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Company Director Disqualification

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Understanding company director disqualification and misconduct

A company director runs the risk of disqualification if they fail to adhere to their legal directorial responsibilities and the company subsequently becomes insolvent and enters a formal liquidation procedure.

As part of the liquidation, whether this is a director-initiated CVL, or a compulsory liquidation ordered by the court, the appointed insolvency practitioner will be required to investigate the conduct of the company's directors during the time leading to it becoming insolvent. If the actions of the directors can be seen to have contributed to the company's failure, they may be at risk of disqualification. 

You can be disqualified from acting as a director for instances of wrongful trading, fraudulent trading, or other instances of unfit conduct. Director disqualification lasts for a period of up to 15 years and the length of the ban will be determined by the level and severity of misconduct which has taken place.

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.

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What happens if you are disqualified as a director?

If you are disqualified as a company director, you will be unable to become the director of another company without the prior agreement of the court. You also must not be directly/indirectly involved with the setting up, management, or promotion of a company or limited liability partnership during the period of your disqualification order.

As an alternative to having a disqualification order served, you may choose to voluntarily sign a disqualification undertaking. This means that proceedings don’t go through the court but, ultimately, the restrictions imposed on you will be the same as detailed above. If an undertaking or order is breached, you may face a prison sentence of up to two years plus a further period of disqualification.

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What are the grounds for disqualification as a company director?

  • Wrongful trading (trading while knowingly 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 company assets
  • Fraudulent dealings
  • Non-compliance with instructions from the Official Receiver or appointed insolvency practitioner
  • Being an undischarged bankrupt

Consequences of director disqualification

A disqualification order does not prevent you from taking a job with the company, or from operating as a sole trader. If you take an employed position within a company following disqualification, you must not act as director 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.

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Can director disqualification affect my personal 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

What happens if a director disqualification order is breached?

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.

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Am I at risk of disqualification?

As part of both voluntary and compulsory liquidation proceedings, an investigation is conducted by the appointed insolvency practitioner and a follow-up report 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 for this.

Applications are passed through the court, and you will be given the opportunity to answer all allegations against you 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 there are circumstances which justify this, but measures may be put in place to protect the public and restrict your powers in these instances.

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