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.
Directors’ disqualification is a formal legal process that restricts you from holding directorships or participating in company management. It typically occurs when you’re deemed ‘unfit’ to serve as a director.
You may face disqualification through a court order if you’re found guilty of serious misconduct, such as[1]Trusted Source – GOV.UK – Company director disqualification:
Misappropriating company assets
Engaging in fraudulent trading
Trading while the company is insolvent
Failing to maintain proper financial records
Disqualification can also result from competition law violations, like price-fixing, which could lead to a ban of up to 15 years.
Other reasons for disqualification include being an undischarged bankrupt or violating a prior disqualification order.
It’s important to note that you can choose to voluntarily disqualify yourself for a set period. This option might be preferable if you recognise that you’ve fallen short of your directorial duties.
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)[2]Trusted Source – GOV.UK – Company Directors Disqualification Act 1986. These include insolvency, misconduct, bankruptcy, and fraud.
Unfit Conduct
As a director, you can be disqualified if your behaviour is deemed ‘unfit’. This broad term encompasses a range of actions that demonstrate you’re not suitable to manage a company.
Unfit conduct may include:
Allowing a company to continue trading when it can’t pay its debts
Using company money or assets for personal benefit
Failing to comply with statutory obligations, such as submitting tax returns
The court considers the nature and extent of harm caused by your actions when determining unfitness. They’ll also look at whether your conduct was isolated or part of a pattern of behaviour.
To avoid being labelled unfit, always act in the company’s best interests, maintain transparency in your dealings, and seek professional advice if you’re unsure about your responsibilities.
Fraudulent Trading
Fraudulent trading is a serious offence that can lead to your disqualification as a director. It occurs when you knowingly allow a company to operate with the intent to defraud creditors or for any other fraudulent purpose.
Examples of fraudulent trading include:
Taking customer payments for goods or services you know can’t be delivered
Deliberately misrepresenting the company’s financial position to obtain credit
Continuing to trade and incur debts when you know the company is insolvent
If found guilty of fraudulent trading, you could face disqualification for up to 15 years, as well as criminal charges and personal liability for company debts.
To protect yourself, always be honest in your business dealings, maintain accurate financial records, and cease trading immediately if your company becomes insolvent.
Wrongful Trading
avoiding insolvent liquidation. Unlike fraudulent trading, wrongful trading doesn’t require intent to defraud; it’s based on your knowledge of the company’s financial situation.
You may be guilty of wrongful trading if:
You knew or ought to have known that insolvent liquidation was inevitable
You failed to take every step to minimise potential losses to creditors
If found liable for wrongful trading, you could be disqualified and ordered to contribute personally to the company’s assets.
To avoid wrongful trading allegations, regularly review your company’s financial position. If insolvency appears likely, seek professional advice immediately and consider ceasing operations to protect creditors’ interests.
Remember, as a director, you have a duty to act in the best interests of the company and its creditors when insolvency threatens. Ignoring financial difficulties won’t make them disappear and could lead to serious consequences for you personally.
Failure to Keep Proper Company Records
As a director, you’re legally required to maintain accurate and up-to-date company records. Failing to do so can lead to disqualification.
Proper record-keeping includes:
Financial accounts
Minutes of board meetings
Register of shareholders
Records of all business transactions
If you don’t keep adequate records, you may be unable to fulfil your duties effectively or demonstrate that you’ve acted properly in managing the company. This could be seen as evidence of unfitness to be a director.
To avoid this, implement robust record-keeping systems and regularly review your documentation processes. Consider seeking professional help if you’re unsure about your record-keeping obligations.
Failure to File Accounts and Returns
Timely filing of company accounts and returns is a crucial responsibility for directors. Failing to do so can result in disqualification.
You must ensure:
Annual accounts are filed with Companies House within 9 months of the accounting reference date
Confirmation statements are submitted annually
Tax returns are filed with HMRC by the deadline
Repeated failures to file or late filing can be seen as evidence of irresponsible behaviour or lack of competence. This could lead to disqualification proceedings.
Set up reminders for important filing dates and consider using accounting software or professional services to help you meet your obligations consistently.
Breach of Fiduciary Duties
As a director, you have fiduciary duties to act in the best interests of the company. Breaching these duties can lead to disqualification.
Your fiduciary duties include:
Promoting the success of the company
Exercising independent judgment
Avoiding conflicts of interest
Not accepting benefits from third parties
If you’re found to have breached these duties, particularly if it results in significant harm to the company or its stakeholders, you could face disqualification.
To protect yourself, always prioritise the company’s interests over your own, declare any potential conflicts of interest, and seek approval for any actions that might be seen as self-serving.
Remember, understanding and upholding your fiduciary duties is fundamental to your role as a director. If you’re ever in doubt about a decision or action, seek legal advice to ensure you’re acting within your responsibilities.
Insolvency-related Offences
As a director, you must be particularly vigilant when your company faces financial difficulties. Insolvency-related offences can lead to disqualification.
These offences may include:
Preferential payments to certain creditors
Disposing of company assets at undervalue
Failing to cooperate with the insolvency practitioner
If your company becomes insolvent, you must prioritise the interests of creditors. Any actions that unfairly disadvantage creditors could be grounds for disqualification.
To protect yourself, seek professional advice at the first sign of financial trouble. Be transparent with creditors and insolvency practitioners, and avoid any transactions that could be seen as unfairly preferential.
Competition Law Violations
Breaching competition law can result in director disqualification for up to 15 years. This is a serious consequence of anti-competitive behaviour.
Examples of competition law violations include:
Price-fixing agreements with competitors
Abusing a dominant market position
Bid-rigging in tender processes
If you’re found to have contributed to such practices, even if you weren’t directly involved, you could face disqualification.
Ensure you understand competition law and implement robust compliance programmes in your company. Regular training for all staff can help prevent inadvertent breaches.
Being an Undischarged Bankrupt
If you’re declared bankrupt, you’re automatically disqualified from acting as a director until you’re discharged from bankruptcy. This usually takes 12 months but can be longer in some cases.
During this period, you must not:
Act as a director of any company
Be involved in forming, marketing, or running a company
Acting as a director while bankrupt is a criminal offence and can lead to further disqualification.
If you face personal financial difficulties, seek advice early. Consider voluntary arrangements or other alternatives to bankruptcy if possible.
Breach of Previous Disqualification Orders
If you’ve been previously disqualified as a director, breaching the terms of that disqualification is a serious offence. It can lead to further disqualification, fines, and even imprisonment.
Breaches might include:
Acting as a director while disqualified
Being involved in the management of a company without court permission
Using an alias to circumvent the disqualification
If you’re under a disqualification order, strictly adhere to its terms. If you wish to be involved in business management, apply to the court for permission, clearly stating your case.
Remember, director disqualification is designed to protect the public and maintain the integrity of the UK’s business environment. By understanding and avoiding these common grounds for disqualification, you can ensure you remain fit to serve as a director and contribute positively to your company’s success.
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:
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.
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.
Be a receiver or manager of a company’s property: Disqualified directors cannot take insolvency-related roles like liquidator, administrator or administrative receiver.
Act as an insolvency practitioner: They are prohibited from acting as an insolvency practitioner or being involved in insolvency proceedings.
Be involved in forming, marketing or running a company without court permission: Even indirect roles like consultancy, shareholding or decision influencing may require permission.
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
How long can a disqualification last?
The duration of disqualification can vary depending on the severity of the misconduct. Typically, it ranges from 2 to 15 years.
Can a director challenge a disqualification order?
Yes, a director has the right to defend themselves against disqualification proceedings in court. They can present evidence and argue their case to contest the allegations.
What happens if a disqualified director breaches the disqualification order?
Breaching a disqualification order is a criminal offence. It can result in severe penalties, including fines and imprisonment.
Are there any ways to remove or reduce the period of disqualification?
Once a disqualification order is in place, it generally cannot be reduced or removed before the end of the specified period. However, the affected individual can apply to the court for permission to carry out specific business activities under certain conditions.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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