This week’s business press reported the suspended prison sentence and community service order imposed on a man who breached his director’s disqualification order. These are serious criminal penalties reflecting the attitude or the Department for Business Innovation and Skills and the courts.
So what, you think? Couldn’t happen to me…..I bet Mr Rodgers thought that too.
Director’s disqualification orders are made against directors who have not played by the rules when running their companies. The failure of the business is not enough. There are common law and statutory duties imposed on directors and it is a failure to comply with those duties that leads to the bringing an action that leads to disqualification. A director does not have to have been dishonest for an order to be made.
Most cases are resolved by the directors agreeing to a period of disqualification, probably because when they see the cost of defending the proceedings and the costs they will have to pay to BIS if the order is made anyway, they go pale and weak at the knees.
What some entrepreneurs do is set up a new business and get their sister, brother, father or someone to put their name on the register at Companies House. However, that so called director does not run the business, the entrepreneur does. A breach in anyone’s book (except possibly the entrepreneur’s).
You can be a director without having your name in the register. A director is anyone who makes the strategic decisions for a company, either alone or with others. If he is involved in the running of the business generally, he is a de facto director and has all the obligations of a director. If he flits in and out he is at least a shadow director and has some but possibly not all those duties but both are directors for the purpose of the disqualification.
Getting found out
So, how does he or she get found out? You can assume that the disqualification is likely to follow the failure of a company which leaves disgruntled creditors who may watch that person’s activity. New trading partners may want to wrong foot the director. Employees may feel let down. Anyone can blow the whistle and the BIS takes it seriously as do the courts.
Can I do anything?
The order does not stop a person working. They can:
- Run a business that is not incorporated; a sole trader or a partnership. There is nothing to stop the partner being a limited company. However, that has its own inconveniences
- Work in a business in which someone else makes the strategic decisions. The order does not prevent a person owning a business, just running it. Again, not ideal.
- Apply for the permission of the court to be a director of a specific company.
Will I get permission?
Well, it is not easy. The court takes into account primarily the protection of the public. Obviously operating with limited liability generally protects a director’s personal assets from the company’s creditors unless they have given personal guarantees. The whole purpose of the disqualification process is to stop people from leaving creditors in the lurch on a regular basis.
Applications are not common but the courts have set out some criteria.
- Did the disqualification arise from dishonesty on the director’s part?
- Will the proposed company have limited liability?
- What will be the effect on the director’s ability to earn a living of making or of not giving permission? Permission may be given even if the director can make money without it
- Will the public i.e. creditors be at risk?
Avoid it in the first place
I have been giving seminars on directors’ duties this year and am running a series of articles in my publication Streetwise. If you want to come to a seminar please tell us and we will tell you when the next one will take place. You can get the relevant Streetwise by following this link.