Two of Carillion’s former finance chiefs have been banned from being directors for over a decade. But what does a disqualification mean practically? Keystone Law’s Cory Bebb explains.
Following the collapse of construction company giant Carillion in 2018, two of its former chief financial officers, Zafar Khan and Richard Adam, have been disqualified from acting as a company director, or being concerned in its management, for 11 and 12-and-a-half, respectively.
This is just four years short of the maximum penalty of 15 years reserved for the most serious cases such as fraud, reflecting the severity of the allegations against them.
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The Insolvency Service, an agency part of the Department for Business and Trade that was responsible for managing Carillion when it went into administration, accepted an undertaking from Khan in settlement of its action against him.
Khan did not dispute, for the purposes of the undertaking only, that he caused Carillion to rely on false and misleading financial information for the preparation of the company’s 2016 financial statements.
This resulted in the material misstatement of profits in relation to the performance of five major construction contracts, which included Battersea Power Station and Royal Liverpool University Hospital.
The quantum of the misstatement was assessed by the secretary of state at a massive £208.5m, which would have shown a year end loss of £61.7m in contrast with the reported profit before tax of £146.7m.
It was then alleged that Khan used those misleading financial statements to justify a £54.4m dividend payment to shareholders on 9 June 2017, just seven months before Carillion’s collapse.
What are director disqualification proceedings?
Director disqualification proceedings are pursued by the Insolvency Service on behalf of the secretary of state for business and trade in relation to misconduct of directors of companies which have failed and entered administration or liquidation.
The purpose of the proceedings is to protect the public from the disqualified director repeating such misconduct in relation to other companies. In this case, Carillion held approximately 450 construction and service contracts across government, employing over 43,000 people.
Given the nature of the allegations against Khan, arguably this was at the lower end of the period which ought to have been applied, but there may well have been mitigating factors or a discount recognising the provision of an undertaking instead of forcing the Insolvency Service to take the matter to a trial.
When faced with such proceedings, directors do have the option to offer a voluntary undertaking not to be a director, or be involved in the management of a company, as an alternative to being disqualified by a court following a trial, as happened in this case.
The secretary of state will sometimes offer a ‘discount’ on the period if an undertaking is provided before proceedings are issued, and will not seek its legal costs.
Compensating creditors
In October 2015, the secretary of state was given the power to apply to the court for an order requiring a disqualified director to compensate creditors for the loss suffered as a result of the conduct for which the director was disqualified.
It is unclear whether such an order will be pursued in this particular case and such orders have been rarely obtained since the power was granted.
A disqualified director can apply to the court for permission to be a director of a specific company whilst disqualified, although this usually comes with conditions attached. The conditions depend on the original misconduct and the extent to which they will reduce the risk of further misconduct.
Breach of a disqualification is a very serious criminal offence which can result in imprisonment. The director in breach will also be personally liable for the debts of the company in which they are involved and may face further disqualification.
Good practice for construction directors
The Companies Act 2006 is the primary source of company law governing the UK. It outlines the duties of company directors to ensure good governance and compliance with the Act, essential components of any successful business.
The construction industry has faced major challenges over the past few years, including Brexit, the increase in the price of materials and fuel, difficulty in obtaining funding for projects, and supply chain issues.
These will undoubtedly impact a company’s financial position and it is the duty of the directors to recognise and address these problems. Good practice for directors includes disclosing financial problems to shareholders (if applicable), planning ahead and considering the impact of fluctuating costs, and any difficulties or delays with imports and exports if EU companies are involved in the supply chain.
Creditors, liquidators, administrators and litigation funders are increasingly looking to directors to personally compensate the losses of a company which has failed and entered an insolvency process.
Directors who are unsure or facing difficulties should seek professional advice, as this could reduce their exposure to such personal claims and liabilities.
Failure to do so could see company directors in a similar position to those overseeing the finances and governance at Carillon, not just in terms of disqualification but also personal liability to compensate the company and creditors for substantial amounts.
The secretary of state for business and trade is currently pursuing the remaining directors in relation to the collapse of Carillion, with a trial set to begin in the week of 16 October 2023.
Cory Bebb is a dual qualified solicitor and licensed insolvency practitioner specialising in advising and representing company directors at Keystone Law.
