Did you know that 95% of directors of insolvent companies avoid disqualification?

Did you know that 95% of directors of insolvent companies avoid disqualification?

Naturally, there are some very negative connotations attached to the idea of company liquidation. While liquidating a company isn’t necessarily a negative thing, and is something which can even be the result of a voluntary move, most directors who approach liquidation think of it as a ‘defeat’ and worry about the impact it could have on their entrepreneurial standing – they worry about disqualification.

The reality is that disqualification depends on a wide number of factors, including the reason the company had to wind up and the director’s conduct as a leader of the business. Of course, when your business is approaching insolvency you must make contact with an insolvency practitioner who can steer proceedings. This Insolvency practitioner may be able to advise you on whether or not you may get disqualified but it’s extremely difficult to tell, particularly when there are so many internal factors of which they may not be aware.  For the most part though, if a director doesn’t have a history of insolvencies the changes of a ban are extremely low, lower than you might think in fact. On average, only 5.25% of directors face a disqualification, particularly those running small to medium businesses where the failing can be attributed to factors outside of their control.

Insolvency laws in the UK have engineered in way that promotes a ‘rescue culture’ rather than a slap on the hand. Sometimes business succeed and sometimes they fail, and there are so many extraneous variables it’s almost impossible (and indeed, pointless) to assign blame. The important thing is that directors and businesses get a fair run, and that’s what insolvency/liquidation is all about. It’s not a means to an end, simply a way of tidying something up that hasn’t quite worked and wiping the slate clean. To get a disqualification you have to do more than simply have a failing business model.

What is disqualification?

The Company Directors Disqualification Act was passed in 1986, and can be enforced by the court if the Secretary of State finds evidence of bad practice in the last 3 years of the companies trading. Commonly, an insolvency practitioner will have to generate this report as part of their proceedings and winding up of the company.  A disqualification order isn’t necessarily a punishment per se, but a way of preserving public interest when a director has acted unethically or recklessly.  A director can be disqualified if:

  • They continue to trade to the detriment of creditors when the company was clearly insolvent.
  • They fail to keep proper accounting records or books.
  • They fail to submit tax returns or other monies owed to the Crown.
  • They don’t cooperate with their insolvency practitioner or liquidation professional.

Of course there are other reasons for disqualification, but these are among the most common. So long as your affairs are in order, you focus on the interests of your creditors and accept that your company is insolvent instead of trying to battle up hill, insolvency will be the life line you need to carry on your life in business.

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