I recently acted for an individual who had been offered the opportunity to start up his own business with a friend of a friend (the ‘investor’) offering funding and his experience to help my client get started and make a success of the venture.
My client was named as the sole director and shareholder and thought that he had been presented with a fantastic opportunity to make a better life for his young family.
However, the reality was very different!
The investor used his position of trust with my client to direct the running of the company including being recorded as a signatory on the company’s bank account.
As a result, whilst my client was named as the sole director of the company the investor assumed responsibility for a number of administrative/organisational functions with my client effectively only being left responsible for operations.
After the initial start up period the investor arranged for the company to make payments to him in order to repay the original investment. These payments totalled tens of thousands of pounds.
The business was unsuccessful and was placed into creditors’ voluntary liquidation after less than 12 months of trading.
The Insolvency Service subsequently threatened to issue disqualification proceedings against my client on the basis of the failure to maintain proper books and records along with other failures including the failure to maintain complete payroll records. The disqualification order being sought against my client was eight years.
Whilst my client understood that the investor was responsible for these tasks his position as sole director means that he was held accountable for each of these failures.
By negotiating with The Insolvency Service I was able to reduce this to six years and a disqualification undertaking was agreed in order to avoid the further costs that would have been incurred had proceedings been issued.
My client is now in a significantly worse position than he was before agreeing to act as the director of the company. In addition, my client is also facing the prospect of a claim being issued against him by the liquidator of the company for the monies paid to the investor.
How can you prevent this happening to you?
This is a lesson to anyone considering accepting an appointment as the director of a company. By accepting an appointment as a director you, and any fellow directors, will be jointly responsible for decisions made on behalf of the company. If you don’t understand those duties you should seek advice before agreeing the duties of a director and signing on the dotted line.
If you would like any further information or advice on insolvency matters, please contact Paul Formby in our Dispute Resolution team on 0844 391 5858.