Director disqualification has serious implications. If your conduct as a director is under investigation, it is vital to seek expert legal advice.
At Altion Law, we can determine the best course of action in your particular case. This might involve defending the allegations, working to have the Insolvency Service’s case against you dropped. Or, you might prefer to accept wrongdoing and enter into a voluntary undertaking.
We can explain the situation further, acting on your behalf to minimise the consequences and secure a positive outcome.
“I cannot be thankful enough to Rebecca and Altion Law for the service and help I received, through a very difficult time”.
Success in A Director Disqualification Matter
The Insolvency Service were investigating a company director who worked in the communications sector. The Insolvency Service alleged multiple inaccuracies in business accounts and wanted to disqualify the director for eight years as they considered it a serious matter. The Insolvency Service had only allowed very short deadlines for responses to be given.
Our client had other businesses of which he was a director. A disqualification would therefore have had serious ramifications for himself and his family. Altion Law was instructed and obtained an extension to the timescales the Insolvency Service had set, allowing more time to compile a defensive challenge to the allegations.
Altion Law worked with the client and obtained evidence to support his case. A detailed response was then provided to the Insolvency Service evidencing the client’s position and disputing the suggested disqualification.
The Insolvency Service took some time to respond, but no further questions were raised following Altion Law’s response. The Insolvency Service then clarified that they no longer intended to take any further steps to disqualify our client as a director. This was fantastic news for our client as he was then fully able to press on with his business without the matter hanging over his head.
What Is Director Disqualification?
Director disqualification is when a director of a company is disqualified for a set period of time. This will be a minimum of two years and up to a maximum of 15 years. During this time, the individual is not permitted to work as a director, or be involved in the formation, promotion or management of a company, whether directly or indirectly.
When Can A Director Be Disqualified?
The law relating to director disqualification is called the Company Directors Disqualification Act 1986. The legislation states that a director should be disqualified if ‘his conduct as a director makes him unfit to be concerned in the management of a company’. The purpose of disqualification is to protect public interest.
So, when exactly might a director be accused of ‘unfit conduct’? Examples include:
- Fraudulent behaviour
- Trading to the detriment of creditors because the company cannot pay its debts (known as wrongful trading)
- Failing to keep/deliver proper company accounting records
- Failing to prepare/file accounts and other statutory returns to Companies House
- Failing to prepare/file company tax returns or pay tax due to HMRC
- Using company money or assets for personal benefit
- Continuing to take credit when there is no reasonable prospect of creditors being paid
- Failing to co-operate with the official receiver/liquidator’s request
- Being convicted of a criminal offence in relation to the promotion, formation, management or liquidation of a company
Unfit conduct in overseas companies after 1 October 2015 may also be taken into account.
It is also important to note that unfit conduct does not have to be deliberate. Even if mistakes were made due to negligence or carelessness, it can lead to a director’s disqualification.
How is a director disqualified?
Director disqualification proceedings may be initiated if:
- The company becomes insolvent, in which case the Insolvency Service will investigate former/current directors as a matter of routine
- A director is made bankrupt
- A director is convicted of a criminal offence in relation to the promotion, formation, management or liquidation of a company
- Formal complaints are raised regarding a director’s conduct – for example, for persistent breaches of the Companies Act 2006
Typically, director disqualification is associated with company insolvency. When this happens, the Insolvency Service will investigate your actions as the company’s director. If the Insolvency Service believes you have breached your obligations, and it is in the public interest to pursue the matter, you will be sent a Section 16 Letter.
The Section 16 Letter outlines the allegations against you. You will be invited to accept the charges and enter into a voluntary undertaking, whereby you agree to be disqualified. Or, you can defend the charges.
If you deny any wrongdoing, you can submit a response to the Insolvency Service, providing evidence to support your case. Then, the Insolvency Service will either drop or the case against you, or it will take the matter to court.
If the case goes to court, there will be a hearing. Once the evidence has been heard, the court must consider:
- Whether there has been a breach in fiduciary duties
- Whether there has been a breach in legislative or other obligations
- The frequency of any breaches
If you are found guilty, you will be subject to a disqualification order. This will set out how long your disqualification should last and whether any other conditions apply, such as a Compensation Order.
Find out more about how director disqualification proceedings work and the role of the Insolvency Service.
If you are under investigation by the Insolvency Service, or you are concerned that you could be disqualified as a director, please contact us at Altion Law. We offer expert legal advice and representation to directors whose conduct has been called into question.
Time limits for director disqualification
As of 1 October 2015, disqualification proceedings must be commenced against a director within three years of the first date of insolvency. This might be the date of the first winding up order, voluntary liquidation, administrative receivership or administration.
Prior to October 2015, an application for a disqualification order had to be made within two years, if the company was insolvent.
The Insolvency Service will also set certain time limits. For example, once you receive a Section 16 Letter, you will be given a deadline by which you must respond. These deadlines can be very short, making it difficult to gather evidence in support of your case. When you instruct our solicitors, we can request an extension, allowing for a thorough response to be complied.
How long does director disqualification last for?
If the court determines that you should be disqualified as a director, it will order that you be disqualified for a period between two and 15 years, depending on the severity of the allegations.
Generally, you will be disqualified for:
- 2 to 5 years for reckless or negligent conduct as a director
- 6 to 10 years for serious misconduct which is more directly prejudicial to the public interest
- 11 to 15 years for fraudulent behaviour or extremely serious misconduct
Disqualification starts 21 days after the Court Order is made.
Consequences of a director disqualification
For some, being subject to a disqualification order poses little risk. For others, it will be disastrous, impacting their ability to earn an income. The disqualification may also result in a Compensation Order, which can have devastating financial implications. Any breaches may lead to further penalties.
The consequences of a director disqualification are outlined in greater detail below.
You can no longer work as a director
A disqualification order usually prevents the disqualified director from being involved in the promotion, formation or management of any limited company. This can make life very difficult for you, as you may be the director of one or more companies – from which you make a living. However, this is not permitted during the period of the disqualification. Instead, you must revert to being an employee, a sole trader or form an unincorporated business.
You are also not permitted to appoint another director to act on your instructions. This is very risky, not only for the disqualified director but also for the nominee. In fact, if the nominee is aware of the disqualification order, he/she will be held personally liable for all debts the company incurs while they are acting on your behalf.
Additionally, you cannot participate in the management of a company. Hiring staff, controlling the company bank account or taking what might be regarded as executive decisions, may all be seen as breaching the disqualification order or undertaking.
There are other restrictions associated with a director disqualification. For example, you cannot:
- Sit on the board of a charity, school or police authority
- Be a pension trustee for a charity
- Be a registered social landlord
- Sit on a health board or social care organisation
- Be a solicitor, barrister or an accountant
You must apply for ‘leave to act’
If you want to work as a director during the disqualification period, your only option is to apply to court for ‘leave to act’. Permission from the court is essential if a disqualified director is to avoid committing a criminal offence.
A formal application must be made to the court. You will have to satisfy the court that you have reasonable need to resume your role as a director and that the public will be adequately protected. Even if the request is granted, the court may impose conditions or restrictions.
Your name will be added to the disqualified directors register
Companies House has a list of all the directors who have been disqualified by the courts and the Insolvency Service. This can be accessed by the public. Therefore, while you may get leave to act as a director from the courts, the shareholders of a company may not be willing to hire you. This type of reputational damage can hinder your ability to secure future employment.
You may be subject to a Compensation Order
If the actions of a director causes loss to one or more creditors, the Insolvency Service may seek a Compensation Order. This requires a disqualified director to contribute towards an insolvent company’s assets, so that it may repay its creditors. In other words, you will become personally liable for repaying HMRC and any other creditors.
If you agree to a disqualification undertaking, you can negotiate a compensation undertaking with the Insolvency Service. However, if your case proceeds to court – and you are made subject to a disqualification order – the court will decide whether to issue a Compensation Order.
You face further penalties for breach of conditions
If you are in breach of your director disqualification order or undertaking, it amounts to a criminal offence. As a penalty, you can be:
- Sent to prison for up to two years and/or a fined
- Disqualified for a further period
- Held personally liable for the company’s debts for the time you acted
in breach of the disqualification order
What to do if you are facing a director disqualification
If you are facing a director disqualification, you have two options available:
- Deny any allegations of wrongdoing and fight the charges
- Agree to a director disqualification undertaking
Deny the allegations
If you want to defend a claim for your disqualification as a director, it is vital that you put forward your version of events and respond to the allegations raised.
When you instruct our solicitors, we will examine the quality of the evidence against you before responding to the Insolvency Service. We will submit our own evidence, along with a witness statement, demonstrating that you met your fiduciary duties. Often, this is sufficient to get the case against you dropped. If the matter does proceed to court, we will represent you throughout, putting forward a strong defence.
Agree to a director disqualification undertaking
Alternatively, you may accept the charges and decide to enter into an undertaking. This ensures you avoid the cost and stress of litigation through the courts. It also enables you to negotiate with the Insolvency Service on the terms and conditions of your disqualification.
We can handle the negotiations of a voluntary director disqualification undertaking. If appropriate, we can also make an application to the court for you to remain a director of your current business.
It is advisable to seek expert legal assistance during negotiations with the Insolvency Service, as the terms of any undertaking need to be carefully scrutinised. Otherwise you could be at risk of civil or criminal action in the future.
Find out more about a director disqualification undertaking.
Expert legal advice
Director disqualification is a gruelling process that can have a severe effect on those involved. If you are concerned you might be found unfit as act as a director, it is best to seek expert legal advice from us at the earliest available opportunity.
If you have already received a letter from the Insolvency Service, or you believe you may soon receive a letter, please contact us straightaway. We understand what is at stake and will apply our legal expertise to secure a positive outcome on your behalf.