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.

The 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.

What is unfit behavior?

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

• Failure to submit annul 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 2-3 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 (see a guide to company voluntary arrangements).

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.

CompanyRescue Ltd does not advise using liquidation or phoenixism to turnaround a viable company unless there are very exceptional circumstances. So if you are worried about wrongful trading, you can generally avoid any risk of disqualification by using a CVA.

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

These are not large amounts of debts to the tax man in insolvency, so if your company has PAYE and or VAT debts be careful and act responsibly – talk to us now on 01289 309431.

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.

We have good contacts with a number of law firms that specialise in defending disqualification actions. Contact Keith Steven now for a discussion if you are worried about CDDA issues.