Disqualification of company directors

Disqualification of Company Directors

Notes on the Company Directors Disqualification Act 1986 (CDDA).

Those who become directors of limited companies should:

• carry out their duties with responsibility; and  
• exercise adequate skill and care with proper regard to the interests of the company’s creditors and employees. 

The majority of directors do this effectively, but the CDDA is a powerful tool against those who abuse the privilege of limited liability. CDDA applies not just to persons who are formally appointed as directors, but to those who carry out the functions of directors - ie, de facto directors who may be in charge of the day to day business and planning, but not actually be the legal directors of a company.

CIMA does not require any member who is bankrupt or insolvent to resign his or her membership, but if a member is disqualified from acting as a director of a company or a trustee of a charity, Byelaw 8c states that:

“a Member shall cease to be a Member… if the Member shall have been made subject to a company director’s disqualification order or undertaking, or shall be disqualified from acting as a trustee under the Charities Act 1993.”

Director’s disqualifications are still relatively rare, but with a special web site to stop rogue directors continuing to act illegally, together with some high profile disqualifications, disqualifications today are more in the public domain.

The Insolvency Act 2000 was partly intended to facilitate the process of directors’ disqualification. Directors can admit culpability in return for lighter penalties.

Important points to remember

The Insolvency Service says that CDDA only applies where the company has gone into liquidation. Usually, company voluntary arrangements have a mitigating effect, provided the directors take all reasonable steps to maximise creditors’ interests.

Directors can become personally liable for the 'wilful failure' of their company to operate PAYE on their remuneration.  (Under s71 of The Criminal Justice Act 1988 (Confiscation Orders 1996) and s114 The Social Security and Administration Act 1992, it is possible for the court to confiscate a directors property as a consequence of such failure).

From April 2001, the Insolvency Act 2000 has also enabled the Secretary of State to accept disqualification undertakings from directors. These have the same effect as disqualification orders, but do not need a court to be involved.

When can the courts make disqualification orders under the CDDA?

The Insolvency Service lists the following examples:

• certain criminal offences connected with the Companies Acts legislation
• wrongful trading (such as trading while insolvent); 
• failure to comply with filing requirements under the Companies Act Legislation; 
• unfit conduct in insolvent companies. 

More than 9,600 disqualification orders have been made because of unfit conduct in failed insolvent companies since 1986, for periods up to the statutory maximum of 15 years.

Insolvent companies

An insolvent company is defined in the CDDA as one that:

• goes into administrative receivership;
• enters administration; or  
• goes into liquidation at a time when its liabilities exceed its assets.

How do disqualification proceedings begin?

If there is any unfit conduct, then the liquidator, administrative receiver, administrator or Official Receiver has a duty to send the Secretary of State for Business, Enterprise and Regulatory Reform (at the DBERR) a report on the conduct of all directors who were in office in the last three years of the company's trading. The Secretary of State has to decide whether it is in the public interest to seek a disqualification order against a director.

Examples of the most commonly reported conduct are:

• allowing the company to continue to trade when it was unable to pay its debts; 
• failure to keep proper accounting records; 
• failure to prepare and file accounts or make returns to Companies House; and failure to submit returns or pay the Crown any tax due.

Who brings the proceedings in relation to a failed company?

The proceedings are brought by the Secretary of State for Trade and Industry or, usually in compulsory winding-up cases, by the Official Receiver at the direction of the Secretary of State. The matter is heard, and decided by the court, unless the Secretary of State accepts a disqualification undertaking from a director.

The minimum period of disqualification is two years and the maximum 15 years.

A disqualification order usually carries with it an order to pay the costs and expenses of the Secretary of State or the Official Receiver or both.

What is the effect of a disqualification order or disqualification undertaking?

Unless he or she has court permission, the person is disqualified for the period stated in the order or undertaking from:

• being a director of a company; 
• acting as receiver of a company's property; 
• directly or indirectly being concerned or taking part in the promotion, formation or management of a company; or  
• being a member of or being concerned or taking part in the promotion, formation or management of a limited
  liability partnership.

For more information on the effect of a disqualification order or undertaking, see the Insolvency Service’s publication ‘Company Directors Disqualification Act 1986 and Disqualified Directors - effect of disqualification orders and disqualification undertakings’.

Is it possible to be a director or be involved in the management of a company during the disqualification period without breaking the law?

A disqualified person can apply to the court for permission to act while disqualified. The court may grant permission but will need to be satisfied that there are adequate safeguards to protect the public interest and may impose conditions.

Much of the above information comes from the Insolvency Service’s website, especially the guidance leaflets on the CCDA and Failed Companies.