Disqualified Directors, Are they named and shamed and hung, drawn and quartered?
Disqualified Directors, Are they named and shamed and hung, drawn and quartered? It is very easy to set up a limited company and they can be bought “off the shelf” in a matter of minutes, but do the new directors understand The Companies Act and know what the duties as a director really are?
In reality, the answer is NO and directors have no idea of what obligations face them in the future. Sometimes at the commencement of the company’s life, the company accountants, if the company has one, will advice the directors of their duties, but all too often, the directors start to trade with no knowledge at all of how to run a business from the legal side.
When a company goes into administration, administrative receivership, or liquidation, whether voluntary or compulsory liquidation, the Insolvency Act and Insolvency Rules “Kick In” and the Administrator or Liquidator has a statutory duty to report on the director’s conduct of the company under the Company Directors Disqualification Act 1986 (CDDA).
The insolvency practitioner will have to report to the Secretary of State for Business, Innovation & Skills all directors who held office in the last 3 years of the company’s trading.
It will be the Secretary of State who decides to seek a disqualification order.
CDDA is a powerful tool against those directors who abuse the system and will also apply to Shadow and Defacto Directors.
So, what are they looking for and what happens to the directors, are they named and shamed and hung, drawn and quartered?
The courts will be looking for criminal offences, fraudulent and wrongful trading; trading whilst knowingly insolvent; failure to keep proper accounting records; failing to comply with filing requirements, trading to the detriment of creditors, and any other unfit conduct.
Disqualification can be for a minimum period of 2 years and a maximum of 15 years.
The directors will be notified of the decision to apply for disqualification and the Secretary of State must apply for disqualification within 2 years of the date of insolvency, unless the court extends the time.
The director can give an undertaking of a disqualification to the Secretary of State, rather than face court attendance, which saves costs. This changed with the introduction of the Insolvency Act 2000, which saves the necessity of a court involvement.
So, what happens, what is the effect on the director?
The director, unless they obtain the courts permission, is disqualified from:-
– being a director of a company
– acting as a receiver of the company’s property, directly or indirectly be concerned, or take part, in the promotion, formation, or management of a company, or a LLP
– acting as an insolvency practitioner
The director will also have to pay “for the pleasure” of going through the disqualification order and will be liable to pay the costs of the disqualification proceedings!
If someone contravenes a disqualification order or undertaking, they will be committing a CRIMINAL offence and is liable to prosecution and can also be held personally liable for ALL of the debts of the company concerned. They can even go to prison.
This does happen quite a lot and the Insolvency Service has a telephone HOTLINE which enables the public to report any contraventions to them on 0845 601 3546
Apart from the disqualification order and then having to pay for the costs of the court case, the directors will also have their name appear on a public record as they inform the Registrar of Companies and it is also recorded on the Insolvency Service website, for all to see.
If the disqualification order is quite severe and usually if it involved taking deposits from the public, then the press will pick up on the disqualification order and this makes interesting reading in the papers.