Director Disqualification Guide 2021
- Director Disqualification
Director Disqualification - What You Need To Know
Directors are legally responsible for running a company, and, under the Companies Act 2006, there are set statutory duties and responsibilities that all company directors must adhere to. These include (but are not limited to):
- Acting as per the company's constitution;
- Only exercising powers for the purposes for which they are granted;
- Acting in a way they believe would be most likely to promote the success of the company;
- Exercising independent judgement when acting in the best interests of the whole company (rather than representing the interests of just one shareholder/group);
- Exercising reasonable care, skill and diligence when carrying out their duties;
- Avoiding direct/indirect conflicts of interest between themselves and the company;
- Not accepting benefits from third parties given because of their role as a director;
- Not accepting benefits from third parties given by doing/not doing anything as a director;
- Declaring an interest (where one exists) in any proposed transaction or arrangement.
There are millions of directors throughout the UK, and most uphold their responsibilities effectively. However, if you fail to comply with your legal obligations, you may find yourself disqualified from acting as a director. This can have a serious and long-lasting impact on an individual, so it is essential that you understand the facts.
In this guide, our expert commercial solicitors, who have substantial experience in defending director disqualification claims, have set out precisely what director disqualification means, and the possible impact it may have on you, your reputation and ability to continue acting as a director in the future.
Common reasons for director disqualification
Anyone can report a company director's conduct as being 'unfit', and reports are made for many reasons, including where someone suspects a director of committing fraud, selling faulty products or services, not paying a company's debts/tax, or causing harm to suppliers or customers.
Once a report is made, The Insolvency Service, acting on behalf of the Secretary of State, will assess any information reported, and consider whether to carry out further investigations.
But what are the most common reasons for director disqualification?
1) Company Insolvency
Today, disqualification is most commonly sought against directors of insolvent companies. When a company is placed into insolvency proceedings (including compulsory liquidation, voluntary liquidation, or administration), a director's conduct will be automatically investigated. In such situations, a director may be disqualified to prevent repeat behaviour.
It is possible to avoid director disqualification if the director's conduct is found to be appropriate. Indeed, most directors of an insolvent company are not disqualified. The burden of proof rests upon the Secretary of State to establish if a director's conduct is unfit and should result in disqualification.
Where a director is declared bankrupt, director disqualification is automatic. This means that the director is automatically disqualified from acting as a director of a limited company, or as a partner of a Limited Liability Partnership (as well as some other types of organisations). This automatic director disqualification falls under the remit of the Company Director's Disqualification Act 1986. Failure to adhere to these restrictions could result in criminal charges.
The most common reason for a director to be disqualified is because the matters relied upon amount to misconduct capable of constituting unfitness. However, misconduct does not have to be deliberate. In many cases, it occurs because the director is not competent or organised enough to meet their legal obligations.
4) Fraud and Misconduct
Director disqualification is sought following deliberate wrongdoing such as intentionally not paying taxes, fraud, and criminal acts.
What constitutes unfit behaviour?
Below are the most common reasons as to why a director may be deemed to be unfit in their position.
- Allowing a company to continue trading when it cannot pay its debts
- Allowing a company to continue trading to the detriment of HMRC (or a general body of creditors)
- Not keeping proper company accounting records
- Not sending accounts and returns to Companies House
- Not paying tax owed by the company
- Using company money or assets for personal benefit
- Matters of public interest (usually severe cases)
- Fraudulent dealings.
However, this is not an exhaustive list. If a director disqualification claim is brought against you for unfit behaviour, there are various options including:
1) Go To Court and Defend Your Case
If you decide to defend yourself, the Court will weigh up all the 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, the Court will also look at any mitigating factors (e.g. whether a downturn affected the company's cash position rather than director negligence). If the Court does issue a disqualification order, you will usually have to pay the costs and expenses incurred by the Secretary of State (and any other parties involved).
2) Offering a Disqualification Undertaking
A disqualification undertaking is where you voluntarily disqualify yourself. Many directors prefer to offer an undertaking as it allows them to put the matter behind them and move on. It also means that you are unlikely to have to meet any costs incurred by the Secretary of State.
However, once accepted by the Secretary of State, a disqualification undertaking has the same legal standing as a court order. As such, professional legal advice is strongly recommended before offering an undertaking.
Company Directors Disqualification Act 1986 (CDDA)
The Company Directors Disqualification Act 1986 (CDDA) deals specifically with director disqualification. Its primary purpose is to maintain the integrity of the business environment. To support this objective, the Act sets out the procedures for company directors to be disqualified in some instances of misconduct.
The Act also sets out the standards for assessing unfitness. These standards are used to determine whether a person is fit to serve as a director.
More recently, the government introduced emergency legislation to ensure directors are not held personally liable for situations out of their control during the Coronavirus pandemic. These measures temporarily relaxed the rules on wrongful trading in a very unclear business environment.
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 (and automatically removed when your disqualification ends).
Perhaps more importantly, if you are disqualified as a director, 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 means, while you can continue to work as an employee, even for the same company, you cannot:
- Be the director of a UK company
- Be the director of a company based abroad that operates in the UK
- Be involved in the formation, management, or promotion of a company
- Act as a company director/undertake the duties of a director (e.g. hire staff, make executive decisions, etc.)
- Appoint a third party to manage a company under your guidance (doing this also places your appointee at risk of prosecution and financial liability).
You can operate as a sole trader or join a partnership (if it is not a limited liability partnership). However, if you hold a particular profession (e.g. accountant, solicitor, barrister, etc.), your professional body may prevent you from operating during the disqualification period. Also, you might not be able to hold a position of trust (e.g. as a trustee of a pension scheme, or a board member of a school or charity).
And there are other potential penalties to consider. For example:
- You could be held personally liable for losses and/or fines arising from illegal or negligent acts (possibly leading to bankruptcy)
- You could be held personally liable because of decisions made by the other directors (directors can be made jointly and severally liable for any breach of responsibilities, so if there is a disagreement between yourself and other directors, make sure your position is recorded in the minutes)
Breaking the director disqualification rules is also a criminal offence which could lead to you becoming personally liable for debts incurred during the infringement period, and/or a prison sentence of up to two years.
* It is possible to apply to the Court for permission to act as a director or take part in the management of a company while disqualified. But this decision is very much at the Court's discretion.
How long can a director be disqualified for?
A director can be disqualified for up to 15 years. There are three tiers of director disqualification:
- 2-5 years (usually for reckless or negligent conduct as a director)
- 6-10 years (usually for serious misconduct which is more detrimental to the public interest)
- 11-15 years (for the most severe breaches, usually fraudulent or otherwise serious/criminal behaviour).
How many directors are disqualified each year?
According to the Insolvency Service, the total number of director disqualifications increased in 2019/20 compared to the previous year. Year-on-year, the average period of disqualification also fell slightly. According to the stats:
- Fifty-two 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 getting 1,280 disqualifications for the reporting year 2019/20, that was 3.0% higher than in 2018/19
- For the third consecutive year, the average length of a disqualification decreased, falling to five years and four months
- Over 6,800 former directors are currently disqualified, and more than 2,400 persons are presently subject to bankruptcy and debt relief restrictions
- In 2019/20, 74 directors faced criminal charges which resulted in 66 convictions
- In 2019/20, the most common allegation made in director disqualifications cases concerned unfair treatment of the Crown (this usually means HMRC).
What's the purpose behind director disqualification?
The primary purpose of disqualifying an individual from acting as a director is to protect the public interest. For example, to stop a director with a history of abusing their position of trust from repeating behaviour that harms others.
In a nutshell, through the disqualification process (and the potential criminal consequences of a breach) the legislation helps to protect the company, its shareholders, and other stakeholders (e.g. the public, creditors, customers, employees, etc.), from directors who may otherwise engage in repeat offences.
Are you facing director disqualification proceedings?
At Summit Law, we specialise in defending director disqualification claims and supporting disqualified directors. Our experienced commercial lawyers have a proven track record in:
- Successfully persuading the Secretary of State to withdraw court proceedings against clients across a broad range of industries;
- Successfully persuading the Insolvency Service not to recommend to the Secretary of State to issue proceedings;
- Successfully applying for and obtaining permission to act for various clients across a broad range of industries;
- Successfully negotiating reduced disqualification periods in respect of disqualification undertakings;
- Successfully defending director disqualification proceedings at trial.
We also proactively protect our clients against disqualification order/undertaking breaches by seeking the Court’s permission for them to undertake prohibited activities where needed.
If you or your company is caught engaging in anti-competitive, negligent, illegal, or fraudulent activity, you could face serious personal consequences. The law also applies to those acting as a director without being legally appointed. So, even if you have only received an initial letter or phone call from the Insolvency Service, you must contact us straight away.
We offer an initial letter of advice for a competitive fixed fee. Should you require legal support beyond this, we provide tailored fixed fee estimates. For more information, please contact our specialist director disqualification lawyers today by calling 020 7467 3980.