Insolvency Practitioners and Future Trends in Director Disqualification

Our London Team of Insolvency Practitioners Discuss Future Trends in Director Disqualification and How to Minimise the Chances of Disqualification if Insolvency Strikes

When a company becomes insolvent, if the Insolvency Service has reason to believe that the insolvency was caused by a director(s) not carrying out his/her responsibilities correctly, then they will investigate. Take a look at our ‘Directors’ Duties Do’s and Don’ts’ infographic for a summary of the main responsibilities.

Such investigations often come about because when Insolvency practitioners are appointed to an insolvent company as Administrative receiver, Administrator, or Liquidator in a Creditors’ Voluntary Liquidation, they are required by law to submit information on the conduct of the directors of the company to the Disqualification Unit of the Department of Business, Energy and Industrial Strategy (DBEIS). If this unit believes there are grounds for an investigation, the Insolvency Service takes over and the outcome of such an investigation can be director disqualification.

In this article our London team of insolvency practitioners looks at what steps companies facing insolvency can take to help ensure they will pass an Insolvency Service investigation. We also look at some of the future trends that it is believed we are likely to see in Director Disqualification this year.

What Happens When the Insolvency Service Investigates?

In general terms, once the Insolvency Service starts its investigation, the director has an opportunity to make representations to the Insolvency Service as to their individual responsibilities and whether they are culpable. The aim is to provide details of all relevant matters to the investigators to try and head off the intended director disqualification proceedings. Specialist legal advice is often taken.

However, what could the company have done before insolvency? Of course, all company directors and trustees will know that good financial control and management are key to any successfully run business.  However, when trading becomes challenging and there is a risk of failure, early advice from appropriate professionals, such as a licensed insolvency practitioner greatly mitigates the personal risks directors of distressed businesses face.

The 6 main signs of a company in distress, covered in more detail in our ICAEW Guide to Insolvency and Restructuring are:

If a company is facing some or all of these symptoms, then, once again, early advice from an Insolvency Practitioner can help.

Even if the outcome is still insolvency, the likelihood is that those under investigation will have all the necessary information at their finger-tips to demonstrate to the Insolvency Service that despite the insolvency, all possible actions were taken to avoid it, thus mitigating the personal liability aspect and minimising the likelihood of Director Disqualification.

Director Disqualification is Serious – 4 Likely Future Trends

If the Insolvency Service’s investigation results in director disqualification, the maximum period of disqualification is 15 years being banned from being involved in the running of any company. That is a serious punishment, financially and commercially, quite apart from the reputational damage it causes, and is a further reason why all businesses who are facing insolvency should take professional advice from an Insolvency Practitioner or accountant.

However, the world of director disqualification is always changing, and here we summarise 4 areas where we believe we are likely to see significant changes.

  1. Director Disqualification Compensation Cases

The Law has changed to allow for cases where financial compensation is sought from the Director, in addition to his/her Disqualification.  We are not aware of any such cases that have brought by the Insolvency Service so far, but it is unlikely to be long.  We anticipate however that we will see such cases during 2019.

  1. More Criminal Law proceedings and more Directors serving actual time in PRISON

Director Disqualification has long been a civil matter. However, directors need to be aware that the Insolvency Service and the DBEIS now employ specialist teams of Criminal Investigators who investigate offences relating to corporate failures. This is where those directors who are disqualified can also end up in prison, for:

  1. Pursuing Director Disqualification cases against Directors where the company is not in a formal insolvency

Such cases are pursued most commonly under section 8 of the Company Directors Disqualification Act, and we expect to see more of these cases in 2019.

  1. Dissolved companies

On 26 August 2018, the Insolvency Service and the DBEIS announced a:

“…. new crackdown on reckless Directors, specifically those who have dissolved companies to avoid paying workers or pensions.”

Inevitably, such action is taken by directors whose companies are facing insolvency and It is said that Directors who do so will be targeted for disqualification and fines. Directors dissolving a company (rather than liquidating it) in order to avoid paying creditors is a big problem that needs addressing. It is expected that many disqualification cases in 2019 and onwards will arise out of dissolved companies where creditors are left unpaid.

Contact our Insolvency Practitioners if Facing Insolvency

Directors are at ever greater risk of Insolvency Service investigations following insolvency, with director disqualification a very real possibility if the duties of directors have not been followed. And there are several trends in the director disqualification arena where the unadvised/poorly advised director can be even more severely punished and even go to prison.

Our mantra of taking early professional advice from Licensed Insolvency Practitioners is never more appropriate. So, if you are facing insolvency, call us on 0208 088 0633 or contact us for a free initial consultation. If you are facing an Insolvency Service investigation and you need some skilled legal advice, then we can point you in the right direction.