DTI clampdown on directors

Citation

Southby, K. (2006), "DTI clampdown on directors", Strategic Direction, Vol. 22 No. 5. https://doi.org/10.1108/sd.2006.05622eab.002

DTI clampdown on directors

DTI clampdown on directors

The DTI is actively pursuing unfit directors for both civil disqualification proceedings and criminal prosecutions.

For those running a profitable business, director’s duties seem largely hypothetical in nature. The directors’ primary duties are to act in the best interests of the company. As long as the company is healthy, protecting the interests of the shareholders (who are often the directors themselves) will largely achieve this. However, the benefits of limited liability for directors and shareholders come at a price: the law places a heavy burden of obligation and responsibility upon those who own or, more significantly, manage the affairs of a limited company.

From a criminal prosecution perspective the key trigger for the operation of many of these duties is the insolvency or impending insolvency of the company. Until that point the question as to whether or not directors have breached their duties rarely arises. The corresponding danger of course is that it is not until the point of insolvency that directors consider how their previous actions during more prosperous times may be exposing them to criminal liability. Even in the most successful companies, directors must avoid ostrich tendencies and always be mindful of potential future scrutiny of their decisions in the event that things go awry.

It is at the point of insolvency that a liquidator or the official receiver (‘OR’) will become involved. They are required to report any evidence of possible criminal offences that are uncovered whilst investigating a company’s affairs. A decision is then taken on whether the matter should be referred to the Department of Trade and Industry or any other prosecuting authority to consider commencing criminal proceedings under the Insolvency Act, Companies Act, Theft Act or Company Directors Disqualification Act.

Issues that the DTI will pursue include:

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  sales of company assets at an undervalue;

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  treating some creditors more favorably than others;

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  carrying on trading when there is no reasonable prospect of the company avoiding insolvency;

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  company books and records being incomplete or failing to show an accurate picture of the company’s affairs;

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  falsification of the company books;

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  malpractice before and during a liquidation;

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  non-disclosure or concealment of the company’s affairs;

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  failing to co-operate with the official receiver or liquidator.

A successful prosecution for these offences can give rise to a variety of sentencing options, including financial penalties, imprisonment and/or a disqualification order on the conviction of a director for a criminal offence in connection with the management of a company.

The range of offences which the DTI can consider prosecuting is extremely broad, ranging from the seemingly technical to the clearly fraudulent. The DTI’s policy is that in order to protect and promote commerce and the wider business community it must be seen to be rapid and effective in implementing the range of sanctions it has available. Thus even the more technical offences of failings in company accounting records will be viewed as a failure to disclose the causes behind the failure of the company, thereby masking the creditor’s true entitlement to the company’s funds. However, there is a balancing act that must be struck between the justifiable prosecution of a dishonest or reckless “gambler” and the honest if unfortunate director who through genuine and understandable ill luck finds himself in the hands of the OR. The DTI’s role is intended to be to promote trade and not to oppress those who participate in it.

The guidelines for reporting matters to the DTI are that the OR and liquidators should not be pedantic about isolated technical failures, e.g. the occasional lapse in filing annual returns, but should be objective about each director’s conduct. A decision will then be made by the disqualification unit or the prosecutions unit as to whether it is in the public interest to proceed with the matter.

A busy company director cannot realistically be expected to know all of the regulatory provisions that might apply to his business. He can however be expected to find out.

On a practical level it is perfectly possible for directors to ensure that all of their duties are fulfilled provided they approach their role in the right way. Many of the offences that the DTI seek to prosecute have an “honest and excusable” defence. This means that the risk of legal liability can be minimised by directors ensuring that:

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  they reach their decisions in a competent and honest way;

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  accurate records exist of the decisions that were reached and the manner in which they were reached; and

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  they consider the trading position of the company and its ongoing financial viability at regular intervals, seeking professional advice where necessary.

Katherine SouthbyLitigation specialist at Yorkshire law firm Gordons.