On what grounds can a company director be disqualified?

Introduction

When a director fails to fulfill their legal responsibilities, they run the risk of disqualification. The rules of disqualification are laid down in the Company Directors Disqualification Act 1986 (CDDA); the act is designed to restrict the abuse of the limited liability company structure.

In this article we discuss the grounds for director disqualification and the impact this can have on a director. The article is intended to give some idea to the reader of the process and should not be considered legal advice.

How a disqualification order/undertaking works

The Insolvency Service may investigate a company (or director personally) and the company/director’s conduct if the company is involved in insolvency proceedings. If the Insolvency Service decides to bring disqualification proceedings, it will write to the director setting out the matters which it considers make the director unfit to be concerned in the management of a limited company.

At this point the director can either;

• Offer the Insolvency Service a disqualification undertaking, to end further Court action and voluntarily disqualify themselves, which usually results in a discounted period of disqualification and the Insolvency Service not requiring any payment of costs.
• Defend the case in court, however if it is adjudged that a director has not fulfilled their duties and legal responsibilities, the Court can make a disqualification Order against the director, and impose a Costs Order and/or a Compensation Order requiring the director to make a personal contribution to the creditors.

Disqualification can last between 2 years and 15 years, preventing the person from being involved in the formation, promotion, or management of a company or limited liability partnership. Breaching this undertaking is a criminal offence, and can lead to a fine and prison term of up to two years and a further period of disqualification.

Grounds for Disqualification

A company director’s conduct can be deemed to be ‘unfit’ in the following scenarios;

• Not maintaining or preserving full accounting records.
• Not submitting accounts and records on time to Companies House.
• Trading a company when it can’t pay its debts as they fall due (trading while insolvent).
• Avoiding paying tax liabilities and trading at risk of the Crown.
• Using company funds or assets for personal benefit.
• Retaining customer deposits and failure to supply goods and services.
• Fraudulent trading.
• Failure to cooperate with the liquidator.
• Other breaches of legislation.

How will Disqualification affect the director?

Director disqualification does not prevent a person from going in to paid employment or operating as a sole trader. However, they mustn’t act as a director in the employed position or use another person to manage the company under their instruction, essentially operating as a shadow director.

Operating in a management role, with access to company bank accounts and having responsibility for hiring employees, may be seen as fulfilling the duties of a director, so may be in breach of a disqualification order or undertaking.

A Disqualification Order or undertaking can also affect the person’s ability to work in various professions and will prevent them from sitting on the board of a charity or acting as a school governor. A person may be able to seek permission to act as a director from the Court, where it can be shown there is a need and measures are put in place to protect the public.

Summary

In insolvency proceedings, the Insolvency Service will act on behalf of the Secretary of State, who decides if it’s in the public interest to begin an investigation and potentially take further action against the director.

Advice should be sought as soon as a director is faced with the threat of disqualification, so they can consider a defense in Court or give a disqualification undertaking.

For more information, please don’t hesitate to contact me on 0115 871 2921 or by email aftab.zahoor@bridgewood.co.uk.

Bridgewood are recovery and insolvency specialists committed to providing the very best advice and solutions. Operating nationally, we combine our technical expertise with a personal approach in order to deliver positive results for our clients and partners