Defending Those Facing The Prospect of Becoming Disqualified Company Directors

A company which looses a director to disqualification can find itself in a difficult situation.

If the case is proven he or she will no longer be able to act as a company director, have any influence over the affairs of the business. Also the former director will not be able to be appoint a 'shadow' to run the company for them. And while they can still remain in business as a sole trader or in a partnership they can longer enjoy the tax breaks and concessions associated with running a limited liability.

It should also not be forgotten that in addition to these handicaps for disqualified company directors there is also the very real prospect of loss of reputation. Those who have been banned from being a director appear on the Disqualified Directors Register. They are forbidden also to become a charity trustee, or work as an insolvency practitioner.

There are fines and imprisonment for those classed as disqualified as company directors who continue their previous role. And those involved in the companies which allow them to contravene any bans will also face action.

Those facing becoming disqualified directors have every right to put up their own defence to prevent the ban being put in force. However, they are best advised to consult with solicitors who specialise in advising on and defending such cases.

Following discussions between the solicitor and client it will be determined whether there is a defence against the Directors Disqualification Order. Any defence is made in court, documented as a 'Summary of Truth' is made under oath. Others may also be asked to speak for the defence and the lawyer will helpful in co-ordinating this.

Sometimes people facing the prospect of being declared disqualified company directors may not have a defence. However, the solicitor may well be able discover there is a case for persuading the court there are mitigating circumstances. While proof of mitigating circumstances will not prevent directors from becoming barred, it may well reduce the period of time that has to be spent as a disqualified director. This is especially important, as, depending on circumstances, bans can last in excess of 10 years.

Those facing the unenviable prospect of becoming disqualified directors should seek legal assistance from specialist solicitors as quickly as possible. If your local solicitors haven't got sufficient expertise in this area of law, there are a number of legal practices who do specialise in providing legal representation for disqualified directors and who can deal with your case via e-mail and phone and sometimes Skype.

If you need a Solicitor to help you deal with a Disqualified Directors  Order then contact Bonallack & Bishop. They are a firm of lawyers who often act for disqualified company directors. Senior Partner Tim Bishop sees himself as a businessman who owns a law firm.

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Why People Can Be Declared Disqualified Company Directors and The Consequences

Company directors can be disqualified, amongst other things, for misconduct under the Company Directors Disqualification Act 1986.

Anyone falling foul of the act is banned for a specified length of time from being a director or from being involved in the management of any company.

During the period of disqualification he or she must not become a director or manager of another business or form a new limited liability company. Under the terms of the act disqualified directors must not appoint a 'shadow director' to act on his or her behalf. Neither can the banned director become a shadow director on someone else's behalf.

Another reason for being declared a disqualified company director is 'unfitness'. Someone can be deemed unfit to have a directorship if he has been in breach of his duties, responsible for the misapplication of company property, failed to keep records and make annual returns, or been involved in fraudulent trading.

It should also be noted that a bankruptee whom is undischarged is unable to be a director.

The more serious breaches of the Act, such as fraudulent trading, could lead, in the worst scenario, to a 15-year disqualification. This is the maximum company directors' disqualification. The minimum ban in all director disqualifications is two years.

Should anyone breach the terms of their disqualification, the consequences are severe -- in particular they could face a maximum two-year prison sentence and/or a fine. Not only this, but they could also end up responsible for paying all the company debts if they are found to illegally be acting in the role of a director.

If a director is banned from acting in that role, their name will appear on a Disqualified Directors Register. This list can be accessed by the public through the Companies House website. The name will not be taken of this register until the disqualification period has ended.

As is quite clear, the results of being disqualified when you are a director are very serious. So should someone be presented with a Disqualified Directors Order then the action should be defended in court. Even if there is no defence a successful plea of mitigating circumstances could see the ban imposed being less severe.

Should a director facing a disqualification order want to launch a defence, or demonstrate to the court that there were mitigating, circumstances then it is in his own interests to seek the assistance of a solicitor who specialises in such cases.. A solicitor such as this will be able to make sure that the client in question gets the appropriate type of help and receives an excellent standard of advice.

The consequences of receiving a Disqualified Directors [ http://www.disqualified-directors.co.uk/ ] Order are significant. If you think this could apply to you, get in touch with Bonallack & Bishop, solicitors specialising in representation of disqualified company directors [ http://www.disqualified-directors.co.uk/disqualified-company-directors ].

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Have Directors and Officers Engaged in Wrongful Self-Dealing With The Corporation?

Each member of a corporation's board of directors owes a fiduciary duty to the corporation and its shareholders. That duty fundamentally has two obligations: the duty of care (directors must perform their jobs diligently and competently) and the duty of loyalty (directors cannot use their positions of trust to further the private interests of any third party - including themselves). Under both these duties, but especially the duty of loyalty, the interests of the corporation and its shareholders must always come first.

As part of the duty of loyalty, directors and officers (as well as controlling shareholders) are required to act with "inherent fairness" to the corporation. That especially relates to any contracts that the board is called upon to approve. It can sometimes be the case that contracts would be between the corporation and one or more individual board members. Any such contract must be fully disclosed and approved by a majority of board members who are not themselves contracting with the corporation. If approval is not given in this way, the contract may be considered void.

In California, so long as certain requirements are met, a contract or other transaction between a director or officer and the corporation is "neither void nor voidable" simply because of the director's or officer's interest in that contract. However, if those requirements are not met, the transaction covered by the contract will be upheld only if the director or officer can prove its "fairness" to the corporation.

A. What Constitutes an "Interested-Director" Transaction:

(1) Contracts between a director and the corporation: ANY contract or transaction directly between the corporation and one or more of its directors is subject to the requirements described in Part B below. The director involved in such a contract is called an "interested director," and it is presumed that the director's interest is material.

Typically, a material interest includes compensation arrangements, stock option agreements, buying or selling assets, leasing property or similar actions that produce a financial benefit for the director.

(2) Contracts with another company in which the director has "material financial interest": A contract or other transaction with another entity is also subject to the requirements below if a director has a "material financial interest" in such a firm. An example would be a company board member who is also an executive of an investment group, such as a private equity firm, that has taken an ownership stake in the company.

B. Requirements to Avoida Conflict-of-Interest Challenge: Contracts between a corporation and one of its directors are "neither void nor voidable" simply if the director has a personal financial interest in the transaction, but this is only the case if the following specific legal requirements are met.

(1) Shareholders approve the contract after receiving full disclosure about it: A contract cannot be challenged because of a director's financial interest if the material facts about the contract were communicated to the shareholders. After such communication, the contract must be approved by a majority of shareholders (and/or the shares they represent) not directly involved in the contract. All materials facts about the director's interest in the transaction and about the contract itself, must be disclosed to the shareholders if they are not already aware of them. Any shares held by the director who has an interest in the contract are not entitled to vote. A majority of those shareholders without an interest (called "disinterested shareholders) must give good faith approval of the contract.

No showing of fairness is required. If disinterested shareholders give such approval, the contract does not have to be shown "just and reasonable"to the corporation - as it must be without such approval (below).

(2) The board approves after receiving full disclosure and concluding that the contract was fair to the corporation: A second way in which a contract is protected from challenge over a director's self-interest in the transaction is if (a) the material facts were disclosed to the board, (b) a disinterested majority of the directors approve and (c) the approving directors deem the contract to be "just and reasonable for the corporation at the time they authorized, approved or ratified it. A more detailed explanation of all three elements will make this clearer.

a. Full disclosure: All materials facts regarding the director's interest, and the contract itself, must be disclosed or known to the board before it acts upon the matter.

b. Disinterested majority: The "interested" director cannot vote on the contract. The board vote to authorize the transaction must exclude the interested director.

c. Fairness requirement: If approval is only by vote of the board (and not of the shareholders), the transaction must also be demonstrated "just and reasonable to the corporation" at the time of such approval.

Approval by a disinterested majority of the board is presumed to demonstrate that those voting concluded the contract is fair to the corporation, so that the burden of proving its lack of fairness is on any party who challenges the contract. Such challenges could be raised either by a shareholder in a derivative action, by the corporation itself or by its creditors.

(3) Without approval by a disinterested board or shareholders, fairness must be proved: Failure to obtain disinterested board or shareholder approval does not necessarily invalidate an interested director contract. However, in such cases, the burden rests on the party seeking to uphold the contract (normally, the "interested" director) to prove that it was "just and reasonable" to the corporation at the time it was authorized or entered into.

C. Remedies available to the corporation for a problem transaction: If the contract or transaction fails to meet the requirements above for shareholder or board approval, two main remedies are available to the corporation. It may either.

Rescind the contract and recover anything of value that the contract paid to the director or;Affirm the contract and sue the interested director fordamages (the amount of the "unfairness" or excessive price charged to the corporation).

If the corporation fails or refuses to bring an action against the director, any shareholder may institute a derivative lawsuit on the corporation's behalf.

Robert M. Heller has extensive experience in business litigation with an emphasis on shareholder disputes. He has been admitted to practice law in both California and New York. He can be reached at (310) 286-1515, or by email: heller@hellerlaw.com.

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Penalties and Consequences For Disqualified Directors

The Company Directors Disqualification Act 1986 is the legislation that facilitates directors to be disqualified from their position.

This act gives the Secretary of State the right to apply to the court to have the director of an insolvent company declared unfit to continue with his or her duties.

For a director to be declared unfit he must have acted negligently or fraudulently. Examples include allowing the company to trade while it is insolvent or taking on loans on the behalf of the business which have no hope of being paid. Failing to keep proper records, not lodging accounts or tax returns or being remiss paying HMRC what is due are also grounds for company director disqualification.

Company directors' disqualification is dealt with in the civil courts, but the criminal courts can also impose bans. Should someone ignore a Disqualified Directors Order then he is committing an offence. In such cases the penalties are fines and/or a two year term of imprisonment.

Generally the periods of disqualification are between two to 15 years. The most serious cases include fraudulent activity relating to a company being wound up. That can lead to the maximum period of directors' disqualifications. Persistent failure to keep proper accounts can lead to bans of around five years.

The court can take cognisance of mitigating factors, such as adverse economic factors. In such cases the length of disqualification may be reduced. But in the best case scenario a defence is put to the court under which the Disqualified Directors Order is thrown out.

Whether someone wants to mount a defence or plead mitigating factors it is always best to seek legal advice from a solicitor who specialises in disqualified company director cases. The solicitor will be able to determine whether there is a realistic defence or mitigating factors to be put to the court.

The solicitor will also arrange for representation for potentially disqualified directors in court, the submission of evidence - 'Statement of Truth' - and the calling of witnesses.

Seeking legal advice and representation for is very important because the penalties for disqualified directors are very severe. Once the director is banned he can have absolutely no role to play in his company. Nor can he appoint a 'shadow' director to carry out his wishes. Furthermore, following the ban disqualified company directors cannot form another limited liability company until the period of disqualification has been served. Their name will also appear on a register which the public has access to.

Dealing with a Disqualified Directors Order can be quite difficult. If you want more information then contact Bonallack & Bishop, they specialise in advising and representing disqualified company directors. Senior Partner Tim Bishop is responsible for all major strategic decisions.

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