The Insolvency Service have recently released their 2018/19 statistics on director’s disqualification.
This blog sets considers the Insolvency Service statistics, the effect of disqualification and a checklist of what to do to ensure you minimise your personal liability and avoid being disqualified.
The 2018/19 statistics:
- 1,242 directors were disqualified for misconduct.
- Since April 2014, the average length of disqualification is 7 years. However, on occasion, directors have received more substantial bans.
- 70 people in received Section 6 disqualifications (ban for unfit conduct in relation to an insolvent company) of 11-15 years.
- 43% of the substantial disqualifications involved some form of tax misconduct, such as VAT fraud. Other examples of misconduct included dubious investment schemes and directors breaching a previous ban.
Examples of misconduct that can lead to disqualification
When a director acts fraudulently, wrongfully or his behaviour is seen as unfit, he is at risk of being disqualified. Failure to adhere to your duties as a director will result in an investigation by the Insolvency Service and potentially disqualification. Examples of misconduct include:
- Failing to submit annual accounts and returns to Companies House on time
- Excessive salaries or drawings when the company is insolvent
- Continuing to trade when you know or ought to have known the company was insolvent
- Continuing to take credit when there is no reasonable prospect of creditors being paid
- Misrepresenting the company’s position
- Failure to respond or comply with a liquidator’s request
- Choosing to pay back certain creditors over others
Receiving a director disqualification claim from the Insolvency Service
It is important that you do not ignore this claim, this will not help! You should ensure you have a full history of company documentation as the Insolvency Service will request this. If you have complied with the duties, you should be able to prove there was no misconduct by providing such documentation. Remember that although this claim is serious, it is based on the Insolvency Service’s investigation to date. These claims threatening disqualification can be defended, to do this in the most effective way, it is best to obtain legal advice as insolvency is a complex area of law.
Seeking professional advice at the earliest opportunity
Trying to deal with a director disqualification claim yourself can be more detrimental to your case.
Receiving advice early ensures that you do not put yourself in this position and can make a difference to the disqualification claim being withdrawn entirely without proceedings being issued or any disqualification period being significantly reduced. Do not simply avoid all communications from the Insolvency Service and hope it will ‘go away’. It is best to obtain legal advice and co-operate with them.
The Insolvency Service may investigate your company or the directors personally if the company is insolvent or a complaint has been made. If it is alleged that you have breached your directors’ duties, you will receive details of your alleged misconduct in writing from the Insolvency Service. You then have the option of contesting the allegations in court which may lead to a disqualification order or you can provide a voluntary disqualification undertaking.
A disqualification order/undertaking involves banning you from being able to act as a director of a limited company or being involved in the running of a company, for anywhere between 2 and 15 years depending on the circumstances. In addition to this, you would be subject to a range of disqualification restrictions. If you are then found to breach your disqualification restrictions, you could be fined or sent to prison for up to two years.
Disqualification is a serious punishment for not fulfilling your duties as a director, this has significant reputational and financial consequences. Your details are published online on the Companies House disqualified directors register. The Insolvency Service are increasingly using wider social platforms such as Twitter to publicise disqualification orders or undertakings more effectively. As a director, you should consider the impact this negative publicity can have on you and your business.
How to ensure compliance and avoid disqualification
Being a responsible director
Taking on the role of a director bears a lot of responsibilities and duties which continue until the moment you resign from your position. These duties include: following the company’s rules (contained in the Articles of Association), keeping company records, filing your accounts and paying tax as and when due and informing shareholders if you may personally benefit from a transaction the company makes. Even if you hire someone else to delegate these duties, as a director, you are still legally responsible for your company’s records, accounts and performance. You must report any changes to Companies House and file returns on time, ensuring these deadlines are met.
I have in excess of 15 years’ experience in acting in director’s disqualification matters, including a number of years acting on behalf of the Insolvency Service. I am therefore well placed in advising directors and minimising any disqualification period proposed.