A question that frequently arises from director’s seeking business recovery advice is what the likely implications are for the directors if the company ultimately enters some form of formal insolvency procedure. As well as financial implications, such as being called upon under a personal guarantee for a company debt, the risk of being banned from acting as a director of a company can be a cause for concern for many directors. Often, it is something that directors are aware of, but are uncertain of what it means and whether it may be relevant to them.
Following the liquidation or administration of a company, the appointed insolvency practitioner has a duty to report on the conduct of the directors of the insolvent company. Following that report, the Insolvency Service will consider whether there has been any unfit conduct on the part of any of the directors. If unfit conduct is discovered, the Insolvency Service will look to have the director disqualified (banned) from acting as a director of a company. The length of time for which a director can be banned from acting as a director can vary depending on the severity of the unfit conduct and can be for up to 15 years. During that time, a disqualified person can not act as a director of a company, nor be involved in forming, marketing or running a company.
There are many reasons why a director’s conduct may be considered to be unfit, such as:
- Failing to keep adequate company records
- Allowing a company to continue trading when it is insolvent
- Not paying debts due to HM Revenue and Customs
- Failing to submit accounts and returns to Companies House
- Using company assets such as company money for their own personal benefit
The total number of disqualifications each year is around 2,000. To put that in context, in the period July to September 2014, there were 4,179 corporate insolvencies, equating to in the region of 12-13,000 corporate insolvencies a year. Whilst the proportion of directors of insolvent companies who become subject to disqualification proceedings is therefore small compared to the overall number of insolvencies, it is also something that does occur and that directors need to be aware of.
Directors whose businesses are facing financial difficulties and are concerned about whether they may face disqualification proceedings may avoid seeking advice and try and continue running their business in the hope that the situation will improve. In fact, seeking professional advice is one of the most important things that a director can do if there are financial pressures and the risk of insolvency.
By discussing what being disqualified from acting as a director means and the reasons why directors are disqualified, insolvency advisors can alleviate many of the fears of directors as to whether there is a potential issue for them. In addition, they will be able to understand the duties that they have as a director of a company which may be insolvent, in particular their duty to act in the best interests of creditors. A qualified practitioner can discuss how different business recovery options available to the business will affect directors, such as how a Company Voluntary Arrangement can affect director’s responsibilities. If a director is ultimately faced with disqualification proceedings, it can be a strong mitigating factor if a director has sought professional advice and has acted upon it.
There is another very good reason why directors should seek business debt advice as early as possible. When there is a delay in seeking advice, the financial position of the company can deteriorate further. We see many businesses where, had advice been sought from us sooner, there would have been many more options available to the directors some of which would have meant avoiding insolvency altogether. The solutions provided can focus on business owners retaining their business, dealing with cash flow problems and setting businesses back on a path toward profitability.
Seeking advice at an early stage will therefore not only allow you to discuss any concerns that you many have and minimise any risk that you may have as a director, but also give you more opportunities to set your business back on the right track.