How worried should I be about director's disqualification?

When your company goes into liquidation, the liquidator has a duty to examine the company’s books and records to check there are no irregularities.  They will be looking for signs of ‘unfit conduct’ or that as director, you have not met your legal responsibilities to the company.  This could be trading whilst insolvent, not keeping proper accounting records, not sending accounts and returns to Companies House, not paying tax or using company money or assets for personal gain.  The liquidator has to report their findings to the Insolvency Service which, if thinks it appropriate, will investigate.  In some cases, this can lead to prosecution and disqualification, so we take a look at the facts, figures and rationales for disqualification here.


How worried should I be about director’s disqualification?

Statistically speaking…

The Insolvency Service provides various statistics each quarter which will help us put this in context.

In the three years to 2016 there was 16,215 company insolvencies on average.  Of those, the average number of disqualifications was 1,204 per year.  Of that number, 95% relate to insolvent companies, and 5% relate to convictions.  (Note: disqualification proceedings must take place within three years of the insolvency.  This means that the disqualifications put in place in 2015, will most likely relate to insolvencies in 2014, and possibly 2013 too.)

If we assume that the 95% of insolvent company disqualifications average 1,143 per year, and there are 16,215 insolvencies on average, then around 7% of company insolvencies lead to disqualification.  

In reality this figure is likely to be slightly lower.  It would not be unusual for more than one director of a company to be disqualified where evidence of unfit conduct has been found.

Directors-disqualification-insolvency-service-statistics

What are the main reasons for disqualification?

The table below shows that just over half of the allegations are in relation to unfair treatment of the crown.  

This is likely to mean that HMRC was a majority creditor in the insolvency, and that the Insolvency Service considered other creditors to have been paid substantially in priority to any tax debts which had arisen.  It may have also deemed that the company used funds which should have gone towards tax debts to continue trading instead.  In our experience, directors are considerably more likely to be considered for disqualifications for unfair treatment of the Crown if they haven’t paid any tax at all within the 12 months prior to liquidation.

One of the reasons that unfair treatment of the Crown accounts for over half of all disqualifications, is that it’s comparatively easy to prove.  In contrast, disqualification for misappropriation of assets accounts for only 2.26% of disqualifications.  This is due to complications in compiling evidence, and certainly not because it is 25 times less common an occurrence!

Insolvency-Service-statistics-causes-of-director-disqualifications

How can we help?

If you are a director facing potential disqualification proceedings, we are able to advise and negotiate on your behalf.  We understand the process as both ‘poacher and game-keeper’, and can help formulate a strategy for defence. 

If you have any further questions about disqualification don’t hesitate to contact one of our business rescue experts.

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