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When and how can I be disqualified as a Director?

It was the Company Directors Disqualification Act 1986 that introduced “Directors Disqualification”. The intention of the legislation was, according to the politicians who introduced it, to protect the public from directors who could seek to abuse their position, as a director, of a limited liability company.

If you are disqualified as a director this will not, in itself, stop you from being able to operate a business or even from being involved in a partnership, as long as it is not a limited liability partnership. However, a disqualification undertaking or disqualification order does stop you acting in the promotion, formation or management of a company with limited liability.

Your company enters into insolvency

If a company is placed into compulsory liquidation, voluntary liquidation or an administration, then following the appointment of a liquidator or administrator there will be, as part of the investigation by the liquidator or administrator into the reasons for the failure of the company, consideration of the merits of the directors’ actions and decisions taken in the period immediately before the insolvency of the company.

Once this has been completed then a report will be sent by the insolvency practitioner to the Insolvency Service. This report will be reviewed and this can result in further investigations, by case managers at the Insolvency Service, in order to determine whether there is sufficient evidence of misconduct on behalf of the director to then warrant a potential director’s disqualification proceedings to be bought to protect the public interest in this particular case.

On a personal level, should a director become subject to a bankruptcy order, either because he has declared himself bankrupt due to overwhelming debt or because a creditor has petitioned for his bankruptcy, then disqualification as a director will be included within the terms of the bankruptcy order.

Director misconduct

The fact remains however that in the vast majority of cases where a company goes into insolvency, the directors, do not face directors’ disqualification proceedings as a result of the investigations referred to above. It is also worth noting that there is also no real guaranteed criteria that leads to the commencement of directors disqualification by the Insolvency Service and it is looked at on a case by case basis.

In most cases, the directors who become subject to director disqualification proceedings are those who, following an investigation, are believed and subsequently found, by the court, to have not carried out their duties, in the management of a company, correctly.

The misconduct, that directors can be accused of, often extends from breaches of a statutory duties within the Companies Act legislation to not paying taxes – deliberately or more often due to a lack of financial means, to at the other end of the spectrum involving fraud or other acts of a criminal nature.

There does not have be a deliberate intention by the director in order for their actions to be considered to be sufficient to warrant disqualification. In our experience, the actions will, more often than not, be as a result of not thinking of the consequences or simply not paying attention to the detail.

It is very often the case that many disorganised or over worked directors find themselves being targeted for directors’ disqualification. The justification of this is that whether the intention is deliberate or careless it does not matter really as the reason for seeking disqualification is to prevent them from causing damage to the public, it is not – as in criminal proceedings – to achieve a prosecution.

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