Director disqualification is governed by the Company Director Disqualification Act 1986 (CDDA). Although there are a number of potential reasons for a company director to face disqualification, the most common relates to insolvency. However, it is worth noting that new additional grounds, included in the Small Business, Enterprise and Employment Act 2015 (SBEEA), mean that it is also now possible to face disqualification: (1) if an individual is convicted of a company-related offence in a foreign jurisdiction; and (2) where an individual issued instructions to a director that led to that director being disqualified. Clearly, this represents a significant broadening of the reach of director disqualification legislation.

Disqualifications: An Upward Trend

In the financial year 2013-2014, there were 1208 director disqualifications, with the average length of disqualification being 6.2 years. This is not to say that finding oneself the director of an insolvent company is an automatic shortcut to disqualification. Over a period of five years, only one in 20 directors of companies that went into administration, insolvency or receivership were subsequently disqualified from acting as a director. Despite this apparently reassuring statistic, director disqualifications do appear to be on an upward trend. Figures covering the first quarter of 2016 show that 390 directors were disqualified, which is an increase of 56% on the same period in 2015. The effect of the SBEEA is likely to exacerbate this trend.

Disqualifications: Reasons for the Rise

This upward trend is likely to be due, at least in part, to new reporting rules that came into force in April 2016 that place director conduct under much closer scrutiny than previously. Of greater interest is why this closer scrutiny was deemed necessary.

Disqualifications: The Process

Under the April 2016 reporting rules, office holders (i.e. the official receiver, a liquidator, an administrator or a receiver) now have a duty to provide a report on the conduct of every director of an insolvent company, if that insolvency started on or after 6 April 2016. The report, known as a D report, must be submitted to the Insolvency Office’s Disqualification Unit. It is then the Insolvency Service’s job to investigate the director’s conduct and to determine if disqualification is in the public interest. If the Insolvency Service decides to pursue disqualification, it is obliged to give a minimum of ten days’ notice of its intention to the affected director. There are then two ways in which the disqualification can take effect. The first is through a court order, and the second is via the director offering a disqualification undertaking. Both routes have the same result: an individual is disqualified for between two and 15 years. Sometimes it is possible to avert this outcome by seeking the professional services of experts, such as

Disqualifications: The Effects

To be on the receiving end of a disqualification order is a serious matter. As well as prohibiting that person from being a director, it also bars them from promoting, forming or managing a company in any capacity. This is designed to prevent puppet directorships, in which a disqualified director carries on running the company by “pulling the strings” of an individual who has been appointed in their stead. It is a criminal offence to act as a director while a disqualification order is in effect. To do so also risks the individual concerned being held personally liable for any or all of the company’s debts. In certain, very limited, circumstances it is permissible to apply to the court for permission to act as a director while disqualified. Whether or not permission is granted is at the court’s discretion.

Disqualifications: Determining Unfitness Amendments to the CDDA now express what constitutes unfit conduct in far more general terms. The court must now assess, and take into consideration, an individual’s responsibility for a company’s failure. This includes the effect of that individual’s conduct on any loss or harm suffered by or to the company. Any breach of fiduciary duty may result in the director facing a Civil Compensation Order. The amount is at the discretion of the court. Any director facing court-ordered disqualification or who offers a disqualification undertaking is now potentially liable for a Civil Compensation Order. The wish to avoid this may make directors even keener to avoid disqualification.

Disqualifications – How to Avoid Them

With the new legislative changes and the promise of yet more to come, this is a complicated area and one that is difficult to navigate without specialist advice. However, prudent directors will take action at a much earlier stage. Carrying out duties responsibly and honestly while also having due regard for the interests of creditors is essential. It is often worthwhile to seek professional advice on the proper performance of directors’ duties. It is certainly worth doing for any director facing disqualification investigations, considering making voluntary disqualification undertakings or wishing to defend disqualification proceedings.