Directors of limited companies have to meet a number of legal duties.
You can face disqualification from acting as a director if you have failed to meet these legal responsibilities by participating in unfit conduct, or wrongful or fraudulent trading.
What are a director’s legal responsibilities?
The Company Directors Disqualification Act 1986 is the primary legislation governing the disqualification of directors, with further requirements set out under the Insolvency Acts 1986 and 2000, and the Companies Acts 1985 and 2006.
By law, your legal responsibilities as a company director include, but are not limited to:
- Following the company rules as laid out in its Articles of Association or company constitution
- Only exercising powers as a director for the reasons they are granted
- Acting in the interests of the company and promoting success of the company
- Avoiding conflicts of interest between yourself and the company
- Declaring if you have any interests in proposed transactions or agreements
- Exercising reasonable care, diligence and skill when performing duties
- Keeping up to date company records and reporting any changes
- Filing company accounts and tax return
- Informing all shareholders where a director may benefit from a company transaction
- Paying corporation tax
- Registering for and completing self-assessment each year
Allegations that you have failed to meet any of these duties can result in an investigation into your conduct.
Grounds for disqualification as a director
Common grounds for director disqualification could include:
- Failure to maintain proper accounting records for the company
- Permitting a company which is unable to pay its debts to continue to trade
- Failure to submit accounts and returns to Companies House
- Failure to pay company tax
- Use of company funds or other assets for own benefit
- Involvement in fraudulent dealings
- Operating as a director while an undischarged bankrupt or under a debt relief order
Disqualification investigations can result from formal insolvency proceedings as well as specific complaints made against a director and their conduct.
Formal disqualification procedures
The Insolvency Service has the power to investigate you as a director and your business where insolvency proceedings are in progress, or where a complaint has been made against you.
The Insolvency Service deals with complaints about:
- Bankrupt persons or those with a debt relief order
- Persons who are subject to bankruptcy or debt relief restrictions
- Operational companies
- The conduct of company directors
- Disqualified directors, or bankrupt persons acting as directors
- The unlawful reuse of prohibited company names
Third parties, such as Companies House, are permitted to raise a complaint about a company director, whether that person is a member of staff, another director, a customer, a supplier or another individual who believes the company director to have participated in unfit conduct.
The Insolvency Service deals with the majority of disqualification complaints, however other bodies can apply to have you disqualified where applicable:
- Where a director has failed to file company accounts or annual returns (also known as confirmation statements) or has submitted fraudulent documents: Companies House.
- Where you believe the director has committed an act of fraud, contact the Serious Fraud Office.
- Where you believe the director has broken UK domestic competition laws: Competition and Markets Authority (CMA).
What happens during a disqualification investigation?
If you are subject to an investigation by the Insolvency Service, they will contact you in writing and outline:
- that a claim for unfit conduct has been made against you and the details of that claim (e.g. allegations that you have failed to submit company accounts, have not paid company tax or have acted as a director whilst being an undischarged bankrupt);
- that the Insolvency Service will begin the disqualification process; and
- how you may respond to this.
The statutory powers of investigation afforded to official receivers are far-reaching and non-prescriptive. They extend to obtaining information, material and explanations relating to the conduct and financial affairs of the subject of the investigation. This also includes the power to examine people in court.
Importantly, investigations are aimed at serving the public interest rather than the needs of individual parties, such as creditors.
The outcome of the investigation may be:
- To take no further action
- To forward the information to their Criminal Enforcement team or other relevant authority so that you may be prosecuted or dealt with as necessary
- To issue a warning with a request to rectify the situation and improve conduct
- To apply to liquidate your company
- To disqualify you.
If you are notified of your disqualification, generally you would have two options: wait for the claim to be taken to court or provide the Insolvency Service with a disqualification undertaking which would lead to you voluntarily disqualifying yourself.
Should an investigation into a director be taken to court, proceedings may be in accordance with civil law or criminal law, depending on the allegations.
Impact of disqualification as a director
If you are found to have failed in your director duties, the court can make a disqualification order of between 2 and 15 years. During that time:
- You cannot act as a director of any UK registered company or overseas company with UK connections, without approval being granted by the court.
- You cannot form, market or run a company, in any capacity, without leave from the court.
- You cannot take on a role that requires them to act in the manner of a director, such as making executive decisions, without permission from the court.
- You cannot hire or otherwise instruct a third party to run a company on their behalf, without leave from the court.
The following restrictions may also apply:
- You will generally not be permitted to sit on the board of a charity, police authority or school.
- You will generally be unable to work as a barrister, solicitor or accountant, having lost your professional registration.
- You will generally not be able to act as a trustee for a pension fund, act as a registered social landlord, or sit on a health board or social care body.
During the period of disqualification, your details will be published online with the Companies House database of disqualified directors and the Insolvency Service’s register of disqualified directors. The latter covers a period of 3 months and lists reasons for disqualification. A disqualified director will remain on the Companies House register until their period of disqualification comes to an end.
It is a criminal offence to act as a director while disqualified. Should you be found to have breached your disqualification order, you could face imprisonment for up to 2 years and a possible fine, depending on the severity of the breach.
Director disqualification FAQs
What is a director disqualification?
Directors of limited companies can be disqualified from holding a director position for a period of time if they are found to have breached their legal duties as a director.
How long can a director be disqualified for?
Company directors can be disqualified for up to 15 years, depending on the breach. For reckless or negligent conduct as a director, disqualification can be 2-5 years; for serious misconduct that is detrimental to the public interest, disqualification can be for 6-10 years; and for the most severe breaches, usually fraudulent or serious, criminal behaviour, disqualification can be 11-15 years.
Is director disqualification a criminal offence?
No, disqualification of a director is a civil process, not a criminal offence.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.