According to figures released by the Insolvency Service, a record 1252 people were barred from acting as company directors during the last financial year, with the average length of disqualification rising to 6.5 years – an increase of 12%.
As the downturn leads to greater numbers of businesses continuing to trade while insolvent, the government is taking a more determined stance against directors who breach regulations warns Julie Palmer of the Bournemouth office of business rescue, recovery and turnaround specialist Begbies Traynor.
“These latest figures show how seriously the Department for Business Enterprise and Regulatory Reform (BERR) is taking the matter of directors’ liabilities,” says Julie. “In our experience BERR is targeting disqualification in cases where there are significant or disproportionate VAT and PAYE/NIC arrears. With HMRC currently being more accommodating about repayment plans for existing tax arrears, this could create serious problems in the future if the business does not survive.
“In addition, many lenders require personal guarantees against government finance initiatives and other loans, making it more imperative than ever for directors to fully understand their liabilities and ensure they stay on the right side of the law.”
The Enterprise Finance Guarantee Scheme (EFGS) is a case in point. Designed to improve availability of working capital through term loans and consolidation of overdrafts, the government guarantees 75% of any loan against default with the remaining risk being covered by the lending bank. Because the loan criteria is based on future funding requirements – not payment of historic debt – banks see the provision of a personal guarantee as a ‘buy in’ from directors. Some banks may also take the opportunity to improve their security on existing loans over a company’s assets and implement or increase a customer’s personal undertaking.
“The most important question for any director being asked to give a personal guarantee is whether or not their business is viable moving forward,” advises Julie.
“Accurate, up-to-date financial information and forecasts are imperative and professional advice should be sought at the earliest opportunity, not least because directors need to stand back and view their situation objectively. Additional legal guidance is also strongly advised in situations where personal property is in joint names and the spouse or partner has no involvement with the business seeking the funding. After all, it’s your home you are putting at potential risk.
“If BERR receives an adverse report about any aspect of a director’s activity then that person could be disqualified from being a director of any company for between two and 15 years. Early advice helps directors avoid personal pitfalls and can increase the chances of their business surviving.”
Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.
Julie is a member of the Insolvency Practitioners Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.