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When can a director be disqualified from acting as a director?
This is covered by the Company Directors Disqualification Act 1986. There are provisions dealing with the consequences of a conviction for an indictable offence (i.e. an offence tried at the Crown Court only.) This relates to offences directly connected with the promotion or management of a Company but there is also provision for a Court to impose disqualification if it wishes where there has been a finding of fraudulent trading, any other fraud or a breach of duty in relation to the Company. In practice a liquidator will bring proceedings against a Director for breach of fiduciary duty and/or misfeasance whereupon he will in due course look, if found at fault, to bring Disqualification proceedings.
A Disqualification Order can also be made where there has been a failure to comply with the provisions of the Companies Act. This includes and refers to the failure to produce documents and returns to the Registrar of Companies.
An Application can also be made to the Court by the Secretary of State, the Official Receiver or liquidator. The Court is then asked to consider whether a Director is a fit person to be concerned in the management of a Company in the light of the allegations against him. The Court can impose a period of disqualification of not more than 15 years.
It should be noted that once an individual person is made personally bankrupt, he must not act as a Director until discharged from his bankruptcy, and without any relevant bankruptcy restriction affecting him. This disqualification is automatic and the automatic discharge will generally be 12 months after the bankruptcy Order was made.
What are the consequences of a disqualification order?
The Act imposes a criminal liability and a personal liability for the debts of a Company if a Disqualification Order is breached. The Order prevents a person being a Director OR otherwise participating in the management of the Company. A person so disqualified can apply for permission to act in relation to the Company despite the Disqualification Order.
When is a disqualification order sought?
One of the bases upon which an Order will be made is if, under Section 6, he is regarded as “unfit.” There is no discretion in this instance. If the Court finds complaints alleged and proved, the Court must order a period of disqualification. There are specific instances of unfitness which are a useful guide. These include:-
- Persistent default in reporting and filing documents;
- Insolvent trading;
- Setting up of phoenix companies where the commencement of trading by another company with a similar name as the first which has been wound up;
- Demeanor of the Director;
- Dishonesty/fraud/serious lack of probity.
What mitigation is available to a director in these circumstances?
Mitigation is only relevant in so far as it relates to the conduct complained of and not when raised generally. There are merely examples, however:
- Where the Director has lost his own personal money in the liquidation;
- No personal gain to the Director;
- Reliance upon professional advice;
- Good history in running other Companies;
- Ill health at the relevant time.