Written ByRobert Moore
Marketing Manager
Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.
Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.
Q: 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?
A: Of course not! However, if you act fraudulently, wrongfully or stupidly then you are at risk!
A director can be disqualified for a number of reasons, including wrongful trading, fraudulent trading or ‘unfit’ conduct. Failing to adhere to your duties as a director will result in an investigation and disqualification.
This guide is based on the Company Directors Disqualification Act 1986 (CDDA). It is difficult subject matter, but a crucial one for every director to consider. The Act is relevant when reviewing the company’s insolvency and how they have acted with regards to it. 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 negligently. The Government agency will first have to prove wrongful trading or “unfit behaviour” before any action can be taken.
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 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.
Due to the widespread misuse of Bounce Back Loans there has been a push to investigate directors that have either;
These are the key points that the Department of Business Innovation and Skills (DeBIS) seeks to ban directors on:
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). The Insolvency Act 2000 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, instead of an 8-year disqualification, the director can elect to admit liability immediately for a smaller sentence like a 3-year ban.
CDDA only applies where the company has gone into liquidation; it does not apply in a company voluntary arrangements (CVA). So, a CVA doesn’t require any bans or even investigations into directors’ conduct. Therefore consider using that rescue mechanism first.
Directors can become personally liable for the “wilful failure” of their company to operate a PAYE scheme 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 director’s 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 and restart 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, please contact us by email at help@ksagroup.co.uk
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: conviction; imprisonment for up to 2 years, a fine or all. 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 legal 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.
What is a CVA? | Company Voluntary Arrangements Explained
A CVA or Company Voluntary Arrangement is a legally binding agreement with your company's creditors which allows a proportion of its debts to be paid back over time. 75% of the creditors, by value, who voted need to support the proposal.
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Pre Pack Administration Process and Procedures
Pre pack administration is an insolvency procedure which allows an insolvent company to sell its assets to a buyer before appointing administrators. It’s a powerful, legal way of selling the business on to a trade buyer or third party.
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Worried Director What Will Happen To Me After Liquidation?
"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director. If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020. Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly. I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim. This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork". It isn't worth the risk. If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP) or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at help@ksagroup.co.uk
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A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.
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