Director Disqualification: How does this happen?

Updated: 15th February 2021

On what grounds can I be disqualified as a company director?

A director runs the risk of disqualification if they fail to fulfil their legal and directorial responsibilities.

If you are disqualified as a company director, it may affect several areas of your life. In essence, you will be unable to become the director of a company without the prior agreement of the court, or be directly/indirectly involved with the setting up, management, or promotion of a company or limited liability partnership.  

Disqualification lasts for a period of up to 15 years, and as an alternative to having a disqualification order served, you may choose to voluntarily sign a disqualification undertaking, which means that proceedings don’t go through the court.

The rules of disqualification are laid down in the Company Directors Disqualification Act, 1986, and are designed to restrict abuse of the limited liability company structure in England, Wales and Scotland.

The Act prevents you from acting in the manner of a company director. In addition, asking someone else to manage a company under your instructions is banned, and can result in the third party also being prosecuted.

If an undertaking or order is breached, you may face a prison sentence of up to two years plus a further period of disqualification.

What are the grounds for disqualification as a company director?

  • Wrongful trading (trading while insolvent)
  • Unfit conduct
  • Not adhering to the filing rules as laid down in the Companies Act
  • Failure to comply with competition law

What constitutes unfit conduct?

This accusation covers a wide remit, and can include:

  • Allowing the continuation of trade when a company is known to be insolvent
  • Not preparing adequate accounting records
  • Failing to submit tax returns when required, or to pay the tax owed
  • Using company monies or assets for personal benefit
  • Failing to send the required returns and accounts to Companies House
  • Attempting to deprive creditors with regard to assets
  • Fraudulent dealings
  • Non-compliance with instructions from the Official Receiver or appointed insolvency practitioner
  • Being an undischarged bankrupt

A disqualification order does not prevent you from taking a job with the company, or from operating as a sole trader. The main issue is not to behave as though you are a director if you take an employed position within a company, or ask others to act on your behalf.

Fulfilling management roles such as hiring staff, controlling the company bank account or taking what might be regarded as executive decisions, may all be seen as breaching the disqualification order or undertaking.

Further potential restrictions in everyday life

It’s not only duties at work that are affected by director disqualification - other areas of life may also be restricted:

  • Schools may prevent you from becoming a governor
  • You won’t be able to become a trustee for a charity without leave from the court or the Charity Commission
  • The Pensions Regulator would need to give their permission if you wanted to be trustee of an occupational pension scheme
  • Health and social care organisations may bar you
  • Professional bodies would need to be contacted, and may ban you from being a member

Implications of Disqualification

Should the disqualification order or undertaking be breached, you will be committing a criminal offence and could face a prison sentence of up to two years, plus a further period of disqualification.

Personal liability for company debts is also a possibility if you contravene the order. This liability would be for those debts incurred when the contravention took place.

Other people and associates may become involved if you request that they act on your behalf – they would also potentially become liable for company debts and face disqualification and prosecution themselves. This is also the case for the officers of a corporation if one of the directors has been disqualified, and they act on his or her instructions/behalf.

How will I know if I am liable for disqualification?

During formal insolvency proceedings, a report is sent to the Secretary of State detailing the conduct of all directors who were in place during the previous three years. The Insolvency Service acts on behalf of the Secretary of State, and they ultimately decide whether it is in the public interest to begin further investigations into the actions of individual directors.

If you are in line for investigation, the Insolvency Service will contact you for more details about your actions, and an explanation as to why you acted as you did. If they decide to pursue a disqualification order, they have a period of up to two years in which to apply.

Applications are passed through the court, and you will be given the opportunity to answer all allegations by providing a written ‘statement of truth.’ You can give a disqualification undertaking voluntarily if you wish, and this will halt court proceedings. Either way, you will be expected to pay court costs.

You are allowed to apply through the courts to become a director again if the need is urgent, but measures may be put in place to protect the public and restrict your powers in these instances.

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