Director disqualification is a legal process in the UK that bans individuals from being a company director or involved in managing any company (even foreign ones connected to the UK) for a set period. This period is typically 2-15 years. Disqualification results from unfit conduct like continuing to trade whist the company is insolvent or making preferential payments. It can also result from misusing company funds, failing to keep proper books and records, or failing to pay tax. In other words, using money which would otherwise be due to HMRC as working capital can lead to disqualification.

This is far from being an exhaustive list! 

I have received a letter from the Insolvency Service to say that they are looking into whether I should be disqualified as a director. Why have I received this letter and what should I do? 

Director disqualification is usually triggered when a company enters an insolvency process – liquidation or administration, for example. One of the Liquidator’s or Administrator’s functions is to investigate the director’s conduct. Then they submit a confidential report to the Insolvency Service. If the office holder finds there has been unfit conduct on the part of the director, then following an initial investigation, the Insolvency Service may conclude that it is in the public interest to investigate further. Also, they may take disqualification proceedings against the director. 

 It is advisable to respond to the Insolvency Service by the deadline they state in their letter. A director can make representations on the proposed allegations as a form of defence or more realistically, mitigation. Moreover, it is advisable to seek legal advice from a solicitor who specialises in directors disqualification matters. Such a solicitor will be best placed to assist quickly and more cost effectively. 

If I am served a directors disqualification what are my options?

You can make representations to the Insolvency Service in relation to the allegations made to try and either dispose of the investigation or to reduce the proposed disqualification period being suggested by the Insolvency Service. A solicitor with the relevant expertise can help you with this. Especially in circumstances where you need to be able to act as a director and seek the necessary court permission (Section 17 Company Directors Disqualification Act 1986). In that case, the lower the disqualification period, the more likely a court would grant permission to act as a director despite being disqualified (more on this below).

  • If, following the submission of your defence, the Insolvency Service still intends to proceed with disqualification and you do not wish to pursue a formal defence in the courts, then you can offer a Disqualification Undertaking. This is an informal version of a disqualification order, but its effects are identical.

What is the impact of directors disqualification?

 You cannot be a director of a UK company or a foreign company with UK connections.

  • You cannot be involved in forming, promoting, or managing any company. This applies even if a director is not formally appointed i.e. so simply ‘acting as a director’ and also applies to shadow directors.
  • It can also prevent you from being a Trustee of charities, pension schemes, or governing schools
  • Acting as a director while disqualified is a criminal offence and can lead to fines, imprisonment, and / or personal liability for the insolvent company’s debts
  • Disqualifications are publicised here Search for disqualified company directors – GOV.UK. Although the individual allegations of unfitness are not set out, the directors name, date of birth, the insolvent company’s name and the disqualification start and end dates are included.

 What does this mean for me?

You are prevented from being formally appointed as a director or acting as a director (de facto director) for the period of your disqualification. You are also prevented from being a shadow director. An example of a shadow director is a majority shareholder or a controlling family member who, without the formal title of ‘director’, is the influence behind major company decisions like approving large expenses, or securing loans. The Board of Directors habitually follows their instructions. This effectively makes them the real decision-maker behind the scenes and is similar to a “puppet master” pulling the strings. Shadow directors are subject to the same legal duties as appointed directors (as are de facto directors). They face penalties if they are in breach. 

I have heard about compensation orders/undertakings – what are these and do they apply to me?

In UK director disqualification cases, compensation orders require a disqualified director to personally repay losses that their “unfit conduct” caused to the company’s creditors. These orders are a serious financial penalty. They are designed to increase director accountability. They were introduced on October 1, 2015. 

The alternative is that directors can offer a compensation undertaking voluntarily to avoid court proceedings for the order. This has the same legal effect as a court order once accepted. 

Can I defend myself against directors disqualification proceedings?

Yes, you can dispute the allegations of unfit conduct and present evidence to show you acted responsibly. The burden of proof is on the person seeking the disqualification (usually the Secretary of State/Insolvency Service). That person must prove the case on the balance of probabilities. 

However, be warned. If you have received a letter from the Insolvency Service to say they intend to take disqualification proceedings against you (otherwise known as a “Section 16 letter”), they will be confident that, following a thorough investigation of your case, it is not only in the public interest to do this. They also believe that the prospects of succeeding are good.

If you want to challenge the allegations of unfit conduct, it is essential you engage with the Insolvency Service early. You should seek advice from a specialist, such as Farringford Legal in dealing with directors disqualification cases. They can help with this as they will know how to respond. They also know what information you need to provide in support of the defences you put forward.