NEWS // What's The Worst That Can Happen?
For most company directors the worst thing that can happen is their company is liquidated. However, often liquidation is not the end. While the company which traded the business comes to an end, the business can continue in a new company - the well known phenomena of the 'Phoenix Company'. However, liquidation can have serious consequences for company directors, potentially the worst being their disqualification as a director forbidding them from being a director of a limited company for a given period of time.
The liquidator of any company has a duty, to report to the Secretary of State for Trade & Industry any person who was a director of the company where it appears to the liquidator that the person's conduct makes him or her unfit to be concerned in the management of a company. It is then for the Secretary of State to bring proceedings before the court seeking an order to disqualify that person. If the court agrees that the person is unfit to be involved in the management of a limited company, they will be disqualified. The period of disqualification can range from 3 to 15 years. So, the liquidation of their company is not the worst thing that can happen to a company director!
So how can you avoid a Disqualification Order? The Act (Company Director's Disqualification Act 1986) gives a number of examples of conduct which may lead to a finding of unfitness. They include a breach by the director of their duties to the company, misapplication of company assets, failure to prepare annual accounts and the extent of the director's responsibility for the causes of the company becoming insolvent. However, they are simply guidelines. Over the years the courts have refined these guidelines and given some indication of how 'bad' the director has to be before they are disqualified.
The general position is that, while actual dishonesty is not necessary, the conduct must go beyond mismanagement and must be in breach of standards of 'commercial morality' or some really gross incompetence which persuades the court that it would be a danger to the public if the director were to continue to be involved in the management of companies. A particularly dim view is taken of using non-payment of VAT and PAYE to fund a company's working capital.
As always, the key to avoiding difficulties is to deal with problems promptly. If your business is having problems do not 'bury your head in the sand'. Deal with them if at all possible and, if they seem insurmountable, seek professional advice.
For further information please contact David Calder on 0131 226 8215
or email david.calder@murraybeith.co.uk