Increase in Director Disqualifications
Huge Rise in Director Disqualification Numbers in 2016.
More directors were disqualified in the first 3 months of 2016, then at any time in the past 6 years. The Insolvency Service secured 390 director disqualifications in the first 3 months of 2016, an increase of 56% on the same period in 2015 and the highest quarterly total since 2010, and claims that the figures demonstrate that it is successfully tackling ‘dodgy directors’. As Director Disqualification Solicitors, we look into these figures more closely in this article and advise directors (and their professional advisors) facing disqualification that such an outcome is not inevitable.
Our Take on These Figures
Here at NDP, we disagree with the Insolvency Service’s conclusion – that they are successfully tackling ‘dodgy directors’ – at least in part. We carefully monitor the grounds on which directors of failed limited companies are disqualified, whether by Court Order or more commonly, where a director has entered into a director disqualification undertaking. Our view is that the introduction of director disqualification undertakings – meaning a director voluntarily disqualifies him/herself to end court action – has led to many director disqualifications that were probably unnecessary.
Crown Debt at Liquidation? This Means a Real Prospect of Director Disqualification
Our view (based on that constant monitoring mentioned above) is that the Insolvency Service are deliberately and actively targeting those insolvent companies where there is Crown Debt for one or more of VAT, PAYE, NI or Corporation Tax owed to HMRC at the date of liquidation, with a view to commencing a director disqualification investigation in such cases. You might almost call such companies low hanging fruit for the Insolvency Service.
In reality that means most insolvent liquidations will see directors targeted for at least a disqualification investigation by the Insolvency Service, because there is often a debt owed by the company to HMRC at liquidation.
It is increasingly apparent that a debt owed by the company at liquidation to HMRC (other than for a nominal or de minimis sum) will likely attract:
- An adverse report sent from the liquidator, on the conduct of all directors of the liquidated company, to the Secretary of State for Business and/or The Insolvency Service (the liquidator has a statutory and a professional duty to report such matters).
- A ‘red flag’ within the Insolvency Service, leading to an investigation into the conduct of the directors by the Insolvency Service, in conjunction with the appointed licensed insolvency practitioner. That investigation may result in other allegations of unfit conduct being made, to include (for example) allegations of ‘failing to maintain/preserve/deliver up company books and records’, which if proved, will likely attract a disqualification period of up to 8 or more years, with potential for Criminal law consequences for the director.
- The very real prospect of the threat of director disqualification proceedings against the directors of the insolvent company.
Does the existence of Crown debt at liquidation mean disqualification is inevitable?
No it does not, but in circumstances where we see most Crown debt disqualifications arising out of directors giving voluntary director disqualification undertakings (rather than the director being disqualified by Court Order) an important point of public interest does arise.
There is a Lack of Scrutiny and Supervision From the Court
Up until the introduction of director disqualification undertakings in April 2001, a director could not be disqualified without Court Proceedings being commenced by the Insolvency Service against the director. The Court thus oversaw the disqualification process in each case.
What are the Consequences of Director Disqualification Undertakings?
Whilst the introduction of director disqualification undertakings introduced a much needed, simplified process for disqualifying directors, it now allows directors to be disqualified by agreement, without the need for Court involvement and the scrutiny of the Court in a particular case.
In NDP’s view, that has inevitably resulted in many directors being disqualified by agreement, often unnecessarily, because for example, the unfit conduct alleged against the director (e.g. ‘trading to the detriment of the Crown’) is simply not made out on the facts of the case, as relied upon by the Insolvency Service. So although there have been record numbers of disqualifications so far this year, we suspect that a proportion are as a result of undertakings that perhaps were not necessary.
So, What Should the Director do?
The Insolvency Service will inevitably make contact with the director who is targeted for disqualification, by letter, seeking the director’s response to the conduct complained of in that letter. It will give time and opportunity to the director to engage with and respond to the Insolvency Service, again by letter and possibly in a face to face meeting.
The Insolvency Service is duty bound to (and does) look at all the circumstances of the case. However, the Insolvency Service are, inevitably, strangers to what has gone before in the months leading up to the liquidation of the company. This prompt is the director’s opportunity to fill in the evidential and factual gaps, to try and persuade the Insolvency Service that it is not in fact in the public interest to pursue that particular case.
Will the Insolvency Service Drop a Case?
NDP’s experience is that the Insolvency Service takes its duty to act seriously. It is also our experience that the Insolvency Service will abandon a case (whether or not it has issued proceedings) if it can be persuaded that it is not (or is no longer) in the public interest to pursue a particular case. The question is what is required for the Insolvency Service to be persuaded?
The Devil is in the Detail. We Know How to Present the Right Details to Help Defend Those Facing Director Disqualification
Here at NDP, we are well used to responding to and engaging with the Insolvency Service on behalf of directors faced with disqualification investigations. Our experience is that the key is gathering the key facts and than knowing how best to present these facts and supporting documents to the Insolvency Service, so as to avoid disqualification completely or to at least give to the Insolvency Service reasons to accept a lower period of disqualification than might otherwise be sought by the Insolvency Service.
A lower period of disqualification will inevitably assist the director in any such application for permission to continue to act as a director, that he or she might make.
Contact Us If You or One of Your Clients is Facing Director Disqualification
Whilst the figures do show that Director Disqualification numbers are up this year, we believe that this is partially explained by an increase in those agreeing a disqualification period by undertaking. Under these circumstances, directors can be disqualified by agreement, without the need for Court scrutiny or involvement, and yet that scrutiny of all of the key facts of a case might well lead to a shorter period of disqualification or of the case being dropped.
At NPD, we are Director Disqualification experts, with long experience of working with the Insolvency Service in such cases. Click here to see some client testimonials.
So, if you, or one of your clients is facing director disqualification, contact us or call us on 0121 200 7040 for help and advice and a free initial discussion, because in our experience disqualification is not inevitable.