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As a director of a limited company, you can trade with the privilege of limited liability. As a result, you also have to be mindful of the many duties you have to everyone you deal with on a day-to-day basis. A director of a company in financial difficulties has even stricter duties, to ensure that the company’s creditors suffer as little as possible leading up to a liquidation or administration. A failure in those duties can have serious repercussions if your company becomes insolvent, including leading to your personal disqualification as a director for up to 15 years.
‘If the Government considers that you have acted improperly following the failure of a company, it has the power to disqualify you as a director for between 2 and 15 years, depending on how serious your misconduct is,’ says Hannah Slaughter, a Senior Associate in the dispute resolution team. ‘This can have a devastating impact on your ability to continue to work, and can have financial and legal ramifications on you personally.’
Hannah looks at what disqualification means, how to avoid it, and what to do if you are subject to an investigation by the Insolvency Service. We also consider how it may be possible to continue as a director, even when disqualified.
What is the directors’ disqualification regime and when might you be caught under it?
The directors’ disqualification regime is a process instigated by the Insolvency Service, which is an arm of the Government. It was brought into legislation to protect the public from directors involved in insolvent companies who are guilty of misconduct. It means that a director can be disqualified from being a company director, and so from having the privilege of limited liability, from anywhere between 2 and 15 years, depending on what misconduct is found.
This regime is aimed at improving public confidence. It is intended to be a deterrent to prevent directors who have run a company badly and then put their company into liquidation or administration leaving behind creditors with no chance of being paid, before opening up a new company the next day with no change in their behaviour.
How does the process work?
The liquidator or administrator of every company that has gone into insolvent liquidation or administration must, by law, submit a report to the Insolvency Service within three months. That report may point out potential areas of misconduct against one or more directors.
The Insolvency Service will then carry out its own investigation and as a result may bring a claim against a director for misconduct.
During the course of their investigations, the Insolvency Service will usually contact the directors themselves for questioning, often by way of a questionnaire. It is at this stage that you, as a director, have the opportunity to put forward sufficient information to persuade the Insolvency Service not to take the matter any further, or perhaps at least to reduce the allegations brought against you. If you receive a request for information from the Insolvency Service, you should take legal advice as soon as possible to ensure that you put forward your best case at that point, to try to avoid the matter being taken any further.
If not, then the Insolvency Service will notify you that they are soon to issue a claim in court. You will have an opportunity to accept a disqualification by way of an undertaking, or to allow the claim to go to court so that you can defend yourself. Once the matter is issued in court, you open yourself up to the risk that you will have to pay the costs of the Insolvency Service if you are subsequently disqualified.
There are other types of disqualification that come about from court proceedings, for example if you are involved in criminal proceedings, but these are not so common and for our purposes we will discuss the standard director disqualification regime here.
What type of behaviour is considered misconduct?
The behaviour that can be caught under this regime is not deliberately wide, and not described in detail in statute. However, broadly, the types of behaviour that are covered are:
• any breaches of the duties you owe as a director to the company; and
• when a company faces financial difficulties, then the duties owed to the company creditors.
An example of misconduct frequently seen is when directors move assets out of the business, and do not obtain proper consideration for them back into the business. This might be that they are transferred at an undervalue, often to a connected company or to the directors, or for no value at all.
Another example might be when directors pay themselves or those connected to them in preference to their creditors. This often happens when a director is aware that the company is unlikely to survive, and so they repay money they (or family members) have lent, or they might repay a bank overdraft over which they have given a personal guarantee to avoid the guarantee being called in.
In the post-Covid era many directors are being disqualified in relation to Bounce Back loans taken out. Either for mis-declaring their turnover when taking out the loan, or for misuse of the loan, or often both. The Insolvency Service are coming down very hard on these directors, and we are seeing disqualification orders usually over 10 years.
Failure to keep sufficient books and records of the company is frequently an aggravating factor in a disqualification order.
Who can be disqualified?
Any director may be caught under these proceedings. This includes not only registered directors, but also shadow directors or de facto directors.
• A shadow director is a person who effectively directs a company from the wings, but does not register as a director at Companies House.
• A de facto director is a person who holds themselves out to be a director, so on the face of it the public believes they are a director.
Any registered director, a de facto director, or a shadow director of a company that has gone into insolvent liquidation or administration can be disqualified. If you were a director previously but resigned, you can still be disqualified for your conduct during your time as a director. Directors are expected to have control of their company and know what is happening, so ignorance of misconduct happening in the company is not a defence, unless you were very deliberately kept in the dark.
What is the impact of disqualification on a director?
A director can be disqualified for anywhere between 2 and 15 years, depending on the misconduct found.
It is also possible for the Insolvency Service now to claim money from a director if the misconduct relates to money that should have stayed in the company, but did not due to the misconduct.
How can I continue to act as a director if I have been disqualified?
It is possible for a director who is disqualified to apply to court for permission to act as a director in a specific company, despite being disqualified. You will need to show why you need to be a director of that company (rather than an employee) and why the company needs you to be a director (as opposed to another person). For example, sometimes your name is key to the continuation of a company and jobs may be saved as a result of you being allowed to continue as director of that company.
In order to be successful, you will also need to show the court why the behaviour that led to your disqualification will not happen again. Sometimes this might mean certain conditions are put in place. For example, if your accounts were not kept properly, you may have to agree to engage an accountant to oversee the accounts process.
This type of application to court can be very successful in allowing you to continue to be a director of a particular company despite disqualification.
How we can help
If you receive correspondence from the Insolvency Service investigating your directorship of an insolvent company, it is important that you do not ignore them and take immediate legal advice. Early responses can often persuade the Insolvency Service not to take their investigation any further. Even if not, we can help with defending or mitigating your position to ensure the least impact on you going forward.
For further information, please contact Hannah Slaughter in the dispute resolution team on 020 7404 9400 or email hannah.slughter@bracherrawlins.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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