What happens to a disqualified director?

Understanding limited company director disqualification

When a company is liquidated, an investigation begins into the underlying causes of its failure. The liquidator scrutinises the conduct of directors to establish whether there is culpability, and reports back to the Secretary of State.

If they believe the director has caused their company’s decline, whether through negligence or deliberate misconduct, it may result in their disqualification under the Company Directors Disqualification Act, 1986 (CDDA).

The Insolvency Service sends a Section 16 letter to the director, informing them of their intention to seek a disqualification order, and the basis on which they’re doing so. The Insolvency Service may also seek compensation from the director for the financial loss suffered by the company’s creditors.

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Why are directors disqualified?

Director disqualification can be due to a range of issues, including wrongful or fraudulent trading, misappropriation of company funds, failing to keep proper business records, and failing to submit statutory accounts and returns.

Directors are placed under great scrutiny during the liquidation process, particularly if it was initiated by a creditor attempting to recoup their money. It’s imperative, therefore, for directors to take action to prevent unnecessary financial loss for creditors particularly once they know the company is insolvent.

What does director disqualification mean in practical terms?

Being disqualified under the CDDA means that former directors cannot become director of any limited liability company, or company that operates abroad with associations with the UK. They also cannot be involved in the formation/management of such a company.

A disqualification order can last for 2-15 years depending on the severity of the case. In some cases this might also be accompanied by other sanctions, such as a fine or personal liability for business debts.

If the terms of the order are breached, the director can receive a fine or be imprisoned for up to two years, so it’s essential to comply with a disqualification order or undertaking.

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What is a disqualification undertaking?

To pre-empt enforced disqualification as a director, some choose to voluntarily make a disqualification undertaking. Essentially, this means they disqualify themselves, and in doing so, court action against them ceases.

This typically lowers the court costs, but it’s always advisable to seek professional advice before going ahead with a disqualification undertaking as it carries the same sanctions and responsibilities as being forcibly disqualified.

Compensation orders and compensation undertakings

As we mentioned earlier, directors may also be required to financially compensate their company’s creditors. This compensation relates to the losses incurred by creditors caused by the actions of the director(s). By signing a disqualification undertaking, the director accepts that they were partly or fully responsible for the business’ decline.

In a similar way, the director may sign a compensation undertaking rather than contest a compensation order through the courts. As with a disqualification undertaking, this typically reduces court fees and brings the matter to an end.

Director disqualification is made public

The disqualification of directors is publicly documented in the Companies House database, and potentially for up to three months within the Insolvency Service’s register of disqualified directors.

The details of each case are noted, along with the start and end dates of the disqualification period. Databases can be searched by members of the public or other interested parties, but in addition to being publicly viewable, being disqualified as a director carries further implications.

Other consequences of being disqualified as a director

Directors are banned from taking on other offices and official positions, including trustee of a pension scheme and governor of a school. They cannot become an accountant, lawyer, or barrister, with other professions also restricting access for disqualified directors.

Clearly, a director’s reputation can be badly affected following disqualification, and this may impact their life in terms of future work and business opportunities. The length of the disqualification order is also key, and indicative of the seriousness of wrongdoing that took place.

If you’re concerned about being disqualified as a company director, or would like more information, please get in touch with our expert team at Real Business Rescue. We operate an extensive network of offices around the UK, and can arrange a free, same-day consultation to discuss the implications of your individual situation.