Understanding Company Director Disqualification and Your Rights
Company directorship brings with it a legal obligation to act in a ‘proper’ manner when undertaking company business. If you are found to have acted improperly, you may face disqualification as well as other penalties and fines.
Outcomes range from a tarnished reputation to a possible prison sentence in the most severe cases. During formal insolvency proceedings, the Insolvency Service will enquire into the circumstances surrounding the company’s financial misfortunes, looking for any instances of ‘unfit conduct’ as laid down in the Company Directors Disqualification Act, 1986.
What ‘unfit conduct’ means
- Continuing to trade when you know that the company is insolvent
- Failing to keep proper accounting records
- Failure to pay company tax liabilities
- Not filing statutory accounts and returns at Companies House
- Using company funds or assets for your own benefit
- Fraudulent activity
- Failing to assist the appointed Insolvency Practitioner.
Once your company is deemed insolvent, the appointed Insolvency Practitioner is required to file a report as part of their official duties. This is sent to the Secretary of State for Business, Innovation and Skills.
If it is in the public interest to take further action, and there is enough evidence to do so, proceedings to effect disqualification will begin. There is a statutory time limit of two years from the date of insolvency in which proceedings can take place, but in certain circumstances this can be extended.
The Insolvency Service or other party, which could include Companies House, will notify you of their intention to begin court proceedings, the grounds for taking action, and the ways in which you can respond. Should you disagree with the evidence they have provided, you are entitled to argue the case in court.
You have two other alternatives:
- Wait for a Disqualification Order from the court
- Agree to make a ‘disqualification undertaking’ which means that you disqualify yourself, and court proceedings cease.
Disqualification can last for up to 15 years, and may be accompanied by a prison sentence in the most serious cases.
What are the rules of disqualification?
Being disqualified as a company director means that, during the time period stated, you will not be able to become or act as the director of a company without specific sanction from the court.
In essence, you cannot:
- Be the director of any UK company, or any company based abroad that has connections to the UK
- Be involved with the formation or running of a company, nor its management or promotion
- Act in the manner of a company director, for example hiring staff or taking executive decisions
- Instruct a third party to manage a company under your direction. This can result in prosecution for yourself and the third party, with the person under instruction potentially becoming liable for company debts.
You are not barred from working as an employee for the same company, but you would need to be very careful how you represented yourself, and what roles you became involved with, unless you have court permission to undertake the duties of a director.
You can also be a sole trader or join a partnership, as long as it is not a limited liability partnership.
Breaking the rules of disqualification is viewed as a criminal offence which could lead to a prison sentence of up to two years, plus a further period of disqualification. You could also become personally liable for any company debts incurred during the time when the disqualification order was being contravened.
Additional restrictions on disqualified directors
Bans and restrictions on disqualified directors are wide-ranging. You may be prevented from being an accountant, solicitor or barrister if your professional body objects. Your eligibility to act as a trustee for a charity or school may also be affected.
Additionally, you would need the consent of The Pensions Regulator to be the trustee of an occupational pension scheme.
Disqualification is a public matter. Your details will be available online at Companies House, and for the first three months following your disqualification, you will be included in an Insolvency Service register.
Your right to seek permission from the court to act as a director
The Company Directors Disqualification Act allows for disqualified directors to apply to the court if they have a ‘reasonable need’ to act as a company director again.
Should the court agree with a request such as this, however, they may put restrictions in place on the duties that can be performed.
As you can see, director disqualification is a serious matter, but we can provide professional advice on what to do next should you be at risk of disqualification. Begbies Traynor have offices spanning numerous UK locations and offer a free same-day meeting.