In recent times, director disqualification proceedings have garnered significant media attention, particularly due to the rise in disqualifications resulting from Bounce Back Loan fraud. Suky Mann, a director disqualification solicitor from Higgs LLP, explains the purpose and procedure behind director disqualification proceedings and its role in insolvency. 

What are director disqualifications?

Director disqualification refers to the legal process of prohibiting an individual from acting as a director or participating in the management of companies according to the Company Directors Disqualification Act 1986 (CDDA).

The overarching objective of the CDDA is to protect creditors from unfit directors and to maintain public trust and confidence. Therefore, the Insolvency Service will look to hold directors accountable for their actions to safeguard the general public.

Disqualification proceedings must be issued within three years of the company being placed into liquidation or administration. The Insolvency Service will review the conduct report of the Officeholder to identify any misconduct that may give rise to proceedings. 

The disqualification periods are split into three brackets, ranging from 2 to 15 years, which indicates the seriousness of the misconduct. Some common examples of misconduct warranting disqualification include:

• non-payment of HMRC or ‘Crown Debts’
• abuse of Director’s Loan Account
• fraudulent Bounce Back Loan (BBL) applications and subsequent misapplication of BBL monies
• failure to fulfil statutory duties

What happens when a company director is disqualified?

Upon disqualification, a director will lose their ability to act as a director of any UK-registered company. The restrictions prevent any active management role or position that allows that individual the ability to exert any influence over a company (subject to any permission applications). 

Any findings made during the disqualification proceedings or alternatively admission made in giving a voluntary disqualification undertaking can be relied on in insolvency proceedings initiated by the administrator or liquidator of the insolvent company. 

The ramifications extend far beyond the immediate consequences referred to above. A disqualified director will also face damage to reputation, harm to future career prospects and restrictions on other business interests. 

What is the purpose of the Company Directors Disqualification Act 1986?

The overarching objective of the CDDA 1986 is to safeguard various stakeholder interests. By ensuring that directors meet their legal obligations and maintain high standards of conduct, the CDDA helps maintain the interests of creditors, shareholders and wider business stakeholders.

Both creditors and shareholders are afforded protection post-disqualification as the act operates to prohibit the director from engaging in further misconduct or mismanagement that could harm creditors’ recovery prospects or any dissipation that could harm the shareholder position of the company.

It is also important to recognise the pivotal role that the Insolvency Service and courts play in issuing proceedings and subsequent enforcement of disqualification orders. Effective enforcement mechanisms are vital to deterring misconduct, promoting accountability, and upholding the integrity of insolvency proceedings. As such, the consequences of breaching a disqualification order are severe.

If an order is breached, the disqualified director can face criminal penalties such as imprisonment for up to 2 years or a fine. A director may also become personally liable for a company’s debts if acting while disqualified. Therefore, the director is no longer protected from personal liability.

Summary

Despite its importance, the regime has challenges and limitations when safeguarding insolvency proceedings. Unfortunately, the regime does not reach far enough to regulate disqualified directors and ensure that they cannot exert influence or engage in wrongful activities through indirect means.

We have seen this, particularly in the context of Bounce Back Loans. There needs to be more consistency in the strategy and disqualification period sought by the Insolvency Service; the current approach suggests a lack of real analysis of the individual circumstances, meaning many cases can be more successfully defended.

The complexity of fraudulent schemes and the ability of some individuals to hide their involvement pose challenges to effective detection and enforcement. Therefore, continuous evaluation and improvement of director disqualification measures are essential to address emerging risks and enhance the regime’s efficacy.

By preventing disqualified directors from perpetuating misconduct and mismanagement, it safeguards the interests of creditors, shareholders, employees and the public.

Maintaining compliance and accountability among directors is essential in supporting the regime’s overarching objective of protection. To limit the pitfalls of the regime, stakeholders must remain vigilant and support the regulatory bodies in their efforts to enforce disqualification orders effectively.

About the author

Suky Mann is a Principal Associate at Higgs LLP. She specialises in a range of contentious insolvency matters and director disqualification.

See also

What are the responsibilities and duties of a company director?

What happens if a company cannot pay a Bounce Back Loan?

Place an insolvency notice

Find out more

Company Directors Disqualification Act 1986 (Legislation)

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Publication date: 10 July 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.