What is Director disqualification?
Director disqualification is a legal process in the United Kingdom that prevents an individual from acting as a director of a company for a specified period. The primary aim of director disqualification is to protect the interests of creditors, shareholders, and the public by removing individuals from directorship roles if they have engaged in misconduct or mismanagement of a company. The process is governed by the Company Directors Disqualification Act 1986 and the Insolvency Act 1986.
Director disqualification can occur in several situations, including:
- Wrongful Trading: If a company goes into insolvent liquidation, and it is found that a director continued to trade the company when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency, that director may be disqualified. Wrongful trading is a serious breach of the director’s duties.
- Unfit Conduct: Directors can be disqualified for engaging in “unfit conduct,” which includes a range of behaviours such as fraudulent trading, fraudulent preferences, failing to keep proper accounting records, failure to submit annual accounts and returns to the Companies House, and other misconduct that is detrimental to the company and its stakeholders.
- Repeated Insolvency: If a director has been associated with multiple companies that have gone into insolvency, the Insolvency Service may seek to disqualify them, especially if there is a pattern of misconduct or mismanagement.
- Disqualification Orders: The Secretary of State for Business, Energy, and Industrial Strategy has the authority to apply for a disqualification order against a director in cases of misconduct or where it is deemed to be in the public interest.
The disqualification process typically involves a legal proceeding in which the Insolvency Service or the Secretary of State for Business, Energy, and Industrial Strategy brings a case against the director. If the court finds that disqualification is warranted, it can issue a disqualification order, which prohibits the individual from acting as a director or being involved in the management of a company for a specified period, usually ranging from 2 to 15 years. During this period, the disqualified individual cannot serve as a director, company secretary, or in any senior management role in a company without the court’s permission.
Director disqualification is a serious matter with significant legal and practical consequences. It is intended to prevent individuals who have demonstrated a lack of integrity, competence, or proper conduct from holding positions of authority in companies. Disqualified directors must adhere to the terms of their disqualification order and can face penalties for non-compliance. It is also a matter of public record, and the names of disqualified directors are listed in the Disqualified Directors Register, maintained by the Companies House.
