November 20, 2020
In the reporting year 2019/20, the Insolvency Service obtained or had significant involvement in obtaining 1,280 director disqualifications, a 3% rise on the previous reporting year. Of these disqualifications, 1,196 were made in relation to insolvent companies.
In light of multiple reports of directors abusing the bounce back loan facilities that have been made available to the public in response to the COVID-19 pandemic, we fully expect these statistics to increase over the course of the next year and beyond. Therefore, it is important for all company directors to have a clear understanding of what conduct could leave them open to disqualification proceedings.
Director disqualification, under the Company Director Disqualification Act 1986 (CDDA), is part of the statutory framework designed to deal with insolvency and the financial misconduct that sometimes causes, or arises from, insolvency.
Liquidators, administrators and administrative receivers have an obligation to submit reports on directors (and shadow directors) if they form the view that the conditions for disqualification are satisfied. This report (known as a ‘D Report’) is submitted to the Secretary of State for Business, Innovation and Skills – thereafter, the Secretary of State will form a view as to whether it wishes to initiate disqualification proceedings against the director.
To review the latest director disqualification outcomes, visit the Insolvency Services website.
What is unfit conduct?
The key question when assessing a director’s conduct is whether it is sufficiently bad as to render the director ‘unfit’ to be concerned in the management of a company. Examples of unfit conduct include;
- Allowing the company to continue trading when it is unable to pay its debts
- Failing to pay tax owed by the company
- Failing to send accounts and returns to Companies House
- Using company assets or money for personal benefit
- Failing to keep accounting records
- Fraudulent activity
- Failure to respond or comply with liquidator requests.
A disqualification order carries with it a minimum period of disqualification of two years and a maximum period of 15 years.
During the disqualification period, disqualified directors cannot be a director of any company registered in the UK or an overseas company that has connections within the UK, nor can he/she be involved with the forming, running or marketing of a company.
It is a criminal offence to breach the terms of a disqualification order, which can attract a fine or even a custodial sentence of up to two years. In addition, the contravening party could be held liable for the debts of the company that he/she was managing.
How can we help?
Prosperity Law LLP has specific expertise in advising on and acting in director disqualification proceedings.
Tom McCue in the commercial litigation team can offer advice and information.