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Director disqualification proceedings on the increase

There has been a marked rise in the number of Director Disqualification Proceedings being issued by the Insolvency Service. In the year to 31 March 2009 the total number of companies targeted was 1,079 by comparison to 820 in the previous year, an increase of some 31%. Whilst these numbers relate to companies, the number of directors being targeted is significantly greater at 1,852*.

Given the recent increase in the number of companies entering into liquidation and administration, these numbers can only be expected to increase in the coming months ahead.

Companies are targeted where there is evidence that one or more of the directors have been involved in activities which suggest those involved are not fit to continue to act as a director.

The Insolvency Service considers the specific involvement of each director when considering prosecutions. Directors who fail to react to misconduct by fellow directors and those who take no part in the management of the company are also liable to prosecution. A successful prosecution can result in individuals being barred from acting as a director for a period from two to fifteen years.

Historically the most common reason for disqualification proceedings being brought relates to directors who use PAYE/NI contributions deducted from employee wages and VAT to fund their business. Many companies have taken advantage of the HMRC deferred payment arrangements; a scheme initiated by the Government in November 2008. Company failures, before completing a deferred settlement plan, are bound to result in the director’s conduct coming under greater scrutiny, resulting inevitably in an increase in the potential for director disqualification.

Other areas which commonly lead to disqualification proceedings include the failure to keep proper accounting records and entering into transactions which are to the detriment of the company.

The recession and cash flow pressures will undoubtedly force further companies into insolvency so it is important that the actions and decisions of management are fully documented where the decision is to continue to trade and, if there is no reasonable prospect of a turnaround or recovery, the directors of insolvent companies should take immediate advice on the cessation of operations.

* Research by Wedlake Bell, 2009

Peter Godfrey-Evans is a partner at Mercer & Hole. The views given in this blog are personal to the author.

 

 

 

Date: 11th September, 2009
Author: Peter Godfrey-Evans

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