Directors' Disqualification - A Growing Threat

Directors' disqualification is nothing new - the current legislation (the Company Directors Disqualification Act) dates back to 1986. However, there are an ever increasing number of corporate offences that can rest with a director personally, which in turn raises the spectre of being disqualified.

This area of law has also seen a visible increase in directors being pursued personally following corporate offending. Increasingly, sentencing guidelines direct the prosecution and the court to specifically consider making a disqualification order.

Very recently, the Home Office disqualified 20 directors following a national crackdown on illegal working practices (whilst also handing out over half a million pounds in fines).

What does a Disqualification Order do?

A disqualified person effectively cannot operate with "limited liability". They cannot form or manage any form of limited company, or act as a director. An important point is that the individual is not only banned from being an appointed Companies House director, but also from acting as a director. Put simply, it is their day to day activity that is important, not their job title.

Disqualified persons are also prevented from holding certain special offices (for example acting as a receiver, or an insolvency practitioner).

Why and when are disqualification orders made?

Fundamentally, orders are made to protect the public by ensuring that only reasonably competent and honest individuals are directors. A court can make an order after the individual has been convicted of an offence that is "connected with the promotion, formation, management or liquidation of a company."

This is clearly a wide range of potential offences, and can commonly include:

  • Fraudulent trading and related insolvency offences;
  • Insider trading and related market regulation offences;
  • Theft, fraud, bribery and other corruption based offences; and
  • Health and safety breaches, environmental breaches and other offences aimed at public protection.

What happens after an order is made?

A disqualification order can run for up to 15 years. After an order is made, the individual will either need to consider an appeal, or resign from any post that would breach the order.

Breach of a disqualification order is a criminal offence, punishable by up to 2 years imprisonment, an unlimited fine, or both.

Also, any individual acting in breach of a disqualification order cannot rely on limited liability protection. Put simply, they become personally liable for all debts and liabilities incurred by a company during any period of their unlawful management.

For all the above reasons, the threat of a disqualification order should be taken very seriously. If you have any questions regarding issues affecting directors or corporate entities, please contact the Business Risk and Regulation team.

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