Commercial Law solicitor, Jonathan Masucci looks at director disqualification and how this happens.
Under the Company Director Disqualification Act 1986 (CDDA), the disqualification of a director is part of the statutory framework designed to deal with insolvency and the financial misconduct that sometimes causes, or arises from such an insolvency. There are a number of grounds for disqualifying a director under the CDDA but the most common ground is typically where a person is a director of an insolvent company.
How can a director be disqualified?
An individual can be disqualified from being the director of a company, if they do not meet their legal responsibilities. A director’s legal responsibilities include:
- following the company’s rules, as set out in its articles of association
- keeping company records and reporting changes in the company
- filing annual accounts and Company Tax Returns
- where the director is also a shareholder, telling other shareholders if they might personally benefit from a transaction the company makes
- paying Corporation Tax
It therefore stands to reason that a director’s conduct in respect of the above responsibilities will generally be deemed “unfit”, where it includes:
- allowing a company to continue trading when it is unable to pay its debts (see our previous article on How to Avoid Wrongful Trading for further information on this);
- not keeping proper company accounting records
- not sending accounts and returns to Companies House
- not paying tax owed by the company
- using company money or assets for personal benefit
In addition to the above, an individual is not usually allowed to be a company director if they are under restrictions from either a bankruptcy or Debt Relief Order.
Being disqualified from acting as a director
The process leading to disqualification of a director begins with The Insolvency Service or an insolvency practitioner either investigating a company or a director of a company, if it is involved in insolvency proceedings or if there has been a complaint.
In the event it is believed that an individual hasn’t followed their legal responsibilities as a director, they will write to them setting out the following:
- what they think the director has done that makes them unfit to be a director;
- that they intend to start the disqualification process; and
- how the individual can respond.
Once such a letter has been received, the recipient essentially has two options. They can either:
- Wait to be taken to court to be disqualified from acting as a director. Where someone opts for this course of action, they will have the opportunity to defend the case in court if they disagree with The Insolvency Service or insolvency practitioner; or
- Give a ‘disqualification undertaking’ – this is where the recipient agrees to voluntarily disqualify themselves which, in turn, will end court action being brought against them.
As a result, those that receive such correspondence in writing from either The Insolvency Service or an insolvency practitioner would be well advised to seek prompt legal advice at the earliest opportunity as, generally speaking, the earlier the claim is dealt with, the lower the costs are likely to be.
It is also worth noting that other bodies such as Companies House, the Competition and Markets Authority and the courts can also apply in certain circumstances to have a director disqualified.
Length and consequences of disqualification
Where a director is disqualified, depending on the severity of the circumstances, the disqualification can be for up to fifteen years. The period of director disqualification will typically fall within one of three categories:
- Lower category offences: a disqualification under this band will normally last between two and five years. Lower category offences may include things such as negligent or reckless conduct which are usually categorised as a failure of judgment rather than an act carried out with criminal or malicious intent.
- Mid-category offences: offences in this category usually result in a disqualification for between six and ten years and are reserved for offences that are more serious and which possibly endanger the public interest.
- High category offences: these are serious offences and carry a term of disqualification of up to fifteen years. Cases falling under this tier are generally related to fraud, embezzlement or serious criminal behaviour, carried out knowingly and for personal gain.
During the period of disqualification, a director is unable to:
- be a director of any company registered in the United Kingdom or an overseas company that has connections with the United Kingdom
- be involved in forming, marketing or running a company
Breaching the terms of the disqualification could also result in a fine or imprisonment for up to two years.
Further consequences and implications
In addition to the above, a disqualified director’s details will be published online on the Companies House database of disqualified directors until the disqualification has ended. The Insolvency Service’s register also keeps a record of any directors that have been disqualified in the last three months.
Where an individual is disqualified from acting as a director, they might also not be able 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.
It is also worth noting that lenders may also check such registers which could impact on an individual’s ability to borrow money.
Those taking instructions from someone who has been disqualified as a director should also be wary, as they could face prosecution and become personally liable for a company’s debts, if carrying out business on such an individual’s behalf.
If you have received a letter about disqualification, have concerns about being disqualified or how the director of a company is acting, or for other Commercial law issues, please contact our Commercial Law team for further advice.