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Director Disqualification for not Keeping Proper Accounting Records

Restaurant Owner Receives 8 year Director Disqualification. What else might the law have in store for him? 

As specialists in defending directors who are investigated by the Insolvency Service for ‘unfit’ behaviour, we keep a close eye on the particular facts and evidence relied upon by the Secretary of State (‘SOS’), in pursuing Director Disqualification cases. The type of conduct relied upon by the IS, to support Disqualification claims, grows ever wider, to include allegations of the Director:

  • Failing to maintain, preserve and/or deliver up company books and records (an old IS favourite).
  • Causing or allowing the company to fail to pay Taxes to the Crown, thus trading to the detriment of the Crown (another IS favourite).
  • Failing to co-operate with the Liquidator and/or the IS.

A recently reported case, detailed below, looks at the Director of a company, trading as an Indian restaurant, who was disqualified for 8 years for failing to provide HM Revenue & Customs (‘HMRC’) with accurate trading and accounting information. We comment on the case, and suggest that disqualification might, possibly, not be the end for the disqualified director.

The details of this disqualification case

Mr MD Taj Uddin (‘Mr Uddin’) was a Director of Spice of Sylhet Limited, based in Brick Lane, London, which traded as Papadoms. The disqualification, which arose out of a voluntary Director Disqualification Undertaking, followed an investigation by the IS.  The IS successfully alleged Mr Uddin had deliberately failed to ensure that his company had provided HMRC with accurate VAT records and information. The company had gone into insolvent liquidation owing more than £199,000 to HMRC for arrears of VAT, PAYE and National Insurance Contributions.  In this case Mr Uddin had disclosed in the company’s Statement of Affairs, presented to its creditors, that the debt to HMRC was the significantly lower sum of £21,434. However, because adequate accounting records had not been kept by the company – and it is a legal requirement under the Companies Act for Directors of companies to do so – it was impossible for the IS investigation to:

  • Verify the true level of the restaurant’s takings, or
  • Discover the reasons why payments of £265,418 had been made from the company between November 2013 and April 2015, including cash withdrawals from the company of £27,827 from the company bank account.

In addition, no wage records were produced, which meant the IS investigation could not accurately establish the number of staff employed, how much was paid in wages and, therefore, the true amount of Tax and National Insurance Contributions that was due from the company.

Comment on this Director Disqualification Case

In the circumstances, it is not surprising that the Disqualification period was 8 years. It means that Mr Uddin will not be able to be a Director of a limited company, or be allowed any involvement in the management (which phrase is very widely defined) of a limited company without his first obtaining Permission of the Court, for the duration of his Disqualification. Would Permission to Act as a Director be granted? Whether he might, on any application by him to Court seeking Permission, obtain such Permission, is open to doubt.  Such consideration is beyond the scope of this article.

Is Disqualification the end of the troubles for Mr Uddin? Possibly not.

 Criminal Offences

  1. If Mr Uddin were to breach the terms of his Disqualification, he should be aware that to act in breach of a Director Disqualification Order is in itself a Criminal Offence, punishable by imprisonment and/or a fine. The Sentencing Council, right now, is actively proposing that such a breach should, as a starting point, attract a minimum 1 year period of imprisonment for this offence. Serious stuff.
  2. To deliberately understate (and thus underpay) Tax payable to the Crown, is quite capable of being construed as criminal conduct that falls fairly and squarely within the definition and terms of various criminal offences. Any successful Criminal prosecution might well be followed up by Criminal Confiscation proceedings, one purpose of which is to deprive the convicted person of his illegally obtained gains.  Again, such matters are beyond the scope of this article.

Director Disqualification Compensation Undertaking – a new type of claim.

  1. Depending on when the unfit conduct took place, Mr Uddin may now be in line to face a claim against him by the SOS, seeking financial compensation from him.

This new type of claim, detailed in Section 15(B)(1)(a) of the Small Business, Enterprise and Employment Act 2015 (‘SBEE’), introduced an entirely new concept into English Insolvency Law, allowing compensation to be paid directly to creditors (or a class of creditors), instead of by way of a contribution to the Insolvent Estate. This new power gives the SOS power to apply for and seek a Compensation Order against a Disqualified Director, as part of the Disqualification process, where the conduct of the Disqualified Director has caused losses to one or more creditors of the insolvent company of which he/she was a Director. How this will play out in real life remains to be seen. Click here for more on this matter. Actions by Liquidators and Administrators

  1. The new type of claim mentioned above, thus provides a further avenue of financial recovery against Directors, over and above the existing types of claims that can be (and that regularly are) pursued against Directors by (for example) Liquidators, alleging Misfeasance by the Director i.e. the misapplication of company assets or company property.

Mr Uddin could conceivably face a claim from the Liquidator of the company in those circumstances, based on (or relying upon) the admissions made by him in the Disqualification claim/Undertaking.  Draconian stuff.

Is Director Disqualification Inevitable Once the Insolvency Service Investigates?Director Disqualification

We cannot comment about Mr Uddin’s particular case as we do not have the full, factual details. However, as solicitors specialising in advising Directors who are facing Disqualification, our experience is that Disqualification is not always inevitable. It is only when the full facts of a case are established, following detailed investigation on behalf of the Director, is it possible to make a Judgement as to whether Director Disqualification is inevitable or whether the period of Disqualification sought by the SOS, is appropriate. When a Director first receives notice of an IS investigation, in many cases there is still everything to play for. We have had many successes in terms of reducing the period of Disqualification or of convincing the IS to drop cases on the ground that it is not in the public interest to pursue a particular case. The key is to make the SOS aware of all relevant factual matters and relevant documents.  Deciding what is material or relevant is fact specific to each case. The world has changed.  Directors and their advisors must be alive to these changes.  The advice that Accountants and Solicitors give to their Director clients in the lead up to insolvency is ever more vital.

Contact us if you are Facing Director Disqualification

Click to see some testimonials and case studies of our director disqualification work If you are being threatened with director disqualification, the sooner you contact us or call us on 0121 200 7040 for a free initial discussion, the more we are likely be able to do to help.

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