Director Disqualification: Unfitness
There are many things that could lead to the Court making a disqualification order against a director.
- Phoenix Companies or Multiple Failures
It is a criminal offence to reuse a company name where a company has gone into insolvent liquidation (Section 216 of the Insolvency Act 1986). This is colloquially referred to as ‘Phoenix Syndrome’ and the reason for the provision is to protect the public from being misled into dealing with the new business.
This could be an offence under Section 2 of the Company Directors Disqualification Act 1986. This section deals with indictable criminal offences and the Court here has a discretion to make a disqualification order against you.
- Misappropriation of Assets
This offence involves using company funds or monies for personal use, and in the process breaching your director / fiduciary duties owed to the company. These allegations are often put against directors and they tend to flow downstream from a potential claim by a liquidator seeking to claim those same funds to the insolvency estate.
The law is not clear cut in this particular area, and it is very important to seek early professional and expert advice to review your legal position. We can assist you there and advise you on the appropriate next steps.
- Unfair Treatment of the Crown
Prior to the COVID-19 pandemic, this was the most common cause of a director’s disqualification. In this case, a director would treat other creditors more favourably than HMRC, resulting in large arrears to HMRC building up in the Liquidation.
HMRC is viewed by the law as an ‘involuntary creditor’, which means that it cannot control how exposed it may be to a company that is trading. Therefore, it has special protections and trading to the detriment of HMRC can incur significant periods of disqualification.
- Transactions to the Detriment of Creditors
In this instance, a disqualification investigation would review whether the director entered into transactions in the run up to the insolvency of the company that were to the detriment of the company’s creditors. For example, assets could have been gifted to friends, or perhaps debts repaid to favoured creditors.
These matters could constitute a breach of the director’s fiduciary duties to the company and therefore lead to his or her disqualification.
- Trading at a Time when Knowingly or Unknowingly Insolvent
Wrongful (Section 214) and/or Fraudulent Trading (Section 213) are offences under the Insolvency Act 1986. These can be complex matters to prove and are commonly claims brought by a liquidator of the company in order to seek financial compensation. This misconduct is also something that the public must be protected from generally, and so it can have disqualification consequences if a claim is brought separately by the Insolvency Service.
- Accounting Matters
A relatively common cause of disqualification is a failure by a director to keep, maintain, and preserve adequate accounting records. Importantly, this is also an offence under the Companies Act 2006, and can lead to disqualification and, in serious cases, criminal investigations.
- Technical Matters
This concerns a failure by a director to comply with his statutory requirements, such as to file returns and documents with Companies House.
- Criminal Matters
Certain types of misconduct (such as fraud) will ultimately be criminal offences that also result in a disqualification from acting as a director of a limited company. It may well be that a criminal investigation runs in tandem with a disqualification claim, which means a director can face two sets of investigations at the same time and consequentially what is said in one, could impact on the other.
- COVID-19 (Bounce Back Loan) Scheme Abuse
Since the end of the Bounce Back Loan Scheme, which arose out of the COVID-19 pandemic, the Insolvency Service has increasingly turned its attention to perceived Bounce Back Loan fraud. This allegation of misconduct is incredibly prevalent and forms a significant portion of the investigations commenced against directors. We have a separate page for a more detailed discussion on this topic here – Bounce Back Loan Disqualification.
Section 6 of the Company Directors Disqualification Act 1986:
