Director disqualification and misfeasance claims are increasing

Director Disqualification and Misfeasance Claims Against Directors are Increasing. 

In light of the increasing number of director disqualifications and misfeasance claims against directors, this article looks at what the Duties and Obligations of the Professional Adviser are in such cases. These duties, especially for accountants and auditors, are under increasing scrutiny.

Director Disqualification

Monitoring, as we do, individual director disqualification case outcomes (and the reasons for those outcomes), significant trends continue to be seen, including:

  • Fraudulent Conduct. Director Disqualifications of 10 years or more, based on allegations by the Secretary of State (‘SoS’) of fraudulent conduct (whether that be fraud by the director against for example, Invoice Discounters, Factors, HMRC or other creditors) are on the increase.
  • Crown Debt. By far the most common unfit conduct alleged by the SOS against directors, arises out of Crown debt that was owed by the failed company at the date of its insolvency.  Insolvency Practitioners are duty bound to report such matters to the SoS, whatever the Insolvency Practitioner’s views on the circumstances of the case. The existence and extent of that obligation is reminded to the Insolvency Practitioner by The Small Business, Enterprise and Employment Act 2015 (‘SBEE’) which was enacted on 26 March 2015, which widens and extends the powers of the SoS to act against what the SoS considers to be delinquent and unfit directors.
  • Liquidators and prosecuting authorities relying on disqualification outcomes (and possibly admissions made by the director in them) as a basis to seek financial recovery and/or criminal convictions (often with ensuing confiscation of asset problems for the directors and his family) against the director.

The steps to be taken by the well advised director, faced with concurrent (or even possible) director disqualification proceedings and a criminal investigation, fall outside of the scope of this article but remain of crucial importance.

With the imminent introduction of Financial Compensation Orders against disqualified directors, the life of the director of an insolvent company will become ever more complicated and dangerous.

Directors will be inevitably less willing to give director disqualification undertakings to the SoS, unless and until the practical effect of these changes becomes apparent.

Misfeasance Claims

NDP’s caseload of cases representing (and pursuing) directors faced with recovery action from liquidators (and soon from administrators under the extended powers contained in SBEE) continues to grow, as does the sideways glance from directors to those who have been engaged to professionally advise them, to include the company’s Accountant and auditors – read on!

A common financial claim, in misfeasance, made by liquidators, is a claim for recovery of so called ‘illegal’ dividends, with the liquidator alleging that there were no (or insufficient) available distributable profits, for those dividends to be declared and/or paid by the company.

Whilst it is beyond the scope of this article to explain illegal dividends, click here for a detailed commentary on such matters.

Dividends

A common refrain that we hear from directors faced with a claim from a liquidator for repayment of so called illegal dividends, is ‘why did the company Accountant let me take remuneration as a dividend when he/she knew or should have known that there were not sufficient available distributable profits or advise me that I might subsequently be attacked by the liquidator?’

That is a difficult question to answer other than on a case specific basis but we consider that the Accountant’s responses of ’that’s what has always happened’ or ‘that was the director’s decision’ will not necessarily, in the future, be a good enough answer for the Accountant, if and when he/she is challenged about such matters by the director, looking for an indemnity (or someone to blame) for the sums that the director has to pay back to the liquidator.

So what if any, is the liability of the Accountant or other professional adviser in such circumstances? 

This will inevitably turn upon factors such as the precise terms of the Accountant’s engagement with the company/its shareholders and the extent of the advice given.  What is clear is that the Accountant should (for example) try and cover (or clarify) the position (as to who precisely they are advising and in respect of what matters) in their terms of their engagement.

What is also clear is that often the company Accountant (who may also be the advising Accountant to one or more directors or shareholders personally) who has gone in and looked at the worsening financial position of the company (perhaps at the request of the directors), perhaps over a period of many months, whilst dividends continue to be declared and/or taken, needs to consider his/her potential exposure to claims from the directors and shareholders very carefully indeed, in respect of such matters.

Similarly, professional advisers need to be wary in light of the imminent introduction of Civil Compensation Orders against disqualified directors.

Such a Compensation Order can require a person to pay an amount specified in the Order to the SOS for the benefit of creditors or to make a contribution to the assets of the failed company, where that director has caused loss to one or more creditors of the company.

An Example of When Professional Advice is Questioned by a Disqualified Director

Think of the director who seeks and relies upon the advice of the company accountant, to keep on trading at a time when the company is in financial distress.  What if that advice is then attacked by the disqualified director who subsequently finds him/herself on the wrong end of a claim from the Secretary of State for a Civil Compensation Order?

Our view is that professional advisers will need to rethink the timing and content of the advice they give to directors and to the company, if their professional indemnity policy is not to be called upon by the director.  The early involvement of a Licensed Insolvency Practitioner or specialist legal adviser may be a better advice route to follow for the advising accountant in such circumstances.

When it Comes to Legal Advice in Director Disqualification and Misfeasance Claim Cases, NDP can Help

Whether you are:

  • An Insolvency Practitioner or Accountant looking to ensure a director gets the best possible director disqualification or misfeasance advice, whether in relation to an investigation or proceedings that have been commenced.

……At NDP we can help. Contact us for help and assistance on these and related issues or why not call us on 0121 200 7040 for a free, no obligation chat?

We are regularly referred disqualification, misfeasance and permission cases by Insolvency Practitioners, Accountants, Independent Financial Advisers, Banks, local law societies and other solicitors. In light of the increasing scrutiny of Professional Advisers in director disqualification and misfeasance claim cases, we are the safe pair of hands needed in such circumstances.

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