What disqualifies you as a director?
Director disqualification can come as a result of a company director failing to meet their legal responsibilities and prevents a person from being in any way, directly or indirectly, concerned or taking part in the management of a company. This is not confined to the management of a company’s internal affairs, and a person may be regarded as a manager if they hold a position equivalent to that of a director, even if not appointed as a director. In the aftermath of a disqualification order, someone can be banned from acting as a director for up to 15 years.
For directors, this can be highly distressing and can have a serious and long lasting impact on an individual. Our claims against company directors team can advise you on your circumstances with commercially minded and practical advice, helping you to understand the allegations you are facing and navigate any investigations or court proceedings with confidence.
To respond effectively, you must first understand the procedure for disqualification in order to appreciate both sides of the argument. Many reasons could trigger the Insolvency Service from investigating the director’s conduct and commencing disqualification action. The more you understand your circumstances, the better equipped you will be to face these challenges.
What are the director disqualification proceedings?
Director disqualification proceedings are legal processes that result in an individual's banning from acting as a director. Usually, a trigger event draws attention to the director's behaviour, such as unfit conduct or trading while insolvent.
The proceedings will start with the initiation brought by the Insolvency Service following an investigation into the director’s leadership. The Insolvency Service will seek to establish grounds for disqualification, and the director will have an opportunity to either voluntarily accept a disqualification undertaking, where they’ll be able to avoid court proceedings, or, the case will proceed to court.
It's then up to the court to judge how long the disqualification order will be, meaning how long the individual will be prevented from acting as a director in any case, be that through the management or formation of a company or through promotion.
What is the director disqualification act?
Under the Company Director Disqualification Act 1986 (CDDA), director disqualification is part of the statutory framework designed to deal with insolvency, and the financial misconduct that sometimes causes, or arises from, insolvency. The CDDA contains a number of grounds for disqualification, but the most common ground is where a person is a director of an insolvent company.
When a company enters into any formal insolvency regime (administration, liquidation or receivership), a director’s behaviour will come under scrutiny. If it appears to the office holder (official receiver, liquidator, administrator or receiver) that the director’s conduct makes them unfit to be concerned in the management of a company, the office holder must make a report to the secretary of state.
On receipt of the report, the Insolvency Service investigates the director’s conduct, and disqualification action will be taken if it is in the public interest.
The Insolvency Service will seek to establish grounds for disqualification, and the director will have an opportunity to either voluntarily accept a disqualification undertaking, which will allow them to avoid court proceedings (which has the same force and effect as a court order), or the case will proceed to court.
It's then up to the court to judge the length of the disqualification order, meaning how long the individual will be prevented from acting as a director in any way, be that through the management or formation of a company or through promotion.
What are the reasons for director disqualification?
Unfit conduct
Unless a disqualification undertaking is offered and accepted, the court must determine whether a director’s conduct has fallen short of the standard of expected competence and care. Each case turns on its own facts and circumstances, and there is no set test for establishing unfit conduct.
A director may be disqualified if they have demonstrated unfit conduct, which might involve serious mismanagement of a company, failing to act in the company’s best interests, or allowing debts to become unmanageable due to irresponsible behaviour.
It will be the job of The Insolvency Service to investigate the behaviour of the director or former director and determine that their commercial failings were indeed a result of unfit conduct as opposed to genuine strife.
Wrongful or fraudulent trading
Wrongful trading occurs when a company director or directors continue to trade despite reasonably knowing that there is no realistic chance of the company avoiding insolvency, thereby breaching their legal duties. Directors may be held personally liable for losses and may face disqualification.
Fraudulent trading involves the intent to defraud creditors. It occurs when directors knowingly carry out business with the intention of deceiving creditors or obtaining financial gain through dishonest means. Fraudulent trading can lead to both civil and criminal penalties, and directors may face personal liability for losses, criminal charges and imprisonment.
Failure to keep proper accounting records
It is the legal responsibility of company directors to ensure that accurate and timely financial records are kept. These records ensure that financial problems cannot be hidden, creditors are kept in the loop, and there is no risk of insolvency investigations being obstructed. Without them, it suggests that the director is acting dishonestly or incompetently, both of which could be the reason behind director disqualification.
Breach of fiduciary duties
Directors are under the obligation to act in good faith, meaning that they protect and prioritise the best interests of the company and avoid conflicts of interest. If they breach these duties, known as fiduciary duties, by prioritising their own personal gain or misusing company assets, they can bring serious harm to the company’s wellbeing and its stakeholders. This display of lacking integrity will likely warrant investigation, which could lead to disqualification.
Non-compliance with company law
Directors are responsible for making sure that the company complies with all of its statutory obligations, including filing accounts, holding required meetings, and paying taxes. Serious or persistent breaches of company law would suggest either wilful neglect or incompetence, leading to company disqualification.
Criminal offence conviction
A director of a company can be disqualified following a criminal conviction, especially when the crime is related to fraud, dishonesty, or financial misconduct. The criminal conviction would indicate a disregard for the law from the director, undermining the faith that’s placed in them to prioritise the company over their own interests and ensure to act within legal regulations. The resulting disqualification may help to maintain public confidence, deter further misconduct, and foster confidence in business leadership.
Involvement in multiple failed companies
A proven pattern of insolvency across one or more failed companies, particularly within a short timeframe, would indicate the likelihood of further mismanagement. A disqualification order might be issued to protect the interests of further companies and creditors from the same outcome.
Contact our solicitors
Our director disqualification solicitors at Isadore Goldman have years of experience advising on director disqualification cases, providing solutions tailored to individuals with commercial needs.
To get in touch with a member of the team in London, you can call us by ringing 0207 353 1000,use our enquiry form or emailing us at london@isadoregoldman.com