Understanding director conduct reports

The changes to director conduct reports that you need to know about

Changes introduced by the Small Business, Enterprise and Employment Act 2015 (SBEE), include the reporting system used by insolvency practitioners, the ‘look back’ period for investigations, and the inclusion of shadow directors in an IP’s report.

The alterations to the previous reporting regime could present problems for you on a personal level should your company fail. That is why it is so important to understand your duties and responsibilities as a director, and be aware of your company’s financial position at all times.

Extension of the ‘look back’ period

Before the amendments were introduced, the ‘look back’ period was two years prior to the start of insolvency. This was the time period investigated by the IP, with a view to revealing any instances of director misconduct.

Investigations include looking at transactions during this period, the movement of assets, and whether or not statutory accounts and returns have been filed.

This time period has now been extended to three years, so if you were a director of a company that became insolvent three years after you left office, you may still be held personally liable and subject to action by the Insolvency Service if they discover anything untoward.

Shadow directors now included in the report

The fact that shadow directors are now included in the IP’s report means that anyone whose advice is regularly taken by the board, or who is involved in managing the company, could be open to allegations of misconduct and face personal liability.

New legislation introduced in May 2015 extended the duties of a director to shadow directors, so it’s important to understand what might constitute a ‘shadow director’ and your responsibilities as such.

A role in the company’s management could signify your status as a shadow director – this might include recruiting senior executives or controlling the finance department, for example.

If you are portrayed as a director by the company, or third parties assume that you are a director, you could be vulnerable to action being taken against you in the same way as a director in law.

A new online system for reporting

Prior to the changes, the appointed insolvency practitioner was required to submit a report to the Secretary of State about the conduct of directors leading up to insolvency, and provide a professional opinion on whether a director was fit to serve in office.

A new online reporting system has now been introduced, whereby the IP no longer has to provide their professional opinion on the suitability of directors. The system analyses answers provided by the IP to certain factual questions, and highlights any instances where misconduct might apply.

This report must now be submitted to the Secretary of State via the Insolvency Service, within three months rather than six months.

Why have the changes been made?

One of the aims in introducing these changes is to increase the amount potentially available for creditors. By looking back three years prior to the insolvency, rather than two, there is more scope to recover monies lost due to director misconduct.

It is also hoped that directors will take greater care in managing a company’s finances, knowing that their conduct will be scrutinised if the company fails. Allegations of misconduct, wrongful or unlawful trading, can have serious consequences including personal liability as a director for your company debts, and even criminal action being taken against you.

If you need further guidance on director conduct reports and how they might affect you in insolvency, seek advice from one of our experts at Real Business Rescue. Our extensive office network comprises 75 offices across the UK with a partner-led service offering immediate director advice and support.