A Guide to Directors Disqualification

A man in the pub said I will be disqualified if my company is insolvent or goes into liquidation. Is he right"?

Of course not, however if you act fraudulently, wrongfully or stupidly then you are at risk!

A straightforward guide to the Company Directors Disqualification Act 1986 (CDDA). This is a difficult subject matter but a vitally important one for every director to consider when reviewing the company’s insolvency and how they have acted.

But first.... because a company goes into liquidation there is NO automatic ban on directors, you can start another limited company, there is no automatic assumption of wrongful trading, and you do not automatically lose your house.

The CDDA Act contains little known but very significant powers, which seek to ban "unfit" directors from being directors of a limited liability company. This action is taken only when the director has acted wrongfully, fraudulently, or just very badly.

By way of example, currently the DeBIS is looking to ban the "Rover 4" - the directors of failed Rover Cars Ltd. This having taken 4 years to work out what went wrong !

The government agency will first have to prove wrongful trading or "unfit behavior".

What is unfit behavior?

These are the key points that the DBIS seeks to ban directors on:

• Failure to submit annual accounts to Companies House on time
  
  
• Failure to submit annual returns to Companies House on time
  
  
• Excessive salaries or drawings when the company was plainly insolvent
  
  
• Trading on when he or she knew the company was insolvent (trading whilst knowingly insolvent)
  
  
• Continuing to take credit when there was "no reasonable prospect" of creditors being paid.
  
  
• Misrepresentation of the facts about the company
  
  
• Failure to respond or comply with a liquidator's requests
  
  

So if you can tick any of these boxes then you could be at risk!

It should be noted that director’s disqualifications are still relatively rare (there are only around 1,000-1,500 per year) but with a special web site to stop rogue directors www.companieshouse.gov.uk continuing to act illegally and some high profile disqualifications such as Terry Venables, they are much more in the public domain.

In the early part of this decade Government policy was also beefed up with the introduction of the Insolvency Act 2000. Part of that legislation was designed to speed up the disqualification process and increase the volume of directors disqualifications.

In a "fast track" approach directors can admit they have acted wrongly in return for lower penalties.

In other words rather than take 3-5 years to proceed with actions by the state followed by, say, an 8 year ban, the director can elect to admit liability immediately for say a 3 year ban.

This has not really worked since then. Indeed in early 2007, the DTI started to examine how to save money in the Insolvency Service. The cost of taking action against directors is quite high and budgets need to be cut.

So, we understand, part of this plan may lead to even lower numbers of CDDA disqualifications in the years ahead.

Important points to remember:

CDDA only applies where the company has gone into liquidation; it does not apply in a CVA.

Usually company voluntary arrangements don’t require any bans or even investigations into directors’ conduct, so think about using that rescue mechanism first.

Directors can become personally liable for the "wilful failure" of their company to operate PAYE on their remuneration. (Under s 71 of The Criminal Justice Act 1988 (Confiscation Orders 1996) and s 114 The Social Security and Administration Act 1992 it is possible for the court to confiscate a directors property as a consequence of such failure). Sorry for the jargon but this is an overlooked and important point.

The Court can make a disqualification order of between 2 and 15 years for unfit conduct.

We do not advise using liquidation or phoenixism to turnaround a viable company unless there are very exceptional circumstances.

Where advice is required on the effects of trading whilst insolvent, directors becoming personally liable for a company’s debts, the confiscation of director’s property under the Criminal Justice Act or any other failure to observe a director’s fiduciary duty, please contact us by email.

 

What are the restrictions placed upon people when banned?

If disqualified, a director may not act as a director or manager in the disqualification period, if he /she does so, that is a CRIMINAL offence.!
The penalties are: on conviction; imprisonment for up to 2 years or a fine or both. Plus the possibility of personal liability for ALL relevant debts of the company.

An interesting point to remember is that; if a director or manager acts on the instructions of a person who has been disqualified then, they too may be made personally liable for the company debts. So beware of banned directors.

Be warned disqualification is a serious business. If you face disqualification proceedings take advice immediately from a well experienced corporate lawyer. It is vital to mount a defence if there are mitigating factors.