What happens to a disqualified director?

Understanding limited company director disqualification

When a company undergoes liquidation, an investigation is initiated into the underlying reasons for its failure. The liquidator meticulously examines the conduct of directors to determine whether there is culpability and subsequently reports to the Secretary of State.

If the liquidator believes that the director is responsible for the company’s decline, be it due to negligence or deliberate misconduct, it could lead to their disqualification under the Company Directors Disqualification Act, 1986 (CDDA).

The Insolvency Service dispatches a Section 16 letter to the director, notifying them of their intention to pursue a disqualification order and outlining the grounds for such action. Additionally, the Insolvency Service may seek compensation from the director for the financial loss incurred by the company’s creditors.

Why are directors disqualified?

Director disqualification can stem from various issues, encompassing wrongful or fraudulent trading, misappropriation of company funds, neglecting to maintain accurate business records, and failing to submit statutory accounts and returns.

Directors face heightened scrutiny during the liquidation process, especially if it was instigated by a creditor seeking to recover their funds. It is crucial, therefore, for directors to proactively address the situation to avert unnecessary financial losses for creditors, especially once they become aware that the company is insolvent.

What does director disqualification mean in practical terms?

Being disqualified under the CDDA means that former directors are barred from becoming directors of any limited liability company, or a company that operates abroad with connections to the UK. They are also prohibited from participating in the formation or management of such a company.

A disqualification order can range from 2 to 15 years, depending on the severity of the case. In certain instances, this may be coupled with additional penalties, such as fines or personal liability for business debts.

Failure to adhere to the terms of the order may result in the director receiving a fine or facing imprisonment for up to two years. Therefore, strict compliance with a disqualification order or undertaking is essential.

What is a disqualification undertaking?

To proactively avoid compelled director disqualification, some individuals opt to voluntarily enter into a disqualification undertaking. Essentially, this involves self-imposed disqualification, leading to the cessation of court action against them.

While this approach usually reduces court costs, it is always recommended to seek professional advice before proceeding with a disqualification undertaking, as it entails the same sanctions and responsibilities as being involuntarily disqualified.

Compensation orders and compensation undertakings

As previously highlighted, directors might also find themselves obligated to provide financial compensation to their company’s creditors. This compensation pertains to the losses suffered by creditors due to the actions of the director(s). When signing a disqualification undertaking, the director acknowledges their partial or full responsibility for the business’s decline.

Similarly, the director may opt to sign a compensation undertaking instead of contesting a compensation order through the courts. Much like a disqualification undertaking, this usually results in reduced court fees and brings the matter to a resolution.

Director disqualification is made public

The disqualification of directors is publicly recorded in the Companies House database, and possibly for a period of up to three months in the Insolvency Service’s register of disqualified directors.

Each case’s particulars, including the commencement and conclusion dates of the disqualification period, are documented. Members of the public or other concerned parties can search these databases. However, aside from the information being publicly accessible, facing disqualification as a director entails additional implications. 

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Other consequences of being disqualified as a director

Directors are prohibited from undertaking other official roles and positions, including serving as a trustee of a pension scheme and acting as a governor of a school. They are also barred from pursuing professions such as accountancy, law, or barristry, as several other professions may also impose restrictions on access for disqualified directors. 

Undoubtedly, a director’s reputation can be significantly marred following disqualification, potentially impacting their future work and business opportunities. The duration of the disqualification order is a crucial factor, reflecting the gravity of any wrongdoing that occurred.

If you have concerns about facing disqualification as a company director or seek further information, please do not hesitate to contact our expert team at Vanguard Insolvency. With an extensive network of offices across the UK, we can arrange a free, same-day consultation to discuss the implications of your specific situation.