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Bans for Rogue Directors have increased exponentially
“With great power comes great responsibility”, so says the line from a well known superhero movie. It is with this idea, if not this exact quote, in mind that the Insolvency Service is increasingly on the lookout for company directors whose behaviour falls short of the expected standard. The service has handed out more bans in the last year than it has in the preceding four years combined.
‘Section 8’ in action
Under section 8 of the Company Directors Disqualification Act 1986, a person acting as the Director of a company can be disqualified from being involved in the management of any company for up to 15 years. A change to this law in 2015 has made it far easier for ‘Public Interest disqualifications’ to be brought before the Court because the evidential grounds for doing so have been broadened.
The Insolvency Service has seized upon this change in order to have delinquent directors banned from managing companies and estimate that they have already saved creditors well over £90 million by so doing.
What can get a person disqualified from being a director?
Being a Company Director is a great responsibility. From the outset, there is the legal obligation to act in a responsible and honest manner in the way they execute their duties. Serious failings in these duties can lead to a ban being sought.
While several factors may lead to a director being declared ‘unfit’, failure to adhere to the legal responsibilities of being a company Director makes a disqualification more likely.
According to the Government’s own guidance, the following conduct may lead to a director being declared unfit to manage a company:
- Allowing a business to continue trading while unable to pay its debts (trading whilst insolvent)
- Failure to keep proper company accounting records
- Failure to file statutory accounts and returns to Companies House
- Failure to pay tax due
- The Director making personal use of company funds
It is also clear that the use of illegal workers and failure to pay the minimum wage is leading to a lot of disqualifications.
What are the advantages of banning people from being Directors?
The rationale of this crusade against unfit directors is that such individuals, after causing the demise of a company they’re involved in, are often found moving onto or founding another company and doing the same thing all over again. Such directors are frequently enriching themselves whilst leaving a trail of dissatisfied customers, unpaid creditors and unemployed staff in their wake.
Disqualifying a director breaks this cycle and in turn, protects consumers and other businesses. A person banned from being a director cannot be involved in the management of any business, in any way, for the period of the ban. An individual caught running or influencing a business whilst disqualified risks a criminal record and a prison sentence.
It’s good for the creditors
Companies don’t operate in isolation. They have creditors in the form of suppliers; honest businesses and individuals who provide goods and services.
HMRC and local councils are also creditors, collecting tax on behalf of the Government and the local community. Money which goes into the essential services we all rely on.
Finally, these unfit directors may be running companies which employ staff, who’ll be left unemployed if and when the company folds.
A company made insolvent due to the mismanagement of an unfit director is likely to leave these three groups without some, or even all of the money they’re owed.
It’s good for the customers
Customers of companies run by unfit directors are likely to also suffer. Payments may have been taken for goods which don’t appear, deliberate malpractice can leave them out of pocket, not to mention the time wasted in phone calls, emails and other proceedings before finding out that the company has closed with their hard earned money and little chance of redress.
It’s good for wider society
The true damage caused by the misconduct of unfit Directors may never be able to be calculated. Unpaid suppliers have less cash to spend, which means less pay for their staff, less investment in their own business and in extreme circumstances may lead to their own insolvency.
Unpaid taxes lead to a strain on the public purse, meaning less public spending, extra tax for everyone else or both.
It also has to be said that the former staff of delinquent directors, who, after finding themselves suddenly unemployed, may not be able to find work straight away. They may not have been paid for the work they did and will themselves need, quite legitimately, to be supported by society in the interim.
While many businesses do operate in an honest manner, a tiny minority do not and end up causing financial problems for legitimate, well run companies. We, therefore, applaud the tough stance being taken by the Insolvency Service. If your business has had the misfortune of trading with a company which was under the leadership of a rogue director and been negatively affected, as a result, get in touch with us, we can give you practical guidance on recovering from the damage they’ve caused.