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On what grounds can a company director be disqualified?

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How can director disqualification happen?

Company directors can be disqualified on the grounds of unfit conduct, which incorporates a wide range of behaviours and actions. The consequences of disqualification can be severe, including hefty fines and even criminal proceedings if fraudulent activity is found.

Directors can be disqualified for between two and 15 years. During this time they’re legally banned from becoming a director or being involved in the formation, marketing, or running of a limited company.

How does director disqualification work?

The Company Directors Disqualification Act (CDDA), 1986, lays out the circumstances in which a director can be disqualified, and the director’s obligations under a disqualification order.

When a company becomes insolvent, the appointed administrator or liquidator investigates the reasons why the company declined. They report back to the Secretary of State on the conduct of all directors who have been in office for the previous three years. If instances of misconduct are found, the Insolvency Service takes the steps they deem necessary, potentially leading to director disqualification.

Director disqualification and the public interest

Disqualification is intended to protect the public from unscrupulous directors who deliberately try to benefit from the limited company structure, which separates the company’s finances from their own.

It’s easy for directors to unwittingly create losses for their creditors, however, by continuing to trade an insolvent company in the belief that they can improve the situation for stakeholders. That’s why it’s highly advisable to seek guidance from a licensed insolvency practitioner at the earliest stage of financial decline.

What constitutes unfit conduct?

The following forms of conduct could lead to disqualification for directors, but this list is far from exhaustive as ‘unfit conduct’ covers a broad spectrum of actions:

  • Allowing a company to trade when it’s insolvent
  • Misappropriating company funds
  • Failing to pay tax owed by the company
  • Not filing statutory accounts and returns at Companies House
  • Failing to keep proper business records
  • Failing to co-operate with the office-holder and/or Insolvency Service

A key element of disqualification is that it can be applied to other officers of the company who aren’t directors – for example, shadow directors.

Disqualification orders and disqualification undertakings

Director disqualification can take place in two different ways - via a court order and a disqualification undertaking.

Disqualification order

This is an order of the court that disqualifies a director for a stated period. Court proceedings are not criminal unless fraudulent activity is found – they’re civil proceedings that can also result in a fine for the director involved.

Disqualification undertaking

In some instances, a director may voluntarily make a disqualification undertaking, which avoids the publicity of court process, but ultimately has the same outcome – a ban on being a director or being involved in the formation, marketing, or running of a company for the specified time.

In both cases directors may be banned from taking other offices, or incur restrictions by organisations such as charities, pension trustees, police forces, and legal/accountancy practices, due to the disqualification.

What if a director contravenes a disqualification order or undertaking?

If a director goes against the terms of a disqualification order or undertaking they could face criminal prosecution and a prison sentence. An extended period of disqualification is also likely to be applied. Contravening director disqualification is a serious offence, and it’s important for directors to comply with the order or undertaking for the full term.

If you would like more guidance or information on director disqualification, please get in touch with our expert team at UK Liquidators. We offer free, same-day consultations so you can quickly understand your obligations as a director.

Jonathan Munnery
Insolvency & Restructuring Expert

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