What is director disqualification?
The term ‘director disqualification’, or simply ‘disqualification’, refers to the legal process of prohibiting (ie banning) an individual from acting as a director of companies or participating in the management of companies. The laws relating to director disqualification are set out in the Company Directors Disqualification Act 1986 (the CDDA).
What are the reasons for disqualification?
Under the CDDA, company directors can be disqualified from acting as a director if they are found guilty of 'unfit conduct'. Examples of unfit conduct include, but are not limited to, when a director:
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commits fraud
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fails to assist an appointed insolvency practitioner, in situations involving insolvency
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allows a company that cannot pay its debts to continue trading
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fails to maintain proper company accounting records
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fails to submit company accounts and tax returns to Companies House
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does not pay any taxes owed by the company (eg corporation tax)
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uses company money or assets for personal benefit
It’s important to note that individuals who are restricted by bankruptcy or a debt relief order are not usually allowed to act as company directors. These individuals are legally prohibited from managing, forming or promoting a limited company unless they have explicit permission from the court. Anyone who attempts to become a company director while their bankruptcy is undischarged will be breaking the law. Once a bankruptcy has been discharged, an individual can become a director.
What is the procedure for disqualification?
Anyone can report a company director for alleged unfit conduct. Most complaints are made to, and handled by, the Insolvency Service. However, complaints may also be made to other bodies, which can apply to have a director disqualified in certain circumstances. For example:
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complaints about the filing of accounts may be made to Companies House
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complaints about serious and complex fraud should be reported to the Serious Fraud Office (SFO)
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complaints can be made to the Competition and Markets Authority (CMA) if a company has breached competition law
Upon receiving a complaint, the Insolvency Service may either:
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decide to carry out a confidential investigation of the company and/or the director(s), or
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pass on the complaint to another public body
After an investigation is conducted, the relevant body may decide to close a company and/or disqualify directors, in addition to potentially carrying out a criminal investigation.
If the Insolvency Service believes that a director has not followed their legal responsibilities, they will inform the director of the details of the allegation and notify them of the disqualification process, and invite them to respond. The director can either:
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wait for court proceedings to be brought and defend the claim in court (if they believe the allegation to be false), or
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provide the Insolvency Service with a 'disqualification undertaking' if they accept the allegations - this is a voluntary disqualification that avoids court
What are the consequences of disqualification?
Disqualified directors are barred from:
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being a director of any company registered in the UK or of an overseas company with connections to the UK
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being involved in the formation, marketing or running of any company
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sitting on the boards of a charity, school, police authority, health board or social care body
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acting as a registered social landlord
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acting as a pension trustee
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acting as a solicitor, barrister or accountant
Breaching the terms of disqualification can result in a fine or, in the most serious cases, imprisonment for up to 2 years.
Anyone who carries out company business based on the instructions of a disqualified director can be prosecuted and become personally liable for the company’s debts.
How long can a director be disqualified for?
Company directors are disqualified for between 2 and 15 years. During this time, their details are published on:
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the Companies House database of disqualified directors (all details will be automatically removed once the disqualification comes to an end), and
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the Insolvency Service’s register of directors that have been disqualified by them within the last 3 months (this will include details of why a director was disqualified)
How to check if a director is disqualified
If a director is based in England, Wales or Scotland and was disqualified in the past 3 months, their full details can be found on the Insolvency Service register. Similarly, the Companies House database provides details of all disqualified directors within the UK.
The bankruptcy and insolvency register can also be searched to find out who is bankrupt or has signed an agreement to deal with their debts in England and Wales. In Scotland, the Register of Insolvencies can be similarly searched.
Can a disqualified director act as a director?
If a disqualified director has a reasonable need to act as a company director during the period of their disqualification, they can apply to the court for permission. The director will have to satisfy the court that the public will be adequately protected if the court grants the requested permission. As a result, the court may require safeguards and impose various restrictions.
Disqualified directors should contact the Insolvency Service for more information and seek legal advice before applying to the court.
