2011-08-16
By staff reporter
The number of disqualification orders imposed on directors of insolvent companies jumped another four per cent last year to 1,437, up from 1,388 the year before, according to law firm Reynolds Porter Chamberlain LLP (RPC).
The number of disqualification orders was up a substantial 23% compared to five years ago, when there were just 1,173 orders. A total of 6,422 directors have been disqualified in the last five years.
Disqualification orders ban directors of insolvent companies from being directors of or taking part in the creation or promotion of a limited company for up to 15 years. They are applied for by the government’s Insolvency Service and approved by the courts if sufficient grounds can be established – such as theft, fraud, continuing to trade while the company is insolvent, or failure to keep proper accounting records.
Jonathan Davies, partner at RPC, comments: “There has been a substantial jump in the number of disqualification orders that have resulted in a ban for a company director.”
“Disqualification orders can have a long-lasting impact on the director’s ability to set up a new business – it is undoubtedly career threatening for directors.”
RPC says that company insolvencies peaked in Q3 2009, so the increase in disqualification orders could be a result of the high number of company failures in the recession.
Davies explains: “Liquidators and administrators look for someone to blame when there is an insolvency and they have been focusing on company directors. With so many insolvencies during the recession, the government has been very busy in applying to the courts this year for disqualification orders.”
RPC points out that in addition to the increase in director disqualifications there has been a widespread clampdown on corporate governance issues since the credit crunch, so it is important for company directors to protect themselves with directors' and officers' (D&O) insurance.
Davies adds, “A lot of non-quoted, small businesses decide to forego D&O insurance because it is seen as an unnecessary cost, but this clampdown demonstrates the importance for company directors of taking out cover.”
“Legal costs for company directors defending themselves against an investigation can increase rapidly, so very few company directors would want to fund their defence out of their own pocket.”
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