Disqualifying delinquent directors fits with a Treasury in recover-and-receive mode

Fresh powers for the Insolvency Service might not have had the cut-through expected, but the direction of travel from HM Treasury indicates that hitting ‘delinquent directors’ is a soundbite we’re going to hear more and more -- with potential implications for those running limited companies, writes licensed insolvency practitioner Gareth Wilcox, partner at Opus Business Advisory Group.

Which legislation permits director disqualification?

 Let me first refresh everyone’s memory about the Insolvency Service’s powers.

Under the Company Directors Disqualification Act 1986, the Insolvency Service has the power to bring proceedings on behalf of the Secretary of State, seeking an order to disqualify individuals from acting as directors where there has been alleged “unfit conduct.” 

The objective is to protect the public and prevent those who ought to be disqualified, benefitting from the protection of being able to trade using limited liability company.

Can contractors contest a director disqualification?

Yes, absolutely. In fact, where proceedings are brought, an individual can contest them.

Or the individual can agree to a disqualification ‘undertaking’ -- usually in consideration for a shorter ban than would be sought by order of the court. 

But the first clue we received that ‘delinquent directors’ are an area which the government wants to advance on, or at least increasingly talk tough about, came in December 2021. Back then, the above powers got extended to enable the Insolvency Service to take action in relation to dissolved companies, where previously it was only applicable to companies which had entered into either liquidation or administration.

This extension was the government’s direct reaction to the widely-reported abuse of the various support schemes introduced during the Covid-19 pandemic.

A director disqualification surge we’re still waiting on

Following the introduction of the extension, it was expected that disqualifications may well increase significantly. This, however, would appear not to be the case. In fact, the latest statistics show that there were only 932 director disqualifications obtained in 2022/23.  This compares to an average of 1,200 and 1,300 between 2013/14 and 2019/20 -- before the onset of the pandemic, during which there was understandably a reduction. 

Digging deeper into the figures, however, 812 (87%) of these disqualifications were by way of undertaking and only 120 (13%) were forced by court order. Furthermore and highlighting that smaller-than-expected application of the covid-inspired booster for the Insolvency Service, only 25 directors of dissolved companies were disqualified using the new powers.

What are limited company directors being disqualified for?

Perhaps unsurprisingly, the most common allegation in the latest batch of disqualifications was in relation to covid financial support scheme abuse, which was associated with 51% of director disqualifications in 2022/2. 

Previously, the most common ground for disqualification was ‘unfair treatment of the Crown.’ That’s code for failing to pay HMRC. This not paying the taxman accords with what I have seen ‘on the ground.’

It is maybe no great surprise that hitting HMRC avoiders ranks top pre-covid, given that the Insolvency Service is a government department itself, therefore protecting the interests of the Crown (as a collector of taxes and as guarantor of the various Covid-support schemes) is likely to be high on its agenda.

But be aware PSCs, director bans are increasing in duration

The expected rise in disqualifying delinquent directors which hasn’t yet emerged is not the full story however, and perhaps the underlying plot is worth a look. 

First and potentially ominously, the statistics show that the average length of disqualification has increased to seven years and four months, up significantly from the previous average of five-to-six years. This increase is attributable to the change in the nature of the allegations being pursued. 

Second, there has been numerous prison sentences handed down to directors for fraudulently obtaining funds under the covid schemes, with the government investing significant sums in seeking recovery actions against those found guilty. 

Jail-time (continued)

But there’s more to indicate that delinquent directors have got their face in a dartboard in a Whitehall office somewhere. The extension of powers against rogues running companies precedes the very latest move by HM Treasury -- to propose introducing criminal offences specifically for tax avoidance promoter personnel using the limited company model.

My take? It’s all indicative of a ‘direction of travel’ by the government that it wishes to be seen to be coming down hard on delinquent directors, and ensuring limited company taxes are being collected. This is also being felt elsewhere in the economy, for example with a greater level of scrutiny being given to claims for R&D tax credits following a Lords’ Committee report published in January 2023.

Putting an end to the relative permissiveness of the past

This range of actions against directors can be explained quite easily if you imagine HM Treasury being in ‘recover and receive’ mode. And that is exactly what we believe to be afoot, especially following years of relative permissiveness by officialdom, and Covid-induced investment which they now need to be seen putting to good use.

So, it will be very interesting to see what the next 12 months will bring both in terms of disqualification actions, implications of the new criminal measures and if I’m right, the delinquent director dartboard very much retaining pride of place. Finally remember, while disqualification numbers may remain relatively low for now, anyone concerned about their own position would be well-served to take advice early, especially as HMT is unlikely to have a reverse-gear on this direction of travel.