Why are some company directors disqualified?

by Sean O'Neill on Mar 8, 2022

Why are some company directors disqualified

Why are some company directors disqualified? You can be banned (‘disqualified’) from being a company director if you don’t meet your many legal responsibilities and fiduciary duties or if you are convicted of an indictable offence.

The responsibilities of a company director are quite serious. The days of directors attending a few board meetings for a fee, with little concern for the consequences if anything terrible happened to their company, are over. Directors are now held accountable, even if they claim they did not have a decision-making position.

Directors can be reported as ‘unit’

One of the most common ways to get disqualified is if you are reported as being unfit. Anyone can report an unfit director. ‘Unfit conduct’ includes:

  • Allowing a company to continue trading even when it is not able to pay its creditors
  • Not keeping proper accounting records
  • Not submitting accounts and returns 
  • Nonpayment of taxes by the company
  • Personal use of company funds or assets

Also, in most cases, you cannot be a director of a company if you are under bankruptcy or debt relief restrictions.

Convicted of a crime

Stubbs Gazette mentions that although directors can be disqualified following an order of disqualification on several grounds (for example, failure to comply with the Companies Acts, incompetence or irresponsibility, a lack of commercial integrity), a significant amount of individuals are disqualified due to some form of financial crime “that has nothing to do with running a company, but that automatically adds them to the disqualified list because of the nature of the crime”.

A director may automatically be disqualified if found guilty of an indictable offence.

In Ireland, individuals convicted in the Circuit Court or a higher Court of an indictable offence relating to a company or involving fraud or dishonesty are automatically disqualified for five years from acting as company officers (directors, secretary, auditor, liquidator, etc.)

On the other hand, restricted directors are usually accused of some offence directly related to the Companies Act – perhaps fabricating something in the company accounts or continuing to trade while insolvent, or some other corporate misdemeanour.

How disqualification works

If your company is involved in insolvency proceedings or a complaint, the authorities in your jurisdiction may investigate your company (or you personally as a director).

They will inform you in writing if they believe you have not followed your legal responsibilities. For example:

  • Why they think you’re unfit to be a director
  • Why they plan to begin disqualification procedures
  • The best way to respond

You can either:

  • Defend your case in court if you disagree with the decision 
  • Make a ‘disqualification undertaking’ – that is, you voluntarily disqualify yourself and the court action against you ends

If you receive a letter about disqualification, it is advised that you seek legal advice.

Aside from The Insolvency Service, other bodies in the UK can apply to have you disqualified under certain circumstances, e.g.

  • Companies House
  • The Competition and Markets Authority (CMA)
  • The courts
  • A company insolvency practitioner

If you are disqualified as a director

In the UK, you’ll be disqualified for up to 15 years. In Ireland, it is usually five years. In the US, it is generally between two and fifteen years. 

Once you are disqualified as a director, you can’t:

  • Be a director of any company registered in your country or an overseas company that has connections with your country
  • Be involved in forming, marketing or running a company

If you fail to comply with the terms of the disqualification, you may be fined or sent to prison.

Other restrictions on disqualified directors

If you are disqualified, there are other restrictions. For example, you may not be allowed to:

  • Serve on the board of a charity, school, or police force
  • Become a pension trustee
  • Become a registered social landlord
  • Serve on a health board or social care board
  • Be a lawyer, barrister, or accountant

Don’t forget that if you carry out a company’s business for someone who is disqualified, you can also be prosecuted and liable for what happens, including any debts that occur.

Download our brochure for the Diploma in Corporate Governance

Related Posts