As a director, you can be disqualified if you fail to meet your legal responsibilities. To prevent this, and to understand what action can be taken, it’s helpful to have a clear understanding of the grounds for disqualification and of the duties and obligations of a director.
Director disqualification is a process by which a person is disqualified, for a specified period, from being a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without permission from the court.
The Company Director Disqualification Act 1986 (CDDA), sets out the statutory basis.
Disqualification Insolvency proceedings are a civil, not criminal, process.
It’s important to understand the breadth of the law.
It not only applies to a person who has been formally appointed as a director, but also to those who have acted as a director without being legally appointed, to shadow directors and to others who have instructed a director, who is subsequently disqualified, to act in an unfit manner. A shadow director is “a person in accordance with whose directions or instructions the directors of the company are accustomed to act.” Section 251 Companies Act 2006
Director disqualification remains a relatively rare occurrence, with around 1,200 disqualifications being imposed each year.
The court can disqualify you for:
An investigation might conclude that you are unfit to hold the position of director if it concludes that you have:
Once a company has entered into formal insolvency proceedings the official receiver, liquidator, administrator or receiver is required to submit a report on the conduct of all directors in office during the previous three trading years.
This is sent to the Insolvency Service, which acts on behalf of the Secretary of State for Business, Energy and Industrial Strategy.
The office holder is required to report whether in their judgement, the behaviour of any of the directors appears to satisfy the conditions for disqualification.
The Insolvency Service has the power to conduct investigations in companies and limited liability partnerships.
This applies if those entities are trading or have ceased trading, without entering into insolvency proceedings.
It may also receive information that suggests serious corporate abuse has taken place, either from members of the public, employees or official regulators.
Based on the information it receives, the Insolvency Service will decide whether it’s in the public interest to investigate further and, ultimately, whether or not to seek a disqualification order.
At this stage, the Insolvency Service may contact the director to request a full explanation of the situation and will formally ask for further information to be supplied to help conclude its investigation.
When a final decision has been reached to seek a disqualification order, the director will be notified by post.
If the director chooses not to respond, or a disqualification undertaking cannot be agreed, then court proceedings will commence. At this stage, a formal notice of the proceedings will be served on the director.
To help speed up the disqualification process, the Secretary of State may accept a voluntary disqualification from a director as an alternative to initiating disqualification proceedings.
This is provisioned for under Section 1A of the CDDA.
The advantage to a director in giving a voluntary disqualification undertaking is that they will then not need to pay the costs of going to court. They may also be given a discount on the length of any disqualification period.
The ultimate decision about whether to accept a voluntary disqualification undertaking lies with the Secretary of State.
It will only be accepted when it appears to be in the public interest rather than applying for, or proceeding with, a court application for a disqualification order.
A breach of the terms of the undertaking has the same criminal and civil consequences as a breach of a disqualification order. Before agreeing to a voluntary disqualification undertaking, it is important to receive expert legal advice about the advantages and disadvantages of such an action.
As a result of the disqualification order or undertaking, the individual concerned is disqualified by the CDDA for the period stated in the order or undertaking from:
As well as the above restrictions, legislation and regulations places a further range of restrictions on disqualified people.
The list of organisations and professions that apply restrictions is wide-ranging and includes charities, schools, pension trustees, police and police authorities, registered social landlords, health boards and social care bodies, solicitors, barristers, accountants and other professionals.
A disqualification order or undertaking can impact severely on an individual’s professional life.
The minimum period of a disqualification order is two years, and the maximum is 15 (section 6(4), CDDA 1986).
The primary purpose of disqualification is the protection of the public.
This requires, among other things, a deterrent element to feature in the period of disqualification. That period must reflect the gravity of the offence and many factors, besides the facts of the offence, need to be considered.
In the case of Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 divided up the period of disqualification into 3 distinct brackets:
Two to five years
Disqualification for this lower bracket period will usually be sought for less serious offences.
Six to 10 years
This period is generally pursued for misconduct that it considers very negligent or serious, but not so serious to merit the top bracket.
10-15 years
This top bracket period is pursued for the most serious cases of misconduct and usually reflect circumstances of fraud – most notable examples in recent years include carousel (or MTIC) fraud, land-banking and mis-selling allegations.
Anyone contravening a disqualification order or undertaking is committing a criminal offence.
As a result, they can be fined, or in some cases, sent to prison for up to two years. A further disqualification period could also follow.
When someone contravenes an order or undertaking, they might also become personally liable for any debts of a company that are incurred during that period. If the disqualified director asks somebody to act on their behalf, then that person could also be prosecuted and/or disqualified and become personally liable for the company’s debts.
Sections 15A, 15B and 15C of the CDDA 1986 contain provisions relating to the power of the court to make a compensation order against, or accept a compensation undertaking from, a disqualified person.
The court may do so where the conduct for which the person was disqualified has caused loss to creditors of the insolvent company of which the person was a director.
A court may relieve a director from liability for negligence, default, breach of duty or breach of trust if it considers that both the following apply:
A person who is subject to an order or undertaking may apply to the court under section 17 of the CDDA for permission to act as a director or to take part in the promotion, formation or management of a named company.
The applicant will have to satisfy the court that they have a reasonable need to do what they are asking – not just that they want to be a director.
They must also satisfy the court that, if it gives the permission requested, the public will be adequately protected. As a result, the court may require extra safeguards and could impose further conditions and restrictions on the applicant.
This is a complex area of company law and one that needs a thorough understanding if a satisfactory outcome is to be reached.
The consequences of a disqualification order or voluntary undertaking are wide-reaching.
If you find yourself subject to a potential disqualification investigation, then you should seek professional advice immediately. Contact us to discuss your case with one of our lawyers on a no-obligation basis.
Contact London +44 7700 158304 or Manchester +44 7700 164107. Alternatively you can email info@jeremygordon.co.uk
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