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How does directors disqualification work?

A man in the pub said I will be disqualified as a director 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!

This guide is based on the Company Directors Disqualification Act 1986 (CDDA). It 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 with regards to it. Firstly it is important to state that your company going into liquidation does not mean there is an 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 it is proven the director has acted wrongfully, fraudulently, or just very badly. The government agency will first have to prove wrongful trading or "unfit behavior" before any action can be taken.

What is unfit behaviour?

These are the key points that the Department of Business Innovation and Skills (DeBIS) 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 (also known as 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

If any of the above points apply to you 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)however with a special web site to stop rogue directors www.companieshouse.gov.uk continuing to act illegally and some high profile disqualifications such as the "phoenix four" and the Farepack directors, 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 as 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.So for example rather than take 3-5 years to proceed with actions by the state and then endure an 8 year ban, the director can elect to admit liability immediately for a smaller sentence like a 3 year ban. This has not really worked since then. 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 consider 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). The Court can make a disqualification order of between 2 and 15 years for unfit conduct.

KSA Group 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 at help@ksagroup.co.uk

What are the restrictions placed upon people when banned as directors?

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.

Some interesting recent directors disqualifications:

Director banned for filing false tax returns to HMRC

A haulage company director has been banned for 11 years after sending false VAT and PAYE tax returns to HMRC, hiding the fact the company actually owed nearly £2 million. Geoffrey Munford of Geoffrey F Munford Limited did not deny his actions (which included making false invoices) when i..
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Director disqualified after failing to pay VAT

Director of D&S Poultry Limited, Darryl Glyn Martin, has been disqualified for seven years after an investigation found he had failed to pay VAT and did not comply with the liquidator when the company became insolvent. The Insolvency Service found he had paid trade creditors before HMRC f..
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Director of wine company banned for nine years

The Insolvency Service found Ofosuherne Ofrori-Duah had continued to trade and take on new orders at his wine company, Vintage International Limited, while he knew it was insolvent. Before the firm went into liquidation in 2012, it had been insolvent for at least 18 months and knowingly had in..
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Entrepreneur of the year disqualified for 12 years

A Kent accountant and director of a construction firm has been banned from directing for 12 years for defrauding the company’s creditors. Alan James Proto was awarded the title Entrepreneur of the Year in 2012 and in the following year was creating false documentation for his company to ..
Read More

MG Rover Group directors disqualified

John Towers and the famous "Phoenix Four" have been banned from acting as company directors following a lengthy process. A report found that they had taken money out of the company which was not in the interest of MG Rover and had manipulated assets and income streams from the company.

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 totaling 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.

David Topping of Cresta Furniture - V. Poor financial records and unaccounted for deposits

The directors of Media & Print Investments (MPI), Ben Crozier and Mike Dolan - 18th February 2013

Farepak Directors following the loss of £40m - See this blog post about how they were exonerated

Maple Grow Limited - Mortgage Scam

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 except Farepack, so if your company has PAYE and or VAT debts like this, be careful and act responsibly talk to us now on 01289 309431

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