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Disqualification of directors & insolvency

Insolvency and disqualification of directors

When can company directors be disqualified?

Under the Company Directors Disqualification Act 1986 (CDDA) a court candisqualify 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

What happens when a director is disqualified?

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.

How to avoid disqualification during insolvency

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. Always ensure that administration is taken care of properly and forms are submitted to Companies House on time. When insolvency looks like it could be on the cards, make sure you do everything you can to protect the company and its creditors. If you fail to take action and allow the company to become even more indebted, you can end up becoming personally liable and potentially even disqualified. It’s important to record the action you take or your representations to the other directors in board minutes, so that these can be referred to at a later date.

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