Becoming the director of a limited company brings with it certain fundamental responsibilities laid down in the law. When these are not adhered to, directors risk what is called a ‘directors disqualification order’, which means they are banned for ‘unfit conduct’ from continuing in their role.
A court will only make a disqualification order against you if there is evidence of wrongdoing or misconduct. This post will give you some idea of what the order means and how it is likely to affect you.
- When and How Can You be Disqualified as a Director?
- How Does Director’s Disqualification Work?
- The Company Directors Disqualification Act 1986
- What’s the Director’s Disqualification Process?
- What are the Restrictions on Disqualified Directors?
- Can a Disqualified Director Work as a Sole Trader?
- Can a Disqualified Director be a Shareholder?
- How to Apply for Permission to act as a Director Whilst Disqualified
When and How Can You be Disqualified as a Director?
You can be disqualified as a company director in the UK for a number of reasons, including:
- Unfit conduct. This can include a wide range of things, such as:
- Mismanaging a company’s finances
- Failing to keep proper company records
- Dishonestly or fraudulently trading
- Using company assets for personal gain
- Breaking the law in the course of your duties as a director
- Bankruptcy. If you are declared bankrupt, you will automatically be disqualified from being a company director.
- Conviction of certain offences. This includes certain offences under the Companies Act 2006, as well as other offences such as fraud and theft.
Director disqualification proceedings can be brought by the Insolvency Service, the Competition and Markets Authority, or any interested party, such as a shareholder or creditor. If the court finds that you have been involved in unfit conduct, it can disqualify you from being a company director for a period of up to 15 years.
How Does Director’s Disqualification Work?
Once a director disqualification order is in force, you are no longer allowed to act as a director of a company in the UK, even if you change your job title or ask others to manage a company on your behalf. Doing so is a criminal offence, and anyone who helps you break the order may also be prosecuted.
Director disqualification does not prevent you from being prosecuted for criminal offences or from being sued by creditors or liquidators for losses caused by your unfit conduct.
The Company Directors Disqualification Act 1986
The basis of the law banning directors is found in the Director’s Disqualification Act 1986, and was amended in the Enterprise Act 2002, and the Small Business, Enterprise and Employment Act 2015.
What’s the Director’s Disqualification Process?
The director disqualification process in the UK is as follows:
- A complaint is made to the Insolvency Service.
- The Insolvency Service investigates the complaint to determine whether there is a good case for disqualification.
- If the Insolvency Service believes that there is a good case for disqualification, it will bring disqualification proceedings against the director in the High Court.
- The High Court will hold a hearing to determine whether the director is unfit to be a director.
- If the High Court finds that the director is unfit to be a director,
What are the Restrictions on Disqualified Directors?
A disqualification order prevents a director from:
- Acting as a director of any company in the UK or an overseas company that has connections with the UK
- Being directly or indirectly involved in the formation, promotion, or management of a company or limited liability partnership (LLP)
- Being a receiver of a company’s property
- Acting as an insolvency practitioner
In addition, a disqualified director may be prohibited from:
- Borrowing money from a company or LLP
- Receiving any payments from a company or LLP, other than wages or salary
- Holding shares in a company or LLP
The specific restrictions that apply to a disqualified director will depend on the terms of their disqualification order.
Is there a Disqualified Directors Register?
All disqualification orders will be registered at Companies House, which keeps a register of all disqualification orders. This register can be accessed by the public.
There is also an online facility operated by the Insolvency Service. This provides the public with details of recent disqualifications, along with the improper conduct that resulted in the disqualification here.
Can a Disqualified Director Work as a Sole Trader?
Yes, this is allowed.
A disqualification order only applies to all companies formed in England, Scotland, Wales or Northern Ireland. It also applies to companies formed abroad if:
- The company is registered in England, Scotland, Wales or Northern Ireland;
- The company has a significant connection to England, Scotland, Wales or Northern Ireland (i.e. it has assets or carries on business in these areas).
A disqualification order does not prevent you from carrying on business as a sole trader or in partnership with others. However, you must not take part in the formation, promotion or management of a limited liability partnership unless you receive court permission to do so.
Can a Disqualified Director be a Shareholder?
Yes, a disqualified director can be a shareholder in a company. However, there are some restrictions on what they can do as a shareholder. For example, a disqualified director cannot:
- Be involved in the management of the company
- Vote on resolutions at shareholder meetings
- Receive any dividends or other payments from the company
If a disqualified director breaches any of these restrictions, they may be held personally liable for any losses that the company suffers as a result.
In addition, a disqualified director may find it difficult to sell their shares in a company. This is because potential buyers may be reluctant to buy shares from a disqualified director, knowing that they will have limited rights as a shareholder.
Breach of a Directors Disqualification Order
If a disqualified director breaks the terms of their disqualification order, they may be fined or imprisoned for up to two years. In addition, they may be held personally liable for any losses that the company or LLP suffers as a result of their breach.
Yes, it is possible to obtain permission to act as a director whilst disqualified, but it is difficult. You must apply to the court under section 17 of the Company Directors Disqualification Act 1986 and prove that:
- The public will be adequately protected if you are allowed to act as a director.
- You have a reasonable need to be able to act as a director.
The court will consider a number of factors when deciding whether to grant permission, including:
- The seriousness of the misconduct that led to your disqualification
- The steps you have taken to address your misconduct and to ensure that it does not happen again
- The impact on the public and creditors if you are not allowed to act as a director
If the court grants permission, it may impose conditions on you, such as:
- Requiring you to obtain the court’s permission before taking up any new directorships
- Requiring you to have a qualified person supervise your activities as a director
- Prohibiting you from acting as a director of certain types of companies
How to Apply for Permission to act as a Director Whilst Disqualified
If you are considering applying for permission to act as a director whilst disqualified, you should seek professional advice from a solicitor or barrister who specializes in company law. They can help you to prepare your application and to understand the process.
To apply for permission, you will need to file a notice with the court and serve it on the Insolvency Service. You will also need to provide the court with a statement setting out the reasons why you are applying for permission and the evidence that you have to support your application.
The court will then hold a hearing to consider your application. At the hearing, you will have the opportunity to present your case to the judge. The judge will then make a decision on whether to grant you permission to act as a director.