When and how can I be disqualified as a director?
The introduction of "Director Disqualification" through the Company Directors Disqualification Act 1986 stemmed from a desire to ensure fairness and protection for the public. There was a sense that, at times, the responsibilities held by company directors were not always being exercised in a way that upheld public trust. This legislation was envisioned as a way to provide safeguards in such situations.
What does director disqualification mean?
When a director is disqualified, it means they are asked not to take part in the activities of forming, promoting, or managing a company, either directly or indirectly. It's worth noting, though, that disqualification doesn't prevent someone from running their own business as a sole trader or being a partner in a traditional partnership. However, involvement in a limited liability partnership would not be permitted once a disqualification order is in place or a disqualification undertaking has been agreed to.
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. When a company enters a formal insolvency, it naturally leads to the 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 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. Each case is genuinely considered on a case-by-case basis.
When a company has entered liquidation or administration, it's helpful to keep in mind that for those directors who do face disqualification proceedings, it often arises from the Insolvency Service's assessment that there's 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 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's also important to understand that the Insolvency Service doesn't necessarily need to see an action as deliberate to consider there to be adequate grounds to justify disqualification. Often, their focus is on situations where it appears that the potential consequences or the details of actions taken may not have been fully considered.
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.