What is company director disqualification?

Can you be disqualified as a company director?

In the most serious cases of failing to fulfil your legal duties or demonstrating improper conduct in your role as a company director, an individual can find themselves disqualified from acting as a company director for a period of up to 15 years. 

Company directorship brings with it a legal obligation to act in a ‘proper’ manner when undertaking company business. If you are found to have acted improperly, you may face disqualification as well as other penalties and fines.

During formal insolvency proceedings, the appointed insolvency practitioner is duty bound to investigate the circumstances surrounding the company’s financial misfortunes, looking for any instances of ‘unfit conduct’ or instances of fraudulent behaviour.

What is ‘unfit conduct’ as a company director?

• Continuing to trade when you know that the company is insolvent
• Failing to keep proper accounting records
• Failure to pay company tax liabilities
• Not filing statutory accounts and returns at Companies House
• Using company funds or assets for your own benefit
• Fraudulent activity
• Failing to assist the appointed Insolvency Practitioner.

Once your company is deemed insolvent, the appointed Insolvency Practitioner is required to file a report as part of their official duties. This is sent to the Secretary of State for Business, Innovation and Skills.

If it is in the public interest to take further action, and there is enough evidence to do so, proceedings to effect disqualification will begin. There is a statutory time limit of two years from the date of insolvency in which proceedings can take place, but in certain circumstances this can be extended.

Director disqualification court action

Director disqualification orders can last up to 15 years and are governed by the Company Directors Disqualification Act (CDDA) 1986. While disqualification orders are rare, the consequences of having one placed on you can be serious. As well as a disqualification order, directors may also be given a compensation order making them financially liable for their misconduct.

The Insolvency Service or other party, which could include Companies House, will notify you of their intention to begin court proceedings, the grounds for taking action, and the ways in which you can respond. Should you disagree with the evidence they have provided, you are entitled to argue the case in court.

You have two other alternatives:

• Wait for a Disqualification Order from the court
• Agree to make a ‘disqualification undertaking’ which means that you disqualify yourself, and court proceedings cease.

Disqualification can last for up to 15 years, and may be accompanied by a prison sentence in the most serious cases.

What happens if I am disqualified as a company director?

Being disqualified as a company director means that, during the time period stated, you will not be able to become or act as the director of a company without specific sanction from the court.

When given a director disqualification order, the individual concerned cannot:

• Be the director of any UK company, or any company based abroad that has connections to the UK
• Be involved with the formation or running of a company, nor its management or promotion
• Act in the manner of a company director, for example hiring staff or taking executive decisions
• Instruct a third party to manage a company under your direction. This can result in prosecution for yourself and the third party, with the person under instruction potentially becoming liable for company debts.

You are not barred from working as an employee for the same company, but you would need to be very careful how you represented yourself, and what roles you became involved with, unless you have court permission to undertake the duties of a director.

You can also be a sole trader or join a partnership, as long as it is not a limited liability partnership.

Breaking the rules of disqualification is a criminal offence which could lead to a prison sentence of up to two years, plus a further period of disqualification. You could also become personally liable for any company debts incurred during the time when the disqualification order was being contravened.

Additional restrictions on disqualified directors

Bans and restrictions on disqualified directors are wide-ranging. You may be prevented from being an accountant, solicitor or barrister if your professional body objects. Your eligibility to act as a trustee for a charity or school may also be affected.

Additionally, you would need the consent of The Pensions Regulator to be the trustee of an occupational pension scheme.

Disqualification is a public matter. Your details will be available online at Companies House, and for the first three months following your disqualification, you will be included in an Insolvency Service register.

Your right to seek permission from the court to act as a director

The Company Directors Disqualification Act allows for disqualified directors to apply to the court if they have a ‘reasonable need’ to act as a company director again.

Should the court agree with a request such as this, however, they may put restrictions in place on the duties that can be performed.

As you can see, director disqualification is a serious matter, but we can provide professional advice on what to do next should you be at risk of disqualification. Begbies Traynor have offices spanning numerous UK locations and offer a free same-day meeting.