Rising from the ashes

It is a common misconception that, following the introduction of the Company Directors’ Disqualification Act 1986, when a limited company goes into liquidation its directors will not be able to set up new companies and carry on trading.

The purpose of the act was to seek to prevent unfit directors from managing limited companies in the future. The unfit conduct would normally relate to their actions regarding a company that had gone into liquidation, administration, or receivership.

But in practice, few directors are being disqualified and, due to the length of time it takes to bring the disqualification proceedings, directors are able to continue to manage other limited companies for a considerable time after the liquidation of the company in which their conduct has been unfit.

When a company goes into liquidation, the liquidator or official receiver has a six-month period in which to submit a report on the conduct of the directors to the Secretary of State for Business, Enterprise & Regulatory Reform (BERR).

BERR then has a period up to two years after the company first became formally insolvent to issue proceedings against a director, if it is believed they should be disqualified.

The proceedings are frequently complex court cases, often defended by the directors, and it can easily take a further year before a decision is made.

Alternatively, BERR can ask the director to consent to a period of disqualification. If the director does not wish to argue the point, he can accept this and the process will only take a few months.

As a result, it can take up to three years after the date of insolvency before disqualification commences.

How do directors get around a disqualification? Some will arrange for their spouse to be nominated as a director of the company, while they pull the strings in the background. It is a criminal offence for a disqualified director to be involved in the management of a company.

Directors may also apply to court for permission to be a director of a new company. The court may look sympathetically on this, if there are measures in place which will protect the trading community from future misconduct and if the disqualified director is essential for the successful running of the new business.

For example, the court might insist there is a qualified accountant on the board of directors, preparing monthly accounts for the rest of the board to examine and that the disqualified director is only dealing with his speciality, for example, marketing.

If directors wish to start again straight after their company has gone into liquidation, they also have to beware of the ‘phoenix company’ rules.

If they immediately set up again using a similar name, they may become personally liable for their new company’s debts. They will also have committed a criminal offence.

There is a simple way round this and that is by buying the assets from the administrator, or liquidator, of the old insolvent company. There are also procedures for bringing the fact that it is a phoenix company to the attention of the creditors of the original insolvent company.