Director Disqualification – Don’t Get Caught Out!

A recent decision by the Insolvency Service to disqualify a director for eight years highlights the importance of keeping company accounts up to date.

The facts of the case are that Mr Gurpeage Singh Bhatii, company director of North West Concrete Limited failed to ensure that his company maintained and preserved adequate accounting records.  In the absence of adequate accounting records from North West Concrete and failing to provide satisfactory explanations it was not possible for the Insolvency Service to fully understand transactions that had taken place, in particular they focussed on the fact that Mr Bhatti had failed to record any cash movement in his business records. The Insolvency Service also looked at money that Mr Bhatti had transferred into his personal account which he claimed was used to pay wages in cash or by cheque however, in the absence of cash records, it was not possible to confirm that all payments transferred to his personal account from the company’s accounts, totalling at least £414,901, were used by Mr Bhatti to pay wages or were otherwise used for the benefit of North West Concrete’s business.

Under various provisions of the Companies Act 2006, all Directors of the company are required to maintain proper up to date records both at Companies House and internally.  A company must keep adequate accounting records under section 386(1) of the Companies Act 2006, otherwise it commits an offence.  These accounts must give a ‘true and fair view of the state of affairs of the company as at the end of the financial year’.

If a director does not comply with his legal responsibilities then they run the risk of being disqualified.

If an insolvency practice reports the company conduct as unfit (i.e. in the above case the unfit conduct was not keeping proper company accounting records) then they may be disqualified.  If the Insolvency Service do not believe that the company has followed their legal responsibilities they will tell the company director in writing what they have done that makes them unfit to be a director, that they intend to start the disqualification process and the ways in which the director can respond to the allegations.  Following this, the company director can wait for the Insolvency Service to begin court proceedings or give a “disqualification undertaking” – this means that the director voluntarily disqualifies themselves thus ending any court proceedings.

Director disqualification can apply for up to 15 years.  As a result of disqualification an individual cannot be a director of any company in the UK or of an overseas company that has connections in the UK and cannot be involved in the forming, marketing or running of a company.  Other restrictions can include being unable to sit on the board of a charity or school, be a pension trustee or become a solicitor, barrister or accountant.

If any of the terms of the director disqualification are breached then a fine or prison sentence of up to 2 years can be applied.

The above case therefore highlights the risks of not fulfilling company directors legal responsibilities and the sanctions that can be imposed for breaches.  At Forbes Solicitors our Business Law team can advise on various aspects of director duties.  Please do not hesitate to contact us on 0800 037 4628.

Pauline Rigby

About Pauline Rigby

Pauline Rigby is Head of the Corporate and Restructuring team at Forbes Solicitors. Pauline’s blogs cover a wide range of corporate issues, specifically areas including company formation, banking, joint ventures and shareholder matters, contractual matters and equity fundraising or investing.

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