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Insolvency – Directors’ Disqualification
Company directors can be disqualified if they do not meet their legal responsibilities. When a company is unable to pay its debts the law sets out a number of specific duties that a director must comply with. However, this is likely to be a highly stressful situation and it is not uncommon for directors to be in breach of one or more of their duties for example, by continuing to trade the business when they know it cannot pay its debts.
If this happens they may be disqualified from being a director. Disqualification is for a specified period, between two years and 15 years. During that time the director is prohibited from being a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without the court’s permission. The term ‘director’ is widely defined in the law and can include individuals who do not have the title ‘director’.
The court also has powers to order a disqualified director to pay compensation to the Company for the benefit of its creditors.
The Insolvency Service
When a company enters into a formal insolvency process a director’s behaviour will come under scrutiny. The liquidators or administrators are required to make a confidential report on the directors’ conduct to the Insolvency Service which may investigate you if there has been a report complaint of unfit conduct.
Unfit conduct covers the following:
- Allowing a company to continue trading when it can’t pay its debts
- Not keeping proper company accounting records
- Not sending accounts and returns to Companies House
- Not paying tax owed by the company
- Using company money or assets for personal benefit
For many directors the first knowledge they may have that there is a threat of disqualification will be the receipt of a letter from the Insolvency Service.
Next Steps
When operating a distressed business you will be making difficult decisions. Having a clear understanding of what is legally required of you is essential.
If you are concerned that you could face disqualification proceedings or if you receive correspondence from the Insolvency Service regarding your conduct as a director, you should seek professional advice as soon as possible.
We have acted for directors facing disqualification proceedings. We have also advised Insolvency Practitioners (IPs) on whether the actions of company directors amount to a breach of their duties. In addition, we have advised individuals who have been disqualified on their roles post disqualification and we have applied for leave of the court for them to hold office during a period of disqualification.