It is so important to have the right guidance and advice when you are faced with Directors Disqualification proceedings. I have been dealing with this type of work for over 20 years.
The purpose of disqualifying directors for misconduct is to stop and prevent any recurrence of similar behaviour, and to protect the general public from facing such risks. Although this does not protect companies in relation to all the other risks – it does help in mitigating the risk that comes with limited liability and the limited regulation of director’s conduct
- where a director has been disqualified by court order or by offering a disqualification undertaking then they are banned from acting in the management of a limited liability company or partnership, unless they have obtained specific permission to act from the Court .
- for many individuals, being disqualified as a director will only have a limited impact on their lives – many will return to employed work, may set up an unincorporated business which can also be done through an unincorporated partnership or it may just be a good time to retire or to do something totally different to what they were doing.
The UK government has increasingly supported legislative efforts over the last few years to make sure that all directors of limited companies are transparent in their dealings when running the company and, if they are not, could be held personally liable for any misconduct or failure to act in accordance with accepted standards of behaviour. The legislation is on our website under CDDA 1986.
Personal liability for damages
As well as being banned on acting as a director or in the management of a limited company, a director faces the following risks when being disqualified by undertaking or court order.
Liability to liquidator
Where a director is disqualified on the grounds of misconduct which caused losses to the company, such losses may also be claimed by the liquidator on the company’s behalf. It is often the case that a director accepts a disqualification undertaking so that it avoids the legal costs of the Secretary of State’s , only to be faced by a much higher and more costly legal claim by a liquidator, which can be very hard to avoid.
Compensation order
New legislation was introduced in 2015 which meant that directors who are disqualified from acting will then be subject to a strict liability for the damages allegedly caused by such misconduct or their actions which led to losses being incurred in the company liquidation . This is what we call the Compensation Order.
Consequences of being disqualified
Once a director is disqualified, there are other more direct real-life changes that will affect his/her personal and business life, including any claims they may face by individual creditors.
I have set out below a summary of the other direct consequences.
The legislation states as follows:-
“(a) he shall not be a director of a company act as receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has leave of the court, and
(b) he shall not act as an insolvency practitioner.”
The above legislation applies to any
- company;
- limited liability partnership;
- building society;
- friendly society; and
- other charitable organisations.
In certain circumstances, the disqualification may extend to an overseas company with “sufficient connection” with the UK.
The following references apply equally to these types of organisations.
What a disqualification does not prohibit
If an individual is disqualified, it does not prevent them from acting as an employee of the company – even if that role is in a relatively senior or specialist/professional capacity. The true test is whether the individual is:
- seeking to act as shadow or de facto director of a company; or
- seeking to act in the management of a company.
If neither of the above apply, then a the disqualification will have no effect on your employed role. Equally, a disqualification does not prevent an individual from holding investments and a shareholding in any company whether it is private or listed – although that individual should ensure that they do not overstep their role as shareholder and NOT an owner-manager, which is often a mistake I see time and time again.
Restrictions on management
A disqualification undertaking or order will have an identical effect – to prevent the individual subject to this contract from acting in any of the capacities as described above.
- for a small company which may have few management personnel – particularly where there is one main director who is now subject to a disqualification – then this may have a catastrophic effect.
- this risk is not so bad for the larger or smaller companies where a third party can take over the management and direction of the company as the disqualified director can either alter the nature of their role or cease acting.
However so often I see that the director just merely registers a replacement at Companies House for instance the brother or the wife as director and then continues to act through that individual. It is so important to take advice so that you do not end up breaching your disqualification order or undertaking.
This can lead to some serious repercussions.
Restrictions on professional organisations
Where an individual is disqualified and either they or their new business is operating in a regulated sector so for instance financial services, accountancy or even the law then there are other rules that apply.
In such circumstances the regulatory body may reach decisions, and possibly even reject the individual/organisation, where the individual or a director has been disqualified.
Many clients commonly face such issues and so it is important, when agreeing to be disqualified, to ensure all of the documentation is properly drafted and advice is sought.
Loss of clients
For some businesses, the profile and respect of the company and its directors is so important to the clients and so the disqualification of the director could have serious consequences that the integrity of the company and its client are potentially questioned if that company is permitted to continue supplying goods or services.
These risks are common, and I often see clients moving away from companies in certain sectors where such sensitivity exists.
For that exact reason it is vital that the disqualification is managed carefully and such risks considered well in advance.
Provided a director is comfortable with such risks, then being disqualified should have a minimal affect.
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