There are many ways a director can be disqualified. In most cases, it will be initiated by the Insolvency Service, which has the power to investigate the conduct of directors of insolvent companies. Alternatively, a court can initiate a ban, usually for fraudulent or wrongful trading cases, or Companies House for failure to maintain a company’s filing record. (Companies House has its own prosecution team!).
Disqualification claims will only be issued if the Insolvency Service investigations support allegations of misconduct by a director. Where a company has become insolvent, a director's misconduct may not be deliberately fraudulent or criminal and will often include actions taken by directors innocently, in error or as a result of a negligent omission. Whilst not an exhaustive list, below are some of the common examples of misconduct that will give rise to a disqualification:
- Non-payment of HMRC and/or failure to submit returns;
- Acting whilst disqualified;
- Acting contrary to the public interest;
- Abuse of directors' loan account;
- Drawing illegal dividends;
- Acting in breach of financial service regulations;
- Trading whilst insolvent;
- Trading to the detriment of creditors;
- Failure to prepare and file accounts or make returns to Companies House;
- Hiding or disposing of assets;
- Failure to keep proper accounting records;
- Failure to cooperate with an insolvency practitioner or office holder.
Covid fraud was a priority for the Insolvency Service in 2023-24 with 62% of director bans solely relating to misconduct and fraud related to bounce back loans and other covid schemes such as Eat Out to Help Out. In total, 831 directors were banned after investigations by the Insolvency Service in 2023-24 which found widespread Covid loan and support programme abuse.
The majority of the individuals avoided criminal charges, but there were 22 criminal prosecutions of company directors, representing a quarter of legal actions brought by the Insolvency Service, while steps were taken to recover £2,833,937 from 90 directors guilty of covid loan fraud through compensation orders.
For the first time the number of directors disqualified for more than 10 years represented nearly half of all bans at 47%, up from 30% the previous year. This is a massive change from 2021-22 when only 6% or 40 odd directors were disqualified for such a long period.
The annual report also showed that Official Receivers handled 10,907 new insolvency cases, up significantly from 9,000 in 2022-23 and returned £59.2m to creditors - an increase of nearly £15m on the previous year’s £45.7m.
There has also been increased action on money laundering and crypto scams with the creation of a dedicated anti money laundering investigation team to focus on misconduct by businesses listed on the Companies House register.
The consequences of being banned as a director are far-reaching. They will not only be prohibited from acting as a director or participating in a company's management, but they will also face several other restrictions on other business activities. Breaching a disqualification order is a criminal offence that can result in a fine, imprisonment or both.
During the period of a disqualification order or undertaking, you cannot act as a director and cannot take part, directly or indirectly, in the formation, promotion, and management of a company or limited liability partnership (“LLP”). But the broader impact of being banned as a director should be considered. The personal consequences are far-reaching and include:
- Effecting current employment and business interests;
- Restrictions on future employment;
- Criminal penalties if a disqualification order or undertaking is breached;
- Compensation orders;
- Other financial penalties – e.g., personal liability for company debts if a disqualification order or undertaking is breached;
- Professional and personal embarrassment;
- Potential claims by the liquidator/administrator of the company;
If a director faces disqualification, they should seek legal advice immediately. In doing so, they may be able to challenge the proposed disqualification order or negotiate a reduced ban with the Insolvency Service. They should also address any underlying issues that led to the disqualification, such as improving their management practices or addressing all financial matters, particularly if they wish to apply for leave to act as a director, notwithstanding a ban.
If you have any concerns, you should seek legal advice.
