Company directors must comply with various legal duties, in particular those set out in sections 171 to 177 of the Companies Act 2006. If a director breaches those duties, they could be at risk of being disqualified as a company director.

Here are some of the questions that our specialist insolvency litigation and dispute resolution lawyers are frequently asked.

What is director disqualification?

Disqualification proceedings can be brought by the Secretary of State for Business & Trade. They are, in most cases, brought against a person occupying the position of director of a company that becomes insolvent, if that person’s conduct makes them unfit to be concerned in the management of a company.

Disqualification orders are made by the court. Alternatively, a director may offer to provide a voluntary disqualification undertaking instead.

What is the effect of disqualification?

If a director is disqualified by a court order or a disqualification undertaking, they are banned for a specified period from acting as a director of a company, or directly or indirectly being concerned with or taking part in the promotion, formation or management of a company without permission from the court.

The person disqualified also cannot be a receiver of a company’s property or act as an insolvency practitioner, and may not be able to take up other positions (for example, as a solicitor, accountant, pension trustee or charity board member).

The minimum disqualification period is two years, and the maximum is 15 years.

What is unfit conduct?

There is no exhaustive list of unfit conduct that may lead to director disqualification. However, common examples include:

• Conduct that seeks to deprive creditors of assets
• Continuing to trade to the detriment of creditors when a company is insolvent
• Fraudulent behaviour

Failing to:

• keep proper accounting records
• prepare and file accounts or make returns to Companies House
• submit tax returns or fairly pay the tax due.
• comply with other regulatory requirements
• cooperate with the official receiver and/or insolvency practitioner

What is the applicable law?

The disqualification of directors is mainly set out in the Company Directors Disqualification Act 1986 (CDDA) and is a civil, not criminal, legal process.

In determining whether a director should be disqualified, a court will also give consideration to other statute laws (ie, the Companies Act 2006) and common laws (ie, previous decisions made by the courts).

Does a disqualification order or disqualification undertaking apply only to company directors?

The CDDA also applies to those who have acted as a director without being formally appointed as such, including shadow directors (i.e. those who exert significant influence over a company’s decisions) and de facto directors (i.e. those performing the functions of directors, and who are treated in that way by the company and third parties).

In addition, officers of other organisations can also be disqualified including partners of a Limited Liability Partnership (LLP), partners of a traditional general partnership, building societies, NHS foundation trusts, charitable incorporated organisations, and incorporated friendly societies.

How is the duration of disqualification calculated?

The Court of Appeal has given guidance in relation to disqualification periods:

• The top bracket of disqualification for periods between 10-15 years should be reserved for particularly serious cases. This may include cases where a director who has already been disqualified has been disqualified again.
• In circumstances where the case is serious, but not serious enough to warrant the top bracket, a disqualification period of six to 10 years is recommended.
• The minimum bracket of two to five years’ disqualification should be applied where, though disqualification is mandatory, the case is seen as not very serious.

What happens if a director ignores the disqualification?

If a director was to ignore the disqualification order or disqualification undertaking and continued to occupy the position of director of a company, that director would be committing both a civil and criminal offence, which may lead to a custodial sentence.