A company is generally managed by many directors who can collectively form the Board of Directors.
They are responsible for making decisions that affect the overall function of the business entity. The directors must act in good faith and work toward the benefit of the shareholders and the company they represent.
A company has no physical existence and is merely a legal entity. It can only act through natural persons.
The person who is a part of the company and works on behalf of the company is known as Director. They are professionals who the company hires to direct its affairs. They are also called the officers of a company.
This article will explain director disqualification and the various grounds for it.
Let’s begin!
What is director disqualification?
Director disqualification refers to the legal process by which a director of a company is banned from acting as a director or from being involved in the management of a company for a certain period of time. This can happen when a director is found to have acted inappropriately, such as by committing fraud, misconduct, or negligence, which has led to the company’s financial losses or insolvency.
The process of director disqualification is governed by the Company Directors Disqualification Act 1986 in the UK and by similar legislation in other countries. Disqualification orders can be made by a court or by the Insolvency Service following an investigation. The length of the disqualification period can vary depending on the severity of the misconduct and can range from a few months to a maximum of 15 years.
Disqualification of directors restricts a person from becoming a director or determining the conditions under which they cannot be appointed as a company director.
Under the Directors Disqualification under the Act of 1986, company directors can be disqualified from acting as directors if they are found guilty of ‘unfit conduct’.
You should always take the help of specialist director disqualification solicitors for legal help. Kangs Solicitors are one the top insolvency solicitors in the UK.
Effects of Disqualification
Director disqualification can have significant consequences for the individual and the company they were involved in.
Here are some of the effects of disqualification:
- Inability to act as a director: The most immediate effect of director disqualification is that the individual is prohibited from acting as a director of any company during the disqualification period. This can impact the individual’s career prospects and ability to earn a living.
- Personal liability: Disqualification does not relieve the individual of any personal liability for any wrongdoing that led to their disqualification. They may be required to pay damages or compensation to creditors, investors, or other parties affected by their misconduct.
- Criminal penalties: If a disqualified director continues to act as a director or be involved in the management of a company, they may face criminal penalties, including imprisonment.
- Damage to reputation: Director disqualification can damage the individual’s reputation, particularly if the reasons for disqualification are related to fraud or other serious misconduct.
- Impact on the company: If a director is disqualified, it can also have an impact on the company they were involved in. The company may struggle to attract investors or secure credit, and may even face insolvency if the misconduct was particularly severe.
The Grounds for Disqualification
Under the UK law, a director can be disqualified due to the following reasons:
- Where they have been declared as a person of unsound mind by a competent court.
- Where they can become undischarged insolvent.
- Where all the insolvency has been applied for, but the application still stands pending.
- Where there is any offence involving moral turpitude, they have been convicted of and sentenced for a period which can’t be less than six months.
- Any court or any tribunal that has passed any order that disqualifies them from being appointed as a director.
- Where they hold the shares of the Company and have made the payment of any such call, provided six months have passed since the last date to pay such call money.
- The Company still needs to repay the deposits accepted by it or pay interest thereon to redeem any payment on the due date or also can pay the due interest dividend declared, so such failure to pay or redeem continues for one year or more.
- They have not obtained a Director Identification Number (“DIN”).
- They are the directors of a company and have yet to file the annual returns for three years running, pay interest, or repay the deposits for over a year. They failed to pay any dividend that was declared for over a year or failed to redeem debentures or pay interest on debentures for over a year.
Remedies against the Disqualifications
If a director is disqualified, there are limited remedies available to them.
However, here are some potential avenues for challenging or reducing the disqualification:
- Appeal: The disqualified director may be able to appeal the disqualification order to a higher court. However, this can be a difficult and expensive process, and the grounds for appeal are limited.
- Negotiated settlements: In some cases, the disqualified director may be able to negotiate a settlement with the regulator or liquidator that reduces the length of the disqualification period or limits the scope of the disqualification.
- Undertakings: The disqualified director may be able to give an undertaking to the regulator or liquidator that they will not act as a director or be involved in the management of a company during the disqualification period. This can be a way to avoid the more severe consequences of a formal disqualification order.
- Disqualification undertakings: In certain circumstances, the disqualified director may be able to offer a disqualification undertaking to the regulator or liquidator, which can be a quicker and less expensive alternative to a formal disqualification order. This involves the director voluntarily agreeing to a disqualification for a specified period, without the need for a court order.
It is important to note that these remedies are not always available or effective, and that prevention is the best strategy for avoiding director disqualification. Directors must ensure that they act in accordance with their legal and regulatory obligations, and seek professional advice if they are unsure of their responsibilities or obligations.