Director disqualification and restrictions > What is director disqualification?

Director disqualification and restrictions > What is director disqualification?

A disqualification order is made by the court under the Company Directors Disqualification Act 1986. The Act applies not only to a person who has been formally appointed as a director but also to those people who have carried out the functions of a director and to shadow directors.
Without specific permission of the court, it disqualifies a person from:
acting as a director of a company
taking part, directly or indirectly, in the promotion, formation or management of a company
being a liquidator or an administrator of a company
being a receiver or manager of a company's property.

An order for disqualification can be made under a number of different sections of the Company Director Disqualification Act 1986 (see also section 4 - Criminal proceedings). The order will specify the period of disqualification. For orders made against an unfit director of an insolvent company, there is a minimum period of 2 years and a maximum of 15 years.

In April 2001 disqualification undertakings were introduced, which are an administrative equivalent of a disqualification order. An undertaking may be given to the Secretary of State which has the same effect as a disqualification order, but do not involve court proceedings.
When can disqualification occur?

When a company has failed, the OR (or IP in a creditors' voluntary liquidation, an administrative receivership or an administration) has to send the Secretary of State a report on the conduct of all directors who were in office in the last 3 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. Any application is heard and decided by the court.

Examples of conduct which may lead to disqualification include:
continuing to trade to the detriment of creditors at a time when the company was insolvent
failure to keep proper accounting records
failure to prepare and file accounts or make returns to Companies House
failure to submit tax returns or pay over to the Crown tax or other money due
failure to co-operate with the OR/IP.
How will I know if a disqualification order is to be sought against me?
Notification of a decision to apply for a disqualification order will be sent to the last address you provided to Companies House or to the OR/IP. The application for disqualification has to be made within 2 years of the date of the winding-up order (or any earlier voluntary liquidation, administrative receivership or administration), unless the court extends the time.
What happens after an application for disqualification is made?

The OR will make a report to the court on the conduct of the directors and send a copy to them. The directors will have the opportunity to give the court explanations or reasons for their actions - but may do so by a statement of truth (a written account of the relevant facts which is sworn on oath or affirmed, usually before a solicitor). There may also be statements of truth from other people (such as the company's bankers, accountants and creditors) presented as evidence to support the case for or against the directors. The court will then decide whether the conduct makes the directors unfit to act in the management of a company and, if so, for how long they should be disqualified.

Disqualification proceedings are taken under civil law, not criminal law.

At any stage in these proceedings you may give an undertaking to the Secretary of State that has the same effect as a disqualification order and will put a stop to the court proceedings.
What is the purpose of the CDDA?

It aims to maintain the integrity of the business environment. 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. The CDDA applies not just to persons who are formally appointed as directors but to those who carry out the functions of directors.
When can the courts make disqualification orders under the CDDA?

The court can do this for example, for:
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.
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 a report on the conduct of all directors who were in office in the last 3 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.

What type of conduct is reported to the Secretary of State?
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 Business, Enterprise and Regulatory Reform 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.

What is the likely period of disqualification?
The minimum period of disqualification is 2 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.

He or she is also absolutely disqualified during the disqualification period from acting as an insolvency practitioner.

Further Information
For more information on the effect of a disqualification order or undertaking, see our publications page, where you will find 'A guide for directors', 'CDDA & Failed Companies' & 'CDDA and Disqualified Directors'

© Crown copyright 2006 copyright notice - Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland
Full details can be viewed at http://www.insolvency.gov.uk