Director Disqualification Solicitors
A formidable reputation defending directors from disqualification
Director disqualification is the process by which individuals can be banned from acting as directors of a company for a period of up to 15 years.
Company directors can be disqualified in several ways. The Insolvency Service, which has the power to investigate the conduct of directors of insolvent companies, ordinarily initiates disqualification.
However, a court can also initiate disqualification in fraudulent or wrongful trading cases. In some cases, a director may voluntarily agree to disqualification to avoid court proceedings, which is referred to as a voluntary undertaking.
Our highly regarded team of director disqualification solicitors have an unrivalled track record of helping directors facing a ban to overturn or reduce the terms of the disqualification.
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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 cooperate with an insolvency practitioner or office holder.
- Fraudulent bounce-back loan applications
- Misapplication of bounce-back loan monies
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.
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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 securing future business opportunities or employment difficult for the director.
- Personal liability: Directors who breach a disqualification order can face personal liability for any loss incurred by the company or its creditors due to 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 just commenced.
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 often assume that it will end matters once their company has been placed into liquidation. Sadly, this is not always the case, and directors often find that the Insolvency Service is investigating their conduct which could ultimately lead to them being banned from acting as a 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 as your director disqualification lawyers
Our team has a formidable reputation and enviable track record in dealing with director disqualification cases, having secured countless client successes.
We pride ourselves on our highly technical expertise across all director disqualification matters, providing our clients with practical solutions to even the most complex of cases.
In addition, we have acted for many disqualified directors, securing section 17 CDDA leave to act whilst disqualified.
FAQs
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
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.
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.
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 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.
Absolutely, but having the right advice and solicitor on board is key.
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.
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.
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.
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.
A disqualification ban does not prohibit you from working as a sole trader or an employee.
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)
Meet the director disqualification team
Suky Mann
Principal Associate - Restructuring & Insolvency
Chloe Shilton
Associate - Restructuring & Insolvency
