As a director of a limited company, you have several legal responsibilities. If you fail to meet these responsibilities you may be subject to disqualification, which is effectively a ban from being a company director for a specified period of time.
To avoid disqualification, it’s important to know the events that can lead to it. Below we discuss the director disqualification process, the grounds for disqualification and the restrictions that result.
The process of director disqualification
Firstly, it’s important to note that disqualification is a civil, not criminal, process.
Anyone can report a company director to The Insolvency Service for unfit conduct, even if the business is solvent and profitable. In other scenarios, The Insolvency Service may investigate a company as part of the wider insolvency proceedings. Other bodies can also apply to have you disqualified, such as Companies House, the courts, or the Competition and Markets Authority (CMA).
Disqualification can not only apply to a person who has been formally appointed as a director, but also to those who have acted as a director without being legally appointed, known as shadow directors and to others who have taken instruction from a person acting as a director whilst knowing they were disqualified.
If The Insolvency Service determines you haven’t followed your legal obligations as a director, you are told in writing exactly what they think you’ve done, that they intend to start the disqualification process and how you can respond (often with the help of legal advice). You can either go to court to contest the charge or give a voluntary disqualification undertaking not to act as a director, in order to end the court action against you.
Reasons for disqualification
Disqualification proceedings occur when a director is deemed ‘unfit’. Unfit conduct includes:
- Allowing a company to continue trading when it cannot pay its debts (i.e. when it is insolvent), known as wrongful trading
- Not keeping proper company accounting records
- Not sending accounts and returns to Companies House
- Not paying taxes owed to HMRC
- Misappropriating the company’s funds
- Selling off assets for less than the true value
- Trading with the intent to defraud creditors
- Actively seeking to deprive creditors of assets
- Failing to cooperate with an official receiver and/or insolvency practitioner
Consequences of director disqualification
You can be disqualified for any period between 2 and 15 years, with the exact time varying from case to case depending on the seriousness of the offences. When disqualified, you are unable to be a director of any company registered in the UK or overseas in a country with ties to the UK. Further, you cannot be involved in forming, marketing or running a company. Breaking these terms can lead to imprisonment for up to 2 years.
Other restrictions stipulate that you cannot:
- 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
In addition you may be forced to repay any monies you have misappropriated either to the insolvency practitioner or via a director compensation order payment to the Insolvency Service.
Director disqualification has serious ramifications for those who have not fulfilled their legal obligations as directors of a limited company. If you want to be a company director while disqualified, you must ask the court for special permission with no guarantee they will grant your request.
Reflecting on director disqualification
Knowing the ‘rules’ for the legally correct way to run a company is imperative to avoid director disqualification.
In our trends for 2023 post, we explained that we expect the number of directors disqualification proceedings to increase with the continuing rise of liquidation cases. This is mainly due to wrongly acquired, or the misuse of, bounce back loans granted by the UK government during lockdown.
If you require support with all matters of insolvency, get in touch with our friendly team at Mercury Corporate Recovery Solutions.