No excuse for company directors to stand by and do nothing
Directors cannot stand by and do nothing. Each individual director owes duties to the company to inform him or herself about its affairs and to join with his or her co-directors in supervising and controlling the other directors. If a director becomes aware that a company is engaging in inappropriate activity, they must take active steps to bring that activity to an end. If they are unable to implement corrective action, they must resign, or risk facing the consequences which befell the directors of Smooth Financial Consultants Ltd.
Smooth Financial Consultants Ltd (“the Company”)
The Company provided debt management services to clients. This involved arranging and implementing debt management plans in return for the payment of a monthly fee. Monies would be transferred from clients to the Company and held on client account (“Client Account Monies”) so that they could be applied in the payment of amounts due to the client’s creditors and also the Company’s fees.
The Company experienced severe cash flow difficulties and misused the Client Account Monies held on trust, treating them as its own working capital instead. When it went into administration on 2 August 2013, the Company owed nearly £850,000 to clients.
The Company’s board of directors comprised of:
The Judge considered the well-established authorities which directors will do well to pay heed of.
(a) The Court of Appeal in Re Westmid Packing Services  2 BCLC 646 held “Collegiate or collective responsibility must… be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them. A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but total abrogation of responsibility is not. A board of directors must not permit one individual to dominate and use them.
(b) Neuberger J observed in Re Park House Properties  2 BCLC 530 that “Directors have duties, and if, having been knowingly appointed a director, a person does nothing, he is likely to be in breach of his duties, and if the company is involved in inappropriate activity, he risks associating himself with, and taking some responsibility for that inappropriate activity.”
(c) Chadwick J in Secretary of State v Arif  1 BCLC 34 stated “In my view it should be clear that those who assume the obligations of directors, which they know they cannot fulfil, are persons whose conduct makes them unfit to be concerned in the management of a company. It is no answer to state “I did what I could”. If a director finds that he is unable to do what he knows ought to be done then the only proper course is to resign.”
The evidence showed that all three directors had knowledge that the Company was misusing Client Account Monies by 12 February 2013 at the latest.
With the authorities in mind, the court therefore scrutinised Mr Jones’ conduct in the narrow timeframe between 12 February 2013 to 22 May 2013, the date he resigned (a little over 3 months) and Mrs Broadstock’s conduct between 12 February 2013 to 2 August 2013, the date of the Company’s administration.
The Judge found that by continuing in office after 12 February 2013 without doing anything to prevent the Client Account Monies being misused or indeed investigate and pursue the issue or explore the options that might be available, Mrs Broadstock’s conduct bell below the standards of probity and competence reasonably expected of a company director. Mrs Broadstock was disqualified from acting as a company director for a period of 8 years.
In relation to Mr Jones, the Judge found that he took no action whatsoever between February and May 2013 to stop the misuse of the Client Account Monies and introduce reforms (something expected of a Finance Director). Had he sought to take such steps and been blocked by Mr Broadstock, it would at that stage have been open to him to resign as a director. Mr Jones was disqualified from acting as a company director for a period of 7 years.
Mrs Broadstock and Mr Jones received stiff disqualifications simply because they did not do enough as directors, notably in a rather short window of time.
Directors must participate and inform themselves and must immediately act to correct any inappropriate activity.
Where a director remains in office whilst a company is involved in inappropriate activity, the court will consider the merits of his or her explanation for doing so. If the director is aware of such activity and does nothing, he or she is likely to be in breach of his or her duties.
However, if the director remains in office with a view to bringing such activity to an end and can be seen to have attempted to do so, that director may escape a finding of unfitness and disqualification. It then becomes necessary to assess what he or she achieved and set out to achieve together with the explanation for doing so. Conversely if he or she is entirely unaware of the inappropriate activity, it becomes necessary to ask why, and that in itself is likely to be a breach of duty amounting to unfitness.
If you are a company director and want to talk in confidence contact Justin McConville.
The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.