Bankruptcy and Director Disqualification

A director can be disqualified for many reasons such as non-payment of taxes, fraudulent trading or unfit conduct.

Bankruptcy is another grounds that can be cause for disqualification.

What is bankruptcy?

Bankruptcy is the final insolvency procedure for a financially struggling company or individual. Bankruptcy becomes the only viable solution where a company or individual cannot keep up with repayments with one or more creditors and/or due to a lack of income.

How can bankruptcy take effect?

Bankruptcy can be a straightforward process. An individual can file themselves for bankruptcy when they acknowledge they have too much debt and cannot repay it. All they need to do is complete a form to request the bankruptcy and pay a £680 fee.

Another reason a bankruptcy petition may be filed is if an existing debt solution has failed to solve the problem. For example, the individual may have agreed a debt management plan or individual voluntary arrangement with creditors, which later he/she could not honour. This would leave bankruptcy as the final solution.

If a creditor wants to make their debtor bankrupt, they can try two methods:

1. obtain a county court judgement or;
2. initially serve a statutory demand which gives a debtor 21 days to pay. Missing a statutory demand deadline entitles the creditor to proceed with bankruptcy.

Disqualification as a result of bankruptcy

If you are made bankrupt, you are automatically disqualified from being director of a limited company. In addition, you cannot:

• Act as a director for any other limited company
• Act as a shadow director for any limited company
• Be a partner at a limited liability partnership or any other type of charitable organisation
• Promote a limited company
• Manage a limited company

These are laws stipulated by the Company Directors’ Disqualification Act (1986). These restrictions remain in place until the bankruptcy is finished in accordance with the Insolvency Act 1986. For all bankruptcy orders made after 1 October 2013, discharge from bankruptcy happens automatically after one year from the date of the bankruptcy order.

How does bankruptcy discharge work?

Discharge from bankruptcy occurs automatically after a year, there is no need to apply to the court.

The only instances where discharge would not be automatic would be in the case of misconduct during the bankruptcy such as:

• Borrowing money irresponsibly during the bankruptcy
• Not cooperating with the official receiver (the person in charge of the bankruptcy).

If evidence of misconduct comes to light, the individual will be subject to a bankruptcy restriction order or bankruptcy restriction undertaking. Either of these sanctions will delay the discharge from bankruptcy, which means the aforementioned restrictions on their ability to act as a director will continue until discharge.

Violating director restrictions is a criminal offence and could lead to prosecution.