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Directors Disqualification During Insolvency - How to avoid it?

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Avoiding Directors Disqualification

A company is considered to be insolvent when it cannot pay bills on time and/or its debts are greater than the combined value of all its assets.

According to UK law, the directors of an insolvent business are required to act in the best interest of the company’s creditors as a whole. Failure to do so could result in accusation of wrongful or fraudulent trading after a liquidation, administration, or receivership procedure.

Any director found guilty of wrongful trading could face financial penalties, being ordered to contribute personally to the company's assets, and/or being disqualified from acting as the director of any limited liability company in the UK for a period of 15 years.

Any one of the company’s creditors/contributories can file a petition to the Court requesting a directors’ disqualification order, which would disqualify the individual(s) in question from acting as a director for up to 15 years. Keep in mind the court will only grant a disqualification order if there is evidence of wrongful/fraudulent trading or misconduct.

It should be noted that not all liquidations end with directors’ disqualification. In fact, it is a relatively rare occurrence, as directors are only disqualified in about 5% of all insolvency cases.

The Department of Business Innovation and Skills (DBIS) examines various aspects of performance when determining whether a director should be disqualified for unfit behaviour. Heed the following tips to be sure you’ll pass the DBIS checklist and avoid directors’ disqualification during insolvency:
  • Practice Responsible Accounting and Reporting – It’s always good to keep thorough documentation of all expenditure and income, as this information could protect you from being accused of wrongful trading.
  • Remember Companies House – Submit annual accounts and reports to Companies House on time.
  • Communicate and Negotiate with Creditors – Failure to respond to a creditor or comply with their requests could be seen as an act of misconduct. Be sure to maintain continual communication with creditors, and consider attempting an agreement through a company voluntary arrangement (CVA). A professionally drafted and proposed CVA will provide a higher chance of success than independent negotiations over the phone or via email.
  • Cease Trading During Insolvency- If you continue to conduct business knowing that there is no realistic prospect of being able to repay debts then you’re putting yourself in the position to be disqualified. In particular, DBIS will be looking for excessive salaries and drawings taken out while the company was insolvent.
  • Seek Guidance - Discuss your case and review options with a licensed Insolvency Practitioner as soon as possible. 

If your company is going out of business and you’re concerned about the possibility of being disqualified as a director, feel free to contact us with your questions. If you’d rather have a conversation over the phone you can call our directors’ advice hotline (0800 231 6040) between the hours of 8am and 10pm, 7 days a week. Our extensive office network comprises 55 offices across the UK with a partner-led service offering immediate director advice.

Who we help

  • Company Directors
  • Finance Directors
  • Sole Traders
  • Accountants
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Jonathan Munnery
Andrew MacKenzie
Julie Palmer
Thomas Mckay
Keith Tully
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