Directors Disqualification

Little known but very significant powers are contained in this Act, which, ostensibly, seeks to ban "unfit" directors from holding such office. Key points that the DTI seeks to ban directors on:

Failure to submit accounts on time
Failure to submit annual returns on time
Excessive remuneration whilst insolvent
Trading whilst knowingly insolvent
Continuing to take credit when there was "no reasonable prospect" of creditors being paid.

It should be noted that director’s disqualifications are still relatively rare (circa 1500 pa) 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.

Government policy has also been beefed up with the introduction of the Insolvency Act 2000. Part of this legislation is to speed up the process of and increase the volume of directors disqualifications. In a "fast track" approach directors can admit culpability in return for lighter "sentences". In other words rather than take 3 –5 years to proceed with actions by the state followed by, say, an 8 year ban for contravention, the director can elect to admit liability immediately for say a 4 year ban.

Quite how this will work in practice remains to be seen.

Important points to remember:

CDDA only applies where the company has gone into liquidation.

Usually company voluntary arrangements have a mitigating effect, provided the directors take all reasonable steps to maximise creditors interests.

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.

CompanyRescue Ltd does 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.

Some interesting directors disqualifications:

Property company director banned:
Former record bankrupt William Stern and his son Mark Stern were disqualified from acting as company directors in April 2000. The High Court found he and his son are unfit to be company directors. William Stern, whose second property empire went into liquidation with debts totalling more than £14 million, was disqualified for 12 years and Mark Stern was disqualified for 4 years.

Northeast disqualification of director:
In a northeast case, the court banned a director of 3 failed Darlington consultancy companies for 6 years, after Customs & Excise wound up all three. The court found the director was using Crown revenues to finance the companies. The total outstanding at the time of liquidations as:

Felgate Engineering Ltd VAT £55k

MAN Engineering Ltd £18k

Newland Communications Ltd £19k

Minister with responsibility for the Insolvency Service, Dr Kim Howells commented last year:

"Directors hold a privileged position in society. It is only fair and reasonable that we expect them to be competent and trustworthy. If they fall below these standards we will take action to disqualify them. This is a message that should be put up in every boardroom."

If disqualified, a director may not act as a director in the disqualification period, if he /she does so this is a CRIMINAL offence the penalties are:

On conviction; imprisonment for up to 2 years or a fine or both
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 is disqualified then they too may be made personally liable for the company debts.

So 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.