Directors Disqualification – Overview
What is a Directors Disqualification?
These are claims brought against directors only or other types of individual who act as a director, but are not formally recognised as being directors in a way you might commonly understand them. For example, ‘De Facto’ directors or ‘Shadow’ directors can also be disqualified from acting as directors.
The rules of disqualification are laid out in the Company Directors Disqualification Act 1986 (CDDA) and their purpose is to attempt to kerb the misuse of the limited liability company in England, Wales and Scotland.
Legal proceedings under the CDDA must be commenced against the director within two years of the date of the formal insolvency of his/her company (soon to be changed to three years minimum).
If you are disqualified you will be unable to become a director of a company without the prior agreement of the court or be directly/indirectly involved with the setting up, management, or promotion of a limited liability company or limited liability partnership.
Disqualification can last (at present) from 2 years up to 15 years. Further, if you ask someone else to manage a company under your instructions whilst banned this could result in the third party also being prosecuted.
Directors disqualification in this sense is different to an automatic disqualification which happens when a director is made bankrupt and subsists during the period of their bankruptcy.
What are the grounds for disqualification as a company director?
There could be numerous reasons for disqualification. Some examples are set out below: –
- Individual bankruptcy (permission can however be sought from the court to allow a directorship to continue)
- Infringement of competition law
- Wrongful or fraudulent trading
- Persistent breach of statutory obligations (for example, failure to file accounts on time)
- Unfit conduct
What constitutes unfit conduct?
Insolvency practitioners are required to comment and file a formal report with the Secretary of State detailing whether:
- The director caused his/her company to trade for too long (also known as trading to the detriment of creditors or trading with knowledge of insolvency)
- There were any mitigating factors, for example was the company’s insolvency caused solely by a downturn that affected its cash position and profit or was it due to directors’ negligence
- The directors continued trading or otherwise defrauded the company’s creditors while the company was known to be insolvent
- The case is a matter of public interest (in very serious cases)
- There was deliberate and persistent failure to submit tax returns when required, or to pay tax liabilities (for example, VAT and PAYE) to the Crown
- Failing to send the required returns and accounts to Companies House
- The Director failed to maintain, preserve or deliver up books and records of the company to its appointed Insolvency Practitioner.
- Not preparing adequate accounting records
- Using company monies or assets for personal benefit
- Attempting to deprive creditors with regard to assets
- Fraudulent dealings
A disqualification order does not prevent you from taking a job with a company or from operating as a sole trader. The material distinction is not to behave as though you are a director or ask others to act on your behalf. If you are required to undertake any management role(s) such as hiring staff, controlling the company bank account or taking what could be seen by others as executive decisions, you could be breaching a disqualification order.
If the disqualification order is breached, you will be committing a criminal offence and could face a prison sentence of up to two years and a fine plus a further period of disqualification. You could also be personally liable for any company debts incurred when the breach took place.
Potential restrictions of disqualification in everyday life
As well as having a direct impact on any potential role in a limited company or limited liability partnership, other areas of life can also be affected, for example: –
- You cannot be a trustee for a charity without leave from the court or the Charity Commission
- You may not be allowed to be a school governor
- You could be banned from certain health and social care organisations
- Professional bodies may ban you from being a member
- The Pensions Regulator would need to give permission if you wanted to be trustee of an occupational pension scheme
What is a Director Disqualification Undertaking?
An undertaking is an alternative to being disqualified by the court. You will be required to sign a document which sets out the unfit conduct you have been accused of whilst being a director. It is a quick and cost effective process and the undertaking can be entered into either before or after commencement of legal proceedings. This is always to be preferred to formally being disqualified as a director by the court.
A director who is disqualified whether by court order or undertaking will have his name included on a central Register of Company Directors which is available to view by the public at Companies House or on the Companies House website.
Permission to act as a director whilst disqualified
Section 17 of the CDDA allows a director to apply to the court to act as a director whilst otherwise subject to a directors disqualification order. The court has a wholly unfettered discretion to permit acting as a director whilst subject to a directors disqualification order if the circumstances justify it. It is important therefore to make sure that any application made to the court sets out the circumstances clearly with regards to issues of cuplability and necessity and/or other deserving factors. Often, there is a need for the company’s success to be a requirement, which a court may recognise and provide permission to the disqualified director to act.
Equally, in the case of bankruptcy, the court has a direction to allow the director to continue to act, and this is often exercised in a similar way as a usual directors disqualification order.
For further information, please contact Sunil Abbi on 0121 212 6346 or email to email@example.com.