Director disqualification: the how and the why

The reason for director disqualification is still unclear to many people.

For the avoidance of doubt, having a company liquidation recorded against you does not automatically prevent you from acting as a director. 

 

Rather than being dealt with by The Insolvency Act, director disqualification is dealt with under the Company Director Disqualification Act 1986 as there can be reasons for disqualification outside of insolvency.

 

What does director disqualification mean?

 

Director disqualification has the following consequences:-

 

  • Prohibition from acting as a director of a company or LLP which is registered or trades in the UK
  • Prohibition from taking part in the promotion formation or management of a company or LLP
  • Inability to act as an insolvency practitioner
  • Restrictions on acting as a solicitor, barrister or accountant
  • Prohibition from acting as the trustee of a pension scheme
  • You may also not be a governor or trustee on the board for schools, charities, building societies, NHS trusts or police authorities.

 

Interestingly, you’re not prevented from being a Member of Parliament or from being a Councillor or Mayor in local government. 

 

Should the law be updated to include these on the list?

 

Director disqualification lasts for a period of between 2–15 years. You can however ask the court for permission to act in the above capacities, if you can show just cause, whilst subject to disqualification. The only restriction a court will not lift is the ability to act as an insolvency practitioner.

 

The disqualification will also appear on the Companies House register for the duration of the disqualification and the Insolvency Service register for three months after the disqualification.

 

For any offences connected to company insolvency which were committed after 1st October 2015, a compensation order may be sought, effectively lifting the corporate veil, requiring you to either-:

 

  • Make a contribution to the insolvent estate where you acted as a director
  • Make payments directly to creditors who were particularly harmed by your actions
  • It also does not affect the right of an insolvency practitioner to pursue civil actions against you separately such as wrongful trading

 

What are the reasons a director can face disqualification?

 

Following a company liquidation there are numerous reasons for which a director can face disqualification. 

 

The most common of which is trading on Crown Debt, with this accounting for over 50% of director disqualifications year by year. 

 

Other reasons include:-

 

  • Causing the company to incur further debts when it is already insolvent, also known as wrongful trading
  • Inappropriate disposition of company funds and assets
  • Becoming insolvent due to fines for illegal activities such as employing illegal workers or data protection breaches
  • Failing to maintain company records causing a detriment to creditors.

 

In addition it’s fairly safe to assume that if your company is liquidated in the public interest a lengthy disqualification is likely to follow due to the actions taken. 

 

Public interest winding up action will generally be taken for fraudulent behaviour within the company.

 

As well as The Insolvency Service being able to seek disqualification of a director, other agencies such as the Crown Prosecution Service may take disqualification action against a director. 

 

This is generally where there’s been an indictable offence in relation to a business and will be handed down alongside any fine or custodial sentence.

 

What is the director disqualification process?

 

In the case of voluntary company liquidation or administration the insolvency practitioner has a duty to formally report on the conduct of the directors. 

 

This report will be submitted within the first three months from the start of the process. Following this The Insolvency Service has three years to decide whether they are going to take further action to seek disqualification.

 

If the matter is passed to the investigation team they’ll generally contact you first to give you an opportunity to explain your actions. 

 

Failure to respond to this may well result in an immediate application to the court to seek your disqualification as a director. 

 

Now while your gut reaction may be to contact the insolvency practitioner you instructed for the company liquidation, they won’t be able to assist you as they owe a duty to the creditors and this would be a conflict of interest.

 

A proper response would be to seek independent legal advice in relation to the offences that are suggested to have taken place. 

 

If you respond properly to their queries and they still feel there are grounds for disqualification they’ll generally offer you a disqualification undertaking. This will usually be more lenient than if it becomes necessary to seek a disqualification order.

 

If they continue to seek a director disqualification order then The Insolvency Service will commence legal proceedings against you. In the event that they’re successful it’s likely that you’ll receive a longer term of disqualification than would be received under an undertaking, as well as being liable for costs. 

 

You’re also more prone to The Insolvency Service seeking to lift the corporate veil by seeking a compensation order against you.

 

What happens if I act in breach of a director disqualification order?

 

There are numerous consequences for breaching a Director Disqualification Order or undertaking as this is a criminal offence. These include:-

 

  • A custodial sentence lasting up to two years
  • A fine
  • The term of your disqualification being extended
  • The lifting of the corporate veil – making you personally liable for the debts of the company where the breach occurred
  • Anyone who aids you in breaching a disqualification or acts as a proxy for you in running a company is also likely to be penalised 

 

It’s not worth taking the risk believing you won’t get caught out – The Insolvency Service actively encourages whistleblowing and have made it extremely easy for members of the public to report directors.

 

Conclusion

 

If you run your company as a responsible director, treating your creditors fairly, then you run very little risk of disqualification. 

 

Whilst facing disqualification, an insolvency practitioner can also pursue you for wrongful trading or other actions to lift the corporate veil.

 

It should be noted that if you repay funds to the estate or compensate the estate for creditors losses this may be viewed as mitigation against the disqualification. 

 

This may not get you completely off the hook, but may reduce the term of your disqualification as a director.