What is directors disqualification?
Directors disqualification is the process whereby a person is disqualified, for a specified period, from becoming a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without leave of the Court.
A disqualification order is made by the High Court under the Company Directors Disqualification (Northern Ireland) Order 2002.
The Order applies not only to a person who has been formally appointed as a director but also to shadow directors, and those people who have carried out the functions of a director.
Without specific permission of the Court it disqualifies a person from:
- becoming a director of a company
- directly or indirectly being concerned or taking part in the promotion, formation or management of a company
- being a liquidator or an administrator of a company
- being a receiver or manager of a company's property
Disqualification proceedings are taken under civil law, not criminal law, but a criminal court may also decide to make a disqualification order after conviction for certain criminal offences.
How long will I be disqualified for?
An order for disqualification can be made under a number of different Articles of the Company Directors Disqualification (Northern Ireland) Order 2002. The order will specify the period of disqualification. For orders made against an unfit director of an insolvent company, there is a minimum period of two years and a maximum of 15 years.
On 5 September 2003 disqualification undertakings were introduced, which allowed directors, with the agreement of the department, to avoid the need for a court hearing by offering an acceptable disqualification undertaking. This has exactly the same legal effect as a disqualification order made by the court, and will usually include a schedule identifying the directors unfit conduct. The consequences of breaching a disqualification undertaking are the same as those for breaching a disqualification order.
When can disqualification occur?
When a company has failed, the Official Receiver (or Insolvency Practitioner in a creditors' voluntary liquidation, an administrative receivership or an administration) sends the department a report on the conduct of all directors who were in office in the last three years of the company's trading.
When a company has been dissolved the department can investigate any matters of unfitness which are reported to the Insolvency Service.
The department has to decide whether it is in the public interest to seek a disqualification order. Any application is heard and decided by the Court.
This involves consideration of a number of factors including the protection of the public, the nature of the allegations at issue, the directors responsibility in respect of such allegations together with any aggravating or mitigating factors and the prospect of success of proceedings should they issue.
The department considers the nature of any matters of unfitness and their impact, not only to the date of the insolvency but also the effect a disqualification might have as a deterrent or in protection of the public.
The department also takes into account any other relevant factors such as personal losses incurred, the period trading, and the age and state of health of the directors.
Conduct which may lead to disqualification
Examples of conduct which may lead to disqualification:
- continuing to trade to the detriment of creditors at a time when the company was insolvent
- failure to keep proper accounting records
- failure to prepare and file accounts or make returns to the Companies Registry
- failure to submit tax returns or pay over to the Crown tax or other money due
- failure to co-operate with the OR/IP
How will I know if a disqualification order is to be sought against me?
Notification of a decision to apply for a disqualification order will be sent to the last address provided to the Companies Registry or to the Official Receiver/Insolvency Practitioner.
The application for disqualification has to be made within three years of the date of the winding-up order (or any earlier voluntary liquidation, administrative receivership or administration), unless the Court extends the time.
What happens after an application for disqualification is made?
The department files its application in the High Court supported by one or more affidavits containing evidence of unfit conduct of the directors and sends a copy to the directors.
The directors will have the opportunity to give the Court explanations or reasons for their actions - and may do so in a replying affidavit. The High Court will then decide whether the conduct makes the directors unfit to act in the management of a company and, if so, for how long they should be disqualified.
At any stage in these proceedings you may give an undertaking to the department that has the same effect as a disqualification order and such an undertaking will normally put a stop to the Court proceedings.