All company directors have a number of obligations they need to follow. Some of those obligations may appear obvious, but some are less so. The key thing with all of them is that the failure to discharge one or more of these obligations can lead to the director being banned from acting as a company director for a fixed period – also known as director disqualification.
It is therefore very important that Directors understand what these obligations are, and how to avoid breaches which could result in them being banned.
What Is Director Disqualification?
Director disqualification is a legal restriction imposed on an individual whereby they are prohibited from acting as a director of a company. In addition, they are unable to participate in the management of a Company. In the UK, this prohibition lasts anywhere from 2 to 15 years. The length of the restriction depends on the severity of the breach(es).
The purpose behind director disqualification is to provide protection for the creditors of the company, its employees, customers, and the general public from directors who have been found to be ‘unfit’ to manage companies.
Causes Of Director Disqualification
There are many reasons why a Director might be subject to Company Director Disqualification. Here are just a few examples:
- Wrongful or fraudulent trading – This means continuing to trade whilst insolvent, or misleading creditors.
- Poor record keeping – Not keeping adequate accounting records.
- Non-compliance with taxes – Repeatedly failing to pay VAT, PAYE, Corporation Tax, etc.
- Abuse of company funds – Using company money or assets for personal benefit without authority.
- Breach of directors’ duties – Acting contrary to the best interests of the company.
- Failure to file statutory accounts – Consistently missing filing deadlines for accounts and statutory filings.
Risks And Consequences
If a director is disqualified, then that person cannot legally act as a director or be involved in managing a company without court approval. Consequently, if a director has breached their obligations and has subsequently been disqualified, there are many risks and consequences that the disqualified director may face, including:
- Damage to professional reputation.
- Difficulty obtaining business finance.
- Personal liability for company debts.
- Fines or criminal penalties for a breach of a disqualification order.
Avoiding Director Disqualification
As a Director, there are several steps you can take to minimise the likelihood of being banned from acting as a Director:
- Keep accurate records – Ensure that you keep adequate records of your business. Ensure that your accounts are prepared accurately and in a timely manner.
- Monitor financial health – Regularly monitor your cash flow and overall business finances. If you believe your business is insolvent, contact a licensed insolvency practitioner immediately, as liquidation and director disqualification can often be linked.
- Meet your compliance obligations – File all relevant submissions and tax returns on time. When submitting your returns, make sure all monies owed to HMRC have been paid.
- Understand your obligations – Be aware of the law relating to your position as a Director. Seek professional guidance where possible, especially in relation to matters beyond your knowledge.
Director disqualification is a serious matter. It will impact not only your profession but also your ability to engage in business for a long while after the ban ends. Therefore, taking steps to prevent this from occurring should be at the forefront of your mind. Most director disqualifications can be avoided through prudent practice, financial discipline, and awareness of director obligations. If you have any questions about director disqualification, you can always give the professional team at Ballard Business Recovery a call for professional advice.
