Will A Director Be Disqualified If Their Company Goes Into Liquidation?
Fast Liquidation Fact
Will a director be disqualified if their company goes into liquidation? No, a director is not disqualified because a company goes into liquidation. A director will only be disqualified because their conduct has fallen below the standard deemed to be acceptable and considered to be unfit. Most directors who go into insolvent liquidation do not get disqualified.
Why Are Directors Disqualified?
Directors are disqualified because, as a matter of law, they have legal duties when running a limited company and if they fail to live up to those expectations by causing avoidable loss, the government steps in to protect the public.
The key responsibility of a director is to act at all times in the best interests of the company and in accordance with the company’s constitution. It is not to act in their own best interests when these are inconsistent with those of the company. If a company is insolvent, the director must consider the interests of creditors before those of the shareholders.
Who Is Most At Risk Of Director Disqualification?
Director disqualification is a government initiated procedure. Whilst there are no hard and fast rules, Directors who appear most at risk of disqualification are those who either have caused a loss to be incurred by the public purse in the form of lost tax or improperly obtained government backed COVID-19 finance loans.
In addition, those at particular risk will also be directors who take unfair advantage of vulnerable people in society and engage in fraudulent conduct.
What Is Liquidation?
Liquidation is the legal process of closing down a limited company through the appointment of a liquidator who realises the assets, which are then used to pay the expenses of the liquidation before distributing any surplus to creditors.
The most typical liquidation initiated by a company’s directors is known as creditors voluntary liquidation.
How Can Director Disqualification Arise?
When a company is insolvent, the liquidator has to investigate the cause of the company’s failure and report on the conduct of the directors in the last three years to the Insolvency Service. The Insolvency Service is a government agency in the Department of Business and Trade.
This happens in every creditors voluntary liquidation case. It is then the decision of the Insolvency Service (not the liquidator) if an investigation is widened with a view to considering director disqualification proceedings.
Director Misconduct That Can Result In Disqualification
Director disqualification only happens if there’s evidence of serious misconduct, which might include:
- Carrying on trading when knowing the company could not avoid insolvent liquidation (wrongful trading).
- Obtaining credit by deception, such as exaggerating turnover to obtain a bounce back loan or misusing the funds for personal benefit instead of for the benefit of the company.
- Failing to keep proper books, papers and records which is a criminal offence.
- Trading to the detriment of the crown (HMRC) using monies collected for its benefit like VAT and PAYE
- Failing to pay taxes, file returns with HMRC or accounts at Companies House.
What Does Director Disqualification Mean?
A director who is disqualified for a period of time is not permitted to act in the promotion, formation or management of a limited company. Such a period may extend in the most serious cases up to 15 years.
