Non-executive directors may have no involvement in the day-to-day management of the companies they serve but, as a recent High Court ruling has emphasised, that does not detract from their duty to ensure that the companies with which they are involved are properly and honestly run.
The case concerned a businessman who was, throughout its trading life, a director of a company that was alleged to have become involved in a missing trader intracommunity fraud (MTIC). The fraud was said to have resulted in the company wrongfully claiming VAT repayments totalling over £1 million.
After the company went into liquidation, the Secretary of State for Business, Energy and Industrial Strategy took action under the Company Directors Disqualification Act 1986. Disqualification orders were sought against the businessman and three others who were, at various times, either directors or shadow directors of the company.
Ruling on the matter, the Court found that the company entered into 28 transactions that were connected to MTIC fraud. They were manifestly not genuine commercial deals and each of the other three men was aware that they were connected to the fraudulent evasion of VAT. The trio were disqualified from acting as company directors for periods ranging from 11 to 14 years. Given that the maximum period of disqualification available to the Court is 15 years, it will be appreciated that the Court found their level of culpability and the harm they caused was significant in this case.
The businessman was in a different position in that the sole allegation against him was that he had abrogated his duties as a director. He was not claimed to have had any knowledge of the fraud. A highly experienced non-executive director, he played no operational role in the company's management and had no involvement in trading decisions. He was paid modestly for his work and was primarily concerned to ensure that the company met its obligations to its investors and shareholders.
Despite his acknowledged obligation to ensure that the company was properly run the Court found that he was blind to what was actually happening. He had abrogated his duty by failing thoroughly to investigate an extraordinary uplift in the company's turnover. His failure to engage fully with HM Revenue and Customs also amounted to a serious dereliction of duty. Overall, he had lost sight of the interests that, even on his own account, he was there to represent.
The Court noted that the impact of a disqualification order on a man whose career had been one of distinction was particularly pronounced. However, he had continued to insist on the fact that he was not running the company’s business and had shown no real appreciation either of what went wrong in the company's management or the seriousness of it. A four-year disqualification order was imposed.
This case is a salutary lesson to those involved in the running of companies that it is not necessary to be listed as a director at Companies House in order for the director disqualification legislation to apply to you. If you are contacted by the Insolvency Service in relation to proposed disqualification proceedings then you should seek legal advice at the earliest opportunity. For help or advice on company liquidation and director disqualification proceedings contact Leanne Schneider-Rose l.schneider-rose@sydneymitchell.co.uk 0121 698 2200.
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