Directors' disqualification - what you need to know

When a company goes into liquidation or administration, an insolvency practitioner is appointed to deal with that failed business. The practitioner has a statutory duty to investigate the affairs of the company. This includes the earlier and ongoing conduct of the company director or directors.

In a compulsory liquidation, this investigation is carried out by the Official Receiver. Under recent legislation, directors of dissolved companies that have not been subject to a formal insolvency process before dissolution, can also be investigated.

An investigation by the Insolvency Service may then follow. The threat or commencement of disqualification proceedings may also be against a named individual. These proceedings will occur when a person is believed to be unfit to act as a company director.

At Birkett Long, we can offer legal support for individuals in Essex who may be facing directors' disqualification. Please contact Kevin Sullivan in our dispute resolution team to discuss your options. You can contact him directly [email protected]

What happens if a director admits to misconduct?

You may be wondering what happens if a director admits to any form of misconduct.

If a company director admits any wrongdoing or a Court finds them liable for misconduct, that person will be banned from being a company director.

They shall not "in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company" without the Court's permission for between two and fifteen years.

There are many examples of misconduct that could cause a directors' disqualification.

These examples could include:

• Fraud relating to government-backed loans (for example, the COVID-19 loans and financing initiatives)
• Non-payment of Crown debts
• Concealing assets
• Unexplained deficiency in the accounts
• Transactions personally helping the director(s) or their families
• Dishonoured cheques
• Use of delaying tactics
• Preferential payments to creditors or guarantors
• Taking deposits whilst failing to supply goods or services
• Transactions at an undervalue
• Wrongful or fraudulent trading

What is the disqualification procedure if a director is guilty of misconduct?

The disqualification procedure will formally start with notice of intended proceedings.

These proceedings are an opportunity for the director to avoid such action by agreeing to a disqualification undertaking. If you do not respond, or you do not agree to an undertaking, proceedings will be issued. Evidence will then be exchanged in routine cases before the matter is set down for a trial.

A director cannot "buy" themselves out of disqualification proceedings – usual commercial considerations do not apply. Instead, it is all about whether the intended proceedings (including the terms upon which they may be settled or discontinued) are in the public interest. 

What happens if discontinuance is not an option?

Discontinuance is the formal abandonment of the proceedings.

If discontinuance is not an option, agreeing to a disqualification undertaking is the only way to prevent any directors' misconduct from going to trial.

A disqualification undertaking is a formal agreement whereby an individual agrees not to be a company director for an agreed period. It has the same force as a disqualification order.

As part of the disqualification undertaking process, all parties will need to agree on undisputed facts about the misconduct.

If the misconduct has led to a quantifiable loss to one or more creditors, you may be subject to a compensation order or undertaking. You will have to take financial account for the consequences of any misconduct.

Our dispute resolution team specialises in offering legal support for individuals facing directors' disqualification. We can explain the differences between disqualification undertakings and orders and advise whether compensation undertakings are appropriate.

You may wish to consider the consequences of adverse publicity

If you are banned from being a company director, you may be concerned about the implications of adverse publicity. If you do not agree to a disqualification undertaking and the matter proceeds to trial, you may find that the case attracts the media's interest.

You may lose any ability to control the narrative of the misconduct. Unsubstantiated rumours or misunderstandings could become public. You may find that it is preferable to agree to a disqualification undertaking to ease an amicable departure.

It's important to note that Companies House keeps a detailed register of disqualified directors. This register is easily searchable by the general public.

You should also be aware that the Insolvency Service website will publish any details relating to directors' disqualifications. In addition, the media could use this register to find out why an individual may be banned from being a director of a company.

Is it possible to seek permission to act as a director if you have previously been disqualified?

Depending on the level of misconduct, you could be banned from being a director of a company for between two and fifteen years.

Seeking permission to act as a director, notwithstanding a ban, maybe a possibility. However, you must have permission from the Court to act in the management of a company.

Failure to seek permission or breaching a disqualification order or disqualification undertaking can have significant consequences. You could attract serious criminal or civil penalties. You could face imprisonment for up to two years and receive a significant financial penalty. What's more, if you are found to be disqualified from acting as a company director, you could be personally liable for any relevant debts of a company.

How can Birkett Long help you with directors' disqualifications?

Our dispute resolution team specialise in directors' disqualifications. In addition, we work with companies and individuals across Essex, helping to explain the legal consequences of your personal situation.

We can help you respond to any notice of intended proceedings and prepare a defence on your behalf. We can also negotiate any disqualification undertakings or seek permission on your behalf to act as a director following an earlier disqualification.

To find out more about how we can work with you, please contact Kevin Sullivan in our dispute resolution team.