THE IMPORTANCE OF PLAYING BY THE RULES

When running a small family company, in particular, it is always tempting to take a fairly relaxed attitude to matters of company procedure. However, Directors need to remember that if they allow things to get out of hand, they may put their personal assets at risk and may face disqualification from acting as a Director in the future. Spouses, in particular, need to understand that by accepting appointment as a Director, they are taking on real responsibilities and, if things subsequently go wrong, may face serious legal consequences.

A good illustration of how things can go wrong is the recent case of The Official Receiver v. Watson and Langford. The company in question was The Accident Group Ltd (TAG). The shares in TAG were held equally by Mr W and Mr L, who subsequently died. The Directors of TAG included Mr W and Mrs L, Mr L’s wife. TAG was involved in funding conditional fee agreements, which provide litigation-funding as an alternative to legal aid. Things went disastrously wrong and the company went bust with net liabilities of £81.2m. The Official Receiver brought proceedings seeking orders that Mr W and Mrs L be disqualified from acting as Directors.

The Judge ruled that both Mr W and Mrs L should be disqualified. TAG had not been run in accordance with the company’s Articles or the requirements of the Companies Acts. A sub-group of Directors, including Mr W, had usurped the function of the Board of Directors. Mr W’s conduct had fallen well below the standards required of a Director and made him unfit to be a Director. As for Mrs L, she had been content to leave the running of the company to Mr L and Mr W and to take substantial dividends from it regardless of how, and whether, they should have been paid. Such an abdication of responsibility made Mrs L unfit to be a Director.

The Judge ordered that Mrs L be disqualified for four years. He postponed setting a period for Mr W until Mr W and his lawyers had had a chance to consider the detail of his judgment. However, it is probably true to say that Mr W is facing a substantial period of disqualification, with all the limitations on his business activities that that implies.

To find out more, please contact David Dees / Nick Crook.

Filed: 10/06/2008 16:21:04