Here we explain who can be disqualified from acting as a company director, why a director might be disqualified, and what it means to be disqualified. We also look at ways in which a director may be allowed to act as a director despite being disqualified in certain circumstances.
At Harper James we have many years’ experience in all matters relating to directors’ disqualification. If you are informed that disqualification proceedings are being brought against you, then contact us as soon as possible for advice on your options. If you are a disqualified director, or are due to be disqualified but wish to continue as a director, then we can guide you through the process to ask for permission to be a director which will maximise your chances of success. Contact one of our specialist insolvency team for more information.
- When can a director be disqualified?
- Who can be disqualified?
- What leads to disqualification?
- Can I defend a claim against disqualification?
- If I am disqualified, what does this mean in practice?
- Obtaining court permission to act as a director while disqualified?
- How do I ask for permission?
- When might leave be given?
When can a director be disqualified?
There are various ways in which a director can be disqualified, but the most common of these is to be disqualified for 'unfit conduct' as a director of an insolvent company or limited liability partnership.
Who can be disqualified?
A director or shadow director or a de facto director can all be disqualified. This means that you don’t have to be registered as a director at Companies House to be caught. A shadow director is someone who is not officially a director, but has control over the company, often referred to as the ‘puppet master’, sitting in the background. A de facto director is someone who holds themselves out to be a director, and people dealing with that person would have reason to believe they are dealing with a director, even if not officially registered as such.
What leads to disqualification?
The insolvency practitioner who acts in the insolvency of a company is obligated to make a report to the Secretary of State for Business Innovation and Skills to raise any issues they find in the company that might warrant further investigation against a director. The Secretary of State will look into these issues and if they find that there was misconduct then they will take court proceedings to disqualify a director for anywhere between 2 and 15 years.
There is no prescribed bad behaviour set out in legislation, but misconduct can include a wide range of activity such as wrongful trading, failing to keep proper books and records, or failing to pay tax, to criminal activities such as fraudulent behaviour. Using a prohibited name will be clear misconduct. For more information on these see: When it is possible to use a prohibited company name? Any breach of standard directors’ duties will most certainly be caught. For more information on these see our article on what are a directors duties on insolvency and how can they avoid personal liability for breach.
Can I defend a claim against disqualification?
A claim will be brought by the Secretary of State which must go through the usual court process and is decided upon by a specialist judge having considered all the evidence. It is possible for any director to defend themselves against this action with the right evidence. There is also an alternative available to court which allows a director to sign an undertaking confirming their misconduct and agreeing not to act as a director for an agreed period. This will usually be a year or two less than would be found in court, as agreement means the costs of trial are avoided.
If I am disqualified, what does this mean in practice?
A disqualified director is prevented from acting in any way as a director of a limited company, and may not act as receiver of a company's property or in any way (whether directly or indirectly) cannot be concerned or take part in the promotion, formation or management of a company unless they have the permission of the court.
This includes acting as a shadow director or de facto director, and lasts for as long as that director is disqualified, so anywhere from 2 to 15 years.
There are additional ramifications, such as being prevented from acting in various positions such as a trustee of a charity, or a school governor, or trustee of an occupational pension scheme or an insolvency practitioner. Many professions will not allow a disqualified director too, such as the police, and various professional bodies, and licensing positions.
If a disqualified director acts in breach of their disqualification order, there can be severe penalties. These include further disqualification. The disqualified person will also be held personally liable for all debts and other liabilities of the company incurred during their involvement with it, which can be considerable, and in addition a director might be asked to provide compensation to creditors who are affected by their acting while disqualified. The financial ramifications can therefore be severe. There are also criminal sanctions, including imprisonment for up to two years and/or a fine.
Obtaining court permission to act as a director while disqualified?
It is possible under legislation to apply to court to act as a director of a company while you are disqualified. This will be limited usually to certain circumstances, for example where a director is integral to the fabric of a company and their disqualification may lead to the failure of the company with the consequent loss of jobs and knock on effect on creditors. It is usually limited to a particular company, rather than being a director of any company, and often a court will put in conditions to the permission being granted to safeguard the public
How do I ask for permission?
You will need to make an application to the court for permission, with your supporting evidence.
Timing is very important. If you don’t want a break in your directorship, then your application for permission must be heard within 21 days of a disqualification order being made against you. Otherwise you must resign until permission is granted.
You must provide all evidence to the Secretary of State as well as the court. They are not a party to the proceedings in the usual way, but they must report to the court to say if they object to the application, and if so, why. The court is not obliged to follow the recommendations of the Secretary of State, but will inevitably listen to their concerns and these will be highly influential. This therefore requires careful planning on the part of your lawyer.
For this reason, at Harper James we will liaise with the Secretary of State in advance of making any formal application to court on your behalf, to iron out any potential concerns they might have in advance that might lead to objections. This will ensure that your application has the best chance of success at the hearing.
When might leave be given?
The court will look at all of the circumstances, but primarily the judge will need to be assured that the public will be protected, and that the misconduct that led to the disqualification won’t occur again in this company. Public protection is the paramount concern, so this must be borne in mind when asking for leave.
The director asking for permission will need to show that everyone is aware that they are disqualified and no one is being misled. They may need to put in place certain measures to reassure the judge, such as bringing in a professional financial director onto the board of directors to keep an eye on the company. Other conditions might be that the director is restricted to a specific role, or that the company meets its tax obligations each month, or that the director can’t commit the company to any financial risks without another director’s consent. These will depend on what the allegations of unfitness were, and the risk of them happening again. Its very unlikely a person will be given permission to be the sole director of a company. Other directors, and the more independent the better, will need to be in place.
If permission is given with conditions, then any breach of the conditions will cause the permission to come to an end, and if the director continues then he will face the civil and criminal penalties mentioned above.