Guest author Paul Williamson of Selling My Business – a renowned business sale specialist – explains why, when you’re caught between right and wrong, it’s always best to return to the question: what’s the best decision for creditors?

What is director disqualification?

A director that is disqualified is effectively banned from acting as a company director for up to fifteen years. A disqualification order is issued by the court, and anyone can report a company director for unfit conduct and failing to fulfil their legal responsibilities. Director disqualification aims to deter company directors from taking advantage of the benefits that limited liability presents.

When is a director deemed unfit?

A director is deemed unfit if they trade while insolvent, intentionally defraud company creditors or commit any of the following offences:

• Continue trading while aware that the business is insolvent and, therefore, unable to pay its debts.
• Fail to pay taxes, prepare accounting records, and submit accounts and records to Companies House as is their directorial duty.
• Use company funds for a personal benefit.
• Commit fraudulent behaviour that deprives creditors of assets.

How can a director be disqualified?

The Company Directors Disqualification Act 1986 establishes the circumstances under which a company director can be banned from performing their duties. This may likely be the result of an Insolvency Service investigation that is conducted when a company goes into liquidation or administration. If the business does not undergo an insolvency procedure, the director can still be reported as unfit to the Insolvency Service.

If a company director wishes to voluntarily disqualify themselves as a director to avoid court proceedings and to put the matter behind them, they may wish to give a disqualification undertaking. The Disqualification Undertaking procedure was introduced as a result of the Insolvency Act 2000 to give company directors the ability to issue voluntary disqualification and swiftly end enquiries, subject to agreement from the Insolvency Service.

What are the implications of director disqualification?

If you’re disqualified as a company director, you are unable to act as the director of a company or participate in the forming, marketing, or operating of a company without permission from the court.

If the director fails to comply, here are the repercussions:

• Disqualified director may be fined.
• Disqualified director may be imprisoned for up to two years.
• Disqualified director may be held personally liable for company debts.

The consequences of director disqualification are serious as they can stop you from operating a company or acting in any capacity to manage a business.

What is the current state of director disqualifications?

According to the Insolvency Service, during 2021/22, 802 directors were disqualified under the Company Directors Disqualification Act 1986 as a result of their work. The number of director disqualifications in 2021/22 and 2020/21 was lower than in financial years between 2013/14 and 2019/20 – before the coronavirus pandemic. This coincided with a historically low number of company insolvencies as a result of the pandemic, during which there was a moratorium on winding up petitions.

The increase in company insolvencies has not yet resulted in a surge in director disqualifications due to the time gap between insolvencies and investigation proceedings. The average length of director disqualifications has been between five years and five months, and six years in each of the past ten financial years.

For director disqualification outcomes in 2021/22, the most common allegation made was ‘Unfair treatment of the Crown’ (meaning HMRC), which was an allegation in 297 cases, accounting for 37% of all allegations. The second most common was the 141 allegations (17%) relating to Covid-19 financial support scheme abuse, such as the Bounce Back Loan Scheme. Covid-19 support schemes were provided to help deliver an economic benefit, although a small number of company directors used funds for their personal benefit.

If as a director you are suspected of misconduct, you could be investigated by the Insolvency Service which is part and parcel of entering company administration or liquidation. If deemed unfit as a director, you’re no longer able to run a company which can be detrimental if you have career plans that involve managing your own business.

Insolvency and debt investigations

Seeing the whole picture in insolvency and debt cases is key to maximising returns to creditors. For more information on how ESA Risk can help to identify hidden assets or locate targets who have gone to ground, contact Mike Wright, Investigations and Risk Management Consultant, at mike.wright@esarisk.com, on +44 (0)843 515 8686 or via our contact form.

You can also learn more from our Insolvency & Debt Investigations brochure:

This article was written by guest author Paul Williamson of Selling My Business.