Top Tips for Directors to Avoid Disqualification

Controlling the company cheque book does not mean you can pay yourself. You must pay other creditors before you pay yourself or risk retrospective fines and disqualification as a director.

The number of British company directors facing disqualification has soared by 17 per cent over the last year. This has been largely fuelled by the recession causing directors to make detrimental business decisions in favour of personal interests and a notable rise in cases involving fraud. A total of 2169 directors of insolvent companies faced disqualification proceedings in the year to March, up 17 per cent from 1,852 the year before.

Severe pressure on a business, more common in a recession, leads some directors to break the law in a last ditch attempt to save their business or their own personal financial situation. When a company goes bust and an insolvency practitioner gets appointed these irregularities are usually uncovered.

In the past it was often only one director, increasingly multiple directors at the same company are facing banning orders because the Insolvency Service is identifying more instances of collusion between directors. There were 1,047 companies targeted over the past year involving 2,169 directors under threat of disqualification. The biggest increase in proceedings against directors was for making non-commercial transactions while the company was insolvent, with 388 cases recorded, up 56 per cent from the year before.

A growing number of directors also faced disqualification for underpaid tax, which resulted in 813 banning orders during the year. However the number of directors banned for criminal matters including fraud and theft also rose by 52 per cent with 265 disqualifications.

In my experience working as a business doctor, directors that find themselves the wrong side of the law are for the greatest part ignorant of their responsibilities as opposed to bad or deliberate fraudsters. Things that just seem to be right or are apparently in their discretion are often illegal for the very good reason of protecting vulnerable creditors. In the 'heat of battle' to save a business the pressure on directors can be huge. For example, an angry spouse who is trying to manage the family budget, take a greater burden of domestic chores, see little of their director partner might just insist the director pay themselves whilst others remain unpaid.

The Companies Act sets out the duties and responsibilities of directors and how they must behave at the point their business becomes insolvent. I have previously co-produced, with other turnaround managers and lawyers, a guide for directors to managing an insolvent business that is still available at no cost to help anyone who might be unsure of their lawful duty. It is unlawful to run a company that cannot pay its creditors on the due date without complying with certain specific criteria. It is absolutely unlawful to make payments that prefer one creditor ahead of another and, in particular, favour the directors ahead of other creditors.

One piece of information that shareholders and directors should know, and most do not, is that an insolvent business need not necessarily be liquidated. It is perfectly reasonable and lawful for directors to stop paying creditors and to both take, and pay for, advice about handling the affairs of the company. It is also quite normal for an insolvent business to be rescued by a firm of specialist turnaround practitioners. That treatment will usually retain at least some of the value in the business for them where liquidation would see most of the value lost and any recovered dispersed between creditors.