The Act – LEGISLATION “Company Directors Disqualification Act 1986” sought to consolidate previous legislation in this area and to act as a strong deterrent to directors who fail in their legal responsibilities and so are deemed to be ‘unfit’. Once a disqualification is imposed by the court, an individual cannot be a director of any company registered in the UK or an overseas company that has connections with the UK or be involved in forming, marketing, or running a company.
The law also affects so-called shadow directors, who perform this role but are not officially appointed as directors. A key purpose of the Act is to stop directors ‘phoenixing’ where they repeatedly close companies and set up new ones.
Anyone is able to report a limited company director for misconduct, but typically, this would be the Official Receiver or a liquidator who is investigating a business that has collapsed. Their official report will cover reasons for the failure, uncover any wrongdoing, and state if there are mitigating factors. There may then be an investigation by the Insolvency Service and if a disqualification is sought, then the proceedings must be started against the director within three years of the date of the formal insolvency of their company.
Meanwhile, although the Insolvency House is most likely to seek a director’s disqualification, other bodies also have the right to do this and they are Companies House, Competition and Markets Authority, and the courts as well as licensed insolvency practitioners.
What Constitutes an Unfit Director?
There are a number of reasons and these include:
- Allowing a company to continue trading when it cannot pay its debts
- Failing to keep proper company accounting records
- Not sending accounts and returns to Companies House
- Not paying tax that is due
- Using company money or assets for personal benefit
- Infringement of competition law
- Fraudulent activity
How are Directors informed about Disqualification Proceedings?
Directors will be informed by letter that this is the outcome of any investigation and given reasons why they are believed to be unfit to act as a director. There are then two choices – directors can either wait to be taken to court by the Insolvency Service or defend the case if they disagree with the findings.
Or, they can inform the Insolvency Service that they agree to a “disqualification undertaking” – this means the director voluntarily disqualifies themselves and so this ends the court action.
The disqualification undertaking requires the former director to sign a document that sets out the unfit conduct they have been accused of while being a director.
The process can be entered into either before or after the commencement of legal proceedings. An undertaking is generally seen as a more preferable option compared to being disqualified as a director by the court.
Whichever route is taken, since disqualification is a serious matter, many directors will choose to take legal advice at an early stage.
How Long can a Director be Disqualified for?
A disqualification can be for up to 15 years and typically, the most serious cases would be for over 10 years, while those which are ‘middle ranking’ would be for between six and 10 years. The minimum ban is for two years.
If the terms of the disqualification are broken, then the former director could be sent to prison for up to two years and fined.
Is a Director’s Disqualification Made Public?
Yes – there is a Companies House database of disqualified directors, with details being removed from this once the disqualification is serviced. The Insolvency Service also has a register of directors who are disqualified and available for the last three months, which includes details of why they were banned.
What are the Implications of Being a Disqualified Director?
There are a number of other restrictions that can affect a disqualified director and these include being unable to:
- Sit on the board of a charity, school or police authority
- Be a pension trustee
- Be a registered social landlord
- Sit on a health board or social care body
- Be a solicitor, barrister or accountant.
Can a Disqualified Director Still Work?
The Act does not prevent someone from employment, so they would be able to take a job or be a sole trader. However, they do need to be aware of restrictions and avoid any activities that are synonymous with being a director, such as controlling another company’s bank account or recruiting staff.
Meanwhile, a director may apply to the court, even if they are subject to a ban, should they wish to act as a director. The court has the right to allow this if it is felt the circumstances are justified. For example, if there could be clear benefits in terms of a business or any employees.
What Happens if a Disqualification Order is Breached?
If the former director breaches the disqualification order, then they could face a prison sentence of up to two years, a further period of disqualification and they will be committing a criminal offense. They could also be personally liable for any company debts if these were incurred when the breach took place.
Further, if a barred director asks someone else to manage a company under their instructions while banned, this could result in the third party also being prosecuted.
Updates to Company Director Disqualification Law
The Small Business, Enterprise, and Employment Act 2015 – LEGISLATION “Small Business, Enterprise and Employment Act” brought in broader grounds for disqualification, including for some foreign offences, increased levels of reporting, extended time periods for taking action and the introduction of creditor compensation.
In addition, the Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Act 2021 – LEGISLATION “Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Act” allows the secretary of state to investigate the conduct of former directors of dissolved companies and they will be entitled to apply to court for the former director to be disqualified and, if the director’s conduct has led to creditors of the dissolved company suffering a loss, to also seek compensation.
This closes a loophole under the Company Directors Disqualification Act and brings an end to the previously time-consuming and costly process of applying to court for a dissolved company to be restored to the register and means former directors can now be investigated and potentially disqualified.
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The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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- LEGISLATION “Company Directors Disqualification Act 1986”
- LEGISLATION “Small Business, Enterprise and Employment Act”
- LEGISLATION “Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Act”