Under the Company Directors Disqualification Act 1986, a company director may be disqualified if they do not meet their legal duties and obligations. Given the consequences of breaching the law as a company director, it is important that everyone in this role understand their legal duties and the circumstances that may give rise to potential disqualification.
If a company goes into liquidation, this does not automatically lead to the disqualification of a director from forming another company. Company directors involved in a liquidated company are generally free to establish a new limited company as long as they have not breached the rules (e.g. been convicted of an indictable offence, become involved in wrongful trading, or been deemed unfit as a director).
In this article, we will explain when and how a company director may be disqualified and the implications of being subject to a disqualification order by a court under the Company Directors Disqualification Act 1986.
What is the Company Directors Disqualification Act 1986?
The Company Directors Disqualification Act 1986 (CCDA) sets out when and how company directors must be disqualified from their role due to misconduct. Where a company director is found to have breached the rules, a Court may issue them with a disqualification order. If a company director is subject to a disqualification order, they are no longer permitted, for a certain period of time, to:
- Perform the role of a director of a company
- Act as receiver of a company’s property or in any way (directly or indirectly)
- Be concerned or take part in the promotion, formation or management of a company unless with permission from the court, or
- Act as an insolvency practitioner.
If a company director is found to have breached their duties as a director, they may be subject to an investigation and subsequently disqualified.
On what grounds can a director be disqualified?
A company director may be disqualified for a wide range of reasons in accordance with the CCDA, including for reasons of general misconduct, unfitness, competition infringement, and certain other reasons such as wrongful trading.
Disqualification for general misconduct in connection with companies
Under section 2 of the CCDA, a court may issue a disqualification order against a company director if they are convicted of an indictable offence (on indictment or summarily) that relates to a company’s:
- Liquidation or striking off
- Receivership of property
This means that a director can only be disqualified if they are found guilty of an offence that relates to the company for which they are a director.
An indictable offence is one where the individual has a right to a trial by a jury in a court.
A summary offence is a criminal offence that is only triable in the magistrates’ court. It is important to note that a director can only be disqualified if they are found guilty of three summary offences in the past five years.
The Courts have the power to disqualify a director for up to 15 years in such circumstances.
A director may also be disqualified on the grounds of their general misconduct if they persistently breach company legislation, commit an act or acts of fraud, or due to certain convictions abroad. Again, for any such acts of general misconduct to lead to disqualification as a director, it must be proven they relate to the management of the limited company for which they are a director.
Disqualification for unfitness
The CCDA also states that a company director can be disqualified on the grounds of their unfitness to perform their role. Section 6 of the CCDA states:
“The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied—
- (a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and
- (b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies one or more other companies or overseas companies) makes him unfit to be concerned in the management of a company”.
“Unfit” in this sense can include where a director:
- allowed a company to continue trading at a time when it could not repay its debts
- allowed a company to take on more debt when it could not be repaid
- drew excessive salaries at the time when the company was insolvent
- failed to keep proper company accounting records
- failed to send accounts and returns to Companies House
- failed to pay taxes owed by the company to HMRC
- used the company’s money or assets for personal benefit
- failed to comply with the requests of a liquidator
Disqualification for competition infringements
Section 9A of the CCDA explains that a company director may be issued with a competition disqualification order if they are found guilty of certain company competition infringements. For such an order to apply, the director must have breached competition law, and the court must consider them unfit to manage a company. Breaching competition law means that a director must have infringed:
- the Chapter 1 prohibition rules within the Competition Act 1998 on agreements preventing, restricting or distorting competition, or
- the Chapter 2 prohibition rules within the Competition Act 1998 on abuse of a dominant position,
For these reasons, it is important that company directors avoid any personal involvement in infringements of competition law and not encourage anti-competitive behaviour. They must also take any appropriate and reasonable steps to mitigate the risk of and deal with infringements of competition law.
Disqualification for other reasons
The CCDA also states that a director may be disqualified if they are found guilty of participation in wrongful trading, they are an undischarged bankrupt, they are deemed “designated persons” under sanctions legislation, or they fail to make payments under a county court administration order.
What is the process for disqualifying a company director?
If there has been an allegation that a director has breached the legal responsibilities of their role, the Insolvency Service or another authorised body may carry out an investigation. At the outset, the authorised body will inform you in writing, explaining:
- why they are carrying out an investigation regarding your fitness as a director
- their intention to commence the process of disqualification
- the process you can follow to respond
If you receive a letter from an authorised body informing you of a pending disqualification, you may decide to allow the authorised body to take you to court. If you disagree with the reasons for your possible disqualification, you will have the opportunity to mount a defence when you attend your court hearing. It is essential to have expert legal representation to defend you in this scenario.
Alternatively, you can issue an authorised body with a ‘disqualification undertaking’, which means that you understand and agree with the reasons for disqualification, and you will effectively disqualify yourself voluntarily. Doing so will end any pending director disqualification court action against you.
In addition to the Insolvency Service, the bodies that can initiate the process of seeking a disqualification order against a director include authorised company insolvency practitioners, Companies House, the Competition and Markets Authority (CMA), and the courts.
What are the implications of being a disqualified company director?
If you are disqualified as a director for the duration of the disqualification period (up to 15 years), you are restricted from acting in the role of director for any company. This restriction applies to any UK company or any overseas company with connections to the UK. You will also be restricted from forming, marketing or running a company, and you may be prohibited from:
- sitting on the board of a charity, school or police authority
- being a pension trustee
- being a registered social landlord
- sitting on a health board or social care body, or
- being a solicitor, barrister or accountant
The details of your disqualification will be publicly available on the Companies House database of disqualified directors and the Insolvency Service’s register of directors
The penalties for breaching a director disqualification order can include a fine or even being imprisoned for up to 2 years.
Due to the wide range of grounds for possible disqualification as a director of a limited company and the impact this can have on the individual and company concerned, it is essential to do all you can to avoid such action being taken. Breaches which may lead to disqualification can be avoided by providing comprehensive in-house training to directors to ensure they understand their obligations. In addition, by seeking legal advice from a specialist in company law when making important decisions or taking certain actions relating to a company they represent, directors can ensure they do not fall foul of the rules in the first place.