Directors who don’t meet their legal responsibilities can be banned or disqualified from being company directors.
As a director of a limited company, they have a duty to do their best for the success of the company and to put the company’s interests first. In addition, they have the following general duties in accordance with The Companies Act 2006:
- Follow the company’s articles of association, which set out how the company is run, owned and governed
- Promote the success of the company before their own
- Exercise independent judgement
- Avoid conflicts of interest
- Not accept benefits from third parties
- Inform shareholders if they might personally benefit from a transaction or arrangement the company makes.
In addition, they must also:
- keep company records up to date and reporting any change
- file accounts and the company tax return
- pay Corporation Tax, amongst other duties.
Directors who are found to have acted improperly or dishonestly may face disqualification, fines and even imprisonment in the most serious cases. During formal insolvency proceedings, the licensed insolvency practitioner will investigate the circumstances surrounding the company’s failure, looking specifically for ‘unfit conduct’ in line with The Company Directors Disqualification Act 1986.
This involves the following:
- continuing to trade when directors knew that there was no prospect of avoiding liquidation
- failing to keep accounting records
- failing to pay company’s tax liabilities
- not filing statutory accounts and returns at Companies House
- using company funds or assets for personal gain
- failing to assist the appointed insolvency practitioner
If the company is in formal insolvency proceedings or if a complaint has been made, the Insolvency Service will investigate the company or the director personally. If they think the director hasn’t followed his or her legal responsibilities, they will include this in a report submitted to the Secretary of State (SoS). The authority will inform the director in writing about what they believe he or she has done, whether they intend to start the disqualification process and how he or she can respond.
What are the Rules of Disqualification?
A disqualified company director cannot become a director of a company or act as one during the time period stated without permission from the Court. This doesn’t mean that individuals can simply change their job description to sidestep the order or ask a third party to manage a company under their instructions. Simply put, directors cannot do the following:
- be the director of any UK company or any company based abroad that has a connection 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, recruiting staff or taking an executive decision
- instruct a third party to manage a company under direction. This can result in prosecution for the director as well as the third party involved, with the later potentially becoming personally liable for the company’s losses.
There are other restrictions that come with a disqualification order, for instance, the former directors may not be able to do the following
- sit on the board of a charity, school or police authority
- be a pension trustee
- sit on a health board or social care body
- be a solicitor, barrister or accountant
- be an insolvency practitioner
- be a receiver of a company’s property
Understanding directors’ rights and sole trading
Disqualified directors are not banned from working as an employee for the same company or from holding shares in a private limited company. That said, he or she should exercise caution on how they represented themselves and what roles they became involved in unless they had court permission to carry out the role of a director.
They can also work as a sole trader or within a joint partnership but not as a limited liability partnership. To set up as a sole trader, they will have to register for self-assessment and file a tax return every year. The responsibilities of the self-employed are as follows:
- maintaining good records of business sales and expenses
- filing a tax return every year
- paying income tax on your profits and Class 2 and Class 4 National Insurance. For more information, go to the government website for the self-employed.
Breaking a disqualification order is a criminal offence, which could lead to a fine or a custodial sentence of up to two years, in addition to a further period of disqualification, if they break the terms of the disqualification.
If you would like to know more about director disqualification orders and your rights, please call 08000 746 757 or email [email protected] for free and confidential advice from one of our professional advisers.