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Andrew Ryan – Partner and Head of Dispute Resolution discusses all commonly asked questions on director disqualification proceedings.
On what basis can a director be disqualified?
There are various reasons why a director may be disqualified from acting as a director of a limited liability company. The reasons can vary from negligence or incompetence, through to criminal behaviour and repeat offending. The most common reason is ‘unfit conduct’ under section 6 of Company Directors Disqualification Act 1986. It provides that the court shall make a disqualification order against someone where it is satisfied (1) that they are or have been a director of a company which has at any time become insolvent (whether while they were a director or subsequently), and (2) that their conduct as a director of that company (either taken alone or taken together with one or more other companies or overseas companies) makes them unfit to be concerned in the management of a company.
Does the court have a discretion whether to make a disqualification order?
Under section 6, the court must make an order if the conditions are satisfied and unfitness is found. This is not discretionary.
When does a company become insolvent for these purposes?
It becomes insolvent if (1) it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up (2) it enters administration, or (3) an administrative receiver of the company is appointed.
What is ‘unfitness’ for these purposes?
There is no definition of unfitness. The court takes a ‘broad brush approach’ looking at the director’s conduct as a whole.
Can claims be brought against former directors of a dissolved company?
Not at the moment. This is a loophole. In May 2021, the government announced that the Insolvency Service will be given the power to investigate them.
Who brings directors disqualification proceedings?
Proceedings are either brought in the name of the Secretary of State, for voluntary winding up, or by the official receiver, in compulsory winding up cases. Both exercise the same functions.
What are the effects of a disqualification order or disqualification undertaking?
The main effects are that without court permission, the person is disqualified from (1) acting as a director of a company and (2) taking part, directly or indirectly, in the promotion, formation or management of a company or LLP.
Can a disqualified director be a shareholder?
The answer seems to be – yes – but they cannot without permission of the court form a company and/or be involved in the promotion and/or management of a company.
How long can a director be disqualified for?
The period of disqualification can range between 2 and 15 years, depending on the seriousness of the unfitness.
Can one instance of misconduct be sufficient?
Yes – if the misconduct is sufficiently serious.
Is previous good conduct taken into account in determining unfitness?
No – but it may be appropriate for mitigation if there is a finding of unfitness.
Can a director seek permission to remain as a director of specific named companies?
Yes.
Can a partner of an LLP be disqualified if found to be unfit?
Yes.
Can a claim only be brought against those recorded as directors at Companies House?
No. The law applies not only to those 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”.
Can you do a ‘deal’ and agree to be disqualified for an agreed period?
Yes. The usual way this occurs is to provide an undertaking to the Secretary of State not to act as a director for a specified period. Once accepted by the Secretary of State it has the same effect as a court order and can only be amended by the court.
Does a disqualification order take effect immediately?
Not normally. Unless the court otherwise orders, the period of disqualification begins at the end of the period of 21 days beginning with the date of the order. This allows a director to put their house in order while still acting as a director but avoiding sanctions for breach.
Is there anything a director must do to enable themselves to act as a director again once their disqualification order expires?
No – on the expiration of a disqualification order, the disqualification simply expires.
Can a disqualified director become a sole trader?
Yes.
Is the disqualification order published?
Yes. Once a disqualification order is made, the Secretary of State will issue a press release. This is usually a publication local to the defendant unless the matter is particularly high-profile. Also, the director will be included on a Central Register of Company Directors, which is available to the public at Companies House and at the Insolvency Service website and is searchable by the public.
Who pays the costs if a disqualification order is made?
When a disqualification order is made (or a disqualification undertaking is given) the director is likely to be responsible for the Secretary of State’s costs unless agreed otherwise. If an undertaking is accepted before court proceedings are commenced then the Insolvency Service may not seek any costs from that director.
What are the penalties for contravention of a disqualification order or undertaking?
Anyone contravening a disqualification order or undertaking is committing a criminal offence and can be fined and/or sent to prison for up to 2 years. They could also be disqualified for a further period. They may also become personally liable for any debts of a company that are incurred during that period.
Can you appeal a disqualification order?
Yes – but you need permission to appeal. It is rare for an order to be rescinded or varied.
For further help, get in touch with our team of Business Solicitors in Manchester and Glossop who can offer qualified commercial and corporate legal advice.
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