27 October 2015: Alan Limb from BRI Business Recovery and Insolvency’s Southampton office explains how a recent change in legislation is designed to disqualify more unfit Directors.
Whenever a Company goes into Liquidation, Administration or Receivership the Insolvency Practitioner who is appointed has to report on the behaviour of the Company’s Directors. This includes anyone who was a Director in the 3 years before insolvency, as well as “Shadow” Directors – anyone else whose instructions the Directors used to follow when running the Company.
The reports are sent to the Insolvency Service, a Government Department whose role includes deciding which individuals it should prosecute to disqualify them as a Director for up to 15 years. The Insolvency Service recently set up a Twitter Account to publicise its successes at obtaining Disqualification Orders. A glance at the hashtag #DodgyDirectors shows some common themes amongst offences that result in Disqualification:
- False accounting or keeping poor quality accounting records;
- Transferring assets out of the Company to put them beyond the reach of creditors;
- Taking money from the public in advance for goods that aren’t supplied;
- Failing to pay tax due to HM Revenue & Customs; and
- Directors paying large sums to themselves whilst not paying creditors.
The Insolvency Service has been criticised historically for concentrating on the cases with the greatest chance of obtaining a Disqualification Order. Additionally, Directors are encouraged to agree to a Disqualification Undertaking where the Insolvency Service convinces them that the chance of being disqualified in Court is high. In giving the Undertaking voluntarily, the Director is disqualified for a slightly lesser period than if an Order had been made against them because the uncertainty of a trial is avoided.
Nevertheless, you may be surprised to learn that the number of Directors who are disqualified each year is less than 5% of all Directors of Companies that become insolvent. In our experience at BRI Business Recovery and Insolvency, some Directors who have deserved to be disqualified have avoided punishment because they didn’t commit the most serious offences.
Consequently we welcome the changes to the Disqualification regime that have been introduced from 1st October 2015 by the Small Business, Enterprise and Employment Act 2015. These should result in more Dodgy Directors being prosecuted. The main improvements are as follows:
- The period after insolvency when an application to Court can be made for a Disqualification Order has increased from 2 to 3 years;
- It is now possible to disqualify a person convicted of a Company related offence abroad;
- A person who influences or instructs unfit Directors will now be eligible for Disqualification; and
- A disqualified Director may also be required to pay the amount of money that creditors lost as a result of his misconduct.
We hope that the Insolvency Service’s resources will also be increased to use these new powers fully and ensure that all Directors who deserve to be disqualified actually suffer that penalty in future.
If you are a Director of a Company that is struggling financially and you are concerned about the possibility of disqualification then please do not hesitate to contact BRI Business Recovery and Insolvency and we’ll be happy to help. Our contact details can be found by clicking on “The Team” above. It is never too early to seek advice and we always encourage Directors to do so before they take any action that they could live to regret.