Nine former directors of Farepak, the failed Christmas hamper business, are facing disqualification in the High Court in an action brought by the Insolvency Service.
Farepak issued a series of profit warnings in 2006 before calling in BDO as administrators in October of that year. More than 113,000 Farepak customers lost an estimated £40m. Farepak was not regulated by the FSA so no one was entitled to compensation under any government scheme.
The Insolvency Service said: “The application was made in the public interest on the grounds that the conduct of each director in relation to the relevant company or companies makes him or her unfit to be concerned in the management of a company.”
So what do you have to do to get disqualified? Well, losing £40m of people's Christmas savings is going to make you very unpopular, but were they negligent?
To be disqualified the government agency will first have to prove wrongful trading or "unfit behavior". Having a business that becomes insolvent DOES NOT automatically mean that you will be disqualified. This is despite what many people may think.
These are the key points that the BIS 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 (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 are taking payments "knowing" you can't honour them and misrepresenting facts then you are in difficult territory.
Blogged by Robert Moore