Directors are legally responsible for running a company and making important decisions on behalf of the company. As such, they have a range of duties and responsibilities that they must fulfill.
According to the Companies Act 2006, these duties include the duty to act within their powers, the duty to promote the success of the company, the duty to exercise independent judgment, the duty to exercise reasonable care, skill, and diligence, and the duty to avoid conflicts of interest.
In addition to these statutory duties, directors also have a range of other responsibilities that they must fulfill.
For example, they must ensure that the company complies with all relevant laws and regulations, maintain accurate financial records and accounts, and act in the best interests of the company and its stakeholders.
Failure to fulfill these duties and responsibilities can result in legal action being taken against the director. It is important for directors to be aware of their duties and responsibilities and to take steps to ensure that they are fulfilling them to the best of their ability.
What is a directors disqualification?
Director’s disqualification is a legal process in which an individual who has been a director of a company is prohibited from acting as a director or taking part in the management of any company for a specified period of time.
This can occur when a director has breached their legal duties, engaged in fraudulent or dishonest behavior, or has been involved in serious misconduct.
The disqualification can be for a period of up to 15 years and can have serious consequences for the individual, including restrictions on their ability to obtain credit, access to finance, and the ability to work in certain industries.
Disqualification orders are usually made by the courts or the Insolvency Service, which is a government agency responsible for investigating corporate wrongdoing.
What does it mean to be disqualified as a director?
Being disqualified as a company director refers to the legal process by which an individual is prohibited from acting as a director or being involved in the management of a company for a specified period.
This disqualification is typically imposed by a court or government authority and arises from the director’s misconduct or failure to fulfill their legal obligations. Disqualification can result from various activities, such as fraud, dishonesty, wrongful trading, or engaging in activities that are detrimental to the company or its stakeholders.
It serves as a significant penalty and aims to protect the public interest, ensuring that individuals with a history of mismanagement or malpractice are not allowed to hold positions of authority within companies.
During the disqualification period, the individual is restricted from forming, managing, or promoting a company, and violating this prohibition can lead to severe legal consequences.
Overall, being disqualified as a director signifies a loss of credibility and trust, emphasizing the importance of ethical conduct and responsible leadership in the corporate world.
Common reasons for director disqualification
Anyone can report a company director’s conduct as being “unfit” if they believe that the director is not fulfilling their duties and responsibilities in an appropriate manner. Reports of this nature are made for a variety of reasons, including where someone suspects a director of committing fraud, selling faulty products or services, not paying a company’s debts or taxes, or causing harm to suppliers or customers.
If a report is made, it will be investigated by the relevant authorities to determine whether the director’s conduct is indeed unfit. If the investigation finds that the director has failed to fulfill their duties and responsibilities, they may face legal action or be removed from their position as a director. It is important for directors to be aware of the potential consequences of their actions and to act in accordance with their duties and responsibilities at all times.
Once a report is made regarding a company director’s conduct being “unfit,” The Insolvency Service, acting on behalf of the Secretary of State, will assess the information provided in the report and consider whether to carry out further investigations. If the Insolvency Service decides to proceed with an investigation, they will gather additional information and evidence to determine whether the director’s conduct is indeed unfit.
This may involve interviewing witnesses, reviewing documents, and examining the company’s financial records. Once the investigation is complete, the Insolvency Service will make a decision based on the evidence gathered, and may take action against the director if they are found to have acted in an unfit manner. It is important for directors to cooperate fully with any investigations and to provide any information or evidence that is requested in order to ensure that the process is fair and transparent.
What are some of the frequent causes for director disqualification?
Disqualification is most commonly sought against directors of insolvent companies. When a company is placed into insolvency proceedings, such as compulsory liquidation, voluntary liquidation, or administration, a director’s conduct will be automatically investigated.
This is because the insolvency of a company can often be caused by the actions or inaction of the directors. If the investigation finds that the director’s conduct has contributed to the company’s insolvency, they may be disqualified to prevent them from engaging in similar behavior in the future. Disqualification can also be sought against directors of solvent companies if their conduct is deemed to be unfit.
It is possible for a director to avoid disqualification if their conduct is found to be appropriate. In fact, most directors of an insolvent company are not disqualified. The burden of proof rests with the Secretary of State to establish that a director’s conduct is unfit and should result in disqualification.
This means that the Secretary of State must present evidence to show that the director’s actions or inaction caused or contributed to the company’s insolvency, and that disqualification is necessary to prevent similar conduct in the future. If the director is able to provide evidence that their conduct was appropriate, or if the Secretary of State is unable to provide sufficient evidence of unfitness, the director may be able to avoid disqualification.
Director disqualification is a serious consequence of bankruptcy; it not only affects limited companies, but also extends to Limited Liability Partnerships. This means that a director declared bankrupt can no longer offer their services in an official capacity, and the legal implications are far reaching.
Any compulsory liquidation means that the director is automatically disqualified, which places limitations on their professional capacities going forward. It is therefore essential for directors to be aware of the potential outcomes of bankruptcy proceedings, so they can take all necessary precautions to minimise the risk where possible.
Under the Company Director’s Disqualification Act 1986, any person who does not meet the requirements necessary to be a company director is automatically disqualified. This disqualification applies even if the person has not knowingly or intentionally broken the law; simply being unknowingly ineligible for a directorship can lead to disqualification without criminal action.
The severity of these restrictions means that failure to adhere could result in criminal charges and as such it is extremely important that individuals understand their eligibility in relation to these measures before applying for any sort of directorship.
The most common reason for a director to be disqualified is because their conduct is considered to be unfit. This is often referred to as “misconduct” and refers to actions or inaction on the part of the director that are capable of constituting unfitness. Examples of misconduct that may result in disqualification include fraud, mismanagement of the company’s affairs, failure to pay the company’s debts or taxes, and causing harm to suppliers or customers.
If a director’s conduct is found to be unfit, they may be disqualified to prevent them from engaging in similar behaviour in the future. Even the most diligent director can make mistakes, but when those mistakes substantively breach their legal obligations they become instances of misconduct.
As is to be expected, some of this misconduct is deliberate and done out of ignorance or disregard for the law, but oftentimes it occurs simply because directors are not competent or organised enough to comply with their legal requirements.
Consequently, the ongoing education and training of directors is essential in order to create an environment that holds parties to a higher standard and ensures proper corporate governance.
Fraud and Misconduct
When directors become disqualified due to deliberate wrongdoing, the company may suffer irreversible damage. Deliberate wrongdoing which can lead to director disqualification often includes extremely serious acts such as tax evasion and fraud, as well as any criminal conduct.
Companies must work diligently to make sure their directors do not engage in such activities, not only for the safety of their stakeholders but also for the integrity of their organisation.
What constitutes unfit behaviour?
There are several reasons that a director may be deemed to be unfit in their position:
- Mismanagement of the company’s affairs, including financial mismanagement or failure to follow proper governance procedures
- Fraud or other criminal acts
- Failure to pay the company’s debts or taxes
- Causing harm to suppliers or customers
- Not filing accounts and returns to Companies House
- Misleading shareholders or other stakeholders about the company’s financial or operational performance
- Using the companys money or assets for personal benefit
- Failing to co-operate with Liquidator
- Engaging in conduct that is likely to bring the company or its directors into disrepute
It is important for directors to be aware of their duties and responsibilities and to ensure that they are fulfilling them in an appropriate manner. If a disqualification claim is brought against a director due to unfit behaviour, there are various options including:
Go To Court and Defend Your Case
If you decide to defend yourself against a director disqualification claim, the court will consider all the relevant facts and circumstances to determine whether your conduct has “fallen below the standards of probity and competence appropriate for persons fit to be directors.”
When weighing up a case to determine whether a director’s conduct is unfit, the court will also consider any mitigating factors that may have contributed to the situation. For example, if a downturn in the economy affected the company’s cash position rather than the director’s negligence, this may be considered a mitigating factor. The court will also consider any steps that the director took to address the issue or to minimise the harm caused.
This means that the court will consider whether your actions or inaction were appropriate given the duties and responsibilities of a director, and whether they meet the standards of honesty, integrity, and competence that are expected of directors. In making this determination, the court will consider the evidence presented by both sides and may also consider expert testimony or other evidence as necessary.
If the court determines that your conduct was unfit, you may be disqualified from serving as a director in the future.If the court determines that a disqualification order is necessary, the director will usually be required to pay the costs and expenses incurred by the Secretary of State and any other parties involved in the case.
Offering a Disqualification Undertaking
A disqualification undertaking is a voluntary agreement in which a director agrees to disqualify themselves from serving as a director or in a similar role. Many directors prefer to offer an undertaking as it allows them to resolve the matter quickly and move on with their lives.
It also means that they are unlikely to have to pay any costs incurred by the Secretary of State or other parties involved in the case. It is important to note that once accepted by the Secretary of State, a disqualification undertaking has the same legal standing as a court order.
This means that if you agree to an undertaking, you will be legally bound by its terms and will be disqualified from serving as a director or in a similar role.
Company Directors Disqualification Act 1986 (CDDA)
The Company Directors Disqualification Act 1986 (CDDA) is a piece of legislation that deals specifically with director disqualification. Its primary purpose is to maintain the integrity of the business environment by setting out the procedures for disqualifying directors in cases of misconduct.
Under the CDDA, directors may be disqualified for a variety of reasons, including mismanagement of the company’s affairs, fraud or other criminal acts, failure to pay the company’s debts or taxes, and causing harm to suppliers or customers. If a director’s conduct is found to be unfit, they may be disqualified to prevent them from engaging in similar behavior in the future.
The CDDA applies to directors of limited companies and certain other types of organisations, and directors who are disqualified under the Act may be subject to additional penalties or restrictions.
What are the effects of director disqualification?
Disqualification is a public matter, so being named as a disqualified director can be embarrassing and damaging to your reputation. If you are disqualified, your details will be published on the Companies House database of disqualified directors, which is available to the public.
This means that anyone can search for your name and see that you have been disqualified from serving as a director. While this information is typically only of interest to those in the business community, it can still be embarrassing and potentially damaging to your reputation.
It is important for directors to be aware of the potential consequences of disqualification and to take steps to avoid it if possible. If you are disqualified, your details will be automatically removed from the database when your disqualification ends.
Once a disqualification has taken place importantly, you are not permitted to act as the director of a company (without specific authorisation*), for the entire disqualification period (between 2 – 15 years). This also means that you will be while you are able to work as an employee, you are not permitted to:
As a disqualified director, you are not permitted to do the following:
- Act as a director of a limited company, or in any other capacity that allows you to promote, manage, or form a limited company
- Take part in the promotion, formation, or management of a limited company, or any business that is not a limited company, but which carries on a business similar to that of a limited company
- Be the director of a oversea company that operates in the UK
- Act as a receiver of a company’s property
It is important to note that the restrictions on a disqualified director’s activities apply to all companies, not just the company in relation to which the disqualification order was made.
If you are a disqualified director and you engage in any of the activities listed above, you may be in contempt of court and may face additional penalties or restrictions.
While you are disqualified from serving as a director of a limited company, you may still be able to operate as a sole trader or join a partnership (assuming it is not a limited liability partnership). However, if you hold a particular profession, such as an accountant, solicitor, or barrister, your professional body may prevent you from practicing during the disqualification period.
Additionally, you may not be able to hold a position of trust, such as as a trustee of a pension scheme or a board member of a school or charity, while you are disqualified.
Violating the rules of director disqualification is a criminal offence that can result in personal liability for debts incurred during the violation period and/or a prison sentence of up to two years.
*It is possible to request the court’s permission to act as a director or participate in the management of a company while disqualified, but the court has the discretion to grant or deny this request.
How long can a director be disqualified for?
A director can be disqualified for a period of up to 15 years, with the length of the disqualification determined by the severity of the conduct. There are three tiers of disqualification:
- 2-5 years for reckless or negligent conduct as a director,
- 6-10 years for serious misconduct that is more detrimental to the public interest,
- 11-15 years for the most severe breaches, typically involving fraudulent or otherwise serious/criminal behavior.
How many directors are disqualified each year?
According to data from the Insolvency Service, the number of director disqualifications increased in 2019/20 compared to the previous year, and the average period of disqualification fell slightly. Key findings from the data include:
- 52 companies were wound up in the public interest, down 10 cases from the previous financial year
- The number of bankruptcy and debt relief restrictions increased to their highest annual level since 2014/15
- The Insolvency Service obtained or had significant involvement in obtaining 1,280 disqualifications in 2019/20, a 3.0% increase from the previous year
- The average length of a disqualification decreased for the third consecutive year, falling to five years and four months
- Over 6,800 former directors are currently disqualified, and more than 2,400 persons are currently subject to bankruptcy and debt relief restrictions
- In 2019/20, 74 directors faced criminal charges, resulting in 66 convictions
- The most common allegation made in director disqualification cases in 2019/20 was unfair treatment of the Crown (usually meaning HMRC).
What’s the purpose behind director disqualification?
Disqualification of an individual from serving as a director is primarily intended to protect the public interest. This can include preventing directors with a history of abuse of their position of trust from repeating behavior that harms others.
Overall, the disqualification process and the potential criminal consequences of a breach serve to protect the company, its shareholders, and other stakeholders (such as the public, creditors, customers, and employees) from directors who may engage in repeat offences.
What to do if you are facing director disqualification proceedings?
If you are facing a directors disqualification order you need to seek immediate legal advice to defend your position, Insolvency lawyers specialise in defending director disqualification claims and supporting disqualified directors.
You will need an experienced commercial lawyers who has a track record of:
- Successfully convincing the Secretary of State to withdraw court proceedings against clients in various industries
- Successfully convincing the Insolvency Service not to recommend issuing proceedings to the Secretary of State
- Successfully obtaining permission to act for clients in various industries
- Successfully negotiating reduced disqualification periods for disqualification undertakings
- Successfully defending director disqualification proceedings at trial
Working to protect directors from disqualification order/undertaking breaches by seeking the court’s permission for them to engage in prohibited activities when necessary.
Even if you have only received an initial letter or phone call from the Insolvency Service, it is important to contact a specialist or solicitor. The law applies to those acting as directors without being legally appointed, so it is important to take action to protect yourself and your business.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.