTS! It can be extremely expensive to legally defend against such actions. We can assist in resolving these issues and put you back in control of your future.

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Disqualification of directors

Potential causes of disqualification include:

allowing the company to trade while insolvent
not keeping proper accounting records
failing to prepare and file accounts
not sending returns to Companies House
failing to send tax returns and pay tax
conduct that deprives creditors of assets
fraud

In some cases, you could also face criminal charges, fines or being made personally liable for the company’s debts.

Disqualification proceedings are handled by the courts or the Insolvency Service. If they find against you, you’ll be disqualified for between 2 and 15 years.

While disqualified, you must not:

be a director of any company
act like a director – even without being formally appointed
influence the running of a company through the directors
be involved in the formation of a new company
act in a way that promotes a company

Ignoring a disqualification order is a criminal offence. You could be fined and sent to prison for up to two years.

Even if you have not been disqualified, some rules may prevent you from becoming a director of another company. The rules prohibit directors of insolvent companies from becoming the director of another company with the same or a similar name (known as a ‘prohibited name’) for 12 months. The rules also prohibit directors of insolvent companies from acting in a way to promote, form or manage a company with a prohibited name.