How Can Director Disqualification Affect You?
If a director is found to be failing to meet their requirements, whether that's by trading fraudulently or failing to submit documents such as a confirmation statement, they can be disqualified from acting as a director in any company in the UK (including those that only operate in the UK but are based overseas). Being disqualified can have serious, long-term, repercussions that can damage not just your career, but also your reputation. This means it can be worth understanding exactly what director disqualification is and how it may affect you.
What is director disqualification?
Director disqualification means that you cannot be the director of a company, or manage a company, for the duration of the disqualification period. This can also mean you are unable to act as a director, even if you aren't named as a director on paper.
The majority of disqualification cases are brought about from company insolvency. If the company is reported to the Insolvency Service, they can either open an investigation into the company in general or on you as a director. If they believe that you have neglected your legal responsibilities, they may apply to have you disqualified. You may also be investigated by Companies House, the Competition and Markets Authority (CMA), the courts or an insolvency practitioner.
Anyone can report a company director as being 'unfit' through the gov.uk website.
What can be classed as unfit?
There are several ways which a director can be found to be unfit, these include:
- Failing to file a confirmation statement or annual accounts
- Not keeping proper accounting records, or filing inaccurate accounts to Companies House
- Failing to pay tax owed by the company
- Personally gaining from the company's assets
- Keeping trading when the company is insolvent
In October 2016, new legislation was passed, which now means that directors who have been disqualified can be held personally liable for their company's debts and any money owed to HMRC. So in addition to being disqualified, they can be left with extensive bills to pay.
As well as the financial and professional costs of disqualification, there is also the cost to the person's reputation that can come with it. All disqualified directors are listed on the Companies House directory for the length of the disqualification, and are listed on the Insolvency Service Service's Register for three months. These databases can be searched by anyone, and anyone can report a director if they believe they have breached the terms of the disqualification.
Consequences of disqualification
You can be disqualified from acting as a director for a maximum of 15 years. You will have to step down from the management of your present company and you will be barred from taking up the directorship of any UK company, or overseas company that has dealings in the UK. You will also be banned from forming, running or marketing a new company, even if you have someone acting on your behalf in the management of it.
There are other restrictions that will apply during your period of disqualification, these can include:
- You can be prevented from taking up other positions of trust including:
- sitting on the board of a school, charity or police authority, or;
- acting as a pension trustee.
- You cannot:
- be registered as a social landlord
- sit on a health or social care board
- You may not be able to practice as a solicitor, barrister or accountant.
Breaching any of these restrictions can run the risk of a heavy fine, or being sentenced to 2 years in prison.
What's a disqualification undertaking?
When you have been investigated by the Insolvency Service and they decide to apply to the court for a director disqualification, they will notify you of their intention. You are then given an opportunity to enter into a disqualification undertaking, this means you are agreeing to voluntarily disqualify yourself, meaning you avoid having to go to court. The benefit to a disqualification undertaking is that it can lead to more lenient disqualification periods, lower fines and lower compensation requests. Whichever route you go down, it's important that you seek good legal advice.
Can you appeal your disqualification?
It is possible to appeal the disqualification, even if you've undergone a disqualification undertaking. However, you cannot reduce the disqualification period to below the minimum of 2 years.
If you need to act as a director during your disqualification period, you can apply to the court for special permission that will allow you to do so in exceptional circumstances.
How long does disqualification last?
The length of the disqualification depends on the gravity of the offence and the facts of your case. Generally, there are 3 bands that you can fall into.
Lower category offences - a disqualification will normally last between 2 and 5 years. This is generally for things such as negligent or reckless conduct, usually with a failure of judgement rather than an act carried out with malicious intent.
Mid-tier offences - a disqualification will normally last between 6 and 10 years. Offences in this category usually are more serious and possibly pose a risk to public interest.
Serious offences - a disqualification of up to 15 years. These are usually cases that involve fraud, embezzlement or serious criminal behaviour which is carried out for personal gain.
Can you still be affected once your disqualification period has ended?
Once you reach the end of your disqualification period, your name and details will be removed from the Companies House register. Once your details have been removed, people will not be able to find them through a search. However, in a digital age, there may be searches in the newspaper which could still provide results.
Will it affect your credit rating?
If you have not carried out your legal duties in accordance with the Companies Act 2006 and the Insolvency Act 1986, you can be held personally responsible for paying off the company's debts.
If this happens, you effectively take on the debt which can affect your credit rating, since it then becomes personal debt.
This post is to be used for information only and does not act as legal nor professional advice. You should seek your own professional legal advice.
- 06 Jan 2021 - Planning for Shareholder Exits
- 17 Dec 2020 - How Do Management Companies Make Decisions and Manage Disputes?
- 10 Dec 2020 - Becoming a director of a management company
- 24 Nov 2020 - Are Directors and Shareholders Liable for Company Debt?
- 06 Nov 2020 - Can My Company Make Contributions Towards My Pension?