Directors Disqualification

When a company goes into liquidation or administration, the insolvency practitioner appointed to deal with the failed business is under a statutory duty to investigate the affairs of the company, including the conduct of its director(s). In a compulsory liquidation, the investigation is carried out by the Official Receiver.

Inquiries can go right back into an individual’s past history as a director of the company in question, and any other companies, and also into their conduct after they are no longer a director if it relates to a matter connected with or arising out of the insolvency of that company.

“Director” can include a ‘shadow director’ – defined as being a person in accordance with whose directions or instructions the directors of the company are accustomed to act.

As well as former directors, ‘de facto’ directors can be investigated. A de facto director is a person who acts as if they are a director but are not actually appointed as one, or whose appointment has now expired.

The sort of misconduct that typically will not go unnoticed includes:

• Non-payment of Crown debts
• Concealing assets
• Unexplained deficiency in the accounts
• Appropriation of assets to other companies for no value or at an undervalue or on the basis of unreasonable charges for services
• Transactions personally benefitting the director(s) or their families
• Overvaluing of assets in accounts so as to obtain loans or other financial accommodation or to mislead creditors
• Loans to the director(s) in making share purchases
• Dishonoured cheques
• Use of delaying tactics
• Phoenix operations (a company that has emerged from the collapse of another via insolvency)
• Misconduct in relation to the operation of a factoring account
• Preferential payments to creditors or guarantors
• Taking deposits whilst failing to supply goods or services
• Transactions at an undervalue
• Wrongful or fraudulent trading
• Where criminal convictions have resulted

A director of a limited company can be disqualified following a criminal conviction. However, the rules vary depending on whether a director is convicted of an indictable offence or following three default orders or convictions for summary offences within the preceding five years.

Further, it is not a requirement that the offence took place within the company; the offence may relate to the defendant's role within the company. The offence need not concern misconduct of the company's affairs or dishonesty. Moreover, the defendant does not have to have been a director at the time of the offence or at the sentencing hearing, nor does the defendant have to be a ‘shadow director’.

A directors disqualification order (DDO) disqualifies a person from operating with limited liability. It is used as a penalty in addition to the offence, the purpose of which is to protect the public from those who, for reasons of dishonesty, naivety or incompetence, abuse their role and status as director and may jeopardise creditors and others associated with the business of that director.

The effect of a DDO is that the relevant person subject to the Order must not:

• act as an insolvency practitioner;
• be a director of a company;
• be a liquidator or administrator of a company;
• be a receiver or manager of a company's property; and/or
• in any way, directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order.

The use of a DDO is invariably intended to ensure that only reasonably competent, responsible and honest people act as company directors.

If an allegation of unfitness to be a director is proven, a person can be banned from being a director for a period of between 2 and 15 years. The technical definition of a director disqualification means that the individual concerned cannot in any way – whether directly or indirectly – be concerned or take part in the promotion, formation or management of a company unless that person has the court’s permission.  

A director disqualification ban can have far reaching consequences – not just for the individual concerned, but also for their family, and any employees of a business set up by that individual since the demise of their previous business.

The consequences of breaching a director disqualification can be very grave:

• It is a criminal offence, which in serious cases could result in a period of imprisonment of up to 2 years or a fine or both; and/or  
• An individual can be held personally responsible for all the relevant debts of a company if, whilst the subject of a disqualification order or undertaking, they are involved in the management of a company.  

Such personal liability can also extend to any person who is involved in the management of a company and who is willing to act on instructions of a person who they know is a banned director or an undischarged bankrupt.