The Courts have the power to disqualify a director under the Company Directors Disqualification Act 1986. This applies to individuals who are formally appointed as directors at Companies House, but also to shadow directors who are not formally appointed but act and/or carry out the functions of a director in any event.
Risk factors for directors
There are a number of circumstances when a director can be disqualified, but typical examples include :-
- failure to keep proper accounting records
- failure to file appropriate documents with Companies House
- failure to pay appropriate tax or submit appropriate returns and/or continuing to trade whilst a company is insolvent.
- Being associated with numerous companies which have failed leaving unpaid debts
Applications to disqualify directors made by the Secretary of State are not common, there are generally around 1,000 or less made per year, so the conduct complained of is generally serious and/or persistent.
Any application will normally be heard by the courts but often before it reaches that stage the secretary of state will write to the Director in question to set out their findings and recommendations. It may be at that stage that the director can voluntarily agree to accept a ban and negotiate terms in relation to any disqualification period prior to the matter proceeding to court. The issue will strongly rely on any report from the official receiver of the company, although the director will have the opportunity to put his representations forward.
Effects of disqualification
If disqualification is decided, at worst it can result in criminal proceedings or orders for personal liability for debts, it will prevent individual from acting as a director of a company, taking part in the promotion, formation, or management of a company, acting as a liquidator or an administrator or acting as a shadow director. Aside from these implications, the effect on an individual’s credibility and perceived trustworthiness can be very significant. The minimum period of disqualification is 2 years and the maximum is 15 years.
Once the individual has been notified of grounds for a potential disqualification, they should seek legal advice in order to properly prepare their case. They should then in turn enter into constructive discussions with the secretary of state in relation to the matter. It may be that the department issue a set of questions to the director requesting a response. Again legal advice should be sought in order to complete this. Once further information is provided the secretary of state will take a view as to whether to pursue this matter further and/or whether they require additional information.
The secretary of state maintains a register at Companies House of directors who have been disqualified and this is also possible for the public to view.
It is important that directors fully understand their obligations and also any terms that they are bound by if they accept a disqualification, or if this is forced upon them.
We can help if you are a director facing an application to disqualify you or are a creditor or shareholder of a company and feel so strongly that one or more directors have acted in a way which should be penalised that you want advice on how to approach the Official Receiver or Secretary of State with evidence that a director ought to be disqualified. Please get in touch.
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