Director Disqualification - FAQs

If disqualified as a director, a person is not allowed to act as a director or be involved (directly or indirectly) in the formation, promotion or management of a company for anywhere between 2 and 15 years without the prior permission of the court.

The length of the disqualification will largely depend on the severity of the offence that is being alleged and the conduct of a director in question.

Where a company has entered insolvency the appointed liquidator or administrator will be under a duty to investigate the conduct of anybody who was a director or former director of the company in the 3 years preceding the insolvency. Any concerns which arise over the conduct of a director will be reported to the Insolvency Service (IS) who will in turn consider whether disqualification is appropriate and in the public interest to pursue.

The IS (on behalf of the Secretary of State - SOS) can obtain the disqualification of a director in two ways:

- obtaining a disqualification undertaking

- filing a claim at court

Where a disqualification claim is filed in court, unless the matter is settled beforehand, a judge, at a hearing, will decide whether someone should be disqualified and for how long.

When deciding whether to pursue the disqualification of a director, it is normal for the Insolvency Service (IS) to send out questionnaires to the company's former directors. The questionnaires will typically raise queries surrounding the company's trading history, your role as a director and when you first became aware of the company's financial difficulties.

Even though the replies to the questionnaires are commonly used in later disqualification proceedings, the questionnaire itself should not be ignored. That said, it is important to seek legal advice before completing the questionnaire so that you can fully understand the implications of your answers and to avoid a situation where information is provided which could prove to be damaging later on (should a claim be progressed).

There is no definition in the governing legislation which sets out when a director will be considered unfit. The IS will therefore consider all of the conduct and behaviour of the director. Disqualification proceedings may be threatened in the following circumstances:

- the director(s) continued to trade the company when it was insolvent to the detriment of its creditors

- a failure to keep proper accounting records for the company and/or a failure to file these with Companies House

- a failure to pay crown debts (e. sums due to HMRC for VAT, PAYE, NIC and corporation tax)

- misconduct of a director (by way of example, paying preferred creditors ahead of other creditors/repaying money to themselves in settlement of their liabilities when third parties were not paid)

- it appears that an individual may have been guilty of fraud

- the director is unfit to act as a director or be involved in the management of the company (for example, misappropriation of company property, excessive remuneration, retaining company property etc)

The above are only examples and do not set out every ground on which the IS could decide that an individual is unfit to act as a director.

Before a claim is filed an individual should receive correspondence from the IS (or its lawyers) setting out the grounds on which he/she is considered to be unfit to act as a director, the evidence it intends to rely on in support of this and the period of disqualification it considers appropriate. This pre-action correspondence may also include an offer of a director disqualification voluntary undertaking (addressed below).

On receipt of this letter (commonly called a Section 16 letter), it is important that legal advice is secured to limit the risk of proceedings being issued. This correspondence should never be ignored as, with our assistance, action through the courts may be avoided.

An undertaking is essentially where a director agrees to be disqualified. This will involve the director agreeing that he or she will not act as a director (or be involved in the formation or management of a company) for an agreed period of time.

Ordinarily, undertakings will be negotiated before disqualification proceedings have been issued and can avoid the time and costs associated with legal proceedings. That said, whether an undertaking should be agreed (or negotiated with the SOS) will depend on the facts of each case.

We strongly recommend that legal advice should is secured from one of our specialist lawyers before agreeing to an undertaking.

There are two ways that you can avoid proceedings. The first is to agree to an undertaking addressed above, the second it to defend the claim on a pre-action basis by setting out your disputes. The success of the latter will largely depend on the facts of each case and we can advise you on the prospects of disposing of the allegations pre-action (and post issue).

Whilst the investigations of the company's financial affairs may be the basis on which disqualification proceedings are pursued by the SOS, it does not necessarily follow that rectifying the financial problems by offering to inject funds into the insolvent estate will cease the action against you. Any allegations involving conduct will still need to be addressed and, on its own, offering a monetary sum will not put a stop to proceedings.

The time frames are presently:

- If your company entered liquidation prior to October 2015, a claim must be brought within 2 years from the date of the liquidation; whereas

- If your company entered liquidation on or after 1 October 2015, the SOS now has a 3 years from the date of insolvency to bring disqualification proceedings.

The 3 year period for liquidations from and including October 2015 will only be relevant if the claims of misconduct as a director took place on or after 1 October 2015. For any allegation of misconduct before this date, the 2 year period will apply.

The answer is probably.

On a disqualification order being made or an undertaking being given, a director will usually be responsible for the SOS's costs unless agreed otherwise. This is the usual starting point.

As disqualification proceedings are civil proceedings, it follows that the general principles governing costs apply. In basic terms, a court will usually require the losing party to pay the winning parties costs, such costs to be assessed on the standard basis if not agreed between the parties.

The position will largely depend on whether or not proceedings have been issued.

If the matter is disposed or pre-action, it would be unusual for the IS/SOS to agree to pay your legal fees and there is no obligation on them to do so. However, if proceedings are issued and you successfully defend the claim (or it is subsequently discontinued), then there are likely to be cost consequences for the SOS. The common order is that costs be assessed failing an agreement between the parties.

Please note that the level of costs awarded will turn on the facts of each case. However, it is unlikely that you will ever recover 100% of your legal fees incurred in defending the matter.

In addition to those directors who have been formally appointed, those individuals who carried out the functions of a director (but did not hold the title of director) could still find themselves the subject of disqualification threats/clams. This will largely depend on the facts of each case.

Whilst this is possible, the period of disqualification can only be reduced if the disqualification resulted from a disqualification undertaking. It is not available if the disqualification has been by way of court order.

The reduction of a period of disqualification would involve an application to court. However, this cannot be reduced below a period of 2 years (that being the statutory minimum disqualification period).

A disqualification order or undertaking will prevent you from running your own business if that business is a company or limited liability partnership. It is therefore possible that you could continue to operate your own business as a partner (in an unincorporated partnership) or as a sole trader.

Yes, but this would involve an application to court.