Directors Disqualification Proceedings

Directors disqualification proceedings are issued if a company director's conduct is believed to be unfit or if they have failed to meet their legal responsibilities. Proceedings are instigated by the Insolvency Service on behalf of the Secretary of State or by the official receiver (part of the Insolvency Service). However, anyone can report a company director for inappropriate conduct. If you face director disqualification proceedings, you could be prohibited from performing a number of duties for between 2 and 15 years, so it is essential to understand what is happening and how it might impact you.

At Summit Law, we specialise in defending director disqualification claims and supporting disqualified directors.

What are the directors disqualification proceedings?

Director disqualification falls under the Company Directors Disqualification Act 1986 (CDDA). The CDDA endeavours to uphold the integrity of the business environment. The CDDA sets out the responsibilities placed on anyone who becomes a director of a limited company. The law also applies to people (or other legal entities) who have acted as a director without being legally appointed (including shadow directors).

Director responsibilities include:

  • Carrying out their duties honestly and responsibly
  • Ensuring they/ the company comply with all relevant laws and regulations
  • Exercising sufficient skill and care regarding the interests of the company’s creditors, customers, shareholders, employees and, in some circumstances, the public.

As well as limited companies, the director disqualification procedure also applies to other types of organisations such as limited liability partnerships (LLPs), banks and building societies, NHS foundation trusts, Further education bodies, and more.

Where a director fails to meet the required standards, the CDDA places an obligation on the Court to make a disqualification order against them. In such cases, it is believed that the director’s conduct makes them unfit to be concerned in the management of a company. If disqualification proceedings are going to be issued against a director, they will receive a section 16 letter. This letter will set out the Secretary of State's intention to issue proceedings against them.

If you receive a section 16 letter, you must seek legal advice as soon as possible. The Secretary of State has three years from the date of insolvency to start director disqualification proceedings.

The director disqualification period can last for a maximum of 15 years. During this time, the law will prevent you from carrying out the following duties:

  • Being the director of a UK registered company
  • Being the director of a company based abroad that operates within the UK
  • Being involved in the forming, marketing, or running of a company
  • Acting as a company director (e.g. hiring staff, making executive decisions, etc.)
  • Appointing someone else to manage a company under your guidance.

If you face director disqualification proceedings, the Court will examine the facts and circumstances of your case. Suppose the Court agrees that a disqualification order is required. In that case, you will typically have to pay any costs incurred by the Secretary of State. However, if circumstances allow it, you can avoid the Court process if you agree to a disqualification undertaking. This lets you voluntarily disqualify yourself and prevent court action and the threat of such costs.

Nevertheless, you should not accept the certainty of director disqualification without specialist legal advice, because it might be possible to persuade the Insolvency Service to impose a shorter period of disqualification or drop your case altogether.

Basis for determining disqualification of directors

There are millions of directors serving in companies throughout the UK, and most uphold their responsibilities effectively. But, in some cases, unfit conduct can lead to director disqualification. Unfit conduct includes things such as:

  • Allowing a company to continue trading when it cannot pay its debts
  • Not keeping proper company accounting records
  • Not paying tax owed
  • Using company money or assets for personal benefit
  • And more.

The following reasons could result in a person becoming disqualified from acting as a director.

MISCONDUCT, FRAUD OR CRIMINAL BEHAVIOUR

In most cases, directors are disqualified due to misconduct. And this misconduct does not have to be deliberate. Misconduct can be used as a basis for director disqualification if the director in question is not capable or informed enough to meet their legal obligations. Director disqualification can also be pursued following purposeful transgressions such as intentionally not paying taxes, fraud, and criminal acts.

COMPANY INSOLVENCY OR PERSONAL BANKRUPTCY

Director conduct is automatically investigated when a company is placed into insolvency proceedings. This is the most common reason for director disqualification proceedings to be issued. However, it is possible to avoid director disqualification in such cases if the director's conduct was not inappropriate. Indeed, most directors with an insolvent company are not disqualified. However, where a director is declared bankrupt, director disqualification is automatic.

PUBLIC INTEREST WINDING-UP ORDER

If the public needs to be protected from a company, a winding-up order may be issued. For example, where a business could not pay its debts or if it continued to trade despite knowing that it could not fulfil its duties to the customer. The period of director disqualification in such cases is often lengthy due to the level of public harm caused.

The director disqualification period lasts for between 2 and 15 years. There are three tiers of director disqualification, with the most severe breaches (usually fraudulent or other serious/criminal behaviour) attracting bans of 11 years plus.

The Courts approach to directors disqualification

If you decide to defend yourself against such proceedings, you will have the opportunity to respond to the allegation(s) raised and give the Court reasons for your actions. You will also be able to explain why any allegations are wrong and provide evidence to support your case. When considering 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).

The Court will then evaluate all the facts, evidence, and circumstances to decide whether your conduct has 'fallen below the standards of probity and competence appropriate for persons fit to be directors'.

The CDDA sets out the procedures for company directors to be disqualified. If a director’s conduct is found to be unfit, the Court must disqualify. Even if the director did not mean to neglect their responsibilities and did their best, incompetence or a lack of understanding is no defence. A director who failed to understand the obvious will be deemed just as unfit as one who did realise the situation and did nothing about it. Nevertheless, "ordinary commercial misjudgement is in itself not sufficient to justify disqualification". Instead, the conduct must display a lack of commercial integrity or fall into the realms of gross negligence or total incompetence[1].

So, as you can see, it is not always straightforward and legal advice is strongly recommended to ensure the best possible outcome for you.

It is also important to understand that, while disqualification proceedings are a civil rather than a criminal process, directors disqualification does not stop any other investigation, action, or legal proceedings (whether civil or criminal) from being conducted against a director.

Why choose Summit Law?

At Summit Law, we specialise in defending director disqualification claims and supporting disqualified directors.  Defining expectations and ensuring your interests are protected, we seek to resolve directors’ disqualification proceedings quickly and cost-effectively. And with Summit Law on your team, we always do this in a way that aligns with your overall needs and goals.

A high-end, Lexcel accredited boutique law firm, we have over 100 years’ experience pursuing and defending directors. And, as a result, we have a strong track record. Helping our clients to achieve positive outcomes, we give you the best chance of success.

We have successfully persuaded the Insolvency Service to withdraw Court proceedings against clients across a broad range of industries. 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. 

[1] Secretary of State for Trade and Industry v Goldberg [2004] 1 BCLC 597 at 611 and Lo-Line Electric Motors Ltd [1988]

Contact our director disqualification experts at Summit Law today

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.

Working on your behalf, we can help complete any necessary paperwork, attend meetings with you, work with you to establish any supporting evidence (e.g. ensure accurate copies of company books, refresh your memory of events, etc.) and make sure you fully understand the claim against you.

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 solicitors today on jb@summitlawllp.co.uk or  ac@summitlawllp.co.uk  or 020 7467 3980.