Reasons for Director Disqualification
The CDDA 1986 serves to act as a deterrent by punishing directors for failing to comply with their duties. The principal purpose of the disqualification regime is to protect the general public by seeking to ensure that the misconduct does not re-occur.
In keeping with its primary purpose to protect the public, a disqualification order or undertaking becomes public record. For example, members of the public can access this information from Companies House. If a director has been disqualified within the last three months, this information is also available to download from the Insolvency Service’s online service. This provides details of the disqualified directors name, last known address, date of birth, the company’s name, the duration of the disqualification and details of the director’s misconduct.
The reasons for director disqualification can be wide ranging and there is no set list of conduct which may amount to unfitness. Each case needs to be considered specifically on its own facts to see if there is any merit in defending the disqualification proceedings or if there are any mitigating factors.
Examples of misconduct
Common examples of reasons for director disqualification include (but are not limited to):
- Causing or permitting a company to trade to the detriment of HMRC
- Causing or permitting a company to trade to the detriment of a general body of creditors
- Failure to prepare or file company accounts
- Abusing a director’s loan account
- Wrongful trading
- Fraudulent trading
- Failure to keep adequate books and records
- Criminal acts
- Using company funds for own personal gain
We have experience dealing with disqualification claims brought on the above grounds (alongside various others). If any allegations of misconduct have been made against you, we recommend that you get in touch with our director disqualification specialist solicitors today for further advice.
Trading to the detriment of HMRC
The most common ground for director’s disqualification claims is that a director has caused or permitted a company to trade to the detriment of HMRC (or a general body of creditors). The starting point with this type of allegation is to establish a discriminatory practice of paying other creditors with the result that the company is trading at the expense of the creditor who is discriminated against.
The evidence required to establish a policy of discrimination can be direct but can also be inferred from conduct; for example, the fact of withholding payment for a significant period in contrast to the payment of others. This is normally found in cases where the company is insolvent, cannot pay all its creditors and the director decides to pay those creditors who press and not those who do not press for payment.
If a deliberate policy of non-payment is established, the court asks whether the director has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies, taking into account any extenuating (not the higher test of exceptional) circumstances.
What does the court take into account?
Section 6 of the Company Directors Disqualification Act 1986 provides that the court shall make a disqualification order against a person where his conduct makes him unfit to be concerned in the management of a company.
The court must have regard to particular matters which include the following:
- The extent to which the person was responsible for the causes of any material contravention by a company of any applicable legislative or other requirement.
- Where applicable, the extent to which the person was responsible for the causes of a company becoming insolvent.
- The nature and extent of any loss or harm caused, or any potential loss or harm which could have been caused, by the person’s conduct in relation to a company.
- Any misfeasance or breach of any fiduciary duty by the director in relation to a company.
- Any material breach of any legislative or other obligation of the director which applies as a result of being a director of a company.
- The frequency of any conduct listed above.
The three-stage test
In the event that director disqualification proceedings are issued, the court will essentially consider a three-stage test:
- Do the matters relied on amount to misconduct?
- If they do, do they justify a finding of unfitness?
- If they do, what period of disqualification is appropriate?
At Summit Law, we have considerable experience advising clients and defending disqualification claims on all grounds. If the Insolvency Service has contacted you, please get in touch with our specialist director disqualification solicitors today for further advice.