Reasons for disqualification of directors

What are the grounds for disqualification as director of a companyThere are several grounds upon which an individual may be disqualified from serving as a director of a company. These can include insolvency of the company, personal bankruptcy, misconduct, fraud, and criminal behavior.

Disqualification may also be imposed if an individual fails to fulfill their legal responsibilities as a director, such as failing to maintain accurate financial records or mismanaging company assets.

In some cases, disqualification may be issued as a result of actions that were taken before the individual became a director, such as involvement in the formation or marketing of a company.

It is important for directors to understand and fulfill their legal responsibilities in order to avoid potential disqualification

What are the grounds for disqualification as director of a company

If a director does not fulfil their legal and directorial responsibilities, they may be disqualified from serving in their role.

These include:

Wrongful trading

Trading while insolvent is a grounds for disqualification for directors. Additionally, directors may be held personally liable for debts owed to creditors if they are found guilty of wrongful trading. When a company is placed into insolvency proceedings, the conduct of its directors is automatically investigated.

While disqualification is often sought against directors of insolvent companies, most directors are not actually disqualified. However, if a director is declared bankrupt, they will automatically be disqualified from serving as a director. To avoid disqualification on grounds of insolvency, it is important for directors to ensure that their conduct is appropriate.

Unfit conduct

The Company Directors Disqualification Act 1986 (CDDA) outlines the responsibilities of directors and provides the legal framework for director disqualification proceedings. If it is believed that a director has been involved in (or has allowed others to be involved in) inappropriate conduct, disqualification proceedings may be initiated.

These proceedings can be initiated by anyone, and reports of director misconduct are often made for a variety of reasons. Once a report is received, the Insolvency Service, acting on behalf of the Secretary of State, will determine whether further investigations are necessary.

Not adhering to the filing rules as laid down in the Companies Act

According to the Companies Act 2006, directors are required to ensure that the annual accounts of their company are accurate and fair. The Act outlines the specific requirements for preparing these accounts, including what must be included and how they should be disclosed and filed.

There are different rules for companies of different sizes. Failing to adhere to these rules can result in disqualification as a director. It is important for directors to understand and fulfil their responsibilities in regards to annual accounts in order to avoid potential disqualification.

Failure to comply with competition law

Competition law aims to create a fair business environment by ensuring that companies compete with each other fairly. If a company or its directors fail to comply with competition law, they may face disqualification as directors, large fines, and even the risk of criminal prosecution.

One type of conduct that is strictly prohibited under competition law is cartel activity, such as price-fixing and bid-rigging. It is important for directors to understand and adhere to competition law in order to avoid potential disqualification and other negative consequences.

What constitutes unfit conduct?

Unfit conduct includes things such as:

  • Allowing a company to continue trading when it cannot pay its debts/when it is insolvent
  • Being a director while bankrupt
  • Not keeping proper company accounting records
  • Not paying tax owed
  • Failing to submit tax returns and accounts to Companies House
  • Attempting to cheat creditors
  • Fraudulent activities
  • Using company money or assets for personal benefit
  • Failing to comply with instructions from an appointed insolvency practitioner or the Official Receiver
  • And more.

While director disqualification is sought following deliberate wrongdoing, it is lessor forms of misconduct that are the most common reason for a director to be disqualified. Rather than being deliberate, in many cases, misconduct happens because a director is not competent or informed enough to meet their legal obligations.

Implications of director disqualification

Disqualification as a director can have serious consequences for an individual. The most immediate effect is a ban on serving as a director of any company (without specific authorization) for the entire disqualification period, which can range from 2 to 15 years. This means that you will not be able to serve as a director of a UK company or any company that operates in the UK, and you will also be prohibited from being involved in the formation, management, or promotion of a new company, or carrying out the duties of a director. You will also be unable to appoint someone else to manage a company under your guidance.

Beyond these immediate consequences, director disqualification can also be embarrassing and damaging to your reputation, as it is a public matter. You may also be prohibited from serving as a school governor, charity trustee, or occupational pension scheme trustee, and professional bodies may ban you from membership.

If you have engaged in inappropriate or illegal conduct, you may also be held personally liable for any related debts, and you could face fines or a criminal conviction. Breaking the rules of director disqualification is also a criminal offense, and if found guilty, you could be held personally responsible for debts incurred during the period of disqualification and/or face a prison sentence of up to two years.

In some cases, it may be possible to seek permission from the Court to act as a director or take part in the management of a company while disqualified.

How will I know if I am liable for disqualification?

If disqualification proceedings are going to be initiated against you, you will receive a “section 16 letter.” However, receiving this letter does not mean that disqualification is inevitable. The insolvency service have a time limit of 3 years from date of liquidation, to disqualify you. You have the option to go to Court to defend yourself and provide a written “statement of truth” addressing all allegations.

In this case, the Court will consider all the evidence and determine whether your conduct has “fallen below the standards of probity and competence appropriate for persons fit to be directors.” The Court will also consider any mitigating factors, such as whether a downturn in business rather than director negligence contributed to the company’s financial position.

If you receive a section 16 letter, it is important to seek legal advice as soon as possible in order to minimise the impact on you. Director disqualifications are relatively rare, and it may be possible to avoid disqualification or reduce the disqualification period through legal action.

Alternatively, you can opt for a disqualification undertaking, which involves voluntarily disqualifying yourself and resolving the matter without going to Court.

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The Insolvency Service has the authority to disqualify directors if it is determined that they have been involved in unfit conduct or have failed to fulfill their legal responsibilities as directors. This may include allowing a company to continue trading while insolvent, being a director while bankrupt, failing to maintain proper company accounting records, not paying tax owed, attempting to cheat creditors, engaging in fraudulent activities, using company money or assets for personal benefit, or failing to comply with instructions from an appointed insolvency practitioner or the Official Receiver.

If the Insolvency Service determines that disqualification is warranted, it can initiate proceedings on behalf of the Secretary of State. Disqualification can have serious consequences, including a ban on serving as a director, damage to reputation, and the possibility of fines, criminal convictions, and personal liability for debts. It is important for directors to understand and adhere to their legal obligations in order to avoid potential disqualification.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

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.