Following the recent local case of a company director who was banned for 9 years for allowing the unlawful transfer of company assets, George Dale, Director of Business Recovery and Insolvency at Thomson Cooper looks at the issue of director disqualification.
Our role in managing Administration and Liquidation cases is often like solving a puzzle, examining layers of complex decisions and transactions which have led to the demise of a company. Over the years I have witnessed many instances where directors have failed in their duties, with serious ramifications. Who ultimately regulates company directors and what constitutes misconduct?
The Insolvency Service
The Insolvency Service is an executive agency of the Department for Business, Energy and Industrial Strategy, responsible for the regulation and overview of the insolvency profession in the UK. As part of their remit they take action, where necessary to clamp down on directors who intentionally or unintentionally breach their fiduciary duties and responsibilities under the Company Acts.
The Insolvency Service has powers given to it by law to consider complaints about:
•   live companies where they’ve received reports of serious and persistent corporate abuse such as significant misconduct, fraud, scams or sharp practice in the way a company operates, causing harm to stakeholders such as customers, suppliers or funders, etc
•   the conduct and actions of directors of companies which have entered into formal insolvency proceedings (administration or liquidation)
•   a disqualified director or someone who is bankrupt acting as a company director or otherwise breaching their restrictions
•   the reuse of prohibited company names
•   other serious misconduct issues
Penalties
Where a director is found guilty of misconduct, The Insolvency Service can impose penalties which can be harsh, including restrictions or disqualification for up to 15 years, depending on the severity of their findings. Directors can offer an undertaking which is a voluntary disqualification, which then stops court action proceeding against them.
Once disqualified, an individual is unable to:
•   be a director of a UK company or a foreign company operating in the UK
•   become involved in the formation, management or marketing of a company
Contravention of these restrictions can involve a fine and prison sentence of up to 2 years.
Cause for concern
In all insolvent cases an Insolvency Practitioner (IP) is required to submit a report to the Insolvency Service on the directors’ conduct in the period leading up to the company’s demise in order to assist them in identifying any adverse conduct by the directors.
This would highlight circumstances such as those set out below;
•   Failing to keep proper books and records of account
•   Continuing to trade to the detriment of creditors, when the directors should have reasonably concluded the company was insolvent
•   Failing to co-operate with a liquidator or administrator of the company
•   Failure to submit returns or pay Crown debt when due (including PAYE, VAT, NI, CT, etc)
•   Excessive salaries or drawings when the company was insolvent
•   Issuing company cheques knowing they will not be honoured by the bank
•   Accepting deposits for work / goods which the directors know will never be undertaken or delivered
•   Acting as director of a new company using a similar or prohibited name
Consequences
Listed below is a series of recent cases where we’ve seen the Insolvency Service take action;
•   Director banned for 14 years after his companies conned people to invest in dubious schemes.
•   Director banned for 6 years for failing to ensure his company kept proper accounting books and records.
•   Two directors disqualified for a total of 12 years after instructing their company to pay more than £830,000 to connected businesses, without explanation or valid commercial reasons, to the detriment of creditors.
•   Two directors of a garage business banned after they allowed a disqualified director to run their company. The directors each received a 5-year ban and the disqualified director received a further ban for 11 years.
•   Director who fraudulently removed significant funds following a petition to wind-up his personal injury company. He also failed to provide company books and records to the liquidator. This resulted in a 21-month jail sentence and a 7-year ban.
•   Director of a road haulage company who submitted false VAT claims to keep his companies afloat received an 11-year ban.
•   Director of a construction company was banned by the courts for 15 years after he was found running companies despite previously agreeing to be disqualified.
Clearly the impact of disqualification proceedings can have far reaching consequences and adverse implications for those involved. It is always advisable in such circumstances to seek suitable independent legal advice.
 George Dale, Director of Business Recovery and Insolvency at Thomson Cooper