95% of Directors of Insolvent Companies Avoid Disqualification

Many Directors assume that they will face an automatic ban from acting as a Director of another company when their existing company goes into Liquidation.

This is most definitely not the case.   The likelihood of a Director receiving a disqualification depends on a number of factors, relating to their conduct as Directors, and the reasons for the failure of the company.

As an Insolvency Practitioner (IP) advising a Director prior to insolvency proceedings,  commenting on the likelihood of the director being disqualified is particularly difficult, as the final decision to take action is within the remit of the Insolvency Service, and there may be issues that the IP is not initially aware of that are relevant to that decision.

In my experience, particularly for smaller cases, where the Directors have no history of previous Insolvencies, the chances of receiving a ban are fairly low.  However, my experience may be skewed by being based on too small a sample, i.e. my own case load.

In order to be able to offer Directors a clearer opinion on the matter, I decided to undertake some research using a larger sample set.  This proved to be relatively straightforward, as the necessary data was available online at Companies House.  I proceeded to collate the numbers for the total Company insolvencies, and total  Director Disqualifications for the United Kingdom, for the 5 year period to 31 March 2012, then analysed the two sets of figures.

The numbers in detail are shown in the table below.  These are reliable numbers as all the appointments and disqualifications for the period are recorded at Companies House.

There are some possible timing issues, in that a Liquidation in 2008 may lead to a disqualification in 2009, 2010, or even later.  The Insolvency Service have 2 years after the date of Liquidation to instigate proceedings.

But timing issues should even out over a five year period, therefore I consider the 5 year average is a reasonably accurate figure.

And that figure is 5.25%.  Effectively only one in twenty directors of companies that went into Liquidation, Administration or Receivership were disqualified from acting as a Director in the 5 year period to 31 March 2012.

Or in other words, there is almost a 95% probability of not being disqualified if your company is subject to formal insolvency proceedings.

It appears clear that for smaller cases in particular, where the company has failed for reasons outwith the control of the Directors, or as a result of management errors that are apparent with the benefit of hindsight, the risks of a disqualification are low.

For larger cases, where the debts are higher, and where there is evidence of serious misconduct, then the likelihood of the Insolvency Service taking action increases dramatically.

The insolvency laws have been designed to promote a rescue culture, to support entrepreneurship and risk taking, to promote wealth creation and job creation.  These figures lend some support to the contention that the system is working fairly well. Directors are being given the opportunity to learn from their mistakes, and are not being prevented from having another go, or from being put off starting a business in the first place.

 

 

United Kingdom Corporate Insolvencies and Directors Disqualification Trends
(Source: http://www.companieshouse.gov.uk/about/pdf/companiesRegActivities2011_2012.pdf)
12 months to 12 months to 12 months to 12 months to 12 months to 5 year Total
31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11 31-Mar-12
Insolvent Liquidations 15,281 19,436 20,995 18,130 19,078 92,920
Receiverships 634 1,063 1,526 1,312 1,379 5,914
Administration 2,733 5,527 3,879 3,032 3,023 18,194
Total 18,648 26,026 26,400 22,474 23,480 117,028
Director Disqualifications
Insolvency Act 2000 Section 6 – By Undertaking * 885 888 1,152 1,162 1,147 5,234
Company Directors Disqualification Act 1986
Sections 2-5 (conviction of indictable offence) 191 198 196 214 223 1,022
Section 6 (unfit director of insolvent company) * 138 143 185 227 221 914
Section 8 (following BIS investigation) 22 23 10 12 6 73
Section 10 (wrongful trading) 0 0 0 0 0 0
Total 1,236 1,252 1,543 1,615 1,597 7,243
Insolvency Related Disqualifications * 1,023 1,031 1,337 1,389 1,368 6,148
Year on Year Disqualifications as a percentage of insolvencies 5.49% 3.96% 5.06% 6.18% 5.83%
Year on prior year Disqualifications as a percentage of insolvencies 5.53% 5.14% 5.26% 6.09%
Year on 2 years prior Disqualifications as a percentage of insolvencies 7.17% 5.34% 5.18%
Average annual percentage rate of Disqualification due to Insolvency 5.25%
Note:  CVA statistics excluded as there is no conduct report on Directors 466 609 781 750 767
CVA as percentage of total insolvencies 2.44% 2.29% 2.87% 3.23% 3.16%

 

UK Employment Law Debate – TUPE – Causes Job Losses

The current laws are very much in favour of the Employee, too much so.

Our laws have been devised to help employees, but they have gone to far, to the extent that this good intention has backfired and led to hundreds of thousands of jobs being lost that might otherwise have been saved.

How has this happened.?  As a result of draconian laws whereby small firms are faced with ruinous payments to make long serving employees redundant.

Long serving employees hold their employers to ransom, they never resign to move jobs, as they want to cash in on the “equity” in “their” jobs.  The longer serving, and often higher paid employees see a tax free windfall-payout as their right, and they are financially motivated not to resign, but to hold-out for a pay-off.

In the meantime, the hard-ppressed business need to cut costs to survive, but cannot afford to pay the redundancy costs to cut back on staff.  The preverse reult is that the business is forced into formal insolvency, i.e. for a Company, Liquidation or Administration, or for a sole trader, Personal Bankruptcy.

If the business could have cut back on some staff, the remaining jobs would have been saved.

Once the company is in liquidation, the employees can claim compensation for their statutory entitlements from the National Insurance fund, as managed by the Redundancy Payment Service, a department of the Insolvency Service, part of BERR (formerly known as the DTi).

The employees get their money, with the experienced, skilled staff often moving onto new jobs straightaway, while the shorter serving employees, get less money and often struggle to get a decent new job with training and prospects like the one they just lost.

As usual the system favours older people in many ways, a bit like the pension system and the health service, all biased to favour older generations, while younger people are left in debt, untrained, and long term unemployed.

The scaremongering about Employees being abused is misconceived.  Running a small business is a nightmare as soon as you have employees, what with Employment Law and Health and Safety , it is not worth the bother, and is a significant discouragement to individuals starting a business in the first place.

My staff are well paid, trained and given 24 days annual leave plus bank holidays.  I don’t force them to work here, they do so willingly.  If I can no longer afford to pay them, or no longer require their services, why should I have to pay them compensation, as if I have done something wrong?

The whole system was set up in the early seventies when the world was a different place, and small companies did not play such an important part in our economy, and when their was a distinct  divide between owners and workers.

Those days have gone, and small businesses are not capable of supporting the current employment law system, which is outdated and causing job losses every day.  It is a disgrace and a scandal and policy makers on the left  should wake up the fact that their out-dated dogma is hurting the poorest in society, the very people these out-dated laws were inteneded to protect.

Perhaps if our politicians, particularly those on the left, had ever run their own business, and appreciate the difficulties and pressures, they might adjust their anti-business, anti-enterprise policies, and seek to re-balance our laws to provide more support for business owners.

Without a thriving small business sector, our economy is in deep trouble, and the individuals who have ideas, ambition and drive are the ones who need our support the most.

Alisdair Findlay – Chartered Accountant, Licensed Insolvency Practitioner, Business Owner

 

 

How to End the Life of a Company

Unlike real people, it is perfectly legal to kill, or if you use the legal term, Liquidate, a Limited Liability Company.

A Limited Company in law is defined as “an artificial person” that is owned by shareholders and controlled by the directors.

When your Limited Company becomes a liability, and has outlived it’s usefulness, perhaps it will be necessary to take the sad but necessary step of ending it’s life.

If your company has few or no liabilities, then it may be possible to have the company dissolved by Companies House. The main problem with this is that the company can be brought back to life withing 20 years of the dissolution, for a variety of reasons, but usually because a creditor (HMRC) is owed money by the company.

If you want to kill the company off properly and have it buried six feet under, so that it is gone for good, then it is necessary to place the company into Liquidation.

The Liquidator deals with the winding up, then has the company dissolved, with no possibility of a return.

If the company has assets, the Liquidator will sell these assets and take his fee from the proceeds. If there are no assets, the fees can range quite dramatically, but a reasonable rule of thumb is the bigger the firm, the bigger the fee they require to cover the overheads of their posh offices in expensive city locations.

A Liquidator must hold an insolvency licence.  The Liquidation process is identical for every company, whatever the size or age, the same rules apply.  It’s so easy you would be amazed.

If the company was running a small business, then its usually a simple matter and the fee’s start at around £2,000 plus VAT.

The bigger the business, the bigger the fee is likely to be as all Liquidators generally charge on a time cost basis.

Running a business is hard, I should know i’m running three  at the moment, as well as over a hundred currently in Liquidation!

Liquidation is so easy it shouldn’t be allowed.

So many people say to me, after placing their company into my hands as Liquidator, I wish I had done this a year ago, before I re-mortgaged my house or ramped up my creditor cards, only to lose that money too, and consequently, find myself in personal financial difficulty too.

The main purpose of  limited Company is to act as a vehicle for a risky venture, to ring fence any losses from your personal estate.  If you are having to fund the company from your own funds, you should seriously consider whether you are throwing good money after bad.

Starting a new company costs around £30, it can be done online, takes me about 15 minutes at www.stanleydavis.co.uk.

If you are a Director of a company that is in cash flow difficulties, you have to consider Liquidation as an option to save the business.  It might not be the right one, but you you should establish all your options before making your decision as to how to take the business forward.

Does My Company Qualify for Administration?

Insolvent Company, Viable Business – Restructuring Options.

The Liquidation of a company is never an easy decision to take. Deciding when the company is insolvent is often not clear cut. Often there are reasonable grounds for the directors of the insolvent company to continue to trade in the expectation that the company can trade out of the cash flow problems, which have often been caused by an unexpected event such as a bad debt, or a sudden loss of business due to external events, such as  the credit crunch.

Sometimes the directors’ mind is made up for them by an unsecured creditor sending in the bailiffs to collect on a county court judgement (ccj) or a secured creditor withdrawing an overdraft facility.  Banks have pretty good monitoring systems these days, so when a company breaches it’s banking covenants, or starts receiving writs or a ccj, the bank will know about it thanks to the electronic adverse credit monitoring systems we can all enjoy in the digital economy. Where a bank is a secured creditor, that is, it has a debenture granting a fixed and floating charge over the company’s assets, the bank has the ultimate sanction of appointing an Administrator.

Indeed, if the company owes money to an aggressive unsecured creditor who foregoes the debt collection route of applying at county court for a county court judgement, but instead applies for a winding-up petition, then the company is faced with being placed into compulsory liquidation, at which point the Official receiver attached to the county court local to the company’s trading address will be appointed Liquidator. Increasingly many creditors are using the winding up petition as a debt collection tool.

Compulsory Liquidation usually spells the end for the company and the business. However, Voluntary Liquidation can be a route to save the business, and/or a way for the directors/shareholders to exit the insolvent company and pass the winding-up over to an appointed Liquidator. At the point of Liquidation control of the insolvent company passes from the directors to the Liquidator who takes control of the company for the purpose of the winding up.

The directors face an investigation into their conduct by the Liquidator who will report to the BIS unit responsible for director’s misconduct if he finds any evidence of misconduct on the part of the directors. This is the irony of the situation where directors of an insolvent company who seek advice from an insolvency practitioner will often be advised that it is in their best interests personally to proceed to instruct the IP to assist with placing the company into Liquidation. Trading on whilst the company is technically insolvent places the directors at risk of being disqualified for a period of years. The directors often think that it is their duty to creditors to fight on and try and recover the situation and make sure that all unsecured creditors get paid. However, if they fail in the attempt and the liabilities end up greater than they were when previously advised to consider placing the company into Voluntary Liquidation or Administration, the risk of a disqualification is greater.

Administration is now the weapon of choice of the banks, this procedure now having largely replaced Receivership for all but older debentures on secured debt. Directors also can appoint an Administrator if this route is possible and appropriate and a more effective alternative in the situation than creditors voluntary liquidation (CVL). More on that subject on another day.

So if your company has a cash flow problem, and is short of working capital, and you need insolvency advice, the only thing that is certain is that doing nothing is not an option. Look at funding options, but also look at restructuring options.  The sooner directors take action, the better chance they have of controlling the situation for a better outcome.

Insolvency Advice Minefield

Insolvency is a business like no other. My approach is simple. Help the person who comes to me for assistance.

It is simply a case of first understanding the situation, think about it carefully, than form the best plan for the person asking for help. If there is a job in it for Findlay James brilliant, if not, no problem, it’s good to help, we are not desperate for business, and we know from experience that we may well be paid back with a referral from that person in the future. At the end of the day, we all like to repay a favour.

Continue reading “Insolvency Advice Minefield” »

Insolvency Outlook : the Domino Effect

The Blind Leading The Blind and the Domino Effect

The US, UK, European and Swiss Central Banks issued $280,000,000,000 into the banking sector, by issuing government bonds, with the security being “damaged assets, as in mortgage backed securities” in an unprecedented, concerted attempt to shore up the global financial system. This sort of debt swap has never been done before. In my layman’s eyes it would appear that they are effectively saying to the banks we will take all the hits, you have a Northern Rock style guarantee that we will support you. Talk about moral hazard!

We are living through a financial crisis unprecedented in it’s scale and scope, and the fear is that it is going to get a lot worse. There is real panic in the air. The mistakes of the past have been repeated. The 1929 crash was amplified by highly leveraged investments going bad, we are now going to see many hedge funds, private equity firms and banks fail as their highly leveraged bets go wrong. I prefer the term bet to investment, it is more honest.
You can see why governments are so obsessed with economic growth, as this allows the financial system to function. When growth disappears, the money system starts to implode. Failure begets failure, what we in the insolvency profession know as the domino effect – a large failure like Rover will cause multiple failures in its wake, and so on, the domino effect ripples on for years.

So who will be the casualties, who will be the largest institution allowed to fail? Anyone for Bear Sterns or Citigroup?

In the meantime, the badger has his first budget later today, and I can’t help thinking what an irrelevance he is. He is totally at the mercy of the machine, he had no choice to nationalise Northern Rock, and he must go along with whatever Mervyn King demands.

Figures from the council of mortgage lenders showed that 50,300 mortgages were taken out in January 2008, 34 percent lower than last year. Then the Department of Communities and Local Government (DCLC – who comes up with these stupid department names, they are a nightmare to remember) announces that house prices are up 8% from last February!

Mr King wants a period of austerity, he wants a house price re-adjustment, so do people without a house, and the house builders are bracing themselves for a big downturn. That downturn is now. Hang on to your hats, the housing sector has been driving the UK economy for 13 years, and all the easy credit and household debt has been accumulated on the back of the feel good factor as house prices tripled. The only question is how far, how fast the fall will be, soft landing or slump? The badger would do well to have a few fiscal rabbits up his sleeve to stimulate the housing sector – if only he read my blog? If only anyone would? Hey, if you don’t write it, it’s certain no-one will.

In the meantime, the speculators have moved on from shorting sub-prime securities to of all things oil, wheat and other commodities, now seen as safe havens. Texan crude hit $110 a barrel another record high. The MD of Greggs is kicking off in the press about the price of wheat, blaming this on speculators, not poor harvests, increased demand or biofuels. Wheat hit a record $13.495 a bushel recently. And it’s being driven by financiers making bets to try and recover their losses to the sub-prime meltdown – my head hurts just thinking about it. Why can’t they just bet on the horses like everybody else? Of course event hat is not certain, given todays cancellation at Cheltenham due to the high winds.

Severe storms from the North Atlantic late in winter/early spring again, more evidence of Climate Change, but that discussion is for another day, although I do like the link. Started a new book “The Carbon Wars” by Jeremy Leggett about the history of Climate Change politics, should be good. Still working my way through “The Shock Doctrine” by Naomi Wolf, one of the most enlightening and truly depressing books I have had the privilege to read.

Outlook for Economic Growth Gloomy As Factory Output Shrinks at Record Rate

This was the heading of a piece in the Times today, a sunny but blustery 8th April 2009 (Heavy showers last night but dry all day :-)

And so to the numbers, not sunny, but apocalyptic! The figures for February are the worst on record, simple as that. The worst ever, that it is historic, makes it no less frightening. Continue Reading!

What is a Prepack Administration

Image for What is a Prepack Administration

What about personal guarantees?

irectors can often be faced with Personal Guarantees, usually to the banks and asset finance companies, landlords and certain types of trade creditors, such as building merchants. Basically if you have signed a guarantee you will be liable for whatever shortfall the creditor suffers in the Liquidation. Where guarantees have been given by more than one guarantor, on a joint and several basis, the guarantor with the most personal assets, is the one who stand to lose more, as any of the guarantors are potentially liable for the total debt. They may then be faced with trying to recover the shares of the other guarantors from them directly, which is not always possible if they have no personal assets left. Directors who are on the hook for potentially large guarantees can be motivated to keep trading in order to prevent these personal liabilities crystallizing and the subsequent debt enforcement action that would follow. This can lead to the company trading whilst insolvent.


Get in Touch

Please contact us via phone at 01242 576 5550 or request a callback