95% of Directors of Insolvent Companies Avoid Disqualification

13th Mar, 2014

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)