Contractors, don’t lose sleep over 1,242 director disqualifications

As if contractors needed another reason to be cautious about setting up a limited company, the Insolvency Service has been thumping its chest about successful prosecutions chalked up by its scary-sounding ‘Criminal Enforcement Team.’

Glancing the team’s latest scalps (an ex-solicitor, a restaurateur and a debt boss), and the corresponding long list of punishments it can mete out (jail-sentences, disqualifications, community orders, penalties, unpaid work and curfews), the temptation is to think that every company director is in imminent danger of being disqualified for some offence or other.

Fortunately, writes Nick Hood, senior adviser to Opus Business Services Group, nothing could be further from the truth. Indeed, the vast, vast majority of law-abiding PSC contractors will not have their fate spelt out under the Company Directors Disqualification Act (‘CDDA’).

Four ways to definitely get disqualified as a director

Firstly, only directors of companies which go through a formal insolvency procedure like liquidation or administration are at risk of a CDDA prosecution.

Secondly, and even then, the offence committed or the background to the insolvency must be really serious for action to be taken.

On a practical level, the Insolvency Service has limited resources for this type of work, so they don’t major on the minor. The acid test tends to be how much money creditors have lost, and the degree to which recklessness or fraud have contributed to the failure.

The third potential thing which can pacify the Insolvency Service’s Criminal Enforcement Team (CET) is how well you, as a director, cooperate with the professionals handling the case Whether the director has ‘form,’ in other words previous business failures, is a fourth provoker (or pacifier) of the CET’s wrath.

So, one quick-fire way to get prosecuted is ignoring a previous disqualification order. Another ‘no-no’ if you want to stay on the CET’s good side is charging members of the public for a service -- and then not providing it.

In our experience, extremely few one-person contractor companies – for whom reputation matters and where ‘niche’ makes the small world we live in even smaller, are likely to fall in into this particular offence category of charging consumers for a service, but then bailing.

More potentially relevant for the average Personal Service Company is the most commonly prosecuted ‘crime’ by the Insolvency Service -- not keeping proper books and records, or withholding them after the insolvency.

What if the Insolvency Service threatens to prosecute you?

Let’s assume you’re not on top of your company’s records and some seriously bad luck befell you. What happens if the worse then occurs and as a contractor, you find yourself  threatened with prosecution by the Insolvency Service?

Well, the information on which the case is brought will have been provided by the liquidator or the administrator, who has to report on the conduct of the directors of all insolvent companies, whether ‘acceptable’ or ‘bad.’

This could of course be a wrong or at least a judgmental view of events. It’s therefore essential that any unfortunate limited company contractor who finds themselves on the CET’s receiving end gets legal advice from a law firm which specialises in defending CCDA prosecutions. This is not a situation where a contractor should consider defending themselves, or think a generalist high street law firm can do the job.

‘Copping a plea’ and other responses

Should you not have the fight in you to even enlist such an expert, remember you can avoid all the trauma of a trial by ‘copping a plea,’ recommended (of course) if you really are guilty as charged. Like all plea bargaining, the sentence will be much reduced in these circumstances and the costs will be vastly reduced.

But if you go to court and lose, or plead guilty, what happens then? In short, you’ll be disqualified from acting as a Company Director or taking any part in the management of any other company for a fixed period, up to a maximum of 15 years. This would now be serious for you, because an up to 15-year ban would make life for most contractors really difficult to live, professionally-speaking.

Enough with the ‘what-ifs’ though. Overall, and even statistically-speaking, you shouldn’t be losing sleep as a limited company director doing his or her legal bit and playing by company law rules. The number of successful disqualification prosecutions every year is vanishingly small. In the year that ended March 2019, only 1,242 directors were disqualified. The average disqualification period was five-and-half-years.

Don’t lose sleep

To add some context, there are 1.9million limited companies in the UK! So despite the temptation to feel frightened when one hears of jail-time for those who, like you, ran a limited company, the best way to think of all this is to remember that they weren’t like you (-- reputable), they were rogues. And looking at those numbers again, the CET are like a lightning bolt. Scary? Yes, but also very unlikely to hit you, let alone strike you down -- unless you get caught orchestrating a torrent of grievously bad behaviour in a commercial thunderstorm. For the rest of you, it’s business-as-usual bar of course a few clouds forecast for April 2020.