Each year within the UK approximately 1,200 individuals are disqualified as directors by the Secretary of State for Business Enterprise and Regulatory Reform (BERR).
In order for court proceedings to commence, the Secretary of State must apply for disqualification within 2 years of the date that the company in question entered administration, administrative receivership or liquidation.
The Companies Court in London or certain local County Courts can hear submissions from the Secretary of State and actions can be brought against both formally appointed directors and ‘shadow directors’; those individuals who have held themselves out as being a director, albeit they are not registered as directors.
Disqualification proceedings are a civil law action taken under the Company Directors Disqualification Act 1986 and a disqualification order can be made against the director for a period of between 2 and 15 years.
The length of disqualification is a matter of discretion for the court, with more serious misconduct attracting a disqualification order in the top bracket of over 10 years. Disqualification figures for 2007 to 2008 indicate that 60% of disqualification orders were for 5 years, 33% were for 6 to 10 years and the remaining 7% were in the top bracket.
There are a wide variety of types of conduct which may result in a disqualification Order being made. Examples include:
1. Continuing to trade to the detriment of creditors (either trade creditors or Revenue and Customs) at a time when the company was insolvent
2. Failing to keep proper books and records and persistently breaching company legislation
3. The director allows the company to use a prohibited name
4. The director fails to co-operate with a liquidator / administrator of the company
Disqualification proceedings are only commenced after a report has been sent to BERR by the official receiver, liquidator or administrator indicating that they have concerns about the director’s conduct. BERR then conducts its own investigations.
What happens if you find yourself in this situation?
It is possible to defend these proceedings, particularly if the director can prove that the insolvency of the company resulted from commercial misjudgement rather than negligence or incompetence on their part. Alternatively, a settlement can be negotiated with the Secretary of State, without the need to proceed to a trial. This is done by way of an undertaking whereby the director agrees to be disqualified for a period that is shorter than that sought by the Secretary of State in the proceedings.
It is possible for a director who is subject to a Disqualification Order or who has undertaken to be disqualified, to obtain leave of the court to act as a director of a specific company by virtue of section 17 of the Company Directors Disqualification Act.
A final point: Beware those that claim, “of course you can defend this,” because often the time and money spent on building a defence would be better applied / spent on negotiating a shorter disqualification period.
In summary, take advice from an experienced lawyer.
This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.
Eleanor Richards qualified as a solicitor with a City firm in 1993. She has specialised in Recovery and Insolvency work for over ten years and has handled all types of insolvency applications for professional clients as well as corporate and individual clients. She has provided advice to insolvency practitioners and directors / managers of businesses.
She has expertise in acting for and against directors who have acted in breach of duty and are subject to disqualification proceedings.