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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.

Interesting statistics on director disqualifications per quarter can be found here.

Since October 2015, the Small Business, Enterprise and Employment Act introduced further measures to disqualify directors who have run insolvent businesses in the past or have influenced other directors. Directors can also now be disqualified if they are involved in company offences abroad. The Act will amend the CDDA, giving a court more time (an increase of a year) to review evidence mentioned above.

Insolvency practitioners will also have more power to assign the benefit of causes of action for fraudulent trading. They must also present up front costs to creditors who need to approve the liquidation. 

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:

253 director disqualifications between July and September

The Insolvency Service has released its latest statistics on director disqualifications, revealing the total number of bans has dropped by 27% year on year. 244 disqualifications in Q3 were connected to insolvent companies, with 18 being wound up in the public interest. The majority of bans we..
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Director banned after failing to keep proper records

Christopher McDonnell of Directline UK Ltd has been disqualified for nine years after failing to provide up to date and accurate account records after his firm went into liquidation. The Lancashire-based company supplied catering equipment and was founded in January 2007. McDonnell was appointe..
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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 banned for seven years after trading whilst insolvent

The director of the Birmingham-based energy research company, Ultra Green Group Ltd, has been disqualified for seven years after continuing to trade to the detriment of creditors. Anthony Clive Blakey’s company went into liquidation in January 2011, owing £2,770,180. An investigati..
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Director banned for six years after trading whilst insolvent

Christopher John Etheridge of D & R Pike Crane Hire Ltd (D & R) has been disqualified as a director for six years after allowing his company to trade for four years whilst knowing it was insolvent. An investigation found the company was in debt of £77,036 by October 2011 with the ..
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Director disqualifications stay at same level year on year

Between April 2015 and March 2016, the Insolvency Service disqualified 1,208 directors and put 131 companies into compulsory liquidation (wound up in the public interest). Almost all the company directors disqualified (1,156) were involved with an insolvent company. 52 were disqualified after ..
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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 disqualified for seven years for trading whilst insolvent

Car garage director, Russell Gwyn Williams, has been banned as acting as a director for seven years after failing to act in the creditors’ best interests while his company, Bets Centres Ltd, was insolvent. The Insolvency Service investigation found Williams was continuing to trade betwee..
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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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Directors disqualified for paying themselves over HMRC and the taxpayer

The Insolvency Service recently reported two cases involving directors of insolvent companies benefitting from company money while ignoring tax liabilities. Jason MacDonald and Scott Darren McDonnell of recruiting company Longbridge PWM Ltd paid themselves £212,815 out of the company&rsq..
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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 ..
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Marquee company director banned for five years

James Elliott Pemble from All Marquees Limited has been disqualified for five years after transferring the company’s money to his own account and other businesses. An Insolvency Service investigation found at least £144,427 had been taken out of the company and paid into Pemple&rsqu..
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Two letting agencies wound up by the High Court

Morgan Fox (Lettings) Limited and Morgan Fox Property Limited have been put into compulsory liquidation by the High Court after it was found the director, Darren Anthony Briggs, had repeated the same wrongdoings as in his previous company , Anthony Morgan UK Limited. This included the failure t..
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