Director Disqualification
Helping directors facing potential disqualification is part of our core business.
- The Investigation Stage
- The Decision to Disqualify
- Director Disqualification Undertakings
- Director Disqualification Process - Compensation Orders
- Director Disqualification Process - Permission to Act
- Director Disqualification Process - Contesting Proceedings
- Effect of Disqualification
Collectively, our team has decades of experience with the director disqualification process and the approach of the Insolvency Service.
Whenever a company goes into administration or liquidation, the administrator or liquidator has an obligation to submit a confidential report to the Insolvency Service on the directors’ conduct. This report can lead to a decision to investigate the directors’ conduct in more detail. The investigation will involve the directors and may lead to a decision to disqualify them from being a director or concerned in the management of a company or LLP. The period of disqualification can range from between 2 to 15 years depending on the seriousness, and the average period is between 5 or 6 years.
Disqualification doesn’t just affect a person for the period of disqualification. It can permanently blight their business career. Companies fail all the time usually through no fault of the directors. In contrast, disqualification marks a person as being unfit to be a director. Even after the disqualification period has expired it can be necessary for the person to disclose that he or she has been disqualified in the past. This not only limits the opportunity to secure employment at an executive level but can prevent the person from being involved in various types of regulated business. If the person sets up a new company, the previous disqualification can make it difficult for the business to obtain funding from conventional sources, and more likely that HMRC will want bonds to be given for PAYE and VAT.
If you have been contacted in relation to an investigation into your conduct as a director, or are facing the threat of director disqualification proceedings, visit one of the links on this page. If you are a director facing a financial claim, visit our page entitled Claims against Directors.
The Investigation Stage
Since 1986 the Government has had the power to disqualify individuals from being directors or managers of companies under the Company Director Disqualification Act 1986. This power can only be used where it is in the public interest for the person to be disqualified. The guiding principle is that it is a privilege to be able to run a business with limited liability, and that privilege should be taken away from those who abuse it.
Whilst around 1,200 directors are disqualified each year, a much higher number than this are targeted for investigation. In many cases the Insolvency Service will close the investigation after gathering information from the directors and from the Insolvency Practitioner’s files. Less frequently, they will decide not to continue after a decision to disqualify has been taken. The Insolvency Service say they will only do this if new information is provided which has not previously been considered. In practice it can be difficult to get the Insolvency Service to change their minds once a decision to disqualify has been made.
If a director receives a letter from the Insolvency Service stating that they are investigating the director’s conduct, the first thing the director should do is to consider whether they have any insurance policies in place that will cover the director’s legal costs incurred in dealing with potential disqualification proceedings.
The best chance to avoid disqualification is for directors to engage early in the investigation phase, before a decision to disqualify is made. In doing this, directors need to understand that whilst the situation is new for them, the Insolvency Service personnel are dedicated to investigating directors’ conduct. What appear to be simple questions (e.g. have you delivered up all the company’s records, when did you realise the company was insolvent etc) contain traps for the unwary.
It is quite common for the Insolvency Service to invite a director to a meeting, being either a physical meeting or a remote meeting using video conferencing. Whilst it is usually sensible to agree to a meeting, attending a meeting unprepared and without the benefit of legal help can backfire spectacularly. A common mistake is for the director to assume the Insolvency Service investigator knows far more about the company than the investigator actually does, with the result that the director does not explain matters which are critical to the investigation.
We have considerable experience of helping directors deal with investigations and meetings, and have a track record of identifying and providing the Insolvency Service with relevant information which leads to investigations being closed.
The Decision to Disqualify
If the Insolvency Service decides that a director should be disqualified, then they issue what is described as a “section 16 letter” informing the director of that decision, outlining the allegations of unfit conduct, and setting out the period of disqualification which the Insolvency Service considers is appropriate. The letter will invite the director to give a disqualification undertaking on the basis that if the director decides not to do so then the Insolvency Service will issue court proceedings to obtain a disqualification order. The letter will also say whether the Insolvency Service is going to ask for a compensation order.
The section 16 letter will also say that the director can request a copy of the evidence on which the Insolvency Service is relying. That evidence used to be in the form of a draft affidavit (sworn witness statement) setting out the allegations of unfit conduct accompanied by a draft exhibit containing copies of all the relevant documents. More recently, the Insolvency Service has changed its procedures. Nowadays a draft affidavit and exhibit will only be prepared if the director declines to offer a disqualification undertaking. Whilst this approach is understandable to save costs, it does mean that the Insolvency Service’s evidence can be little more that copies of various documents without any explanation as to how those documents are being used to make the allegations of unfit conduct set out in the section 16 letter.
After the section 16 letter has been issued, it becomes more difficult to persuade the Insolvency Service to discontinue. There is little hope of doing so without legal assistance.
The period of disqualification proposed by the letter will range between 2 and 15 years depending upon the seriousness of the allegations of unfit conduct. A period of 2 to 5 years (the lower bracket) is for less serious matters; 6 to 10 years (the middle bracket) for more serious matters; and 11 to 15 years (the top bracket) for the most serious unfit conduct including dishonesty and directors who have acted in breach of a previous disqualification.
Director Disqualification Undertakings
Of the 1,200 or so directors who are disqualified each year, around 80% agree to give disqualification undertakings rather than requiring the Insolvency Service to prove their case in court to get a disqualification order.
For all practical purposes, a disqualification undertaking has the same effect as a disqualification order. Directors who give undertakings usually do so because they know they are going to be disqualified if they go to court. The attraction of giving an undertaking is that the Insolvency Service will usually agree to a slightly shorter period of disqualification, and the director will not have to pay any legal costs of dealing with court proceedings. However, even in this situation, legal advice from us can help in minimising the period of disqualification and can frame the allegations of unfit conduct which the director has to admit, or not contest. This can be important as liquidators will often see disqualification as a green light to investigate whether the liquidator has any civil recovery claims against the director.
Negotiation of director disqualification undertakings is often done in conjunction with an application to court to obtain permission to act as a director of a specific company which needs the director to continue acting, despite the disqualification.
Even if the director decides not to give a disqualification undertaking at this point, it is always open to the director to offer to give an undertaking at any point up to and including the disqualification trial. The purpose of the process is to disqualify the director for the correct period, and if the director offers an undertaking for an appropriate period on the basis of admissions of unfit conduct that justify it, then it becomes next to impossible for the Insolvency Service to refuse the offer. If proceedings have been issued, the Insolvency Service will normally require the director to pay its costs, though the amount and time period for payment can usually be discussed.
Director Disqualification Process - Compensation Orders
New rules introduced in October 2015 allow the Government to seek financial compensation from directors who admit to unfit conduct.
In practice, it is rare for the Insolvency Service to seek a compensation order. They are so rare that they are not even included in the Insolvency Service’s published data on enforcement outcomes. The dilemma for the Insolvency Service is that if they say they want a compensation order against a particular director, then it is less likely that the director will give a disqualification undertaking.
However, one of the key considerations for the director is to work out what effect a disqualification undertaking or disqualification proceedings will have on the office holder’s view, and whether it may encourage the office holder to take civil recovery proceedings against the director.
The admissions of unfit conduct made by the director when giving an undertaking are usually expressed to be admissions for the purposes of the disqualification only, and not for any other proceedings. However, the fact that admissions have been made may encourage the office holder.
If a director fights the disqualification proceeding all the way to trial, then all the evidence given in those proceedings will be in the public domain, including the director’s own statements made on paper (e.g. in witness statements) or under cross-examination. The Judge will make findings of fact based on the same evidence. This can provide the office holder with a wealth of information that would not otherwise be available and could provide the office holder with evidence to take a civil recovery action against the director, even if the director is not disqualified.
If the allegations of unfit conduct are based on the failure to pay sums due to HMRC whilst other creditors are paid, then from July 2020, there is a risk that HMRC will use the evidence gained through the disqualification investigation and proceedings for the purposes of deciding whether to issue a Joint Liability Notice making the director jointly liable with the company for unpaid PAYE and VAT.
What this all boils down to is that any director issued with a section 16 letter will benefit from taking legal advice from experts in directors’ disqualification proceedings.
Director Disqualification Process - Permission to Act
If directors disqualification cannot be avoided, and provided the allegations leading to disqualification are not so serious as to lead to a tariff in the top bracket (or the upper middle bracket), a director can apply to court for permission to continue to act as a director or manager of a specific company. This is usually done at the same time as negotiating the terms of a disqualification undertaking.
The guiding principle is that the company must need the particular person to be a director. How easy or difficult it is to get permission will depend on the nature of the company’s business, who else is involved, and what role the disqualified director is to play.
We have experience representing directors in permission to act applications and can guide you through the requirements and likely conditions that the court might impose as a condition for granting permission.
Director Disqualification Process - Contesting Proceedings
This is the most expensive option for a director, but sometimes it is unavoidable if the director does not agree with the Insolvency Service’s case. Usually, the dispute is about whether the director should be disqualified at all, but sometimes the dispute is about some of the more serious allegations of unfit conduct, which the director denies, or the length of disqualification that the Insolvency Service is seeking.
The Insolvency Service has 3 years from the date of administration or liquidation to bring disqualification proceedings under section 6 of the Company Directors Disqualification Act 1986. However, this time limit can be illusory as it is often possible for the Insolvency Service to take similar proceedings under section 8 instead.
The Insolvency Service does not publish statistics on the number of disqualification cases issued in court that are subsequently discontinued or lost at trial. A FOI request in 2010 led to the Insolvency Service publishing statistics that indicated around 15% of contested proceedings were withdrawn or lost at trial.
We know that the Insolvency Service’s view of a case can change after the director’s evidence in answer is served when the Insolvency Service engages a barrister to advise on whether to take the case to trial. This returns to the point that the Insolvency Service can only continue disqualification proceedings in the public interest, and that it is required to keep the public interest test under review at all stages. If the test is not met, the proceedings must be withdrawn. The Insolvency Service is not allowed to take the proceedings to trial in the hope of obtaining an order.
It is always possible for the director to offer a disqualification undertaking at any point up to and including the trial.
If the Insolvency Service obtains a disqualification order at trial, then the director will be ordered to pay the Insolvency Service’s costs. Alternatively, if the Insolvency Service withdraws the proceedings or loses at trial, then it will have to pay the director’s costs.
One problem of defending proceedings is that the period of any disqualification order will only start to run from the date it is made. This is typically between 1 and 2 years after the section 16 letter is issued. During that period, the director’s personal life and business interests will suffer because of the uncertainty caused by the risk of disqualification.
Effect of Disqualification
On the face of it, disqualification simply prevents the disqualified director from being a director or being concerned in the management of a company or LLP. The disqualification is noted on the register of disqualified directors, which is a public register.
Breach of the disqualification is a criminal offence, and also makes the disqualified director personally liable for the debts of the company or LLP. In addition, anyone acting on the instructions of a disqualified director can be personally liable as well as committing an offence.
In practice, the restrictions are potentially far wider-reaching both during and after the period of disqualification.
During the period of disqualification, there are various other restrictions that apply. For example, a disqualified director cannot be a trustee of a charity. In addition, professionally qualified people (accountants, surveyors, dentists, solicitors, etc.) may find themselves subject to disciplinary action, whilst in various other occupations (e.g. police, court staff, bank workers, etc), disqualification might lead to termination of employment or work restrictions.
In small, family companies, the disqualified director may take up a position that on the face of it is not a management role, but we have observed situations where, nonetheless, the company’s bankers have terminated the company’s facilities because they are not prepared to take any risks.
We have also encountered situations where the disqualified director’s personal facilities have been terminated by way of their bank telling them their business is no longer wanted.
After the period of disqualification has expired, the stigma of disqualification can continue to hamper the person’s ability to become involved in other businesses or to set up their own business. Investors and banks may be unhappy supporting any business which has employed someone in an executive capacity who was previously disqualified. There are many industries whose rules of operation won’t allow it, such as in the travel trade. Professionals who have been struck off won’t be able to resume just because the disqualification period has expired.
Frequently asked questions about director disqualification
What acts constitute "unfit conduct" for director disqualification?
“Unfit conduct” means behaviour that makes you unfit to run a company. It usually arises when your company becomes insolvent.
Examples include:
- Wrongful trading (continuing when insolvency was unavoidable)
- Not paying HMRC taxes
- Failing to keep proper accounts
- Taking excessive drawings
- Preferring certain creditors
Because the definition is broad, early advice is essential before responding to the Insolvency Service.
How long does a director disqualification order last?
A disqualification order lasts between 2 and 15 years. The length depends on the seriousness of the alleged misconduct.
Courts generally apply three brackets:
- 2–5 years – less serious
- 6–10 years – serious
- 11–15 years – most serious
The period reflects both risk to the public and the level of wrongdoing. Specialist advice can affect both outcome and length.
Can I still be a director of another company if I am disqualified?
No, unless the court gives you permission. While disqualified, you cannot act as a director or be involved in managing any UK company.
This includes acting informally as a “shadow director” (directing from behind the scenes).
You may apply for court permission (“leave”) in limited circumstances. Because breach is a criminal offence, take advice before accepting any role.
What is a Director Disqualification Undertaking?
A Director Disqualification Undertaking is a voluntary agreement to accept a ban. It avoids court proceedings but has the same legal effect as a court order.
By giving an undertaking, you:
- Avoid contested court action
- Accept a fixed disqualification period
- Conclude the matter more quickly
What happens if I breach a disqualification order?
Breaching a disqualification order is a criminal offence. You risk consequences ranging from a fine to up to 2 years’ imprisonment and assuming personal liability for company debts incurred during the breach
Acting as a shadow director can also count as a breach. The consequences may be severe, so if your role may cross the line, seek legal advice immediately.
Does director disqualification affect my personal credit rating?
No, disqualification alone does not automatically affect your personal credit rating. It is not the same as bankruptcy.
However, your credit may be impacted if you signed personal guarantees, become personally liable through court action or are declared bankrupt.
Can I still own shares in a company if I am disqualified?
Yes, you can still own shares. Disqualification prevents you from managing a company, not from being a shareholder.
However, you must not take part in management decisions or influence the board in a way that amounts to control.
The distinction can be blurred in owner-managed businesses, so structured advice is recommended before remaining involved.
Can I be personally liable for company debts if disqualified?
Yes, in certain situations you can become personally liable. Disqualification itself does not automatically make you responsible for debts.
Liability may arise through:
- Personal guarantees
- Wrongful trading
- Fraudulent trading
- A Compensation Order (a court order requiring you to repay creditor losses)
What is a Section 16 letter?
A Section 16 letter is formal notice that disqualification proceedings are being considered. It sets out the allegations and gives you a deadline to respond.
This is your opportunity to challenge the evidence before court action begins.
You should not ignore it. A properly prepared response can sometimes prevent proceedings entirely.
Can I apply for leave to act as a director while disqualified?
Yes, you can apply to the court for permission (“leave”) to act. Approval is not automatic and is usually limited to a specific company.
The court will assess:
- The seriousness of the misconduct
- Safeguards protecting creditors
- The risk to the public
A carefully prepared application is essential to maximise your chances of success, so it’s recommended that you seek expert legal advice.