Director Disqualification – Everything You Need To KnowAugust 27, 2021
Unfit conduct can result in director disqualification for up to 15 years. It’s vital for directors to understand their legal responsibilities.
Furthermore, breaking the terms of a company director disqualification can lead to a fine or prison sentence of up to two years.
UK company law sets out the procedures around director disqualification via the Company Directors Disqualification Act 1986.
The legislation applies not only to formally appointed directors, but those acting as directors, shadow directors, or anyone found to have instructed directors to act in an unfit way.
The law is designed to ensure they follow company rules, keep accurate records and pay fair taxes.
Here is everything you need to know, and how to avoid any breaches of legal responsibilities.
What is director disqualification?
Director disqualification is a ban from serving as a director for any UK registered company, or an overseas one with UK connections. This includes the creation of, or running of, any firm.
Aside from companies, the order also applies to organisations such as trusts, societies and LLPs.
An application for company director disqualification could come from several bodies. These include The Insolvency Service, Competition and Markets Authority, Companies House, or the courts.
If you receive written notification about the beginning of a disqualification process, you typically have two main options:
- The first is to go to court - here you can try to defend the case if you dispute the claim
- The second is to give a disqualification undertaking. In other words, you accept the director disqualification claim voluntarily, ending the court action
It’s also possible to give a disqualification undertaking once court proceedings have begun in order to end the case. However, you may still be liable for any costs and expenses incurred so far.
We would recommend seeking independent professional guidance, such as legal or debt advice.
The legislation detailing the standards for assessing unfit conduct, as well as the consequences, is called the Company Directors Disqualification Act 1986.
What is the Company Directors Disqualification Act 1986?
The Company Directors Disqualification Act 1986 consolidates UK law relating to company director disqualification orders.
Before that, the original law first featured in the Companies Act 1928.
Initially, courts had the jurisdiction to issue a director disqualification order for a five year time period. This was extended to a maximum of 15 years in the Companies Act 1981.
Director disqualification is a civil offence, not a criminal one.
There are other consequences resulting from bans issued under the Company Directors Disqualification Act 1986.
A new entry is added to the Companies House register, creating a list that anyone can search.
The Insolvency Service also adds an entry to its own database of company director disqualification results from the last three months.
Other restrictions resulting from the Company Directors Disqualification Act 1986 could include a ban from sitting on charity, school or police authority boards.
What causes company director disqualification?
The law is in place to preserve business integrity in the UK. It ensures that directors carry out their responsibilities in an honest and compliant manner.
Examples of unfit conduct leading to disqualification include failing to:
- Cease trading while unable to pay off company debts
- Maintain proper company accounting records
- Send accounts and returns to Companies House
- Pay tax owed by the company
- Cooperate with insolvency practitioners
- Comply with certain regulatory requirements
Fraud using company funds or assets for personal gain would also result in a company director disqualification.
As we’ve previously discussed, wrongful trading can also have this consequence. There may potentially be debts liable for repayment from when the insolvency was evident.
Failing to act in the best interests of a company could result in a misfeasance claim, followed by a director disqualification order.
Directors’ duties are to manage a company in a way that does not harm its finances. Several of the examples above relate to cases of company insolvency.
An experienced insolvency practitioner can advise on a company’s specific circumstances. They will explain what directors must do to comply with their duties under insolvency legislation.
If you need an insolvency practitioner, or more information about company director disqualification, don’t hesitate to contact us for a no-obligation chat.