What is Director Disqualification and How Do You Avoid It?May 22, 2018
“If my company goes into liquidation, does that mean I get disqualified as a director?”
There’s a lot of misinformation out there about director disqualification and questions like the one above are, unfortunately, relatively common.
During this article, I plan to clear up much of the misinformation and give you a better understanding of the subject. I’ll explain what director disqualification is, how it works and, most importantly, how you can avoid it.
What is director disqualification?
First things first, let’s actually define what we’re talking about. Director disqualification is laid down in the Company Directors Disqualification Act (CDDA) 1986.
The preliminary section says:
In the circumstances specified below in this Act a court may, and under sections 6 and shall, make against a person a disqualification order, that is to say an order that for a period specified in the order— (a) he shall not be a director of a company, act as receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court
Basically, if you fall foul of certain rules (explained later), you can be banned from being a director of a company, acting as receiver for a company’s property or being involved in the promotion, formation or management of a company.
That’s pretty straightforward. Where it gets more complicated is the actual rules that the Act lays out.
Why can I be banned from being a director?
There are many reasons why an individual may be disqualified from being a director, ranging from being convicted of an indictable offence to breaching competition law. However, the vast majority of directors are disqualified under just a handful.
The Gazette, the UK’s official public record, gives four common reasons why a director might be disqualified.
- Not keeping proper accounting records
- Failing to send accounts and returns to Companies House on time
- Refusing to pay tax owed by the company
- Using company money or assets for personal benefit
To that list, I would add several of other common reasons.
First, a company’s bank account must be kept completely separate to the owner’s account. If you confuse the two and start using company money for your own purchases and payments, it can lead to significant personal problems for the director.
Second, if your business becomes insolvent, you aren't allowed to pick and choose which creditors you pay back first. In practice, directors will want to pay back creditors that they know personally, often at the expense of faceless organisations like HMRC. Prejudicing HMRC will significantly increase the chance of the Insolvency Service taking action to disqualify you.
Third, your business must stop trading if it is insolvent. I appreciate that this is often a difficult decision for directors to make — if you have invested thousands of pounds and years of your life into a business, the last thing you want is to see it fail — but it is very risky to continue trading when you can't pay your bills. Directors will often rationalise the decision to continue trading by saying, “We’ll get through this rough patch and it’ll all be fine again.” Often, the company’s situation doesn’t get better and the only thing the director has achieved is increasing the company’s debts.
How does disqualification work?
If your business becomes insolvent or if someone complains about your conduct as a director, you may be investigated by the Insolvency Service.
If the investigation determines that you have not fulfilled your duties as a director, they will officially notify you in writing. This letter will explain why they believe you are unfit to be a director and marks the start of the disqualification process.
At this point in the process, you have two choices.
One, wait until you are taken to court and dispute the investigation. Or two, give what’s called a disqualification undertaking. A disqualification undertaking is essentially disqualifying yourself voluntarily.
While the latter option might seem like rolling over, it does allow you to complete the process substantially quicker. If you take the investigation to court, you might have to wait for several years for your case date and then, if found guilty, serve your disqualification period afterwards. Some directors prefer to just admit fault and complete their ban as fast as possible.
How can I avoid director disqualification?
If the Insolvency Service is pursuing a disqualification order against someone, there is usually a reason behind it. That makes it very difficult to give advice as each case is specific to the behaviour of the director. The majority of my advice, therefore, is preventative and general.
Follow the rules
Obviously, the most sure-fire way to avoid director disqualification is to follow the rules. Keep complete and comprehensive records, submit returns on time, pay your taxes, cooperate with insolvency proceedings and so on.
If you follow the rules, you will not be disqualified as a director even if your business becomes insolvent.
Understand your responsibilities
Following on from my first piece of advice, you simply must understand your legal responsibilities as a director. If the Insolvency Service is investigating your conduct, it’s not enough to say your accountant handles all the business stuff and all the errors are their fault.
It is not your accountant’s legal duty to be the director and it isn’t your accountant who will get struck off or made personally liable for company debts.
If you are unsure of your obligations as a director, please take appropriate advice from a regulated professional like a chartered accountant, corporate solicitor or insolvency practitioner.
Take insolvency advice
Once your company begins to struggle, you should take insolvency advice as early as possible. Make sure all the advice you receive is documented as you may need to present or refer to it at a later date.
If you decide to continue trading, keep regular records detailing why you are continuing to trade. Also, include evidence to show that you are actively tracking your financial position in order to make a proper decision on when it is appropriate to give up.
Are you concerned about director disqualification?
When looking for advice and support, remember that there are quite a number of unregulated and unqualified sharks out there. (As a general rule, keep an eye out for anyone trading as a business rescue adviser!)
If someone tells you that they can make all your problems disappear for a fee (usually a percentage of what you owe), be very wary of accepting their services. If their promises end up being fake, false or misleading, it's you that runs the risk of being struck off and not them.
If you are concerned about director disqualification, I strongly advise that you contact our team today. The sooner you contact us, the longer you give us to work and the better the chance that we can achieve a positive outcome. Click here to talk to a member of our team today for free initial advice.