What is Director Disqualification?
Director disqualification is a legal process that prevents an individual from acting as a company director or from being involved in the formation, promotion, or management of a company for a period ranging between 2 and 15 years.
It applies when a person’s conduct is found to be unfit or where they have failed to meet the legal responsibilities required of directors.
The process applies not only to formally appointed directors but also to de facto and shadow directors (i.e. those who act in, or influence, a director's role without formal appointment).
Common grounds for disqualification include:
- Fraudulent trading
- Failing to submit company accounts or returns
- Using company funds for personal benefit
- Not paying liabilities owed by the company to HMRC
Investigations and Common Grounds for Disqualification
When a company enters a formal insolvency process, such as administration or liquidation, the appointed administrator or liquidator is required to report to the Secretary of State on the conduct of any directors in office during the 3-year period prior to the date the company entered into the formal insolvency process.
The Insolvency Service, acting on the Secretary of State’s behalf, then investigates the directors’ conduct. This may involve gathering financial records, issuing questionnaires and conducting interviews. If misconduct or unfit conduct is established, the director(s) involved may face disqualification proceedings.
Under the Company Directors Disqualification Act 1986 (CDDA 1986), proceedings must usually commence within three years of the company being placed in an insolvency process.
There are two approaches to be taken by the court under CDDA 1986:
- The court has the discretion to disqualify a director for actions including the following:
- Conviction of a serious criminal offence related to company management (in the UK or abroad)
- Persistent default in submitting documents to Companies House
- Fraudulent trading (under section 993 of the Companies Act 2006)
- Fraud or breach of duty while acting as a company officer
- The court must disqualify a director if:
- They were a director of a company that became insolvent (or was dissolved), and
- Their conduct makes them unfit to be concerned with company management
Examples of unfit conduct include:
- Misusing the COVID bounce-back loan scheme
- Continuing to trade when the company couldn’t pay its debts
- Not keeping proper accounting records
- Failing to file company returns or accounts
- Not paying tax liabilities to HMRC
- Using company assets for personal benefit
- Committing fraud
- Acting contrary to the public interest
Disqualification Undertakings vs Court Proceedings
There are two routes to disqualification for a director: providing an undertaking or being made the subject of a court order.
A disqualification undertaking is a voluntary agreement made by the director to accept disqualification without court involvement. It is often quicker and less expensive. This route usually offers several advantages:
- Avoids a formal court process
- Guarantees the length of disqualification (once agreed)
- May include a 6-month discount on the disqualification period (or longer for periods of over 5 years where the Secretary of State)
- Reduces the risk of a compensation order being sought
- Reduces exposure to legal costs that would otherwise be incurred proceedings are issued and a disqualification order is made
If a director chooses not to give an undertaking, or if the Secretary of State believes public interest requires it, the matter will proceed and disqualification proceedings will be issued at court and a judge will hear the case.
The director has the opportunity to defend themselves and either to argue against disqualification or to negotiate the length of the disqualification that will be ordered by the court.
Whether by undertaking or court order, the legal effect of disqualification is the same, and breaching the resulting ban carries civil and criminal consequences.
Consequences of Being Disqualified
Once disqualified, an individual is prohibited from acting as a company director, even informally. Changing job titles or operating through giving instructions to others does not result in being able to avoid the restrictions.
You must not instruct or enable others to manage a company on your behalf, and doing so may result in prosecution both for you and those whom you involve in the management process.
Unless the court grants permission, a disqualified person cannot:
- Act as a director of a company
- Take part, directly or indirectly, in the formation, promotion or management of a company or LLP
- Act as a receiver of a company’s property
- Act as an insolvency practitioner
These restrictions apply across England, Wales, Scotland and Northern Ireland, and include foreign companies with UK business operations or assets. They also apply to:
- Building societies
- Incorporated friendly societies
- NHS Foundation Trusts
- Charitable incorporated organisations
- Registered societies
- Protected cell companies
- Banks
- Further education bodies
- Limited liability partnerships (LLPs) (unless court permission is granted)
Disqualification does not prevent you from working for a company in a non-management role, operating as a sole trader or joining a traditional partnership. However, you must not be involved in an LLP if disqualified after 6 April 2001 without court permission.
You may also hold shares in a company whilst disqualified, but you should seek legal advice before giving any instructions to directors, as that could amount to a breach of the undertaking or order.
Disqualified persons are also barred from promoting or forming companies. Even preparatory actions, such as raising funds, incorporating the business, or making executive decisions, can constitute a breach.
While a disqualified person may serve as a company secretary, this is only permissible if the role does not involve company management. What matters is the nature of the work carried out, not the title.
If You Breach a Disqualification
Breaching a disqualification undertaking or order has serious consequences. You will have committed a criminal office and you may:
- Face up to 2 years' imprisonment and/or a fine;
- Be held personally liable for any company debts incurred during the breach; and
- And/Expose others acting under your instructions to prosecution or disqualification and personal liability for the company’s debts.
If a corporate director is disqualified and breaches its undertaking or order, then the individuals who manage or control that company may be held liable and punished as if the order applied to them personally.
How We Can Help With Director Disqualification
- Responding to correspondence received from the Insolvency Service relating to director disqualification proceedings;
- Assisting with the completion of questionnaires provided to directors by the Insolvency Service (where information is being sought about a director’s role and responsibilities);
- Advising on whether a disqualification undertaking should be given or whether a director could defend the disqualification proceedings;
- Agreeing the terms of a disqualification undertaking with the Insolvency Service;
- Acting for directors who decide to defend disqualification proceedings; and
- Acting for directors who wish to apply to the court for leave to act, or to continue to act, as a director of one or more companies whilst disqualified.
Director Disqualification FAQs
How do I obtain permission to act as a director whilst disqualified?
You can apply to the court under section 17 of CDDA 1986 for permission to act as a director or to take part in the promotion, formation or management of a named company whilst disqualified. The court cannot give permission for you to act as an insolvency practitioner.
You will have to satisfy the court that you have a reasonable need to obtain leave - not just that you want to be, or to continue to be, a director.
You must also satisfy the court that, if it gives the permission requested, the public will be adequately protected and therefore the court may require safeguards and may impose conditions and/or restrictions on you during the period of leave to act.
If you are considering applying to the court for permission to act as a director whilst disqualified, it is important to take legal advice as soon as possible from a solicitor specialising in director disqualifications.
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Director Disqualification Case Studies
Acting for a director of a residential property sales company
We acted for the director of a company engaged in the marketing and sale of residential property that earned commissions from the sale of residential properties. Following the liquidation of that company, the Insolvency Service commenced an investigation into the conduct of the company’s directors. Eventually disqualification proceedings were commenced against our client on the basis that our client allowed the company to trade to the detriment of HMRC.
Our client mounted a full defence to the disqualification proceedings which is rare following the introduction of the disqualification undertakings regime (which allows disqualification proceedings to be avoided and “compromised” via the offering of an undertaking for a set period of disqualification).
Following the exchange of substantial witness evidence and before the trial of the proceedings was due to commence, settlement terms were agreed with the Insolvency Service whereby our client agreed to be disqualified for a short period of time and to pay the limited costs incurred by the Insolvency Service.
Acting for a director of manufacturing company
We acted for the director of several companies engaged in the manufacture of paper and paperboard. Following the companies being placed into administration, the Insolvency Service commenced an investigation into the conduct of the companies’ directors. Eventually our client faced director disqualification proceedings on the basis that he failed to submit tax returns to HMRC and that the companies continued to trade to the detriment of HMRC (i.e. did not pay the tax liabilities owing to HMRC).
The disqualification proceedings were compromised with our client agreeing the terms of an undertaking for a set period of disqualification. Our client avoided paying any legal costs or compensation to the Secretary of State.
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