As the current economic turmoil appears (at least from the government’s point of view) to be fading, efforts are being focused on the clear up operation which began several months ago. In this blog, I will discuss director disqualification and what we (as specialists in this area) are starting to see come through which is directly COVID-19 related.
Most directors are unaware of the government agency, the Insolvency Service, but then a majority of directors (easily) have probably never heard of director disqualification.
Directors of any limited company can be disqualified from acting as a director under the Company Directors Disqualification Act 1986 (as amended) (or “CDDA”).
- this disqualification can be for a failure to file returns or accounts at Companies House.
- in criminal proceedings, there is a general power to disqualify directors but, most commonly, the vast majority of directors are disqualified following their company’s insolvency.
A director disqualification order (or a voluntary undertaking) is serious. If you are disqualified and in any way start or continue to run a business through a limited company, you face the risk of a prison sentence.
Companies have struggled during lockdown but very few have been forced into insolvency, either struggling by cutting staff, claiming government grants and loans or just dissolving the company without placing it into any formal winding up process.
Of those placed into insolvency, and with great expediency, I have seen the Insolvency Service commence investigations into disqualifying directors who applied for and received bounce back loans and CBILs, on the basis that these monies were applied for or used improperly.
- the bounce back loan application form does not prescribe how a director/company should use the loan funds – at the end of the day it is a loan and is repayable (although we will address in a later blog how dissolving your company during lockdown may not have been wise).
- despite this, and consistent with the law on director misconduct, the Insolvency Service is investigating and seeking to disqualify directors who have applied for such loans and improperly used the funds received.
- in some instances this is obvious – if a director sets up a company, obtains a bounce back loan, dissolves the company and pockets the money, he can hardly complain when it is sought to be repaid (and it will). Here is a guide we have recently written on director disqualification and bounce back loans.
However, business is complicated and not all loans have been applied for or used this way.
The number of government investigations into these and similar circumstances is growing and any director that has had a company placed into insolvency or which has been dissolved during the lockdown period needs to carefully review how any grant or loan monies received were used, and, if they have any concerns, arrange for them to be repaid.
Turning to current live companies, they have largely been protected by CIGA 2020 – which places strict restrictions on the circumstances in which companies can be wound up at court on a creditor’s petition.
These protections ceased (to a degree) on 30 September 2021, and we now expect to see hundreds (maybe thousands) of companies with winding up petitions presented against them. If a winding-up order is made (which in most cases it will) then the company will be placed into liquidation and the directors of this company face the same risk as addressed above.
My next blog will set out how this change to the law (including CIGA 2020) will affect companies and their directors.
Should you require any assistance relating to director accountability, contact our director services team. Whatever your situation, we have almost certainly seen it before and our experience can help you find the solution you need.
I would strongly recommend using FWJ for director disqualification matters. Tactically and commercially they played it just right and I am now able to get on with my business life without the worry of disqualification hanging over meA director we defended against a disqualification claim