Not all action against directors when a company goes broke is initiated by the Insolvency Service.
Recently, the Information Commissioner's Office (ICO) issued a warning to rogue directors that it will take strong measures to enforce the payment of fines it has levied where a company goes into insolvent liquidation and subsequent investigation shows that the behaviour of the directors was the cause.
When a company becomes insolvent, the liquidators prepare a report on the conduct of the directors. If their behaviour at any point in the six years prior to the commencement of the liquidation (or more if there was criminal activity) is sufficiently unsatisfactory, the insolvency practitioner will send a report to the Insolvency Service.
The Insolvency Service can take action leading to sanctions including one or more of the following:
- A fine;
- Imprisonment for up to ten years; or
- Banning the director from acting as a director of a UK company.
Typical offences include:
- Failing to keep adequate books and records;
- Carrying on the business 'with the intent to defraud creditors';
- False accounting;
- Withholding information from the liquidators; and
- Abstracting assets of the company for personal benefit.
If you are a director, it is important to remember that the penalties can apply to you even if you were not directly complicit in the offence, if you failed to act to prevent it or should have known about it but were unaware because you were not sufficiently diligent in the exercise of your duties.
In little more than a year, 19 fines have been imposed as a result of ICO actions. A further nine cases in which directors are either under investigation or having fines pursued by the ICO are ongoing.