Understand director disqualification

A disqualification order, made by a court, or a disqualification undertaking, which you give voluntarily, has the same effect. For the period it states, you must not:

• act as a director of any company;
• act as a receiver of a company's property;
• take part, directly or indirectly, in the promotion, formation or management of any company, including a limited liability partnership;
• act as an insolvency practitioner.

The ban covers every company, not just the one that failed. It also covers a company registered abroad that has a sufficient connection to Great Britain. It catches de facto directors, who act as directors without being appointed, and shadow directors, whose instructions the directors are used to following. Running a company through a nominal director does not get round it. The ban normally starts 21 days after the order, or after the undertaking is accepted, and other bodies, such as charities, schools and pension schemes, apply their own restrictions to disqualified people.

Disqualification proceedings are civil, not criminal. Breaking the ban is criminal.

The usual ground: unfit conduct at an insolvent company

Most disqualifications come from section 6 of the Company Directors Disqualification Act 1986. The court must disqualify you for between 2 and 15 years if you were a director, including a shadow director, of a company that became insolvent, or was dissolved without becoming insolvent, and your conduct makes you unfit to be concerned in the management of a company. A company becomes insolvent if it goes into liquidation with assets too small to pay its debts and the costs of winding up, enters administration or has an administrative receiver appointed.

There is no fixed list of unfit conduct. The Insolvency Service gives examples, including:

• keeping the company trading to its creditors' detriment when it could not pay its debts;
• moving assets out of creditors' reach;
• failing to keep proper accounting records or to file accounts and returns;
• failing to submit tax returns or to pay the tax the company owes;
• failing to co-operate with the official receiver or the insolvency practitioner.

The court looks at the matters in Schedule 1 to the Act.

How an investigation works

When a company goes into formal insolvency, the official receiver, liquidator, receiver or administrator must report to the Secretary of State on the conduct of every director in office during the last 3 years of trading. For a company dissolved without a formal insolvency, anyone can complain to the Insolvency Service. The Insolvency Service, acting for the Secretary of State, decides whether it is in the public interest to go further.

If it does, it writes to tell you what it thinks you did, that it intends to start disqualification, and how to respond. You can then defend the case in court or offer an undertaking. An application under section 6 must normally be made within 3 years of the company becoming insolvent or being dissolved, although the court can allow a later one.

You can offer an undertaking at any stage. If it is accepted before proceedings start, the Insolvency Service does not recover its investigation costs from you. After that, you may have to pay the costs up to the date of the undertaking. An undertaking is entered on the public register and only the court can vary it.

Other grounds

If you break a ban

Acting in breach of an order or undertaking is a criminal offence. On conviction on indictment the penalty is up to 2 years in prison, a fine or both. On summary conviction it is up to 6 months in prison, a fine or both, and the fine is unlimited for offences committed from 12 March 2015. You can also be disqualified for a further period.

You also become personally liable, jointly with the company, for the company's debts incurred while you were involved in managing it in breach of the ban. The same applies to anyone involved in management who acts on instructions they know come from a disqualified person or an undischarged bankrupt, so installing a relative as nominal director exposes them too.

Applying for permission to act

You must normally show a real need, not just a wish, and that the public will be adequately protected. The court can attach conditions or require safeguards, and the Secretary of State may appear to oppose. Leave is recorded on the public register of disqualified directors, held by Companies House, which anyone can search before appointing a director.

Compensation orders

Where conduct for which you were disqualified caused loss to creditors of an insolvent or dissolved company, the Secretary of State can apply for an order that you pay compensation. The application must be made within 2 years of the order or undertaking, and you may be offered the chance to give a compensation undertaking instead. The conduct must have taken place after 1 October 2015.