Director disqualification and failure to comply

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Director disqualification

Director disqualification is the process whereby a person is disqualified for a specified period from becoming a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without permission from the court. The Company Directors Disqualification Act 1986 applies.

A person aged 16 or over is legally entitled to act as a director of any company unless he is disqualified, an undischarged bankrupt, subject to a debt relief order, or subject to bankruptcy or debt relief restrictions.

The 1986 Act aims to maintain the integrity of the business environment, and those who become directors of limited companies should:

  • Carry out their duties honestly and responsibly;
  • Ensure that they and the company comply with the law and all relevant regulations; and
  • Exercise adequate skill and care with proper regard to the interests of the company's creditors, customers, shareholders, employees and, in some circumstances, the public.

The Insolvency Service acknowledges that the majority of directors do this effectively. However, failure to meet any of these duties may ultimately lead to disqualification as a result of unfit conduct under civil law. A director may also be disqualified following wrongful trading (such as trading whilst insolvent), breaches of competition law, or conviction for a criminal offence related to the promotion, formation, management or liquidation of a company.

In addition to companies, the disqualification regime also applies to:

  • Limited liability partnerships (LLPs);
  • Building societies;
  • Incorporated friendly societies;
  • NHS foundation trusts;
  • Open-ended investment companies;
  • Registered societies;
  • Charitable incorporated organisations.

A ban on being a director applies to all registered and unregistered companies formed in England, Wales and Scotland. It also applies to foreign companies if the company is registered in England, Wales or Scotland, or has sufficient connection to England, Wales or Scotland even if it is not registered here.

Offering an undertaking

Rather than face civil court proceedings, many directors prefer to offer an undertaking at the earliest opportunity (if they accept that the alleged conduct did happen).

An undertaking can be voluntarily offered at any time during the investigation and is the administrative equivalent of a disqualification order. Once accepted by the Secretary of State it has the same effect as a court order and can only be amended by the court. However, the offer can still be refused if the Secretary of State is not satisfied that it would be appropriate to accept it.

If the undertaking is accepted before court proceedings are commenced, the Insolvency Service will not recover any costs of their investigation from that director. A director may still offer an undertaking during court proceedings, but may be required to pay the costs and expenses incurred in the proceedings up to the date of the undertaking.

Failure to comply with disqualification

Whilst the process of disqualification is a civil one, failure to comply with a disqualification order is a criminal offence which carries a maximum sentence of an unlimited fine or up to two years' imprisonment.

The severe consequences of continuing to act as a director whilst disqualified have recently been highlighted after a bankrupt and disqualified director was sentenced to 18 months' imprisonment after pleading guilty to two counts of acting in the management of two companies.

Michael Graham Quinton, whose sentence was suspended for two years, continued to act in the management of both Limited Risk Limited and Defensa International LLC, contrary to section 13 of the Company Directors Disqualification Act 1986, having been disqualified on 7 October 2009. Mr Quinton had incorporated a company abroad and used the names of others as directors of his British company.

Mr Quinton was also disqualified from being a director for 10 years and ordered to pay costs of £13,818.47.

This case highlights the severity of the offence and the appetite of the courts to punish those who attempt to circumvent their ban. Where evidence is found that indicates criminality rather than unfitness, the investigation will be referred to the Department for Business, Innovation & Skills or another prosecution agency.

An important note to make, however, is that under the 1986 Act, a person can apply to the court for permission to act as a director, or to take part in the promotion, formation or management of a named company, whilst subject to disqualification.

The applicant will have to satisfy the court that they have a reasonable need to do so. It must also be satisfied that the public will be adequately protected and, as such, the court may request safeguards and impose conditions on the applicant

The lesson to take from the Quinton case is that, where a need arises to act as a director whilst disqualified, it is prudent to apply for permission to do so from the court, rather than risk criminal prosecution.