Risk & Economy » Regulation » Directors face greater culpability for company failures

PROPOSALS PUT FORWARD by business secretary Vince Cable have set in motion moves to place greater culpability for the failure of companies on the shoulders of directors, amid concerns over opaque company ownership structures.

At the Responsible Capitalism conference in July, Cable spoke of the need to improve confidence in the UK as an open and honest place to invest following public concerns over tax avoidance by big business.

The government believes such practices place other, often smaller, businesses at a disadvantage and greater transparency over who owns and controls companies in the UK will go some way to levelling the playing field and holding reckless owners to account.

There are two prongs to the proposals. The first centres on transparency; the second on deterring and punishing recklessness.

The transparency prong includes a central registry for information on companies’ beneficial owners to be maintained by Companies House. The register would detail individuals with more than 25% of shares, voting rights or other forms of control over how the company is run.

Additionally, bearer shares face abolition due to the scope they allow for abuse, while the role of nominee directors could also be disclosed to Companies House. Corporate directors – where a company is a director – are likely to be abolished, too, despite the rarity of the practice.

The deterrent includes a shift in the duties of bank directors towards the financial safety of the bank and away from shareholders’ interests, in line with the Parliamentary Commission on Banking Standards.

Similarly, courts will be given the power to consider the impacts of a director’s actions on society more widely, as well as previous failures when considering disqualification. Laws could also be changed in order to prevent disqualified overseas directors from taking director roles in the UK, while pre-pack administrations will be looked at amid concerns over their transparency. Should they go through, the effect of the swingeing changes is likely to be profound.

Streamlining the disqualification process will improve disqualification rates, says Liz Bingham, president of insolvency trade body R3, with a welcome widening of the criteria for recommending disqualification, after several years of falling disqualifications.

Brought to task
With BIS exploring ways to ensure directors who have acted fraudulently must personally compensate creditors, compliance is likely to be high up the agenda, though Baker Tilly partner and R3 policy group chairman Stephen Law does not anticipate compliance being an issue for most stakeholders.

“This is only there to ensure the directors who are culpable are brought to task,” he says. “There’s a streamlined reporting procedure, and the Insolvency Service has the right to approach the directors personally to get information, where before that had to be through the insolvency practitioner.”

Proposals to report after three months instead of six and extend the time frame in which action can be taken from two years to five are expected to engender greater vigilance on the part of directors.

“If a director has acted honestly and without any hint of wrongdoing, there won’t be any problem,” Law added. “One would hope that this might end up with more directors being disqualified and, of course, shadow directors.”

The silver lining for directors found personally culpable for the demise of their business is the introduction of an R3 education scheme to ensure they are able to work elsewhere during their period of disqualification and facilitate their return to business once their ban has expired.

“We need to recognise that directors can make mistakes but, in many cases, this is more about naivety than deliberate wrongdoing. It is entirely appropriate that, after a period of education, such individuals should be given the chance to re-enter the business world,” says Bingham.

Trust and transparency

The main elements of the ‘transparency’ section of the paper include:
• Options for the implementation of a central registry information of companies’ beneficial ownership maintained by Companies House.
• The abolition of bearer shares due to the potential for misuse.
• Whether nominee directors should be required to disclose their status to Companies House and for whom they are acting and whether directors should be banned from signing away their responsibilities as directors.
• The abolition of corporate directors – a situation where a company is director.
The main elements of the ‘trust’ section of the paper include:
• Asking whether bank directors’ duties need to be changed.
• Allowing the courts to take account of the impact a director’s actions have on society and previous failures when considering disqualification action.
• Giving courts the power to make compensation awards against a director when making a disqualification order and allowing liquidators to sell or assign fraudulent trading actions to creditors.
• Offering directors education at the end of their disqualification or a slight reduction in the disqualification period if they take up the offer.
• Changing laws to prevent disqualified overseas directors from being a director of a UK company.
• Extending the time limit in which disqualification action can be taken against the directors of an insolvent company to five years.