Director disqualification is a serious matter that can have a significant impact on a director's ability to work in the future. If you are facing a disqualification investigation, it is important to understand the process and your rights. In this article, our director disqualification solicitors will provide a brief overview of the disqualification process, including what to expect if you are contacted by the Insolvency Service.
Contents:
- What is director disqualification?
- The disqualification process
- What are the grounds for director disqualification?
- What happens if I am subject to an investigation by the Insolvency Service?
- Can I defend the director disqualification claim?
- What happens if a director is disqualified?
- What can’t disqualified directors do?
- What can disqualified directors do?
- For how long can a director be disqualified?
- What should you do if you are facing a disqualification investigation?
What is director disqualification?
A director of a limited company that went into insolvent liquidation or administration might be targeted by the Insolvency Service for disqualification if misconduct is found against that director.
The disqualification process
The Company Directors Disqualification Act 1986 (the CDDA) sets out the statutory framework for the director disqualification process. The CDDA gives the court the discretionary power to disqualify a person from being a director for a period ranging from 2 to 15 years. The director’s previous behaviour and the seriousness of the offence will be relevant in determining the length of any disqualification, as discussed below.
What are the grounds for director disqualification?
There are various circumstances which may lead to the disqualification of a director and these are grouped into broad categories under the relevant legislation rather than being an exhaustive and specific list. Any failure to comply with their duties as a director and company law or any other law will result in the director being at risk of disqualification proceedings. It is important to note that any failure to meet these responsibilities does not have to be deliberate; it can also be as a result of negligence.
Some common examples of these grounds are set out below:
- continuing to trade when the company is unable to pay its debts (wrongful trading);
- being a director after being declared bankrupt;
- failure to pay tax or promoting tax avoidance;
- failure to keep and file accounts or make returns to Companies House;
- fraudulent activity;
- competition law infringements;
- defrauding the company;
- failure to co-operate with the Official Receiver and/or insolvency practitioner.
What happens if I am subject to an investigation by the Insolvency Service?
Often the first sign that you may be under investigation will be receiving a Questionnaire to complete by the Insolvency Service. This will ask general questions about how the company was run and the reasons why the company went into liquidation. It may also ask more targeted questions about matters that you were particularly concerned with, for example, particular financial transactions and if certain monies were removed from the company, what they were used for.
The Questionnaire
At the time of sending the Questionnaire to you, a decision has not yet been made to bring proceedings against you. This is your opportunity to clear up any misunderstandings, and ensure all relevant information is made available to the Insolvency Service. If you ignore this Questionnaire, the Insolvency Service will rely only on what they have by way of information so far, which may not provide the full picture.
Your response to the Questionnaire may open up a helpful dialogue, and might lead to the Insolvency Service deciding not to proceed any further but it is essential that you seek legal advice at this stage as your responses to the Questionnaire could be used to construct a case against you.
You will be given a certain time frame to answer questions, but this can be flexible. As long as you co-operate and don’t ignore requests, the Insolvency Service are quite forbearing.
The decision stage
If the Insolvency Service are not satisfied that you have answered all of their queries fully, or they don’t believe you have addressed issues of concern, they may make the decision to proceed with a claim against you.
At this point they will notify you of their decision, and specify the period of disqualification which they consider to be appropriate. They will offer you the chance to accept disqualification without issuing a claim against you. This is called a disqualification undertaking.
If you have no defence to the claim made against you, then it may be worth considering this option. Often the Insolvency Service will give you a slightly reduced period in return for early co-operation, and you won’t incur the legal costs of defending the claim – either your own or those of the Insolvency Service. Once proceedings are issued, they will inevitably claim their costs from you, even if you settle the claim before it goes to trial.
The claim is issued in court
If you don’t agree to a disqualification undertaking and haven’t persuaded them not to bring a claim, the Insolvency Service will issue a claim against you in court. This will include all of the evidence they have gathered against you so far to justify their decision to proceed. This will usually be at the court closest to the registered office of the company during the last 12 months prior to insolvency.
If you ignore the claim then at either the first or second hearing, the Insolvency Service will ask the court to make a disqualification order against you. They will seek costs against you for their costs to date.
Can I defend the director disqualification claim?
You have the opportunity to fully defend your claim, and put forward your own evidence in response to the evidence against you. If you wish to do this, you should contact an insolvency solicitor as soon as possible, to ensure you are given sufficient time in which to do this.
The Insolvency Service keep matters under review even after issuing a claim against you, so if you can provide evidence even at a late stage that will provide a defence, they are likely to withdraw the claim against you. They may still ask for their costs of the proceedings to date.
Alternatively, you are entitled for the matter to go to a full trial, which will be heard by a specialist insolvency judge.
What happens if a director is disqualified?
If a director is found to be guilty of unfit or illegal conduct, they could have personal liability for their actions and be faced with a hefty fine or even a prison sentence. A director will have to resign from any positions as a director and they won’t be able to be appointed as a new director. As the disqualification process is public and a public register of disqualified directors is available for anyone to search, directors face personal and professional embarrassment upon disqualification.
What can’t disqualified directors do?
In the absence of permission by the court or where relevant, the appropriate regulatory body, if a director is disqualified, they cannot:
- act as a director of a company;
- take part, directly or indirectly, in the promotion, formation or management of a company;
- be a receiver of a company’s property;
- act as an insolvency practitioner;
- act as a trustee for a charity or occupational pension scheme without permission; or
- be a member of a police authority.
Disqualification may also prevent you from acting as a school governor and professional bodies could revoke your membership.
What can disqualified directors do?
Disqualification does not prevent a director from:
- working for a company, although you cannot simply change your job description;
- carrying on business as a sole trader or in partnership with others;
- acting as a company secretary, as long as they are not considered to be involved in the management of the company, which might be tricky in this role;
- holding shares in a company, as long as they are not at risk of being a shadow director or being involved in the management of the company if they are giving instructions to the board of directors.
For how long can a director be disqualified?
The maximum period of disqualification is 15 years depending on the seriousness of the offences the director has committed. The disqualification period is usually decided in accordance with the category of offence, as set out below:
- low level offences (failure of judgment rather than intentional wrongdoing): usually between two and five years;
- mid-level offences (more serious and could be to the detriment of public interest): usually between six and 10 years;
- high level offences (intentional fraudulent, criminal activity): up to 15 years.
What should you do if you are facing a disqualification investigation?
Director disqualification claims can be very worrying for a director, as they can have a serious impact on your ability to make a living. It is vital that you don’t ignore any correspondence or court papers from the Insolvency Service, as this will inevitably lead to a disqualification order being made against you in your absence even if you have a good defence to the claim. Engaging with the Insolvency Service as soon as you hear from them may avoid proceedings being commenced against you, or at the least it might allow for a reduced disqualification period and reduced costs to you.
At Harper James our specialists in director disqualification have many years’ experience advising directors who are targeted for disqualification by the Insolvency Service. If you have received any communication from the Insolvency Service, please don’t delay in contacting one of our insolvency team to discuss your options. The earlier you speak to a professional adviser, the more options remain open to you to avoid disqualification or reduce the disqualification period and associated costs.
