Directors who have misused the various COVID-19 loan schemes are being handed relatively high periods of disqualification. The effects of disqualification can be devastating, particularly for owner-managed businesses where directors are actively involved in representing the business and in their absence, the company and its employees could be placed at risk.
Once a disqualification order is made, the Secretary of State issues a press release, which the local and national media can pick up. This is adverse publicity which will be damaging to both the director and the company. The press release is intended to serve as both a deterrent to others and a warning to anyone who may have dealings with the director who has been disqualified. Disqualified directors are also included on a central Register of Company Directors, which is searchable by the public via the Companies House and Insolvency Service’s websites.
Given the reported scale of the fraud and misuse of the loan schemes, other businesses may be inadvertently trading with other companies that are either directly involved in fraud, are insolvent or where directors have been disqualified. All businesses should have contingency plans in place to minimise any collateral damage should a company it is trading with cease to trade, or its directors are disqualified. Some practical steps businesses can take are:
Reviewing contractual arrangements
Make sure that contractual agreements are properly documented and include termination provisions. If the terms of any contracts are varied, these should be properly documented too. Parent company guarantees should also be reviewed to ensure that any action taken against a subsidiary company does not discharge the obligations of the parent company guarantor.
Monitor cash control
All businesses need to have cash flow budgets and forecasts, which are reviewed regularly. The sooner an issue is spotted, the sooner action can be taken to try and put things right. All businesses should also have an effective credit control process to collect debts quickly and efficiently.
Do your research
Businesses should always thoroughly research the relevant market and the other businesses they are trading with. A lot of information about companies and their directors can be found via websites such as Companies House and the Insolvency Service or by carrying out a simple internet search.
Be proactive
If cash flow becomes an issue for your business, speak to your creditors and try and agree either to defer payments temporarily or to make instalment payments. If one of your debtors becomes insolvent, make a claim to the insolvency practitioner dealing with the insolvency process as soon as possible. It is also crucial to contact an insolvency practitioner as soon as possible if there is any risk of your business becoming insolvent so that advice can be taken on trying to save the business, minimising liabilities and maximising a return for the company’s creditors.