Company Director Disqualification Explained
The insolvency of a company does not automatically imply misconduct on the part of one or more of its directors. The insolvency could have occurred due to a significant downturn in trade, such as the one experienced by thousands of companies during the Covid-19 pandemic, resulting in an unavoidable need to cease trading.
Equally, misconduct on the part of director(s) need not be purposefully fraudulent or criminal and may simply arise from error or negligent omission.
Fraudulent misconduct involves intentionally engaging in criminal activity. This type of conduct has become widespread in the mismanagement of companies, prompting the introduction of strict regulations to deter such activity and penalise those found culpable. For example, while most company directors worked hard to navigate the challenges brought on by the COVID pandemic, some turned to criminal activity. Many exploited government support programs like the 'Business Bounce Back' loans, illegally benefiting from these support schemes.
Apart from the potential for criminal prosecution, directors guilty of such conduct may find themselves disqualified from holding the position of director.
The Company Directors Disqualification Act 1986 (‘the Act’) provides for ‘the disqualification of persons from being directors of companies, and from being otherwise concerned with a company’s affairs.’ The Act sets out the circumstances under which the Court can disqualify a director or, as an alternative where applicable, obtain a Voluntary Undertaking from a director not to act in any management capacity for an agreed period of time.
Given that a criminal prosecution may result in imprisonment and a Disqualification Order may last for up to fifteen years, it is essential for all directors, de-facto directors and other company officers to appreciate the serious consequences of falling foul of the law. They must ensure that they are aware of their legal duties when involved in company formation and management.
Further personal consequences of disqualification may include:
- an adverse effect on obtaining future employment,
- personal liability for the company’s debts,
- family and personal embarrassment
- restriction from holding any form of trusteeship involving, schools, charities and social care bodies.
John Veale of KANGS comments upon Disqualification Orders generally.
Director Disqualification Upon Insolvency
An investigation into a company’s affairs generally arises from liquidation proceedings. The liquidator, administrator or Official Receiver has a duty to provide a Conduct Report to the Insolvency Service. This report covers the company's activities, including those of its directors, officers, and anyone exercising apparent control, for the period of three years prior to the insolvency. The report will highlight any activity which requires further investigation.
The Insolvency Service may conduct investigations or issue further proceedings as it considers appropriate.
The Act provides that the court may make a Director Disqualification Order in a number of circumstances including those where an individual:
- has been convicted of an indictable offence,
- persistently breaches the Act or other company legislation,
- appears to have been guilty of fraudulent trading or fraud in relation to the company,
- been convicted of a relevant offence before a Magistrates’ Court,
- has been convicted of certain offences committed abroad.
Disqualification Orders and Undertakings
Section 6 of the Act provides:
Duty of court to disqualify unfit directors.
The court shall make a director disqualification order against a person in any case where, on an application under this section it is satisfied that:
- the person is or has been a director of a company which has at any time become insolvent (whether while the person was a director or subsequently), or
- that the person has been a director of a company which has at any time been dissolved without becoming insolvent (whether while the person was a director or subsequently), and
- the court is satisfied that the person’s conduct as a director of that company (either taken alone or taken together with the person’s conduct as a director of one or more other companies or overseas companies) makes the person unfit to be concerned in the management of a company.
The Insolvency Service will issue a Section 16 letter which is formal notice that director disqualification proceedings will be issued and outlines the unfit conduct complained of and the length of the disqualification which it seeks.
It may also provide the opportunity for the recipient to offer a Voluntary Undertaking not to engage in the management of any company throughout the duration of the agreed disqualification period.
Effectively, a Voluntary Undertaking will operate in the same manner as a Director Disqualification Order but such an acceptance will avoid the issue of formal proceedings.
Section 7 of the Act provides:
Applications and acceptance of undertakings
If it appears to the Secretary of State that the relevant conditions are met, ‘as respects any person who has offered to give him a disqualification undertaking, he may accept the undertaking if it appears to him that it is expedient in the public interest that he should do so (instead of applying, or proceeding with an application, for a disqualification order)
In sections 6 & 7 ‘director’ includes a shadow director’.
Consequences For Breach
It is a criminal offence to breach a Director Disqualification Order or a Voluntary Undertaking. In the Magistrates’ Court, conviction will result in a fine, a maximum prison sentence of six months or both.
In the Crown Court, conviction will attract a fine, a prison sentence to a maximum of two years or both.
Additionally, any director who conducts a company on the directions of someone who is disqualified by virtue of an Order or a Voluntary Undertaking is equally liable to be prosecuted and found liable for any accrued debt, as will the disqualified director.
How Can We Assist?
As previously mentioned, the imposition of a Director Disqualification Order or Voluntary Undertaking can lead to a range of potentially serious consequences.
The Team at KANGS regularly advises and defends company directors, de facto directors and officers facing Director Disqualification Proceedings and Prosecution for alleged criminal offences related to their management of companies. Our solicitors are highly regarded for their expertise and the guidance they provide in these matters.
Should your company be facing potential insolvency, it is imperative that you seek immediate professional advice. For example, experienced guidance can be instrumental in negotiating in a Voluntary Undertaking that might not have been offered otherwise. Our specialist team has a wealth of experience gained from assisting and guiding clients through issues involving insolvency of every nature.
If you need legal advice or assistance, we are here to help, please do not hesitate to reach out using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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