An introduction to directors disqualification proceedings

Below we discuss common questions that arise when an individual faces the threat of directors disqualification proceedings.

When do director disqualification proceedings arise?

Below we discuss common questions that arise when an individual is threatened with disqualification proceedings by either the Secretary of State or a liquidator and following disqualification.

When do director disqualification proceedings arise?

Director disqualification is governed by the Company Director Disqualification Act 1986 (the “Act”). The purpose of disqualification is to:-

• protect the public interest by preventing further misconduct by a director; and
• act as a deterrent in addition to other legal remedies that ensure directors are transparent in their conduct and dealings.

Disqualification proceedings are most frequently brought against a director once their company has been placed into an insolvency process.  For disqualification proceedings to be instigated by the Secretary of State (acting via the Insolvency Service), there must be some evidence of misconduct by the director.

Are there any other ways a director can be disqualified?

Aside from the usual insolvency process whereby a liquidator identifies misconduct in his/her investigation of the insolvency company and informs the Secretary of State, an individual can also be disqualified:

• Where they have been declared bankrupt;
• Where a company has been wound up in the public interest;
• Following a criminal conviction for certain offences (including fraud); or
• Where there is a failure to comply with Companies House filing requirements.

What many directors do not appreciate is that their actions need not be criminal or fraudulent in nature. Directors are often disqualified just for their failure to hold internal books and records of the company.

Can I consent to disqualification in order to avoid proceedings?

Usually, you will be provided with the option to give a voluntary disqualification undertaking. To entice you to accept the undertaking option, a liquidator or otherwise secretary of state will threaten an adverse costs order against you personally if proceedings are necessary.

If this option is provided to you, you should obtain urgent legal advice.   It may be financially advantageous to consent to disqualification at an early stage, but it is also possible that you have a good defence to any application to disqualify you, so you should consider your options carefully.

What are the types of misconduct that lead to director disqualification proceedings?

Any sort of alleged misconduct could lead to director disqualification proceedings, including:

• Non-payment of HMRC debts;
• Abusing a director loan account (redrawing and sending funds to yourself personally for no consideration which amounts to a ‘Transaction made at an undervalue’);
• Acting contrary to the public interest (i.e., conducting fraudulent activity in your capacity as a director or setting up a company that isn’t legitimate);
• Drawing dividends at times when your company isn’t trading or making any profit;
• Wrongful trading, ie. continuing to trade when you knew or ought to have known that the company was insolvent; and/or
• Acting in breach of financial service regulations.

What are the consequences of director disqualification?

There are some very serious consequences that can result from disqualification. Disqualification can damage your reputation, hinder your ability to run a business and have detrimental effects to your ability to borrow money.

• You cannot be a director of a company in the UK or be involved in the management of the company. You cannot act as a director behind the scenes - what is known as a “shadow director”;
• You are prevented from having a shareholding in a company;
• A disqualification order may also affect your future standing with government departments such as, for instance, you may not be able to obtain various government grants for any future business. Your ability to become involved in certain other capacities (such as trustee of a charity) will also be affected by a disqualification order;
• It can affect your credit rating and current business interests;
• It can lead to further potential criminal proceedings against you. Under section 13 of the Act, contravention of a disqualification order or disqualification undertaking is imprisonable by up to two years’ imprisonment.
• You can become personally liable for certain company debts under section 15 of the Act.
• Under section 15A of the Act (as inserted by section 110 of the Small Business, Enterprise and Employment Act 2015) a disqualified director or an individual who gives an undertaking may be ordered to pay compensation to creditors who have suffered loss as a result of their misconduct.
• A director disqualification can last anywhere between two and 15 years and the extent of time is dependent upon the seriousness of the misconduct. This is publicly recorded on the Disqualified Directors Register.

Can I still work for a company?

A disqualification order (or undertaking) does not mean that you cannot work as an employee of a company.  However, it is important that you do not hold yourself out to be a director of the company or perform any management roles.

I have been threatened with director disqualification proceedings.  Can I prevent them from being brought?

It is usual for a director to receive a letter from the Secretary of State setting out allegations and warning them that director disqualification proceedings are being contemplated.  They will normally be afforded a period of 14 days to respond

If you receive a letter like this it is important that you seek urgent legal advice.   It may be possible to prevent proceedings from being brought if a strong defence case is put together (typically with evidence in support).

How should I respond if directors disqualification proceedings are started against me?

Firstly, if you haven’t done so already, you should instruct specialist solicitors.

Directors disqualification proceedings follow a procedure set out in the Practice Direction for Directors Disqualification Proceedings.

The most common options for an individual facing proceedings are:-

• Filing a defence and seeking to defeat the disqualification claim in court
• Inviting the Secretary of State to withdraw the proceedings on the grounds they are disproportionate and that it is unnecessary to impose a director disqualification
• If a disqualification is highly likely or inevitable, negotiating the length of the disqualification period in “without prejudice” correspondence to try and reach an agreement before the matter reaches a final hearing (with the risk of a substantial costs order and/or compensation order)

Is there any way I can remain acting as director if a disqualification order has been made?

In certain circumstances, it is possible to make and application under a section 17 of the Act, whereby you can obtain the court’s permission to remain a director despite disqualification. Permission might be granted where there are mitigating factors and where the court is persuaded you will act honestly, seek professional advice required and take your duties/responsibilities as a director seriously.

If you are successful with the application and a permission order is made by the court, you still need to be aware that there will be certain limitations and restrictions placed on you which you must adhere to otherwise you will be in breach of the existing order.

If you have been threatened with, or are facing, director disqualification proceedings or wish to make an application under section 17 of the Act, contact our insolvency solicitors by email or telephone 020 3813 7515 for advice and representation.