Company-Director-Disqualification

Understanding company director disqualification and misconduct

A director of a company faces disqualification if they neglect their legal directorial duties and the company goes insolvent, entering a formal liquidation process.

During liquidation, whether it’s a director-triggered CVL or a court-ordered compulsory liquidation, the appointed insolvency practitioner must scrutinise the directors’ conduct leading up to insolvency. If their actions are deemed to have contributed to the company’s failure, disqualification becomes a risk.

Wrongful trading, fraudulent trading, or other forms of unfit conduct can lead to director disqualification. The disqualification period can extend up to 15 years, determined by the severity of the misconduct.

The regulations for disqualification are outlined in the Company Directors Disqualification Act 1986, aimed at preventing misuse of the limited liability company structure in England, Wales, and Scotland.

 

What happens if you are disqualified as a director?

If disqualified as a company director, you can’t take on the role of director in another company without prior court approval. Additionally, you’re prohibited from any direct or indirect involvement in establishing, managing, or promoting a company or limited liability partnership during your disqualification period.

Instead of receiving a disqualification order, you have the option to voluntarily agree to a disqualification undertaking. Although this avoids court proceedings, the ensuing restrictions mirror those mentioned earlier. Violating an undertaking or order may result in a prison term of up to two years and an extended disqualification period.

 

What are the grounds for disqualification as a company director?

  • Trading with awareness of insolvency (Wrongful trading)
  • Improper conduct
  • Non-compliance with filing rules outlined in the Companies Act
  • Violation of competition law

 

What constitutes unfit conduct?

This accusation encompasses a broad scope and may involve:

  • Permitting trade to persist when aware of the company’s insolvency
  • Neglecting the preparation of sufficient accounting records
  • Neglecting the submission of necessary tax returns or settling owed taxes
  • Utilising company funds or assets for personal gain
  • Neglecting to dispatch the mandated returns and accounts to Companies House
  • Trying to disadvantage creditors concerning company assets
  • Engaging in fraudulent transactions
  • Disregarding directives from the Official Receiver or appointed insolvency practitioner
  • Holding an undischarged bankruptcy status

 

Consequences of director disqualification

A disqualification order doesn’t bar you from working for the company or operating as a sole trader. However, if you accept an employed role within a company after disqualification, you cannot serve as a director or instruct others to act on your behalf.

Undertaking management responsibilities like hiring staff, managing the company’s bank account, or making executive decisions may be viewed as violations of the disqualification order or undertaking.

 

Can director disqualification affect my personal life?

Director disqualification doesn’t just impact work responsibilities; it may also impose restrictions in other areas of life:

  • Schools might prohibit you from becoming a governor.
  • To serve as a trustee for a charity, court leave or approval from the Charity Commission is required.
  • The Pensions Regulator’s consent is necessary for trusteeship of an occupational pension scheme.
  • Health and social care organisations may deny your participation.
  • Professional bodies must be notified and may prohibit your membership.

 

What happens if a director disqualification order is breached?

If the disqualification order or undertaking is violated, it constitutes a criminal offence, carrying the potential for a prison term of up to two years, along with an extended disqualification period.

Contravening the order may also result in personal liability for company debts incurred during the violation period. Seeking assistance from others to act on your behalf could make them liable for company debts, facing disqualification and prosecution. This extends to corporate officers if a director is disqualified, and they act on their instructions or behalf, making them susceptible to the same consequences.

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Am I at risk of disqualification?

In both voluntary and compulsory liquidation processes, the appointed insolvency practitioner conducts an inquiry and submits a report to the Secretary of State, outlining the conduct of all directors in the preceding three years. Acting on behalf of the Secretary of State, the Insolvency Service determines whether initiating further investigations into individual directors is in the public interest.

If you are under investigation, the Insolvency Service will contact you for more information regarding your actions and an explanation for your decisions. If a disqualification order is pursued, they have a two-year window to apply for it.

Applications proceed through the court, allowing you the opportunity to respond to all allegations with a written ‘statement of truth.’ You can voluntarily offer a disqualification undertaking to halt court proceedings, but in either case, you are responsible for covering court costs.

You can seek court approval to resume directorship under certain justifiable circumstances, but precautions may be implemented to safeguard the public and limit your authority in such instances.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.