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Directors disqualified after failing to keep company records

Posted: 1st December 2011   In: Dispute Resolution

Two directors of a car dealership have been disqualified for eight years after failing to keep adequate records for their company, which was experiencing trading difficulties.

The company was placed into administration in 2009 with an estimated deficiency of £1.3m. It was then investigated by the Insolvency Service which was unable to find any of the cars listed on the company’s books. 

The case went to Crewe County Court, which found that the directors had failed to ensure that the company maintained, preserved or delivered adequate accounting records. They had also failed to satisfactorily account for the disposal of the company’s stock and sales.

The court also found that the directors had caused the company to enter into transactions which were to the detriment of its creditors when they knew, or ought to have known, that the company was insolvent.

The case highlights the risks directors face when trying to save a struggling company. As soon as a company becomes insolvent, directors have a legal duty to protect the interests of creditors. When formal insolvency procedures get underway, the behaviour of directors over the previous few years could come under investigation.

They could be disqualified if it’s found that they continued entering into contracts or accepting credit after they knew or should have known there was no reasonable chance of avoiding insolvent liquidation. The court could then order them to use their personal assets to help settle the company’s debts.

Many directors find it difficult to recognise or accept the point at which they become insolvent so they should seek professional help as soon as problems start to emerge.

Directors also have a legal responsibility to take action if they discover that other directors are acting fraudulently or dealing inappropriately with company funds. Failure to do so could render them liable for subsequent losses. 

Please contact Neil O’Callaghan if you would like more information about the issues raised in this article.