Company Directors are at risk of being disqualified under the Company Directors Disqualification Act 1986 from holding office following investigations which may take place if their company becomes insolvent or there is other alleged wrongdoing. This short guide is intended to help company directors understand the risks involved with such investigations and provide advice as to how to best protect their position and defend against allegations arising from their conduct in relation to a company.
Routes to disqualification
There are several ways in which a company director can be investigated for alleged unfit conduct which may lead to disqualification.
1. The Official Receiver
When a company is wound up there is an obligation on the Official Receiver to investigate the causes and failures of the company and report this to the court. Directors disqualification proceedings can then result.
2. Insolvency Practitioners
Insolvency practitioners, such as those responsible for liquidating a company, have a responsibility to report on whether the identified conduct of a company director may merit investigation and this forms an important part of the liquidation process. Their reports can lead to further investigations by the Insolvency Service who have the power to bring civil and criminal investigations.
3. The Criminal Courts
Disqualification from being a company director can be imposed by a court when company directors are convicted of criminal offences in relation to a corporate vehicle (Company Directors Disqualification Act 1986 ss.1 and 2). This can be for matters including fraud, insolvency offences, and trade mark infringement. An example of the court upholding a five year directors disqualification order for using a company to commit intellectual property offences can be found in R. v James Clements [2019] EWCA Crim 2253 . The full judgment can be found here. The purpose of the order is to provide protection to the public from those who have abused their position as a director.
4. Regulators
Although this route is less well known, regulators are able to bring proceedings which can include directors disqualification where there has been a serious regulatory breach. These include the Competition and Markets Authority under the provisions of the Enterprise Act 2002 and the Financial Conduct Authority. In proceedings brought by the Competition and Markets Authority the court must make a disqualification order if it is satisfied that the company has committed a breach of competition law and it considers that the person’s conduct as a director makes them unfit to be concerned in the management of the company. The Competition and Markets Authority has published guidance on when it is likely to bring proceedings which can be found here.
Practice and Procedure
Procedure is governed by a practice direction which can be found here and a claim is brought by way of the Part 8 Civil Procedure Rules provisions (as amended). Typically you can expect to be disqualified from being a company director if you have not met your legal responsibilities which can easily be overlooked, especially in small businesses where there are only one or two directors and many decisions are made informally. A full guide to the legal duties of a company director can be found here. Examples of conduct which can lead to disqualification include:
- Trading whilst insolvent
- Failures to keep accounting records
- Failures to file accounts and other Companies House statements
- Failures to pay tax
- Misuse of company funds
It is especially important to receive advice on your duties when your company is, or may be, insolvent, so as to ensure that you do not commit a serious breach which can have repercussions long after the life of your company.
Effect of being disqualified
If you are disqualified from being a company director then you will be prohibited from being a company director registered in the UK or an overseas company that has connections with the UK. You would also be prevented from being involved in forming, marketing or running a company. If you breach the disqualification you may commit a criminal offence which can result in a fine or prison sentence. The details of disqualifications are published online in the Companies House database and Insolvency Service’s register, which may have a reputational impact. You could also be prevented from sitting on the board of a charity, school or police authority, being a pension trustee, being a registered social landlord, or sitting on a health board or social care body. It can also affect your ability to be a solicitor, barrister, accountant or other regulated professional. That being the case, directors disqualification proceedings should not be taken lightly.
Undertakings
Where proceedings are proposed against an individual, it is possible to avoid a full court hearing by undertaking not to be a company director. This ends court action but may involve you making admissions which could affect you in other proceedings, and in effect amounts to a voluntary disqualification. It is essential that you receive legal advice before entering into such an undertaking so as to ensure that your position is not adversely affected by them, particularly if there is a risk of civil or criminal proceedings arising in the future.
How Scarmans can help
We can advise and represent company directors at all stages of insolvency, regulatory and criminal proceedings where they may be at risk of being disqualified. We can be most effective when instructed at an early stage to protect the director’s position before an investigation has started, and can also draft written representations to investigators where there are mitigating circumstances as part of an investigation. If proceedings have commenced against a director we formally represent in litigation, and where an individual has been disqualified we can advise in relation to applications applications for permissions to act, and appeals if necessary. Our team of solicitors, barristers and Queen’s Counsel are experienced in the prosecution and defence of the whole range of civil, regulatory and criminal proceedings against company directors and are thus best placed to help you. We also act on behalf of private prosecutors and creditors where seeking a directors disqualification order may be in the public interest.