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Directors’ conduct reports: Changes you need to know

Charlotte Møller, partner, and Estelle Victory, associate, at Reed Smith explain how legislation changes have affected the reviews of directors’ conduct, when companies go bust

Charlotte Møller
Partner, Reed Smith

Slightly misleading in its title, the Small Business, Enterprise and Employment Act 2015 (the SBEEA) introduces a number of changes affecting businesses, whether small or not.

The provisions of the SBEEA come into effect at different times, depending on the subject matter in question.

Of particular interest to the insolvency profession, and to directors, are the changes to the requirements of an official receiver, administrator, liquidator or administrative receiver (insolvency practitioner) to review the conduct of the directors of an insolvent company prior to the commencement of its insolvency.

Section 107 of the SBEEA amends the Company Directors Disqualification Act 1986, such that the insolvency practitioner must prepare a report into the conduct of any person who was a director at the time a company enters into insolvency, or during the three years prior to that date (director report).

The amendments required to allow further legislation to implement these changes took effect in May 2015. It is envisaged that the changes themselves will take effect in the near future.

The director report now also extends to shadow directors, so those involved in the management of a business must be careful not to act as shadow directors without realising this to be the case.

In addition, the extension of directors’ duties under sections 170-177 of the Companies Act 2006 to shadow directors (effective from May 2015) further underscores how important it is for management, whether or not they are called a director, to be aware of the regulatory framework to which they may be subject.

The extension of the ‘look-back’ period from two years to three years for the director report will increase the workload of an insolvency practitioner, given the additional year for which investigations must be made. The director report must be filed by the insolvency practitioner within three months of the onset of insolvency, unless this period is extended. This will be a burdensome requirement in many cases, and we anticipate a number of such extensions being sought.

Directors who are found to have failed to conduct the affairs of the company appropriately may face disqualification from acting as a director (or shadow director) for up to 15 years, plus a fine and/or imprisonment.

Where director misfeasance such as wrongful trading is found, directors may also be required personally to make good any losses suffered by the company due to their misfeasance.

Presumably, a key reason for the SBEEA changes is to enhance the recoveries available where directors have acted inappropriately, in favour of the insolvent estate of the company.

Another more important reason may be the hope that directors will have regard to the look-back period and the serious potential repercussions of misfeasance, and therefore ensure they manage the affairs of the company in an appropriate manner throughout their appointment.

Directors, and anyone who may be classified as a shadow director, should ensure they act properly with regard to the company, monitor its financial and commercial status regularly and take relevant professional advice where required.

Posted on 12th April 2016 by Marcel LeGouais



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