When there's a rogue director in your company ranks

As ContractorUK readers will be aware - some more painfully than others - rogue company directors don’t only run multi-billion dollar accountancy giants in the US, like Arthur Anderson, the defunct auditor of disgraced corporations Enron and WorldCom, writes solicitor Gary Cousins of Cousins Business Law.

The contract IT sector’s notoriously dodgy director

And while reputable accountants to contractors have now had their say on Darren Upton, who was last month disqualified from being a company director for 14 years, it is noteworthy that his misdeeds were only exposed because his own staff became suspicious and reported him.

The issue of how to deal with a company director who has gone rogue is a question that, unfortunately, arises often, particularly from others in the company – even fellow directors - keen to know how the courts can step in.

When there’s a rogue director in your firm

The first thing to appreciate is that directors owe duties to the company itself and it is usually only the company that can take court action, rather than its shareholders or a fellow director.

This, of course, can lead to problems in companies where there are only two directors as the rogue director is unlikely to agree that action should be taken against himself. However, sometimes the courts will authorise proceedings to be taken in this situation by the company or by a minority shareholder who is being unfairly prejudiced.

As a company director confronted with your counterpart who has gone rogue, you should bear in mind that the courts have a wide range of powers to help you, but which ones they use depend on the particular circumstances of the case. They can roughly be divided into three groups: powers to aid investigation, preserve assets or to remedy the wrong done.

Investigatory powers

The court has the power to compel someone to disclose documents that will be important in a case. ‘Documents’ do not just mean paper documents but also electronic documents and these include all electronic data such as emails as well as soft copies of other documents.

A particular fear when it comes to rogue directors is that these documents will be destroyed or simply disappear if they are given notice to disclose them. In these situations, if the case is strong enough, the courts can make a Search Order. In this situation, no notice is given to the rogue director and effectively their computers can be seized in an attempt to obtain the computer data before they are given a chance to destroy them.

Maintaining assets

If there is evidence that assets wrongly taken from the company may ‘disappear’ (whether physical assets or money), the court can order that the assets be frozen to prevent this. Usually, this comes down to freezing bank accounts.

If assets have been diverted to third parties, the courts will sometimes make orders against those third parties to preserve the company’s assets.

Remedies

The courts have a wide range of powers to attempt to remedy the director’s wrongdoing. If the company can show it has suffered loss and damage by the director’s actions (if he has removed money from the company, for example) the court can order ‘damages’, i.e. that any loss and damage is repaid.

Where a rogue director has benefited from his wrongdoing, for example by diverting contracts and/or customers from the company and has made a profit from them, then the courts can order that he/she gives full details of the profits he/she has made and order that these profits be repaid to the company. This is called ‘An Account of Profits’. The courts can also make these orders against third parties including other companies where contracts have been wrongfully diverted to other parties.

The courts can also make orders to stop any further wrongdoing. These usually take the form of ‘injunctions’, i.e. an order that someone must stop doing something. If, for example, a director has diverted contracts from the company, the court can order that he must stop this. If he does not, he can be sentenced to prison.

The Company’s choice

It is up to the company to suggest to the court what combination of powers it should use in any particular case. This decision will differ from case to case and will be based on the strength of the evidence available, as well as making a decision as to what combination of remedies will best achieve the desired outcome.

It is important to obtain legal advice as soon as possible after you discover wrongdoing by a director. Sometimes this is important to preserve assets as, the longer things go on, the harder it sometimes is to trace missing assets. Also, the courts will refuse to exercise some powers if there has been undue delay in making a court application.

You Vs the Rogue

Therefore, if you think you have a rogue director in your company, first gather together all the evidence you have of any wrongdoing and then take legal advice. Sometimes, confronting the rogue director early on will be a good idea, but not when this gives him or her sufficient time to destroy evidence. In those situations, discreetly obtain legal advice before confronting them.

Editor's Note: Further Reading -

Contractors' Questions: How to remove a company director?

Contractors' Questions: Is a company striking-off request bad if I'm unpaid?

Contractors' Questions: What if our 'Ltd' director oversteps the mark?
 

Wednesday 11th September 2013