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Understanding director disqualification: A guide for company directors

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Understanding director disqualification: A guide for company directors

Reviewed: 17th January 2017

A director of a financially struggling company may go through a various range of emotions. Worrying about what the future holds weighs heavily on the minds of many. The good news is that for the vast majority of directors, the personal ramifications of having a company going into liquidation are marginal. This is because one of the major benefits of running a limited company is that it is classed as a completely separate entity from the individual director. This provides the director with a certain amount of protection should the fortunes of the business take a turn for the worse.

What is director disqualification?

While it is unlikely you will face punishment following the liquidation of your company, there are certain circumstances where a director can be held personally responsible for the failure of the business. As part of the liquidation process, the appointed Insolvency Practitioner will look to the actions of the director in the time prior to the company going under. If they have reason to believe that the failure of the business was due to the actions of the company director then further action will be taken. If there are concerns regarding unfit conduct, then they must be raised with the Insolvency Service who will seek to investigate the allegations. If it is indeed discovered that the director is guilty of unfit conduct then they could face being disqualified from being a company director in the future. Failing to adhere to your duties as a director will result in an investigation and potential subsequent disqualification. There are a number of reasons why a director could find him or herself disqualified, however simply being the director of a company that has entered liquidation is not a reason in itself. In fact, disqualification is an unusual course of action. Out of the approximately 15,000 liquidations that take place each year, only around 1,200 directors find themselves subsequently disqualified; while this may sound like a lot, bear in mind that there may be multiple director disqualifications per liquidation.

What constitutes ‘unfit’ conduct?

There are a whole host of reasons why a director could be deemed to have acted in an unacceptable manner. There is not one set test used for establishing unfit conduct, therefore ach case will be judged on its own merits. Quite simply, according to the Company Directors Disqualification Act 1986, it must be determined whether a director’s conduct has ‘fallen below the standards of probity and competence appropriate for persons fit to be directors’.

This can encompass many elements, but matters which will usually be taken into consideration when determining unfit conduct include:

  • Failure to submit annual accounts to Companies House
  • Drawing particularly high salaries when the company was knowingly insolvent
  • Trading whilst knowingly insolvent
  • Continuing to obtain credit knowing the chance of being able to repay the debts was unlikely
  • Being deliberately obtuse towards the appointed liquidator e.g. by failing to respond to or comply with their requests
  • Breach of duty

This is by no means an exhaustive list and each case will be considered individually.

How long does a disqualification order last for?

If you are disqualified as a director, you would be banned from running a company for a period of up to 15 years depending on the seriousness of the offence.  Of the disqualifications made in 2015/16, the average period of a director’s disqualification was 5.9 years.

How does the disqualification process work?

If it is decided that disqualification action is to be taken, a minimum of 10 days’ notice must be given to the director although typically a director affected by this will be made aware sooner.

Disqualification action does not necessarily happen immediately following the company’s liquidation; however there is a cut off point of 2 years following this date when action must be taken.

Whilst it will be the Insolvency Practitioner who will raise the concerns about the director, it is the Court which must decide whether to enforce a disqualification order.

Should a director accept that their behaviour has fallen short of what is acceptable, and agrees that they should be disqualified, court action can be avoided, however the disqualification order will still stand.

What are the effects of disqualification?

A disqualification order goes further than merely preventing that individual from acting as a director. The individual concerned is also banned from contributing to the formation of a company, or managing a new or existing venture.

Flouting a disqualification order is a criminal offence, and the director will open him or herself up to further penalties including a fine, personally liability for company debts, and even imprisonment.

What if I hold directorships in other profitable companies?

If you have been served with a disqualification order then this affects your position with any other companies you may be a director of.

However you must remember that this is only the case if you have been disqualified. If your insolvent company has been liquidated but you have not been served with a disqualification order, then your status in relation to other companies will not be affected by the liquidation. The key message is that all limited companies stand on their own as individual entities and therefore the failure of one has no impact on the others.

If your company is going out of business and you’re concerned about the possibility of being disqualified as a director, call one of our experts to arrange a confidential meeting free-of-charge. We have an extensive network of 55 offices offering confidential director support across the UK.

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