Why are Company Directors disqualified?
Anyone acting as a Company Director must carry on the Company’s business in a ‘proper’ manner, which in practice means complying with their Fiduciary Duties. This can best be summarised as putting the interests of their Company and its shareholders first.
Directors have a range of duties and responsibilities, which are intended to make sure that the Company’s best interests and its success are their overriding priority, as well as discouraging any conduct designed to benefit Directors or third parties personally to the detriment of the Company.
What conduct can lead to disqualification?
The most common reasons for disqualification include:
- Continuing to trade when the Director knows that the Company cannot pay its debts.
- Not keeping proper accounting records.
- Failing to pay the Company’s tax liabilities owed to HMRC.
- Not filing statutory accounts and returns at Companies House.
- Using company funds or assets for their personal benefit.
- Fraudulent activity.
- Not protecting customer deposits.
- Not assisting or cooperating with the Liquidator or Administrator of the Company.
What are the consequences if a Director is disqualified?
The Company Directors Disqualification Act 1986 (CDDA) is the legal framework for disqualification action against Directors accused of breaching their duties and/or acting improperly. The main penalty if the Director is found guilty is that they cannot act as a Company Director for a period of up to a maximum of 15 years for the most serious misconduct.
Specifically, the ban means that the Director cannot:
- Be the director of any UK registered Company, or any Company based abroad that has connections to the UK.
- Be involved with the formation or running of a company, nor its management or promotion.
- Act in the same manner as a Company Director would, for example hiring staff or taking executive decisions.
- Instruct a third party to manage a Company under their direction. Doing this can result in prosecution of the disqualified Director and the third party, with the person under instruction potentially becoming liable for Company debts.
The Court may also make a compensation order compelling the Director to make a personal financial contribution to the Company. In the most extreme cases, a prison sentence can be imposed.
Any person disqualified can face other restrictions. They may not be able to:
- Sit on the Board of a charity, school or police authority.
- Be a pension trustee.
- Be a registered social landlord.
- Be a member of the Board of a health board or social care body.
- Be a solicitor, barrister or accountant.
Disqualified Directors are not barred from working as an employee for the same or any other Company, but they would have to be very careful how they represented themselves and what roles they became involved with, unless they have Court permission to undertake the duties of a Director.
They can also be a sole trader or join a partnership, as long as it is not a limited liability partnership.
Is it possible to get permission to act as a director while disqualified?
The CDDA allows for disqualified Directors to apply to the Court if they have a ‘reasonable need’ to act as a Company Director again. If the Court grants the request, it may then put restrictions in place on the duties that can be perform.
What happens if a Director breaches their Disqualification Order?
Breaking the terms of a Disqualification Order is a criminal offence, which could lead to a prison sentence of up to two years, plus a further period of disqualification. If a person breaches a Disqualification Order, they may also become personally liable for any company debts incurred during the time when the Disqualification Order was being contravened.
What options are there once disqualification proceedings have been started?
The Insolvency Service or other prosecuting party, which could include Companies House or the Competition and Markets Authority, notifies the Director of their intention to commence Court proceedings, the grounds for taking action and the ways in which the Director can respond. Should they disagree with the evidence with which they have been provided, they are entitled to argue the case in Court.
There are two alternatives:
- If found guilty, to wait for a Disqualification Order to be made by the Court.
- To agree to make a ‘Disqualification Undertaking’, which effectively means that the accused Director disqualifies themselves and the Court proceedings cease.
Disqualification as part of an insolvency process
During formal insolvency proceedings, such as Liquidation or Administration, the appointed insolvency practitioners (IPs) have a statutory duty to investigate the circumstances surrounding the Company’s financial failure, looking for any instances of ‘improper’ conduct or other instances of fraudulent or inappropriate behaviour by the Directors.
IPs must file a report on the conduct of each Director in the company they’re appointed to. This is sent to the Secretary of State for Business and Trade. When sufficient evidence exists and pursuing the case serves the public interest, the Insolvency Service initiates disqualification proceedings. By law, the Insolvency Service must commence these proceedings within two years of the insolvency date; however, the Court may extend this time limit under certain circumstances.
Is there a public record of disqualified directors
Details are published online in:
- The Companies House database of disqualified Directors. Details will be removed from the database automatically when the disqualification ends.
- The Insolvency Service’s register of directors for whom they have obtained Disqualification Orders or Undertakings in the previous three months, including details of why they were banned.
At Opus, we have extensive experience assisting business owners and directors with concerns and challenges, and we will always work with you to find the best solution for you and your business. If you would like to speak to us, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.