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Bankrupt company director

An individual who is a company director (while not bankrupt) becomes bankrupt while in office.

Is he permitted to remain a company director?  If not, is he automatically struck of the company's list of directors or does he remain a director until someone (presumably the trustee in bankruptcy) removes him?

In our office the general thought is that he is not permitted to remain a company director, but if that is the general case, why is it common practice (and I believe it to be the case) that a shareholder's agreement normally requires that a director resign if he is declared bankrupt?  Such a clause appears superfluous if he is not permitted to remain a director anyway under other legislative provisions.

Thanks for any insight.

With kind regards

Clint Westwood

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One for the hair splitters

Certainly an undischarged bankrupt cannot be a director as far as I know and I think there is a consequence of seperate legal identity of the company

I think it is the duty of the bankrupt to notify the company of their position and for the company to do something about it (file the form for the termination and make arrangements for another appointment) when the bankrupt does so (or the company finds out about it)

Its a similar problem to the death of a director in a way and both situations are made more difficult by sole directors and no secretaries

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Thanks

I suspect therefore that the standard clause in the shareholder's agreement is to confer on the bankrupt individual joint responsibility for notifying the company, to protect against the possibility that the trustee defaults on his obligation.

Presumably unless and until the company is notified (by whoever), the individual continues as a director albeit in breach of the Companies Act (I assume it is the Companies Act that renders it unlawful?), for which the consequences would be limited to some disclosure note in the financial statements.

Confirmation or contrary opinions would be appreciated from those in the know.

With kind regards

Clint Westwood

 

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yes

an undischarged bankrupt cannot hold office as director. This is potentially (particularly) a problem with one man band companies and in the case of the only instance I've heard of the trustee in bankruptcy took control and sorted out the legal niceties.

I think your point about shareholders agreements is to cover themselves ...bit of a belt and braces where the legislative requirements are not particularly joined up.

pembo

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So, just to clarify,

when you say he  "cannot hold a position as company director", are you saying that

(1) he automatically ceases to be a company director on the day that he becomes bankrupt, and subsequent formfilling is simply notification of a historical event, or

(2) the company is obliged to remove him from the board, but until such time as the company acts to do so (or the individual resigns) he remains a director in contravention of the legislation?

You appreciate the distinction, I am sure.

With kind regards

Clint Westwood

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as I understand it

anyone who promotes manages or acts as director during their period of bankruptcy is in breach of the insolvency regulations and a formal complaint can be made to the OR in bankruptcy...presumably action can then be taken to force the issue... 

Ideally the bankrupt should do the proper thing and resign on the date declared bankrupt. If hypothetically speaking the bankrupt has had a complete meltdown and refuses or is incapable of resigning then in practical terms there should not be an issue unless a company is 50/50% owned. If the bankrupt owns > 50% then the OR controls the situation and can normally just pass a resolution to remove from office. If the bankrupt owned < 50% then the other shareholders can similarly usually get rid by resolution. If 50/50% then there does appear to be stalemate and dunno what happens then. Over to the OR methinks.

think therefore to summarise this doesn't happen automatically but requires positive action. 

pembo

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thanks

that buttons it down, thanks.

With kind regards

Clint Westwood

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Company Directors Disqualification Act 1986

Also have a look at s11 CDDA 1986 which makes it a criminal "offence for a person to act as a director of a company or directly or indirectly to take part in or be concerned in the promotion, formation or management of a company, without leave of the court when (a) he is an undischarged bankrupt , (aa) . . . "

And s15 which provides "a person is personally responsible for all the relevant debts of a company if at any time . . . in contravention of section 11  . . . he is involved in the management of a company . . ."

Note also that a person who is involved in the management of a company and who acts on instructions of a person whom he knows to be an undischarged bankrupt in these circumstances is himself also personally liable for company debts.  So if you permit the undischarged bankrupt to continue to act as a director (or shadow director) you could make yourself personally liable for company debts.  For that reason you want to be able to force him out immediately!

David

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