Director disqualification, explained

Director disqualification in the UK: how it works

Director disqualification bans a person from being a company director, or from taking part in forming or running a company, for up to 15 years. Cases are usually brought by the Insolvency Service under the Company Directors Disqualification Act 1986, and most of its applications follow a company’s insolvency or dissolution. Here is how the grounds, the process, the penalties and compensation orders work, and what to do if a letter arrives.

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What disqualification is, and the grounds for it

Director disqualification is governed by the Company Directors Disqualification Act 1986 (CDDA), and proceedings brought by the Insolvency Service are civil, not criminal. Without the court’s permission, a disqualified person must not be a director or take part in the promotion, formation or management of a company (section 1). It reaches appointed directors, people acting as directors without appointment and shadow directors, and extends to LLPs.

Most Insolvency Service applications are under section 6, which obliges the court to disqualify a director of a company that became insolvent, or was dissolved without becoming insolvent, whose conduct makes them “unfit to be concerned in the management of a company”. The main grounds:

CDDA section	Ground	Length of ban
6	Unfit director of an insolvent or dissolved company (order mandatory)	2 to 15 years
8	Unfitness, on an application made in the public interest; can involve trading companies	Up to 15 years
8ZA	Person whose instructions led to a director’s unfit conduct	2 to 15 years
2	Indictable offence connected with a company’s promotion, formation, management, liquidation or striking off	Up to 5 years (court of summary jurisdiction), otherwise 15
3 and 5	Persistent default on Companies House filing and related requirements (three or more in five years)	Up to 5 years
4	Fraudulent trading, or other fraud or breach of duty, in a winding up	Up to 15 years
5A	Equivalent company-related conviction abroad	Up to 15 years
9A	Competition law breach plus unfit conduct (CMA or a specified regulator applies)	Up to 15 years
10	Participation in wrongful trading (court declares a liability to contribute)	Up to 15 years
8ZF and 8ZG	Directors of companies promoting tax avoidance (HMRC applies)	Up to 15 years; 2-year minimum under 8ZF

Some bans need no order. Undischarged bankrupts and people subject to a debt relief order or to bankruptcy or debt relief restrictions commit an offence by acting as a director without court permission (section 11).

Who investigates: the Insolvency Service

The Insolvency Service investigates and brings most cases for the Secretary of State for Business and Trade. When a company enters insolvent liquidation, administration or administrative receivership, the office-holder must report on everyone who was a director on the insolvency date or in the three years before it, normally within three months (section 7A). The Service also acts on complaints about dissolved companies, and looks at trading companies showing signs of serious corporate abuse.

If it decides an investigation is in the public interest, this may involve correspondence or interviews with officers, a review of records, and enquiries of creditors, banks, accountants and HMRC. In judging unfitness, the court and the Secretary of State must have regard in particular to Schedule 1 (section 12C): responsibility for the insolvency or for material breaches of legislative or other requirements, misfeasance or breach of fiduciary duty, frequency, and the loss or harm caused. The Service’s examples include trading on to creditors’ detriment while insolvent, failing to keep accounting records or file accounts and returns, not paying tax due, and fraud. It also says misconduct is only one of many reasons companies fail, and that directors should only be disqualified on evidence of wrongdoing or unfit conduct.

Section 6 applications must be made within three years of the insolvency or dissolution unless the court allows more time (section 7(2)); the Small Business, Enterprise and Employment Act 2015 extended this from two years. Applications under sections 2, 5A and 8 can be made at any time.

Disqualification orders vs undertakings

A disqualification order is made by the court after the director has had the chance to respond by affidavit. Unless the court orders otherwise, the ban starts 21 days after the order (section 1(2)), and an order usually carries an order to pay the Secretary of State’s costs.

A disqualification undertaking is the administrative equivalent: the director voluntarily accepts a ban without a court hearing. Once the Secretary of State accepts it, it has the same effect as a court order and can only be amended by the court. The 15-year maximum applies, with a two-year minimum where it replaces a section 6 case (section 1A(2)), and it usually starts 21 days after acceptance.

If an undertaking is accepted before proceedings start, the Insolvency Service does not recover its investigation costs; later, it still ends the case, but the director may have to pay costs to that date. Where more than one ban applies, the periods run concurrently. Orders and undertakings are recorded on the Companies House register of disqualified directors.

What a disqualified person cannot do, and the cost of a breach

Unless the court gives permission, a disqualified person cannot:

• act as a director, which means resigning any existing directorships;
• take part, directly or indirectly, in the promotion, formation or management of a company or LLP;
• act as a receiver of a company’s property; or
• act as an insolvency practitioner, which the court cannot permit.

The ban covers companies formed in England, Wales and Scotland and foreign companies with a sufficient connection to Great Britain, and it also applies in Northern Ireland. Neither a new job title nor having others manage a company on the disqualified person’s instructions gets round it. Under the Insolvency Service’s guidance on the effect of a disqualification, a disqualified person can still be an employee, a sole trader, a partner (but not in an LLP) or a shareholder. “Management” is read widely, though, and may include negotiating with suppliers, hiring staff or handling the company bank account. Other rules can restrict roles such as charity trustee, school governor and pension trustee. The court can give permission to act for a named company (section 17), usually only where there is a reasonable need and the public will be adequately protected.

Breaching a disqualification is a criminal offence, punishable on indictment by up to two years’ imprisonment, a fine, or both (section 13), and a further ban can follow. Anyone managing a company in breach of a ban is personally liable, jointly and severally with the company, for debts incurred during that time (section 15), as is anyone in management who acts on instructions from someone they know to be disqualified or an undischarged bankrupt. See what a founder is personally liable for.

Compensation orders

The Small Business, Enterprise and Employment Act 2015 added compensation orders to the CDDA (sections 15A to 15C) from 1 October 2015. On the Secretary of State’s application, the court can order a disqualified person to pay compensation where the conduct behind their disqualification order or undertaking caused loss to creditors of an insolvent company, or of one dissolved without becoming insolvent. The application must be made within two years of the order or undertaking, and only conduct on or after 1 October 2015 counts.

The court must have regard to the loss, the nature of the conduct and any other financial contribution already made in recompense. Payment goes to the Secretary of State for specified creditors, or as a contribution to a company’s assets, and is provable as a bankruptcy debt. A compensation undertaking can be offered instead, with the same effect once accepted. The Insolvency Service’s guide to compensation orders says details are usually disclosable for six years or the length of the ban, whichever is longer.

If the Insolvency Service contacts you

If the Insolvency Service opens an investigation, it will write setting out its initial concerns and invite your comments. Its guidance says it is in your best interests to respond, because otherwise it can only rely on information from other sources. If disqualification or compensation is recommended, you will receive a summary of the alleged misconduct and a further chance to respond.

• Take legal advice early, particularly before deciding whether to offer an undertaking.
• Respond and cooperate with the liquidator or administrator, and keep your contact details up to date.
• Gather the company records and your explanation of the decisions being questioned.
• Tell your D&O insurer or broker as soon as the letter arrives, and check what the policy wording requires.

Directors’ and officers’ (D&O) insurance commonly includes cover for the legal costs of defending disqualification proceedings and for representation at investigations, subject to the policy wording, limits and exclusions. Policies typically exclude deliberate fraud or dishonesty and do not pay fines or penalties. Apex arranges D&O insurance: see D&O defence costs and investigations cover, how much D&O cover a startup needs, our D&O guide for startups and the founder insurance hub. This page is general information, not legal advice.

Frequently asked

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not legal or tax advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.