Director disqualification: what do I need to know?

When a company director fails to carry out their legal responsibilities, they run the risk of being disqualified. This can be a lengthy procedure resulting in a period of disqualification during which it is not permitted to form, promote or manage a company.

The main law governing disqualification is contained in the Company Director Disqualification Act 1986.

Grounds for disqualification as a company director

Director disqualification usually arises from insolvency and misconduct, but can also be as a result of incompetency and even disorganisation. The grounds for director disqualification include:

  • Carrying out business illegally while insolvent
  • Persistently failing to file company returns and accounts with Companies House
  • Unfit conduct, where a company has become insolvent
  • Breach of competition law

The director disqualification procedure

When a company enters into administration, liquidation or receivership, the behaviour of its directors will be subject to scrutiny. The official involved in the insolvency is required to report any unfit conduct to The Insolvency Service. If the Insolvency Service believes it is in the public interest, it will make an application to the court for a disqualification order.

If the court finds that a company director is not fit to manage a company, it can order a period of disqualification of between 2 and 15 years, depending on the severity of the unfit conduct.

It is possible to enter into a disqualification undertaking to voluntarily disqualify yourself from acting as a director. This option has the advantage of avoiding a court case and may reduce the time taken to deal with the process. It can also result in a lesser disqualification period.

If you are facing possible disqualification as a director, it is always advisable to seek independent legal advice as to the best way to proceed to minimise the impact on your business and your future.

Unfit conduct

If an application is made for a disqualification order, the court will look at whether a director’s conduct has fallen below the required standards of probity and competence, i.e. whether it is ‘unfit’. All behaviour will be taken into account, including evidence of the following:

  • Trading while the company is known to be insolvent
  • Inadequate keeping of financial records
  • Failure to file returns and accounts in accordance with Companies House rules
  • Failure to pay tax
  • Fraudulent activity
  • Attempting to deprive creditors of assets
  • Using company funds or assets for personal benefit
  • Failure to comply with the requirements of the insolvency official
  • Being an undischarged bankrupt

The director should put together a defence which includes evidence of any valid reasons there may be for their actions.

The effect of disqualification

Once an order has been made disqualifying someone from being a company director, they are no longer able to be the director of any UK-registered company or overseas company with connections to the UK. They are also prohibited from managing, forming or promoting a company.

This extends to making executive decisions and hiring staff.

Other exclusions include sitting on the boards of schools, charities or health authorities or acting as a pension trustee, accountant, solicitor or barrister.

A disqualified company director is also banned from directing someone else to act on their instructions or directing a company by proxy. This can result in prosecution not only for the disqualified director but also for the third party who acts on their direction. There is a further risk that the third party could incur personal liability for company debts by getting involved in company affairs in this way.

Breaching a disqualification order is a criminal offence and could result in a prison sentence of up to two years plus an increased period of disqualification.

Compensation orders

In addition to being disqualified, a director may also be the subject of a compensation order.

Compensation orders were introduced on 1 October 2015 by the Small Business, Enterprise and Employment Act 2015 for the purposes of making disqualified directors financially liable for their unfit conduct. It is the role of the Insolvency Service to decide whether a compensation order is in the public interest.

In the case of Secretary of State for Business, Energy & Industrial Strategy v Eagling [2019] EWHC 2806, which was the first reported case brought by the Secretary of State since the introduction of compensation orders, the High Court ordered that the director, Mr Eagling, pay the sum of £559,484 which was the full amount he was alleged to have misappropriated from the company.

In the case of Secretary of State For Business and Trade v Barnsby (Re Pure Zanzibar Ltd) [2023] EWHC 2284 (Ch), the director of the company operated as a travel operator. Despite being insolvent, the director still took bookings and deposits from customers which the company could not provide. The High Court ordered that the director pay compensation equal to the amount creditors lost on holiday deposits amounting to £81,405. 

However, in the case of Secretary of State for Business and Trade v Minto-St Aimie [2024] EWHC 3137 (Ch), the court rejected the Secretary of State’s application for a compensation order. When applying for a Bounce Back Loan (“BBL”), the defendant misrepresented the company’s turnover to obtain a higher BBL and subsequently, personally benefitted from the money. However, the court held that it would have been unfair to make an order for compensation in circumstances where the Secretary of State’s application pleaded misconduct for the director having obtained the BBL but not the use of the same. 

What can a disqualified director do?

A disqualified director may work for a company as its employee, however, they would need to be able to clearly show that they were not involved in anything which could be construed as the role of a director.

It is also permitted to carry on business as a sole trader while disqualified, or be in a partnership although not a limited liability partnership.

There is scope for a disqualified director to apply to the court for permission to act as a director if they can show that there is a reasonable need for them to take on this role. If the court agrees, it may attach restrictions.

What do I do if I think I might be facing disqualification?

If your company is involved in insolvency proceedings, then a report will be sent to the Secretary of State setting out details of the conduct of all directors for the three years prior to the insolvency. The Insolvency Service then decides, on behalf of the Secretary of State, whether it is in the public interest for any individual director to be further investigated.

If you are notified about an investigation, you should take legal advice as to how best to defend your position and mount any defence you may have. It is advisable to seek professional help in preparing any response to Insolvency Service enquiries to give you the best possible chance of putting across your reasons for acting as you did.

If an application is made to the court for a disqualification order against you, you will have the chance to respond to the case and provide a written statement of truth. Again, it is recommended that you seek professional legal advice in drafting this document as it is your chance to explain the situation and defend the Insolvency Service’s allegations.

At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. As well as in-depth commercial expertise we provide an excellent service to our clients and practical advice and guidance.

We have wide-ranging experience in litigation and corporate law, and were named as winner of the Global 100 for Best Firm for Commercial Disputes of the Year 2025 and Gamechangers Global Awards for Boutique Litigation Law Firm of the Year 2023.

If you would like to talk to one of our expert legal team about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.

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Dipesh Dosani Partner
Dipesh advises clients on a wide range of commercial disputes including breach of contract, directors’ disputes, shareholder remedies, partnership issues, professional negligence and intellectual property. He is also able to provide clients with advice on all aspects of insolvency as well as investigations including misfeasance, undervalue transactions, preferences, transactions to defraud creditors and wrongful trading.

    2025-01-20T13:03:05+00:00

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