One of the great fears that can sometimes keep struggling entrepreneurs awake in the wee small hours is being Disqualified as a Company Director and all the consequences that flow from this happening. Screaming media headlines proclaim the guilt and sordid commercial details of the highest profile and most heinous cases.
What can lead to this drastic outcome? What are the misdeeds most often brought to book? What are the consequences? We look at these key issues and highlight the pitfalls to avoid and how best to deal with the prospect of being Disqualified?
There are well over 4 million companies on the register kept by Companies House, which means that there are also millions of Company Directors at any one time. In the latest year reported (2019/20) just 1,280 Directors were Disqualified, a rise of 3% on the previous year. The length of Disqualification fell for the third year running, averaging 5 years and 4 months.
What are the duties of a Company Director?
It is vital for Directors to keep their responsibilities in mind at all times and to be aware of them before they accept the role. The main ones can be summarised as:
- Acting in accordance with the company’s constitution.
- Only exercising their powers for the purposes for which they are granted.
- Acting in a way most likely to promote the success of the company.
- Exercising independent judgement when acting in the best interests of the whole company and all of its stakeholders, rather than representing the interests of just one shareholder or other interested party.
- Exercising reasonable care, skill and diligence when carrying out their duties.
- Avoiding conflicts of interest between themselves and the company.
- Not accepting any benefits from third parties given because of their role as a director
- Not accepting benefits from third parties given as a reward for doing or not doing anything as a director.
- Declaring an interest (where one exists) in any proposed transaction or arrangement.
When is there a risk of Disqualification?
Disqualification proceedings are most often initiated after a company has entered a formal insolvency process, like Administration or Liquidation. In each insolvency case, the practitioner appointed (IP) has to file a report with the Insolvency Service on the conduct of every current Director and any previous Director who served during the three years prior to the commencement of the insolvency process.
Persons acting as ‘Shadow Directors’ are also at risk of Disqualification. Directors who are declared Bankrupt are automatically Disqualified, even if their company is not going through an insolvency process. The Insolvency Service decides which Directors to prosecute, based on the conduct reports submitted by the IP.
What are the main reasons for Disqualification?
The most common reason in 2019/20 was unfair treatment of HMRC concerning the non-declaration and non-payment of taxes. Other causes include:
- Allowing a company to continue trading when it is insolvent and/or cannot pay its debts as they are demanded.
- Allowing a company to continue trading to the detriment of HMRC or the general body of creditors.
- Not protecting deposits taken from customers.
- Not keeping proper company accounting records.
- Not sending accounts and returns to Companies House.
- Not paying amounts due to HMRC and other government bodies.
- Using company money or assets for personal benefit.
- Fraudulent dealings.
- Failure to co-operate with the Administrator, Liquidator or any other insolvency office holder
In severe cases, Directors can be Disqualified in the public interest, usually to protect the public from particularly unethical conduct.
Offences that lead to Disqualification do not have shown to be deliberate. Incompetence or inefficiency are not a defence.
How long can Disqualification last?
The maximum term is 15 years. There are three tiers for Disqualification offences:
- 2-5 years (usually for reckless or negligent conduct)
- 6-10 years (usually for serious misconduct which is detrimental to the public interest)
- 11-15 years (for the most severe breaches, usually involving fraudulent or criminal behaviour)
What should Directors when they are facing Disqualification proceedings?
Before proceedings start
The best outcome will be to work with an experienced professional adviser either to persuade the insolvency Service not to recommend to the Secretary of State that they should authorise the Disqualification proceedings, or to negotiate direct with the Secretary of State to drop the proceedings once such a recommendation has been made.
A Director may accept their guilt and give an undertaking not to act as a Director for an agreed period, which will usually be shorter than they might face if the proceedings continue and they are found guilty by the court.
Defending the proceedings
If a Director believes they are innocent of the allegations, it is open to them to contest the proceedings in court.
What are the consequences of being Disqualified?
For the period of their Disqualification, a delinquent Director cannot:
- Be the Director of a UK company.
- Be the Director of a company based abroad that operates in the UK
- Be involved in the formation, management, or promotion of a company.
- Act as a company director or undertake the duties of a Director (e.g. hire staff, make executive decisions, etc.).
- Appoint a third party to manage a company under your guidance (doing this also places your appointee at risk of prosecution and financial liability).
There are certain professions, which ban Disqualified Directors from practising, including as an accountant, a solicitor or a barrister. They also cannot be the trustee of a school, a pension scheme or a charity.
Getting expert advice
Whether the intention is to negotiate with the Insolvency Service or the Secretary of State to head off proceedings, or to defend the proceedings in court, these are highly technical matters where having good professional advice is invaluable. Even if no proceedings are threatened but a Director suspects they are a risk, getting early advice from experienced experts and assembling the evidence to resist any allegations or mitigate the punishment is essential.
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