Grounds For Disqualification Of Directors

If you are banned from being a company director, the process can have a significant and severe effect on you. To protect yourself, you must understand the grounds for director disqualification. Likewise, it is important that you know what to do should you fall foul of the Company Directors Disqualification Act 1986.

What are the grounds for disqualification as director of a company?

A director risks disqualification if they fail to fulfil their legal and directorial responsibilities. This includes:

Wrongful trading

Trading while insolvent is grounds for the disqualification of directors. Furthermore, if a director is found guilty of wrongful trading, they can be made personally liable for debts to creditors. Today, when a company is placed into insolvency proceedings, the director’s conduct is automatically investigated.

However, directors can avoid disqualification on insolvency if their conduct was not found to be inappropriate. So, while disqualification is most frequently sought against directors of insolvent companies, most directors with an insolvent company are not disqualified. However, should a director be declared bankrupt, director disqualification is automatic.

Unfit conduct

Director disqualification falls under the remit of the Company Directors Disqualification Act 1986 (CDDA). The CDDA sets out the responsibilities placed on directors.

Director disqualification proceedings can be launched if it is believed that a director has been involved in (or has allowed others to be involved in) unfit conduct. Anyone can report a company director's conduct, and reports are made for many reasons. Once a report is made, the Insolvency Service, acting on behalf of the Secretary of State, will decide whether to carry out further investigations.

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

The Companies Act 2006 requires company directors to ensure that their annual accounts are true and fair. The Act also sets out the requirements for preparing the annual accounts, what these must include, and how they should be disclosed and filed. The rules are different depending on the size of the company. Not adhering to these rules is grounds for director disqualification.

Failure to comply with competition law

Competition law provides a level playing field to ensure that companies compete fairly with each other. Failure to comply with competition law can result in director disqualification, large fines, and even the risk of criminal prosecution. Along with other practices, ‘cartel’ activity such as price-fixing and bid-rigging is strictly prohibited.

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 can have a profoundly negative impact on an individual. The immediate consequence is a ban from acting as the director of a company (without specific authorisation[1]) for the entire disqualification period (between 2 - 15 years).

In addition to not being a director of a UK company, or any company that operates in the UK, you are also prohibited from being involved in the formation, management, or promotion of a new company, or carrying out the duties of a company director (e.g. hiring staff, making executive decisions, etc.). Likewise, you cannot appoint someone else to manage a company under your guidance.

But the implications don’t stop there. Because director disqualification is a public matter, the process can also be embarrassing and damaging to your reputation.

If you are disqualified as a director, you may also be prevented from becoming a school governor, or a trustee for a charity or occupational pension scheme. Professional bodies would also need to be informed and could ban you from membership.

Furthermore, if you have engaged in unfit or illegal conduct, you could be held personally liable, and in the worst-case scenario, find yourself facing huge fines or a criminal conviction. Similarly, breaking the director disqualification rules is a criminal offence, and if found guilty, you could become personally liable for debts incurred during the infringement period, and/or face a custodial sentence of up to two years.

[1] In some circumstances, 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.

How will I know if I am liable for disqualification?

You will receive a ‘section 16 letter’ if disqualification proceedings are going to be issued against you.  However, disqualification is not inevitable if you receive such a letter. You can go to Court to defend yourself and answer all allegations by providing a written ‘statement of truth.

If you do decide to defend yourself, the Court will weigh up all the evidence to decide whether your conduct has 'fallen below the standards of probity and competence appropriate for persons fit to be directors'. 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 you receive a section 16 letter, you must seek legal advice as soon as possible to minimise the impact on you. Director disqualifications are still relatively rare, and it might be possible to avoid disqualification or reduce the disqualification period.

Alternatively, you can opt for a disqualification undertaking whereby you voluntarily disqualify yourself.  This allows you to put the matter behind you and move on without Court action.

Why choose summit law

At Summit Law, we are experts in defending director disqualification claims and supporting disqualified directors. In addition to successfully persuading the Insolvency Service to withdraw disqualification proceedings, we have also proactively protected our clients by seeking the Court’s permission for them to undertake prohibited activities where needed. 

Director disqualification could result in serious personal consequences. So, even if you have only received an initial letter or phone call from the Insolvency Service, you must contact us straight away.

Contact our director disqualification experts today

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.