The Risk of Being Disqualified As a Director Is The Nightmare Scenario That Hovers In The Back of Most Directors

The Risk of Being Disqualified As a Director Is The Nightmare Scenario That Hovers In The Back of Most Directors

The risk of being disqualified as a director is the nightmare scenario that hovers in the back of most directors’ minds. It is usually coupled with insolvency and bankruptcy proceedings, with all the associated difficulties those can bring.

Who Has the Power to Threaten a Director with Disqualification?

The Insolvency Service are tasked with pursuing disqualification of director cases. The basis behind most of these cases is that pursuing disqualification is regarded as in the public interest because of the “impact on every law-abiding tax payer”. In other words, the Insolvency Service is primarily motivated by ensuring that the tax burden is as fairly and widely spread as possible. On the face of it, it does not take into account the reasons behind a director’s actions, their motivations or the jobs and livelihoods that are put at risk whenever a director is threatened with disqualification.

Why Might I Face Disqualification as a Director?

Disqualification for Crown Debt is a frequently cited reason for disqualifying someone as a director. Figures from the Insolvency Service state that the average amount outstanding to HMRC in such cases is £975,740. However, in many cases, the outstanding amounts are considerable lower and often between £100,000 and £120,000. This means that even businesses with relatively low annual turnovers can run into problems in this area. Rising Crown Debt risks a director facing an allegation of treating the Crown unfairly or of trading that is detrimental to the Crown.

Failure to keep up to date and accurate records is another common reason for disqualification. The duty to keep up-to-date and accurate records is a statutory one under section 386 of the Companies Act 2006 (the Act). In the words of the Act, records fulfil this duty if they (a) show and explain the company’s transactions; (b) disclose with reasonable accuracy, at any time, the financial position of the company at that time; and (c) enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act. Recent case law demonstrates that a director’s inability to show that he or she is running their company for legitimate purposes may result in disqualification. The test that a director must pass is undoubtedly a high one, which goes to show the seriousness with which the Insolvency Service regards the record-keeping duty.

Why Is a Lack of Accounting Records Regarded as Such a Serious Matter?

Accounting records are key when it comes to investigating what happened in the business, when and why. Without full and accurate accounting records, such as investigation may be impossible at worst and fruitless at best.

Can I Avert Disqualification for Crown Debt?

You may be able to do so if you successfully seek “time to pay arrangements” with HMRC. This often requires specialist advice from an accountant, solicitor or director disqualification specialist.

What Happens If I Am Disqualified as a Director?

Your company may be wound up in the public interest by the Secretary of State for Business, Energy and Industrial Strategy. You are also likely to be required to give an undertaking that you will not take up a new directorship of a limited company for a period of time. This period is usually measured in years rather than months. The maximum period of disqualification allowed is fifteen years. However, any period of disqualification can have a catastrophic effect upon an individual’s business and personal life.

I Think I’m Going to Be Threatened with Disqualification as a Director. What Should I Do?

Firstly, do not panic. Secondly, remember that now is not the time to bury your head in the sand. Thirdly, it is most definitely appropriate to seek expert legal help. With expert help, you can aim to avert disqualification proceedings at as early a stage as possible.

Great. How Will a Professional Help Me Do That?

An appropriate professional ought to be an expert at helping directors in your position put across the reality of their situation to the Insolvency Service. You can help your chances here if you have kept a contemporaneous diary of what actions you took, when and why. Furthermore, try to gather together any other documents, such as emails, phone logs and the like, that might go towards supporting your position.

Are There Any Mitigating Circumstances That May Be Taken into Account?

Yes, in some cases, there are – and an appropriately qualified expert will guide you through these. However, factors that have sometimes been considered relevant include the director’s proper reliance on a professional person during the conduct of their business; a single instance of misconduct that occurred during a period of severe or terminal illness suffered by a member of the director’s immediate family; and misconduct arising from duress. This list is neither exclusive nor necessarily applicable to all situations.

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