Insolvency and disqualification of directors
Under the Company Directors Disqualification Act 1986 (CDDA) a court can disqualify a director for the following reasons:
● any general misconduct in connection with companies
● if they were convicted for an indictable offence in connection with the promotion, formation, management or liquidation of a company
● involvement in fraud during liquidation
● persistent breaches of companies legislation (eg. omitting to submit required documents with Companies House)
● in the case of unfit conduct as the director of a company that has at any time become insolvent
Disqualified directors are not allowed to:
● be a director of any company registered in the UK
● be a director of an overseas company with connections to the UK
● be involved in the formation, marketing or running of a company
● sit on the board of a charity, school, police authority, health board or social care body
● act as a pension trustee
● become a solicitor, barrister, accountant or a registered social landlord
A disqualification lasts for 2 - 15 years. The details of disqualified directors are kept on the Companies House database and are automatically removed when the disqualification ends. Breaching the terms of disqualification can lead to a fine or up to two years in prison.
Insolvency will not normally result in disqualification as a director. In fact, only about 5% of disqualifications are due to insolvency. The CDDA is only used when it is proven that a director has acted wrongfully, fraudulently, or has essentially acted very badly.
However, you must be aware of your duties as a company director at all times, particularly when there is any indication that your business is getting into financial difficulties.