Negosentro.com | Grounds That Will Lead to Director Disqualification | When a director of a company fails to fulfill their duty, they run the risk of being disqualified and fired from their position. Unless the company has sought timely help from professional insolvency practitioners, most company directors can be disqualified under the United Kingdom’s Company Directors Disqualification Act (CDDA) of 1986 if they are found guilty. Most company directors can be disqualified under the United Kingdom’s Company Directors Disqualification Act (CDDA) of 1986 if they are found guilty. Every major company usually has at least one founder, several CEOs, and directors that are removed from their organization during the company’s lifespan. When money and leadership style is at stake, no director is immune to being disqualified. Even the late, great Steve Jobs was once pushed out of Apple.
How It Happens
Directors are usually barred by a vote of the company’s board or if that company goes into liquidation, by the insolvency service. If the director does not own a controlling share of their company there is nothing that they could do to reverse the board’s ruling. Ownership share can lead to loss of control over any company. This occurs when companies bring outside investors that dilute their shares. This also happens to CEOs who are usually on contract for a number of years. Once this contract is finished, they could get fired due to ownership, change in directions, or even insolvency.
Why It Happens
As mentioned previously directors who fail to fulfill their legal duties and responsibilities are usually prone to be disqualified. This means that that director is unable to become a director of any other company. That would mean that they can never be directly or indirectly involved in management, promotions, and planning of a company or limited liability partnership (LLP). NDandP law firm who has advised hundreds of disqualified directors over the years claims that most disqualifications can last between a period of 2 to a maximum of 15 years. During this time the director’s details are usually kept on the company’s database and automatically removed once the disqualification ends. A disqualified director can always apply to the court and might be granted an exception with restrictions to again act as a director for a company within their disqualification period. It is important to remember that the CDDA Act in the UK only applies to companies that have gone into liquidation. Directors can become personally liable for the failure of their company and the courts could confiscate one’s property or accounts as a consequence of their failures.
Some of the consequences of a disqualified director are the following:
- Barred from being a director of any company registered in the UK or any overseas company connected to the UK branch.
- Barred from being involved in the formation, marketing, or running of any company.
- Barred from sitting on the boards of charities, schools, police authorities, health boards, social service boards and acting as a registered social landlord.
- Barred from acting as a pension trustee.
- Barred from acting as solicitors, barristers, or accountants.
Breach of these rules can result in serious fines and even imprisonment for up to two years.
Precise Reasons For Disqualifications
You might be wondering what is defined as an unfit behavior for a director. Banning under the CDDA Act is usually undertaken only when it is proven that a director has acted fraudulently, wrongfully, or just been very bad at fulfilling their responsibilities. Any government agency will have to prove before the court with evidence of these wrongful offenses.
Therefore unfit conduct accusations are usually successfully acted upon if the following has taken place:
- Allowing the continuation of the trade when a company is known to be insolvent.
- Not having adequate accounting records.
- Failing to submit tax returns or pay the tax owed.
- Using company assets or money for personal benefit.
- Failing to send required returns and accounts to Companies House.
- Depriving creditors of their assets
- Fraudulent dealings
- Noncompliance with instructions from the appointed insolvency practitioner.
- Being undischarged bankrupt
- Misrepresentation of the facts about the company
Procedure For Disqualification
Anyone can report a director for unfit conduct. Besides complaints about filing accounts which are usually made in the company’s house, most complaints can be made to the insolvency service, except for serious or complex fraudulent schemes which can be reported to the precise criminal authorities. Once a complaint about a director is received, the insolvency service could decide to carry out their own secret investigation of the company and its director(s) or could also forward the complaint to the correct pertaining public body. Once the investigation has concluded, the courts may decide to close the company and disqualify its director(s) and it could also be followed by a criminal investigation depending on offenses. The insolvency service will inform the director about any details of the allegations and notify them promptly of the process for disqualification and ask them to respond. In this situation, the director has a few options. Those are waiting for all court proceedings to be brought up before them in court so they can defend them if they believe that the allegations are false or that they have a good chance at defending themselves. However, the director can also choose to provide the insolvency service with a voluntary acceptance of the allegations and thus disqualifications which can completely avoid the court process. In this instance, the director might be looked upon favorably and could get a reduced disqualification period instead of the maximum.
In summary, it is important for directors to understand that they could only be disqualified under the CDDA Act of 1986 if their company is insolvent or goes into liquidation. They are at risk of disqualifications if they have acted fraudulently, wrongfully, or have generally been unfit to fulfill their duties properly. Therefore, it is important for directors to review their company’s insolvency measures and reflect on their behavior during their time at the company. If they believe that anyone could have any reasons to file a complaint against them to the insolvency service, then they should immediately consult with a lawyer because the risk of being barred from acting as a director for up to 15 years is very high. It should be noted that even though the UK government has the CDDA Act in place, disqualifications are usually relatively rare with only about 1500 cases per year. However, directors should still properly research this topic anytime their company goes into insolvency just to have a heads up on the proper rules regarding disqualifications.
