What is director disqualification?
Keith Steven explains the consequences of not fulfilling your legal responsibilities
as a director.
As a director, you can be disqualified or banned if you fail to meet your legal responsibilities.
In order to prevent this, you need a proper understanding of the grounds for disqualification, as well as your obligations as a director.
Why would a director be disqualified?
Every director should consider the possibility of disqualification if their company becomes insolvent. However, it is a relatively rare process, with around only 1,200 UK directors being banned each year.
There are several reasons why a director may be disqualified. Here are the core reasons why an investigation may find you unfit to hold the position:
- allowing your company to trade when it can't pay its debts
- not keeping proper accounting records
- failing to send accounts and returns to Companies House on time
- refusing to pay tax owed by the company
- using company money or assets for personal benefit
If directors continue to take credit when there is no reasonable prospect of creditors being paid, or if they misrepresent facts, or fail to respond to or comply with a liquidator's request, they will also be considered for disqualification.
How does disqualification work?
If you're involved in insolvency proceedings, or if there has been a complaint by a third party, you may be selected for investigation by the Insolvency Service.
Anyone can report a director as unfit. This includes Companies House, the Competition and Markets Authority, the courts, and company insolvency practitioners.
If the Insolvency Service believes you have not fulfilled your legal responsibilities as a director, they will notify you in writing.
This notification will explain what they think you've done to classify you as unfit, that they intend to start the disqualification process, and how you can respond.
At this point, there are two options:
- Wait for the Insolvency Service to take you to court and disqualify you – this will give you the chance to defend your case if you disagree with their findings.
- Give the Insolvency Service a 'disqualification undertaking' – essentially disqualifying yourself voluntarily and ending all court action against you.
The latter is often more appealing, as this fast-track approach allows you to admit you acted wrongly, receive a lower penalty, and complete the process much more quickly. If you wait three to five years for court proceedings to take place, and have a long ban on top of that, you will be out of work for much longer.
What does disqualification mean for directors?
A disqualification can last for up to 15 years, and severely limits who you can work for and in what role. And if you break the terms of your disqualification, you could be fined or sent to prison for up to two years.
If you're disqualified, you can’t:
- be a director of a UK-registered company, or an overseas company that has UK connections
- be involved in forming, marketing or running a company
- sit on the board of a charity, school or police authority
- be a pension trustee
- sit on a health board or social care body
- be a registered social landlord
- be a solicitor, barrister or accountant
In addition to the ban, your details will be published online in the Companies House database of disqualified directors and the Insolvency Service's register of directors who have been disqualified in the last three months. This listing will include details of why you were disqualified.
Director disqualification is a gruelling process that can have a severe effect on those involved. If you are concerned you might be found unfit, it’s best to seek expert financial and legal advice before proceedings begin.
About the author
Keith Steven of KSA Group Ltd has been rescuing and turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors. Read more about director disqualification.