Prison not Director Disqualification?

Directors Beware: Inadequate Books and Records Can Now Mean PRISON

The Headline Consequences for the Director of not keeping adequate books and records are significantly more than director disqualification:

  • Imprisonment
  • A fine.
  • A criminal record.
  • Criminal asset confiscation proceedings.
  • Overseas travel restrictions.

Causing or allowing your Company to fail to maintain, alternatively preserve, and/or deliver up the Company’s books and records can result in the Director being imprisoned for between 2-10 years and face an unlimited fine. We have seen a significant increase this year in the number of directors facing criminal investigations, above and beyond director disqualification, for this alleged offence from the Insolvency Service’s Criminal Enforcement Team (CET). This article looks in more detail about why this is happening, and suggests what the well advised director can do when facing this issue.

We saw this coming nearly a year ago! If you, or a client is facing action from the CET, all is not lostBut be careful what you sign up to. Take the right advice. 

Director Disqualification

Directors Often Admit Such Unlawful Conduct in Writing. Why?

Often, a Director of a failed limited company will admit unlawful conduct in writing when he gives a Director Disqualification Undertaking (‘DDU’).  DDU’s can, when used properly, be an effective way for Directors who don’t perhaps have the will or the financial resources to contest allegations of unfit conduct, to avoid the commencement of Director Disqualification proceedings.

Following a liquidation, one of the most common allegations of Unfit Conduct that the Secretary of State levels against Directors in a Director Disqualification investigation, arises out of perceived deficiencies in the books and records of the insolvent Company and what is often framed by the Secretary of State as an allegation against the Director that he/she:

‘Failed to maintain, alternatively failed to preserve, and alternatively failed to deliver up adequate books and records of the company to the Liquidator.’

The obligation to maintain adequate books and records is a statutory obligation. We have seen many cases where, in times gone by, the Director (often with the benefit of legal advice) has signed up to one or more parts of that type of allegation of unfit conduct, thereby agreeing to be disqualified from acting as a Director or being involved in the management of a limited company for a specified time into the future (of between 2 to 15 years), based on that admitted conduct of the Director.

The Consequence of this Particular Unfit Conduct

The wording of that books and records Director Disqualification Undertaking is likely to spell out what the Secretary of State says are the consequences of the Director’s failure, in something like (for example) the following terms:

  1. Inability to verify the purpose of payments totalling £[xxxxxxxx], or verify whether they were utilised within the ordinary course of business or whether they are legitimate transactions or whether they were to the personal benefit of the Directors.
  2. Verify the purpose of cash withdrawals totalling £[xxxxxxx], or verify whether they were utilised within the ordinary course of business or whether they were to the personal benefit of the Director.
  3. Establish the Company’s true VAT liabilities for quarters ending [xxxxxxx] or verify the accuracy of HMRC Assessments for those quarters.’

So, the Director gives a DDU and the immediate threat of Director Disqualification proceedings goes away…phew! Such a negotiated outcome (whilst not perfect) has very obvious attractions for the Director. For example:

  1. The Director may avoid paying the Secretary of State’s legal costs (that might otherwise be payable if Director Disqualification proceedings were issued).
  2. Because such an admission may well attract a negotiated period of disqualification of 5 years or less, the Director is in a good position to apply for and obtain Permission from the Court on his application, to act as a Director moving forward, of named companies, without the Secretary of State kicking up too much fuss by way of opposition to that Permission being granted.

But, Criminal Investigations Have Arrived in Addition to Director Disqualification Undertakings

That, as they say, was often that. The Director licked his wounds, moved on with his new/existing limited company business and the world continued to turn.

However, all change.  In recent times, NDP have seen a spate of new instructions, where Directors are coming to see us, brandishing a letter from a quite different arm of the Insolvency Service, being the Criminal Enforcement Team (‘CET’) (whose tag line is ‘delivering economic confidence…’).

The letter from CET alleges breaches of the Director’s duties to ensure that the Company maintained/preserved/delivered up adequate books and records of the Company.

It is, we think, too much of a coincidence to conclude that this new breed of cases is unrelated to the Insolvency Service having set up a new Criminal Investigation Team back in 2017, operating out of Birmingham as we reported back in 2017.

To put matters in context, we have been instructed on 5 such Criminal Investigation cases in the first 30 working days of 2018 (all relating to allegations of deficient books and records), where the Director is invited by the author of the letter (an ‘Investigation Officer’) to attend a tape recorded voluntary interview to discuss the alleged criminal offences, set out in the letter.

So What are the Alleged Offences?

We are seeing a pattern where the Criminal Law Investigation Officer from CET relies upon:

  1. SECTION 387 COMPANIES ACT 2006 

‘387  Duty to keep accounting records: offence

 (1)     If a company fails to comply with any provision of section 386 (duty to keep accounting records), an offence is committed by every officer of the company who is in default.

 Penalty on conviction:

‘(3)     A person guilty of an offence under this section is liable—

(a)       on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both);

(b)       on summary conviction—

(i) in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both);

  1. SECTION 389 COMPANIES ACT 2006

‘389  Where and for how long records to be kept:

  • If a company fails to comply with any provision of subsections (1) to (3) of section 388 (requirements as to keeping of accounting records), an offence is committed by every officer of the company who is in default.
  • It is a defence for a person charged with such an offence to show that he acted honestly and that in the circumstances in which the company’s business was carried on the default was excusable.’

Penalty on conviction:

‘(4)    A person guilty of an offence under this section is liable—

(a) on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both);

(b) on summary conviction—

 (i) in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both);

3. SECTION 208(1)(C) OF THE INSOLVENCY ACT 1986

 208 Misconduct in course of winding up

(1)     When a company is being wound up, whether by the court or voluntarily, any person, being a past or present officer of the company, commits an offence if he—

(c)     does not deliver up to the liquidator (or as he directs) all books and papers in his custody or under his control belonging to the company and which he is required by law to deliver up, (emphasis added)  

(e)     after the commencement of the winding up, prevents the production of any book or paper affecting or relating to the company’s property or affairs (emphasis added).

(3)     For purposes of this section, “officer” includes a shadow director.’

Penalty on conviction: Again, imprisonment and/or a fine may follow on a conviction.

What Should the Well Advised Director Do?

Some obvious pointers might include:

  • Don’t ignore the incoming letter from the Criminal Enforcement Team. To do so is tantamount to inviting the Investigation Officer to recommend that a criminal prosecution follows.
  • Get some clued up legal advice in a hurry. The statutory offences detailed above are not strict liability offences.
  • What are ‘adequate’ books and records? That will depend on the size and activity of the particular Company. There is real scope to argue this point in most, if not all, cases.
  • Explain why the allegation is factually incorrect. Every case must be considered on its own merits and its own particular and peculiar facts. There may of course be a perfectly good reason on the particular facts why the books and records were not delivered up. For example, the books and records (in whole or in part):
    • Might actually have been delivered up to the Liquidator (so that there is a dispute on the facts).
    • Might have been accidentally lost or destroyed or stolen (or even not collected by the Liquidator). ‘Lost in a fire at the trading premises’ or ‘stolen from my car’ are however excuses that have worn thin with the Courts.
  • Look to see whether the Director can rely on the Statutory Defences available to, for example, section 387 of the Company Act 1986, detailed above.
  • Tool up to meet the allegations head on. There may be relevant, exceptional facts that the Criminal Investigation Offer should be made aware of. For example, ill-health or incapacity of the Director whether at the time of the alleged offences or subsequently.  Such matters can, and do, influence whether or not a prosecution is actually recommended or commenced.
  • Consider whether other persons are involved in the alleged offence(s), so that the full facts of the case are brought to the attention of the Investigation Officer. Remember, the Criminal Investigation Officer is a stranger to what happened in the Company. It may be (for example) that one Director had no/little involvement in dealing with the matters complained of.
  • Seek pre-interview Disclosure of documents from the Criminal Investigation Officer. He will often give it.  It is vitally important to understand what the Investigation Officer believes the case to be about, before any meeting with him/her takes place.
  • Engage in a pre-interview dialogue with the Investigation Officer. This is such an obvious step, but often ignored.

The Tape Recorded Interview Itself

This is a subject justifying a standalone article! In summary, however, the tactics and approach to the interview will always depend on the particular facts of each case. The Director has options. Should the Director, for example:

  • Go ‘no comment’ and hear the questions put to him.
  • Answer open and honestly some/all of the questions in the interview.
  • Submit and read out a carefully prepared written statement at the interview, perhaps in conjunction with answers to questions.
  • Note and then answer the questions after the interview, in writing.

Choosing the right approach in each case is a key part of the wider defence strategy in each case. Preparing fully for the meeting is the key factor.

Whichever route is chosen, a way forward needs to be decided upon and implemented that will best suit the Director on the particular facts of that case.

Contact us for Help and Advice if you Have Received a Letter from the Criminal Enforcement Team

Our experienced defence business crime team, headed by the hugely experienced David Hanman, has decades of hands on experience of dealing with such cases.

If you or one of your contacts needs help here, then the earlier you get in touch with us the better. Please contact us or call us today on 0121 200 7040 for a FREE, no obligation initial chat.

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