When and How Can I be Disqualified as a Director?

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

Meet Our Experts

19th April 2024

How Does Directors’ Disqualification Happen?

Directors’ disqualification is a formal legal process that restricts an individual from holding directorships or participating in the management of any company. It is generally imposed when a director is seen as ‘unfit.’

It may be imposed through a court order if a director is found guilty of serious misconduct such as misappropriating assets or engaging in fraudulent trading. Directors can also choose to voluntarily disqualify themselves for a set period.

Directors may be disqualified for insolvency-related reasons, such as trading while the company is insolvent or failing to maintain proper financial records. Those found guilty of competition law violations, such as price-fixing, could be banned from directorship for up to 15 years. Other reasons for disqualification include being an undischarged bankrupt or violating a prior disqualification order.

What is Unfit Conduct?

“Unfit conduct” for directors generally includes actions that demonstrate a failure to meet legal or fiduciary responsibilities. This can include:

• Engaging in fraudulent activities.
• Trading while the company is insolvent.
• Failing to keep accurate financial records.
• Not complying with tax obligations.
• Misusing company assets.
• Ignoring statutory duties and regulatory requirements.

Common Grounds for Director Disqualification

In the UK, a company director can be disqualified for several reasons, as laid out in the Company Directors Disqualification Act 1986 (CDDA). These include insolvency, misconduct, bankruptcy, and fraud.

Company Insolvency

When a company faces insolvency, it often leads to a thorough investigation of the directors’ conduct and decision-making processes. This scrutiny is primarily aimed at determining if there has been any dereliction of duty or mismanagement that contributed to the company’s financial downfall.

The assessment typically focuses on the director’s adherence to their fiduciary duties and statutory obligations under the Companies Act 2006. Key areas of examination include the director’s role in financial management, their decision-making leading up to the insolvency, and any actions that may have prioritised personal interests or those of specific creditors over the company’s overall wellbeing.

If the investigation reveals that the director failed to act in the best interests of the company or its creditors during the period leading up to the insolvency, this could be grounds for disqualification for a period ranging from 2 to 15 years.

Director Misconduct

Director misconduct is a common ground for disqualification. This encompasses a broad spectrum of actions that breach the duties and responsibilities expected of a company director. The Companies Act 2006 sets out these duties, which include acting within their powers, promoting the success of the company, exercising independent judgment, exercising reasonable care, skill, and diligence, avoiding conflicts of interest, not accepting benefits from third parties, and declaring an interest in a proposed transaction or arrangement.

When directors fail to uphold these standards, it can lead to serious consequences, both for the company and for the directors themselves. Misconduct may involve a range of activities, such as:

1. Financial Mismanagement: This includes irresponsible handling of the company’s finances, such as misappropriation of funds, improper use of company assets, or making decisions that are financially detrimental to the company without due consideration.
2. Failure to Keep Proper Records: Directors are required to ensure that the company maintains accurate and up-to-date financial records. Neglecting this duty can obscure the company’s financial position, impede effective decision-making, and contravene statutory requirements.
3. Conflict of Interest: Engaging in activities or decisions where the director’s personal interests conflict with those of the company. This undermines the director’s obligation to act in the best interests of the company.
4. Breach of Legal Obligations: This includes failing to comply with laws and regulations governing corporate conduct, such as employment laws, health and safety regulations, and environmental laws.

Director misconduct can be identified through internal audits, whistleblower reports, or during investigations by regulatory bodies. If found guilty of misconduct, a director can face disqualification for a period of between 2 and 15 years.

>>Read our full article on the directors conduct report

Bankruptcy

Bankruptcy of a director is a straightforward yet significant ground for disqualification in the UK. Under the Company Directors Disqualification Act 1986, a director who is declared bankrupt is automatically disqualified from holding the position of director in any company. This prohibition remains in effect throughout the period of bankruptcy.

The rationale behind this automatic disqualification is rooted in the principle of financial responsibility and trust. A director, by virtue of their position, is entrusted with the financial stewardship of a company. Bankruptcy, which typically indicates an inability to manage personal or business financial affairs effectively, raises concerns about the individual’s capacity to fulfil this stewardship responsibly.

Fraud

Fraud is a severe and unequivocal ground for the disqualification of a company director in the UK. When a director is found guilty of fraud, it directly calls into question their integrity, trustworthiness, and suitability to manage corporate affairs. Given the serious nature of fraud, which often involves deception for personal gain or to the detriment of the company, employees, shareholders, or creditors, the consequences of such actions are substantial.

What can a Disqualified Director not do?

A disqualified director is subject to various restrictions and prohibitions under the disqualification order or undertaking. Here are some key things that a disqualified director cannot do:

1. Act as a director of a company: This is the core prohibition – a disqualified person cannot be a director of any company during the disqualification period.
2. Manage or control a company: They cannot be involved in the promotion, formation or management of a company, even if they do not hold an official director position.
3. Be a receiver or manager of a company’s property: Disqualified directors cannot take insolvency-related roles like liquidator, administrator or administrative receiver.
4. Act as an insolvency practitioner: They are prohibited from acting as an insolvency practitioner or being involved in insolvency proceedings.
5. Be involved in forming, marketing or running a company without court permission: Even indirect roles like consultancy, shareholding or decision influencing may require permission.
6. Use any letters or title implying director status: They cannot represent themselves as a director or use titles like “director” during disqualification.

Essentially, a disqualification order removes a person’s ability to exert management control or decision-making influence over a company in any capacity during the disqualification period.

FAQs about Director Disqualification