Directors' Duties are a Quid Pro Quo for the Privilege of Limited Liability

In return for the privilege of being able to do business with the immeasurable benefit of limited liability, company directors must observe a range of duties and obligations that are designed to protect the public interest. A High Court ruling provided a stern warning to those who fail to live up to the expectations of that quid pro quo.

The case concerned the sole director of a property management company that was wound up at the behest of one of its clients, who claimed to be owed more than £425,000. Following an investigation of the insolvent company's affairs, the Secretary of State for Business, Energy and Industrial Strategy launched proceedings against the director under the Company Directors Disqualification Act 1986.

Ruling on the matter, the Court found that the director had exhibited a serious lack of concern for the basic obligations owed by the company under property management agreements. He was fully aware of those obligations and was responsible for placing the company in breach of its duties in a systematic fashion. Of particular concern was the intermingling of funds belonging to different customers.

The Court rejected the director's argument that this was how many leading property management companies operate. The client's money was not ring-fenced as it should have been but was mixed in with funds from other sources. Without the client's authority having been obtained, the money flowed out to a range of beneficiaries, some of whom had no connection to the client.

It was not possible to safely conclude that any specific sum was not paid back to the client when the relevant management agreement was terminated. That difficulty, however, arose precisely because of the practice of intermingling client funds, combined with the absence of satisfactory records. The failure to keep adequate accounting records, or at least to deliver them up to the Official Receiver, was a further ground for concern in that it hindered the investigation.

The Court concluded that the director had failed to appreciate and observe the duties attendant on the privilege of conducting business with limited liability. He had shown a serious lack of commercial probity and a lack of insight as to the unacceptability of his business practices. He was banned for nine years from, amongst other things, being a company director or in any way being concerned in the promotion, formation or management of a company, without judicial permission.