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How to avoid a director’s disqualification

No matter the age, size or business of your company, as a company director you have legal responsibilities and obligations. You could face serious consequences for not meeting these requirements. 

One of these consequences could be director’s disqualification. This means being banned as a company director, which prohibits you from setting up, marketing or being involved in the running of a company for a certain period of time.

This article explains the common pitfalls that can lead to director’s disqualification and how you can avoid them. We’ll also highlight some examples of recent cases where company directors have received bans, so you can learn from their mistakes. 

1. Improper directors conduct

2. What is a report?

3. Penalties

4. Covid and changes to the legislation

5. Director’s disqualification case studies

Improper director conduct

So why can director’s disqualification happen? Reasons can include:

  • trading while knowingly insolvent (wrongful trading).
  • failure to keep proper accounts and records.
  • failure to pay tax owed to HMRC.
  • failure to file accounts and returns to Companies House.
  • using company money for personal profit.

Criminal activity can also lead to a director being reported and banned – on top of a criminal prosecution, of course. This could (and does) include fraud or operating scams, failing to provide goods and services as described, flouting health and safety regulations, breaking immigration law, causing harm to customers and/or suppliers…and many other scenarios.

You can find some examples of these in our case studies section below.

Reporting a director

The first thing to note is that anyone can make a report to Companies House about the improper conduct of a company and its directors.

Members of the public can make a complaint about the conduct of a company’s directors via the Government’s website. They can also report a disqualified director.

However, most reports are made by officers of the court, such as the official receiver, company administrator or licensed insolvency practitioner, as a result of investigations during insolvency proceedings.

It’s important to note that your company going into liquidation doesn’t mean there will be an automatic ban on directors.

Part of the role of a licensed insolvency practitioner – or other official of the court – is to discover if the conduct of the directors of the insolvent company has been in line with their legal responsibilities and obligations. If they uncover unfit or improper conduct, the official has a duty to report it to the Secretary of State at the Department of Business, Energy and Industrial Strategy (BEIS, the Government department responsible).

This report is known as a ‘D Report’. On receipt of the D Report, the Insolvency Service will investigate the director’s conduct. Action towards director’s disqualification will be taken if it’s considered in the public interest.

Failing to comply with instructions from the official receiver or appointed licensed insolvency practitioner could lead to director’s disqualification, as could attempting to deprive creditors. You can find a detailed list of the rules and regulations on the Government’s website.

Penalties

Each case is investigated, heard and then judged entirely on its merit and specific circumstances. If you’re found to have acted improperly then you’ll be disqualified (banned) from being a company director. Bans usually range from two to 10 years, depending on the severity of the offence (although they can be longer for ‘repeat offenders’).

Not only that, The Insolvency Service will publish details of the case on its disqualified directors database, including who you are, your misconduct and subsequent punishment (including the start date and length of the ban).

As we have already stated, being banned means that you won’t be able to be involved in the running of a company.

Breaking a ban can have severe consequences, including a prison sentence of up to two years and/or a fine. Furthermore, the ban is likely to be extended.

A word of warning: in some circumstances there’s the possibility that the director will be made to take personal liability for all relevant debts of the company (especially in cases of wrongful trading). 

On top of all this, if another director or manager acts on the instructions of a person who has been disqualified then they too will have broken the law (and may be made personally liable for company debts). 

The message is simple: respect the ban or reap the consequences.

Covid and changes to the legislation

At the start of the COVID-19 pandemic in 2020, the Government introduced a raft of measures to help protect company directors whose businesses were in trouble.

One of these was the suspension of the rules around wrongful trading, an issue of real concern to many directors facing an unprecedented set of circumstances. Originally intended to run until the end of November 2020, the measure was extended until April 30 2021.

The rationale was to provide breathing space for companies under pressure, and meant directors could not face director’s disqualification for wrongful trading, or trading while knowingly insolvent, during the pandemic. 

Please remember, the pandemic and the aftermath does not give directors an excuse to act irresponsibly or neglect their duties in line with the law.

Director’s disqualification case studies

As you’ve seen, director’s disqualification can happen for a whole host of reasons. Here are a few real-life examples.

Trading while insolvent

The collapse of the construction and outsourcing giant Carillion in January of 2018 sent shock waves through the UK economy, causing thousands of job losses and making headlines around the world. 

Four years on, the story hit the news again in January 2021 when the Business Secretary, Kwarsi Kwarteng, announced that the government was launching disqualification proceedings against eight directors of the failed firm.

The Independent newspaper named the eight as Richard Adam, Richard Howson, Zafar Khan, Keith Cochrane, Andrew Dougal, Phillip Green, Alison Horner and Ceri Powell.

One of the accusations made against them, by the Unite union, is that they failed to report the company’s true financial position, and that it was effectively trading while insolvent.

Diverting funds

A director of a metal manufacturer has been banned from directing a company for eight years after fraudulently diverting over £510,000 from a finance firm.

Daniel Knowles led Worcestershire-based HE Knowles from its incorporation in November 2016 until its administration in January 2020.

During the period, Knowles would submit customer invoices to a finance company so as to secure funds in advance, while the company would then be paid directly by HE Knowles’ customers.

However, from April 2019 until the firm entered administration, Knowles had been collecting invoices straight from clients, claiming £510,000 away from the finance group. At the time of its collapse, which triggered an investigation by the Insolvency Service, HE Knowles also owed creditors a further £1.3m.

Martin Gitner, deputy head of insolvent investigations at the Insolvency Service, said: “Daniel Knowles knew the terms of the agreement with the finance providers and that any customer invoices should contain the payment details of the finance company. 

“Instead, he deliberately inserted his own company’s bank details, knowing it would result in HE Knowles (Manufacturing) Ltd receiving payments that should have been paid to the factoring company.”

Gitner added that the length of the ban proves that the service takes matters of this kind “very seriously”, as it will “seek to disqualify those who choose to act unscrupulously”.

Failure to keep proper company accounting records & not paying tax owed by the company.

A restaurateur has been banned for five years after he hid his business’ true takings to avoid paying the correct taxes.

Sadikur Rahman Chowdhury, from Kenilworth in Warwickshire was the director of Simla Restaurant Ltd, incorporated in December 2002. The company traded as a restaurant called Simla Tandoori from premises on West Street in Blandford Forum, Dorset.

Simla Restaurant, however, entered into liquidation in August 2019 and this triggered an investigation by the Insolvency Service into Chowdhury’s conduct.

Investigators uncovered that the business traded without issue until June 2008 when it was discovered that Chowdhury had caused Simla Restaurant to submit inaccurate returns to the tax authorities. Enquiries established that he owed over £48,000 in VAT and almost £113,000 in corporation tax from 2009 to 2017.

It was found that Chowdhury had underdeclared sales to avoid paying the correct taxes and, at liquidation, owed the tax authorities more than £266,000. An additional penalty of over £104,000 was levied by the tax authorities for the under declaration of corporation tax.

On 13 January 2021, the Secretary of State for Business, Energy and Industrial Strategy accepted an undertaking from Sadikur Rahman Chowdhury banning him for five years after the director did not dispute he failed to ensure Simla Restaurant Limited had submitted accurate VAT returns from June 2008 and Corporation Tax returns from October 2009.

The director’s disqualification will commence from 3 February 2021 and he is banned from directly or indirectly becoming involved, without the permission of the court, in the promotion, formation or management of a company.

Poor record keeping.

Failure to submit accounting records and pay thousands of pounds worth of tax landed Lancashire nightclub owners with directorship disqualifications. Paula Kelly and Paul Anthony Kelly, from Thornton Cleveleys in Lancashire, started their seven-year director’s disqualifications on 25 November 2020.

The husband-and-wife team are both banned from acting as directors of a company or directly or indirectly becoming involved, without the permission of the court, in the promotion, formation or management of a company.

Flexitell Limited was incorporated in March 2016 and Paul and Paula Kelly were appointed as directors. Husband and wife managed several nightclubs and pubs in Blackpool under the trading name Ma Kelly’s.

The company, however, entered into administration in May 2017 and Flexitell was referred to the Insolvency Service for further enquiries. Investigators found that Paul and Paula Kelly had not maintained or preserved accounting records throughout the life of the company. This has meant the nightclub owners could not explain their claimed £1.1 million turnover, £195,000-worth of tax owed, and the outstanding balances on their directors’ loans.

On 9 November 2020, the Secretary of State accepted disqualification undertakings from both Paul and Paula Kelly after husband and wife did not dispute they had failed to ensure Flexitell maintained or preserved adequate accounting records explaining an estimated company turnover in excess of £1 million and a £194,000 debt owed to the tax authorities.

How can you avoid director’s disqualification?

The simple answer: follow the rules! However, this is not always straightforward, with many thousands of companies facing a critical period following the COVID pandemic. 

For advice and help with all aspects of insolvency procedures, call 01455 555444 to speak to one of our licensed insolvency practitioners, email us at enquiries@fasimms.com or request a call back

But help is out there. Seek the advice of the experts. A licensed insolvency practitioner and business rescue professional could help rescue your business. If this is unfortunately not possible we can help you do things the right way, by guiding you through an insolvency process that best fits your needs and circumstances.