DPP Business Tax

What is Director Disqualification? Definition, Your Rights & Effects

The Company Directors Disqualification Act 1986 states that an individual who, up until action is taken against them, was acting as a company director “shall not be a director of a company, act as receiver of a company’s property or in any way.

Whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court” and “shall not act as an insolvency practitioner” as a result of certain circumstances and behaviours – whether they take place within the UK or abroad.

These are as follows:

  • Allowing a company to continue trading when it can’t pay its debts
  • Not keeping proper company accounting records
  • Not sending accounts and returns to Companies House
  • Not paying tax owed by the company
  • Using company money or assets for personal benefit

This is not to say that, if a company becomes insolvent or goes into liquidation, those who run it will automatically face director disqualification proceedings. However, in these circumstances, an investigation is extremely likely. In most cases, these enquiries will not result in the barring of any individuals from acting as directors.

So what does director disqualification mean?

The Director Disqualification Process

The main criteria for director disqualification is a failure of the individual in question to meet the legal responsibilities inherent in their role. If there has been a complaint against a particular business to the Insolvency Service or another company insolvency practitioner, Companies House, the Competition and Markets Authority or the UK court – or if your company is involved in insolvency proceedings – it’s likely that an investigation will be launched to decide whether a disqualification order against its director should be raised.

Investigators looking into into a case will search for evidence of wrongful trading, fraudulent trading or unfit conduct in order to report it to the secretary of state, who will then decide whether or not to begin the director disqualification process.

If your company has been declared insolvent, you may be automatically investigated by the Insolvency Service, though they can take up to two years to do so (this time limit may also be extended under particular circumstances). You’ll be notified if an investigation is to take place.

Following the investigation, at least ten days’ notice must be given if a disqualification order against a director is to be sought. At this stage, a director facing disqualification may:

  • Take no action and wait for the court’s decision
  • Avoid the worst of the proceedings by agreeing to make a “disqualification undertaking”, which means you accept the disqualification
  • Seek the court’s permission to remain a company director

What Happens if I am Disqualified as a Company Director?

Director disqualification proceedings may result in a ban on the individual in question acting as a company director for up to 15 years. During this time, they are also prohibited from:

  • Becoming the director of another UK-based company
  • Becoming the director of a company based abroad with any links to the UK whatsoever
  • Becoming involved in the formation, running, management or promotion of any company
  • Taking on duties that would usually be undertaken by a company director, such as hiring staff or making executive decisions on behalf of any organisation
  • Manage or run a company through a third party

They can, however, work as a sole trader or as a member of any partnership – as long as the arrangement does not include limited liability. They are also permitted to stay on as an employee within the company they have been disqualified from directing, or seek work within another company, as long as the above restrictions are adhered to.

Breaching a Director Disqualification Order

If you have been disqualified as a director, it is possible to make a formal application to the UK court, supported by strong evidence, to be permitted to take up the role once again within the period of disqualification you have been made subject to.

However, if you fail to seek permission and continue working as a company director despite director disqualification proceedings against you resulting in a ban, you may face up to two years in prison or a considerable fine. You may also be held personally accountable for any company debts that were accrued during the time you acted in breach of the order.

What Should I Do if I’m Made the Subject of a Director Disqualification Investigation?

If your company has been declared insolvent, investigations in to your activities are very likely and may be nothing to worry about whatsoever. However, if you have reason to believe that the Insolvency Service or any other body is likely to begin the director disqualification process in order to see you removed from your position, it’s highly recommended that you seek legal assistance as soon as possible to help argue your case and defend your position.

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