Restructuring and Insolvency

Disqualification as a Director

Director disqualification is the process by which individuals are banned from acting as a director for a period of between 2 to 15 years.

Director disqualification can happen in several ways. Ordinarily, it will be initiated by the Insolvency Service, which has the power to investigate the conduct of directors of insolvent companies. 

Alternatively, it can be initiated by a court, such as in fraudulent or wrongful trading cases. Sometimes, a director may voluntarily agree to disqualification to avoid court proceedings, referred to as a Voluntary Undertaking

If you would like to speak to one our solicitors, please call us on 01384 327304 for a free initial discussion.

What are the consequences of director disqualification?

Not only will an individual be prohibited from acting as a director or participating in a company’s management, but they will also face several other restrictions on other business activities. 

Breaching a disqualification order is a criminal offence that can result in a fine, imprisonment or both.

What can directors do if they are facing disqualification?

If a director faces disqualification, they should seek legal advice immediately. In doing so, they may be able to challenge the proposed disqualification order or negotiate a reduced ban with the Insolvency Service. 

They should also address any underlying issues that led to the disqualification, such as improving their management practices or addressing any financial issues, particularly if they wish to apply for leave to act as a director, notwithstanding a ban. 

Understanding the legal landscape

The Company Directors Disqualification Act 1986 (CDDA) is the primary legislation governing director disqualification. 

Disqualification proceedings must be issued within three years of the company being placed into liquidation or administration. 

The disqualification period is split into three brackets representing the seriousness of the misconduct, ranging from 2 to 15 years. Disqualification proceedings will be instigated if there has been misconduct by the director. 

The definition of misconduct, however, is wide; listed below are common types of misconduct that can lead to a disqualification ban. 

  • Non-payment of HMRC and/or failure to submit returns 
  • Acting whilst disqualified
  • Acting contrary to the public interest 
  • Abuse of a directors’ loan account
  • Drawing illegal dividends
  • Acting in breach of financial service regulations
  • Trading whilst insolvent
  • Trading to the detriment of creditors 
  • Failure to prepare and file accounts or make returns to Companies House
  • Hiding or disposing of assets
  • Failure to keep proper accounting records
  • Failure to co-operate with an insolvency practitioner or office holder.
  • Fraudulent bounce-back loan applications
  • Misapplication of bounce-back loan monies

How solicitors can help

The majority of disqualifications occur after a company has entered into a formal insolvency process (e.g. liquidation or administration). As a matter of statutory requirement, the liquidator, administrator or official receiver will submit a report to the Insolvency Service on the conduct of all directors in office during the previous three trading years.

The report aims for the liquidator or administrator to flag any behaviour or conduct they consider potentially warrants a disqualification.  

The Insolvency Service, acting on behalf of the Secretary of State for Business, Energy and Industrial Strategy, will then decide whether it is in the public interest to investigate the matter further and, ultimately, whether a disqualification order should be pursued. 

Generally speaking, the Insolvency Service investigation will take the following format. 

  • Section 16 stage – the Insolvency Service will formally notify a director that it intends to pursue a ban by way of a ‘Section 16 Letter’. It will set out the allegations against the director, the period of the ban sought and whether a compensation order will be sought. Even at this stage, the director can try to persuade the Insolvency Service that it is not in the public interest to continue with the threatened proceedings. We can help you ensure that the Insolvency Service’s investigations fall squarely within the legal framework and challenge the allegations against you. 

  • The investigation stage – the Insolvency Service will use the investigation stage as a fact-gathering opportunity, often asking the director to attend an interview and complete a questionnaire. The director’s responses will determine if the Insolvency Service recommends pursuing a ban. Our specialist, experienced solicitors can help you navigate these early enquiries and ensure that you respond appropriately to protect your position. 

  • Issuing proceedings – if the director’s explanations do not persuade the Insolvency Service, court proceedings will be issued against the director. The director can either defend the proceedings, negotiate a voluntary ban or allow a disqualification order to be made on a contested basis. We can advise you on the best option available to you and help to respond to the proceedings in the most appropriate way. 

Grounds for director disqualification

Director disqualification can be pursued on several grounds and typically include;

  • Wrongful or fraudulent trading: Directors can be disqualified if they are found to have traded wrongfully or fraudulently, such as continuing to trade when the company is insolvent or taking assets out of the company for personal gain.
  • Breach of fiduciary duties: Directors have various duties to ensure that they act in the best interests of the company and its shareholders. Disqualification proceedings are likely to follow if a director breaches those duties, for example, by taking actions detrimental to the company or engaging in conflicts of interest.
  • Failure to comply with legal obligations: Directors must comply with a range of legal obligations, such as filing accounts and tax returns on time and paying taxes and other debts the company owes. Failure to comply with these obligations can result in disqualification.
  • A conviction for an indictable offence: Directors convicted of certain criminal offences, such as fraud or money laundering, may be disqualified from acting as a director.
  • Unfit conduct: Directors can be disqualified if they are found to be unfit to manage a company, in circumstances where they are seen to have a history of business failures, a lack of integrity, or a history of non-compliance with legal obligations.

In summary, director disqualification can be ordered on several grounds related to the director’s conduct and ability to manage a company. Directors should be aware of their legal obligations and ensure that they comply with them to avoid the risk of disqualification.

Consequences of director disqualification

The consequences of being banned as a director are serious and transcend far beyond the inability to be a director or participate in company management. Here are some of the consequences that can arise from director disqualification:

  • Loss of reputation: Director disqualification can damage a director’s reputation, particularly if the disqualification is related to fraudulent or wrongful trading. This can make it difficult for the director to secure future business opportunities or employment.
  • Personal liability: Directors who breach a disqualification order can face personal liability for any lo incurred by the company or its creditors as a result of their actions. This can include fines, compensation orders, or even imprisonment.
  • Financial impact: Director disqualification can have a significant financial impact, particularly if the director cannot secure future employment or business opportunities. Directors may also be required to pay legal costs associated with the disqualification process or ordered to pay compensation.
  • Restriction on other activities: Disqualified directors may also face restrictions on other business activities, such as acting as a trustee or receiver. This can further limit their ability to earn a living or participate in the business community.

It is, therefore, vital for directors to understand the potential consequences of disqualification and seek legal advice if they face disqualification proceedings, even if the Insolvency Service investigations have only just commenced . 

Reinstatement and appeals: post-disqualification remedies and strategies

Even when a disqualification ban is inevitable, all is not lost. 

If you have been disqualified either by court order or by way of a voluntary undertaking, it is possible to obtain court permission to act as a director, notwithstanding a ban, thereby allowing you to preserve your current business interests and safeguard your other directorships.

Section 17 of the Company Directors Disqualification Act 1986 allows a director to apply to the court for leave to act as a director or in the management of a company. Indeed, by the time the ban comes into force, the director may have started a new company, and that company’s success requires the director’s ongoing involvement. In those circumstances, it is possible to apply to the court for permission to act as a director without breaching the ban. 

We can work with you to prepare your application and supporting evidence and ensure that your application is determined as soon as possible to minimise the disruption to your business. 

Since breaching a ban is a criminal offence, it is always wise to obtain permission to avoid an inadvertent breach. 

Director disqualification in insolvency cases

Often director disqualification proceedings (including the initial stages of investigations) will run in tandem with an investigation by the liquidator or administrator for claims, including misfeasance and antecedent transactions. 

Directors will often assume that once their company has been placed into liquidation, that’s an end to matters. Sadly, this is not always the case, and directors all too often find that their conduct is being investigated by the Insolvency Service and could ultimately lead to them being banned from acting as director.

In circumstances where the same allegations can give rise to both insolvency claims and disqualification, ensuring that a joined-up approach is taken to both is important, particularly when officeholders can and will rely on admissions and findings made in disqualification proceedings. 

Why choose us?

Suky Mann, a solicitor with over 13 years of experience in director disqualification cases, leads our director disqualification team. Suky has built a formidable reputation in director disqualification, having secured countless victories for her clients. In addition, Suky has acted for many disqualified directors, securing section 17 CDDA leave to act whilst disqualified. 

FAQs

What disqualifies you from being a director?

Disqualification will only follow if there has been misconduct by the director. Examples of misconduct include:

    • Non-payment of HMRC and/or failure to submit returns
    • Acting whilst disqualified
    • Acting contrary to the public interest
    • Abuse of a directors loan account
    • Drawing illegal dividends
    • Acting in breach of financial service regulations
    • Trading whilst insolvent
    • Trading to the detriment of creditors
    • Failure to prepare and file accounts or make returns to Companies House
    • Hiding or disposing of assets
    • Failure to keep proper accounting records
    • Failure to co-operate with an insolvency practitioner or office holder.
    • Fraudulent bounce-back loan applications
    • Misapplication of bounce-back loan monies

Who has the power to disqualify a director?

Disqualification can be imposed by a court, government agency or regulatory body and is typically pursued when a director is found to have engaged in serious misconduct or breached their legal duties. 

How will I know that proceedings have started against me?

The Insolvency Service will issue a formal notice of its intention to commence director disqualification proceedings under section 16 CDDA. This is often called the “Section 16 Letter” and will confirm the period of disqualification sought and the allegations levelled against you. The Section 16 Letter will also confirm if the Insolvency Service intend to pursue a compensation order against you. 

Even at this stage, you can put forward detailed representations setting out why the Insolvency Service should reconsider issuing disqualification proceedings. Many cases have been dropped following our involvement at this stage. 

If all fails and proceedings are issued you will be served with a claim form. You must act swiftly to ensure that the claim form is responded to in time to prevent you being de-barred from defending the proceedings.  

What is a director disqualification compensation order?

Compensation orders are a relatively new mechanism that seek to make disqualified directors financially accountable for the consequences of their unfit conduct. The idea is that the director compensates and makes good losses caused to the creditors of a company that has gone into liquidation or administration. 

The Insolvency Service (on behalf of the Secretary of State) will apply to the court for a compensation order once the decision to proceed has been made. It is open to the director to offer a compensation undertaking before the matter comes before a judge (to avoid the costs and time of court proceedings), agreeing to pay an agreed sum to the Insolvency Service. 

Insofar as the amount of the compensation, this is calculated by reference to various factors, including whether the director’s conduct caused loss to one or more of the company’s creditors, whether those creditors have any other means of recovering their losses and whether any financial recovery is anticipated via claims pursued by the liquidator or administrator.

It is important to note that it is not just directors of companies that have entered into a formal insolvency process that can face compensation orders. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 extended the provision to include directors of dissolved companies. This provision is retrospective, which means that conduct before the Act came into force can be considered.

How do I deal with pre-action correspondence? 

How you deal with any pre-action correspondence will determine whether the Insolvency Service issues proceedings against you, the length of the proposed ban and whether a compensation order will be sought against you. 

As such, you must obtain the advice of specialist and experienced solicitors to assist you in responding to the pre-issue correspondence and navigating what can be a highly stressful process. 

Is it possible to defend director disqualification proceedings?

Absolutely, but having the right advice and solicitors on board is key. 

What kind of settlements is it possible to negotiate?

Our primary aim is to secure the discontinuation of the investigation and/or proceedings. If that is not possible, we will negotiate with the Insolvency Service to reduce the period of the ban and minimise the allegations against you. 

Is being disqualified as a director a criminal offence? 

Disqualification as a director is not in itself a criminal offence, but there are serious legal consequences if the disqualification order or undertaking is breached i.e. where a director continues to be involved in the management of a company that will give rise to a criminal offence, to include a term of imprisonment and/or a fine.

How do you rectify the disqualification of a director?

You can apply for permission to act as a director of a specific company/companies notwithstanding the director's ban. Our solicitors are experienced at making such applications and are on hand to guide you through that process. 

Can I apply to continue as a director even if I am disqualified? 

You cannot continue to act as a director or participate in the management of a company during your disqualification period. This means that you cannot be a company director, whether a private or a public company or hold any similar position of authority, such as a shadow director or a de facto director.

The purpose of disqualification proceedings is twofold; to protect the public and creditors from the actions of unfit directors and to promote good corporate governance. Allowing a disqualified director to continue to act as a director would undermine these objectives.

If you are disqualified as a director, it is essential that you comply with the terms of your disqualification and do not engage in any activities that could be interpreted as participating in the management of a company. Doing so would put you in breach of the ban, which is a criminal offence that can result in fines, imprisonment or both.

However, if there is a need for you to be a director during the period of the ban, you will need to apply to court or the Insolvency Service for permission to act as a director again. This is not an automatic process, and you will need to demonstrate that you are fit to act as a director and that you have addressed any issues that led to your disqualification.

Can I operate my business as a sole trader if I am disqualified?

A disqualification ban does not prohibit you from working as a sole trader or an employee. 

What is the Small Business, Enterprise, and Employment Act 2015?

The Small Business, Enterprise, and Employment Act 2015 (“SBEE”), specifically Part 9 of the Act came into force on 1 October 2015, making significant amendments to the CDDA; specifically introducing:

    • The introduction of a new ground for bringing disqualification proceedings by allowing the Secretary of State to apply to the court for the disqualification of a person who has been convicted of certain offences (s. 104 SBEE)
    • The extension of the regime to cover persons instructing unfit directors of insolvent companies (s. 105 SBEE)
    • The revision of the procedure for determining the unfitness of directors and shadow directors (s. 106 SBEE)
    • The requirements for official receivers, liquidators, administrators and administrative receivers to report to the Secretary of State on the conduct of each person who was a director of a company on the insolvency date or within the three years before (s. 107 SBEE)

Finally, and arguably the most significant, the introduction of Compensation Orders and Compensation Undertakings on persons who are subject to disqualification orders or undertakings, where the person’s conduct as a director caused loss to one or more creditors during the time he was a director of an insolvent company (s. 110 SBEE)

If you would like to speak to one our solicitors, please call us on 01384 327304 for a free initial discussion.

Restructuring and Insolvency - Disqualification as a Director

The Investigation Stage

Dealing with initial enquiries from the Insolvency Service The Insolvency Service will write to the directors asking them to either complete an initial questionnaire or attend an interview to provide..

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Unfit conduct - Types of misconduct

Disqualification claims will not be issued unless the Insolvency Service investigations support allegations of misconduct on the part of a director. Where a company has become insolvent, a directors ..

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Effects of Disqualification

For the period of disqualification order or undertaking you cannot act as a director and you cannot take part, directly or indirectly, in the formation, promotion and management of a company or limite..

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Disqualification Undertakings

Agreeing to accept a voluntary disqualification undertaking has the same practical effect as a disqualification order. If you do not wish to remain a director or you don’t intend to act as a di..

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Compensation Orders

A Compensation Order can be one of the Effects of Disqualification; it allows the Insolvency Service to recover monies from a director whose misconduct has caused loss to the company in the run up to ..

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Permission to Act

If you are already disqualified or are being threatened with disqualification, it is possible to obtain court permission to act as a director notwithstanding a ban. The aim of a disqualification is to..

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Breaching a Disqualification Order

Breaching an Undertaking or Order, deliberately or inadvertently, is a criminal offence. A director in breach could be sentenced for up to 2 years imprisonment and/or receive a fine. In addition, the ..

Read more

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