Directors who don’t meet their legal responsibilities can be banned or disqualified from being company directors.
As a director of a limited company, he or she will have an array of obligations and duties to comply with and perform, including a duty to do their best for the success of the company and to put the company’s interests first. Here are just some of the other duties to consider:
- follow the company’s articles of association, setting out how the company is run, owned and governed
- keep company records up to date and to report any changes
- file company accounts and tax return
- inform shareholders if they might personally benefit from a transaction or arrangement the company makes
- pay Corporation Tax
In some cases, an accountant may be hired to manage some of these things on a day-to-day basis. However, directors are still legally responsible for the company’s records, accounts and performance. Individuals who don’t meet these responsibilities may be disqualified, fined and even receive a prison sentence.
What are the Rules of Disqualification?
Following a disqualification order, which can be up to 15 years that person won’t allowed to be a director of a limited company in the UK and are forbidden from forming a new company unless a Court grants them permission.
In short, disqualified directors can’t do the following:
- be the director of any UK company or any company based abroad that has connections to the UK
- be involved in the formation or running of a company, or its management or promotion
- act in the manner of a company director, for instance, recruit staff or take an executive decision
- instruct a third party to manage a company under his or her direction. This may lead to prosecution for the both the disqualified director and the third party, with the latter potentially becoming liable for company debts
Therefore, being involved in forming a new company or running an existing one creates a point of contention as a disqualified director is permitted to own shares in public companies or private limited companies, and may well be involved in the forming or running of the company.
Being a Shareholder
When a new company is formed, it must have at least one shareholder or a “subscriber” for the registration process. The subscriber must agree that he or she “wishes to form a company” in the memorandum of association, the document that sets up this company. This appears to be in conflict with The Company Directors Disqualification Act 1986, which was implemented to prevent unfit directors from being officers of a UK company.
It’s clear from this piece of legislation that a disqualified director is forbidden from forming a company, yet the Companies Act 2006 requires subscribing shareholders to agree to “form a company”. Whilst a disqualified director shouldn’t be running a UK company, the law doesn’t prevent ownership, which creates a lack of clarity, and until this grey area is addressed, it remains possible for disqualified directors to instruct other directors whilst maintaining ownership of a private limited company.
The Company Directors Disqualification Act 1986
Disqualified directors who are shareholders in a private limited company must exercise caution on how they represent themselves and the types of roles they become involved in unless they have Court permission to carry out the role of director. Clearly, company ownership is permitted, but if they were to act in one of the following ways it would become extremely tough to avoid a director disqualification breach.
- as de facto director (or director “in fact”) who acts as a director, but who hasn’t been formally appointed or recorded as director in the company’s records or at Companies House
- as a shadow director who isn’t openly acting as a director, but is instructing another company director in the performance of his or her duties and the direction of the company
- as a corporate director who is appointed to sit on the Board
- as a non-executive directors who in terms of management and direction of the company and responsibilities, such as the financial affairs of the company, is no different to a formally appointed and registered director
Breaching the rules of disqualification is a criminal offence, which could lead to a custodial sentence of up to two years, plus a further period of disqualification. Individuals could also become personally liable for any company losses incurred during the time when the disqualification order was being contravened.
For more information about your rights as a disqualified director, being a shareholder and how to avoid a director disqualification order breach, please call 08000 746 757 or email [email protected] for free and confidential advice from one of our professional advisers.