More Penalties For Errant Directors

Business Secretary Vince Cable has tabled new rules that will see company directors face tougher penalties for breaking the law. Under Mr Cable’s plans, directors convicted of offences overseas would be banned from running UK companies, and ministers could ask courts to make disqualified directors pay compensation.

In addition, judges may be put under a duty to consider factors, such as previous business failures and overseas conduct, when they assess whether to disqualify an executive. It was also unclear whether compensation would go to “victims who make a fuss” or to all creditors. Legislation to enact the changes is expected to be brought forward in the next parliamentary session. Contact the Corporate and Commercial team at IBB for immediate advice.

Director disqualifications falling

The number of director disqualifications fell from 1,437 in 2010-11 to 1,031 in 2012-13 and Mr Cable did acknowledge that the vast majority of directors in the UK ran their businesses in the right way.

Roger Barker, the Institute of Directors’ director of corporate governance, voiced relief that the Business Secretary’s proposals were toned down. Originally, said Mr Barker, Mr Cable was considering automatically disqualifying company directors after a certain number of failures – on a “three strikes and you’re out” basis. “This would have sent a negative signal concerning the UK’s attitude to enterprise and new business creation,” commented Mr Barker.

The insolvency trade body R3 argued that the Government’s approach to errant directors was “far from joined up”. Giles Frampton of R3 said: “While the Department for Business, Innovation and Skills is trying to bolster powers to deal with directors, the Ministry of Justice is ploughing ahead with changes to insolvency litigation funding that will make it hard for insolvency practitioners to pursue directors and third parties that have taken money out of businesses that belongs to creditors.”

Bearer shares to be abolished

In a separate move, Mr Cable has announced that the Government will make physical share certificates – known as “bearer shares” – illegal. These shares have been used by some investors to keep their identity concealed.

This latest move is intended to support the Prime Minister’s plans to introduce a public, transparent register of company ownership. The register will reveal the name, nationality and birth date of anyone who controls more than 25% of a company.

The CBI is supportive of transparency but has told Mr Cable’s department it would prefer a multilateral but private register. It had also warned of “foreseeable concerns around the security and use of publicly available data, such as the profiling of individuals based on their company holdings or the targeting of individuals with holdings in certain companies.”

The Law Society has also cautioned that the “proposals may damage the attractiveness and competitiveness of the UK as a jurisdiction for the incorporation of companies. We believe that the effect of introducing the proposals will be to drive investors to form companies outside the UK and that the UK could therefore lose a considerable amount of business as a result.”

Action to limit “serial nominees”

The clampdown will further extend to the use of corporate directorships whereby a company can be the director of another company, potentially allowing an individual or group to legally hide their influence over a business.

Mr Cable said the government would be limiting the use of such schemes, as well as taking action to limit the number of “serial nominees” who effectively rent out their names to tens and even hundreds of companies, but play no active role in their management.

The Department for Business, Innovation and Skills said that 6,150 individuals were registered with Companies House as holding more than 20 directorships, meaning that as many as 273,000 companies might have directors who are “neglecting management and being controlled by someone else”.IBB’s experienced corporate and commercial lawyers in West London are experts in all aspects of commercial and corporate law. To talk to one of our corporate or commercial solicitors in West London, call us today on 01895 207973 or email corporate@ibblaw.co.uk.