When and how can I be disqualified as a director?
“Director Disqualification” was introduced by the Company Directors Disqualification Act 1986. The reason why it was felt that it was necessary, or so the politicians who were bringing in the legislation argued, was because there was a feeling that directors of companies were abusing their position and steps needed to be taken to protect the public.
What does director disqualification mean?
It does not stop you from carrying on or operating business as a sole trader or as a partner trading in a partnership – as long as that partnership is not a limited liability partnership (“LLP”). That being said – once you have received a disqualification order or signed up to a disqualification undertaking then you are not to act (directly or indirectly) in the promotion, formation or management of a company.
What happens when the company goes into liquidation or administration?
The initial part of the director disqualification process occurs when your company goes into either a compulsory liquidation, a voluntary liquidation or an administration. As a result of this step there will be an appointment of either a liquidator or an administrator. As part of their statutory obligations, they will have to carry out an investigation into the failure of the company. This investigation, the concluding report of which, you will not see the outcome of will effectively focus on the actions and decisions which were taken, by the directors, in the period which preceded their appointment.
The end of their statutory investigation results in the liquidator or administrator sending a report to the Insolvency Service. This report will then be reviewed by the investigation team at the Insolvency Service. This review will result in a decision not to proceed with the potential claim or a decision that the issue requires further investigation but, this will be with the basis, for there to be misconduct that warrants a potential disqualification against the director, directors or shadow directors to enable the government to carry out its stated aim of protecting the public interest. It should be stressed that each case of potential disqualification is very much decided on its own merits.
It is also possible, in addition to the above and on a personal level, for a director who becomes subject to a bankruptcy order, either because he petitioned for his own bankrupt due to debt or because a creditor petitioned for his bankruptcy. If this happens then disqualification as a director will be included within the terms of the bankruptcy order that is handed by the court.
Misconduct of the Company Director
It remains very much the case that in most situations where a company goes into insolvency there are no director disqualification issues for the director to concerns themselves with despite the investigations referred to above. As I mentioned above the general rule seems to be that there are no concrete criteria or grounds that will mean that a report leads to director disqualification cases being progressed. It is genuinely looked at on a case-by-case basis.
It should be remembered, when considering your position if your company has gone into liquidation or administration, that the majority of directors, who face director disqualification proceedings do so because the investigation which is carried out by the Insolvency Service leads them to conclude that there is sufficient evidence to show the court that the director concerned has not acted, when carrying out their duties, in the public interest.
The misconduct, that directors can be accused of, as has been set out in other articles on this website is wide and encompasses issues that range from failing to maintain company records, to breaches of statutory duties (Companies Act legislation) to trading to the detriment of HMRC – deliberately or more often because of cashflow issues. In more recent times there is a focus on those directors whom, it is perceived, have abused the Covid Loan system.
It is also worth remembering, when considering the likelihood of director disqualification proceedings being bought, that it does not have to have been seen as a deliberate action for the Insolvency Service to consider there to be adequate grounds to justify disqualification. It is my belief that the directors who are considered, by the Insolvency Service, to have not considered the consequence of their actions or, it could be argued, did not consider the detail of their actions.
How our Restructuring & Insolvency team can help you
If you are a director and have concerns about your duties or are facing an investigation, it is crucial to seek legal advice immediately. Please contact Richard Ludlow on 01732 496493 or by the enquiry form on this page.