Updated: Apr 18, 2019
The Company Directors Disqualification Act 1986 (CDDA) which was amended in the Enterprise Act 2002 and the Small Business Enterprises and Employment Act 2015 is an act designed to manage insolvency and financial misconduct that can sometimes cause or arise from insolvency proceeding.
What does a Disqualification Order do?
A Director’s Disqualification Order (DDO) prohibits a person (including a corporate person) from forming or managing a company or acting in the capacity of a director.
A DDO prevents the disqualified person or corporate person from acting with limited liability. This means that they are personally liable for all debts and liabilities that the company incurs during the time that they were managing it unlawfully. The DDO is used as an additional penalty to protect the public from companies which operate fraudulently or dishonestly.
If a disqualified person tries to get around the disqualification by instructing someone else to carry out company business for them, that person can be prosecuted and becomes personally liable for the company’s debts.
Grounds for disqualification
The CDDA set out several grounds for disqualifications. The most common however is disqualification for unfit conduct. Examples of unfit conduct include:
Failure to submit annual accounts or returns to Companies House on time
Excessive salaries or drawings when the company was plainly insolvent
Trading on when the director knew the company was insolvent
Continuing to take credit when there was "no reasonable prospect" of creditors being paid
Misrepresentation of the facts about the company
Failure to respond or comply with a liquidator's requests
Failure to keep proper company accounting records
Failure to pay under a County Court administration order
Not paying tax owed by the company
Making use of the company’s money or assets for the director’s personal benefit
Other grounds for disqualifications include:
1. General misconduct in connection with companies - this includes disqualifications for:
conviction of indictable offence
persistent breaches of companies’ legislation
certain summary convictions
certain conviction abroad
2. Disqualification for competition infringements
3. Disqualification for wrongful trading
4. Failure to pay under County Court administration order
How disqualification works
When a complaint about the conduct of a director is made, the Insolvency Service conducts an investigation of the company or the director in question. Investigations can also be made even when the company has become insolvent.
If the Insolvency Service finds that the director hasn’t complied with their legal responsibilities, they’ll inform the person in writing, advising them:
the actions that have caused the person to be deemed unfit to be a director;
that the disqualification process has begun;
how the person can respond and present their defence.
When they’re advised about the start of disqualification proceedings, the director has two options:
Contact the Insolvency Service and give them a ‘disqualification undertaking’. This basically means that the director voluntarily disqualifies themselves. This will end any court action against them.
Defend the case in court if they disagree with the reasons given for taking disqualification proceedings.
Since the disqualification process is a serious matter, it is a very good idea for the person involved to obtain legal advice as soon as they’re aware that the process has begun.
What happens once a director is disqualified?
A DDO can last between 2 and 15 years. A DDO prevents a disqualified person from being a director or being concerned or taking part in the formation, promotion or management of any company. 'Company' for this purpose includes limited liability partnerships, unregistered companies and foreign companies.
If a person breaks the terms of a disqualification order, they could be fined or sent to prison for up to two years, or both. The Sentencing Council has published a guideline for the offence of breach of Disqualification from Acting as Director effective from 1st October 2018. The guideline sets out the factors the court must consider before passing sentence. This includes culpability and harm before going on to consider aggravating and mitigating factors.
DDOs are registered at Companies House which has a publicly accessible register of all disqualification orders. Disqualified directors’ details are automatically removed from the database at the end of the disqualification period.
The Insolvency Service also operates a register of directors who have been disqualified in the previous three months, including details of why the disqualification application was brought.
There are other restrictions that will apply if a person is disqualified. They may not be able to:
sit on the board of a charity, school or police authority;
be a solicitor, barrister or accountant;
be a pension trustee;
sit on a health board or social care body;
be a registered social landlord.
What happens after an order is made?
Once a person has been made subject of a DDO, they will need to either:
consider an appeal, or
resign from any post that would cause them to breach the order.
Reduction of period of disqualification
An admission of liability can serve to reduce the period of disqualification. As an example, a director who is the subject of a disqualification application could wait for months, if not years while the case is being deliberated and then have an eight-year ban imposed. If they admit liability immediately, they may have a shorter ban, perhaps three years, imposed. This remains a decision for the individual director.
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