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Director Disqualification – Business as usual for the Insolvency Service

Director Disqualification for Failing to pay HMRC. 

A recent press release from the Insolvency Service (“IS”) talks about a case where the directors of a company, Bombin Limited, caused or allowed the company to trade to the detriment of H M Revenue & Customs (“HMRC”). The company went into Liquidation on 3 October 2013, and on 15 December 2014 the Secretary of State accepted Director Disqualification Undertakings from the two directors from 5 January 2015, for three years and six months and two years and six months respectively.

What was the cause of the disqualification undertakings?

The wording of the director disqualification undertakings as set out in the press release is quite typical of the Insolvency Service, and is repeated below, in a statement from one of the directors:

“I caused Bombin Limited (“Bombin”) to trade to the detriment of HM Revenue & Customs (“HMRC”) from at least 7 April 2011 to 23 August 2013, resulting in tax liabilities of £136,055 at liquidation. In particular:

  • Bombin made two payments totalling £7,737 in respect of Value Added Tax (“VAT”) leading to arrears of at least £83,693. Of the arrears, VAT is overdue for 02/11, payable in full by 07 April 2011 at the latest. The last payment made by Bombin was £3,934 on 20 September 2011; 23 months prior to cessation of trading.
  • Bombin made payments of £4,000 in respect of PAYE/NIC liabilities of £9,417 for the tax period 2010/11; payable in full by 22 May 2011 at the latest. Additional liabilities of £40,308 were incurred for the tax periods 2011/12 to 2013/14 of which £5,263 was paid, leading to arrears of £40,462.
  • In comparison an analysis of available bank statements shows that between 7 April 2011 and 29 April 2013 at least £623,491 was credited to Bombin’s bank account; of this £17,000 was paid to HMRC. Between 31 March 2011 and 3 October 2013, HMRC liabilities increased by £112,823; whilst trade creditors decreased by £8,198 to £23,528.”

This is the type of director disqualification case that NDP sees on a daily basis at the moment. Typically, the directors are alleged to have caused or allowed the company to trade to the detriment of HMRC. In other words HMRC have (usually) not been paid as much proportionately as compared to trade creditors (and perhaps the directors).

Parallel Claims by Liquidators against the Director personally

Non payment of Crown debts by the company in the period leading up to liquidation may also result in the liquidator alleging that such conduct is Misfeasant, under section 212 of the Insolvency Act 1986 and looking for evidence that the director has engaged in Wrongful Trading under section 214 of the same Act.

Such claims are claimed by liquidators to achieve a financial recovery against the directors personally (in other words where directors might lose the protection of Limited Liability), so great care needs to be taken, therefore, in dealing with such claims in disqualification proceedings.

The Insolvency Service made these comments

The comments offered by Sue MacLeod, the Chief Investigator at the Insolvency Service are also fairly typical:

“These bans should serve as a warning; if you fail to [fulfill] your obligations and seek to gain an unfair advantage over competitors, by not paying VAT and PAYE, you could lose the protection of limited liability.”

Is there anything the disqualified director can do?

These type of director disqualification cases appear to be viewed by the IS as easy targets. However, the periods of disqualification do not in our experience usually exceed five years, unless the case of non-payment is very serious. Therefore one of the ways forward for the disqualified directors if they need to continue to trade in the limited company capacity is that they could make an application to Court for permission to act as a director, whilst disqualified.

At NDP we are seeing an increasing number of directors who are instructing us to make these applications to Court for this permission. Usually the well advised director considers making the application for permission at the same time as being disqualified as a director or offering an undertaking.

The well advised director may, as part of the Permission procedure, have to offer a number of safeguards to the Court. One of the key considerations for the Court (typically) will be to see that the same behaviour complained of in the (earlier) disqualification proceedings is not repeated.

The benefits of receiving permission to act as a director whilst disqualified

Permission to act as a director whilst disqualified avoids the consequences of breaching a disqualification ban by acting in the management of a company (which is a broad definition for a director to fall foul of) including:

(1)    An increased period of director disqualification;

(2)    A criminal conviction;

(3)    Personal liability for the company debts, possibly necessitating bankruptcy;

(4)    Potential liability under the Proceeds of Crime Act;

(5)    An inability to trade in the industry that the director knows well; and

(6)    Reputational damage to that director in their industry.

If you are facing director disqualification, we can help

The team at NDP, with many years of combined experience, is well versed in providing the right advice in the area of director disqualification, and to advise you on mitigation when you are faced with director disqualification proceedings.

Contact us, or call us on 0121 200 7040, straight away for a free initial discussion. We promise that we will not put you under undue pressure to instruct us. It is always the case that the sooner you get in touch, the more we can help.

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