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The facts behind director disqualification proceedings

June 11, 2009

Each year around 1200 individuals are disqualified as directors by the Secretary of State for Business Enterprise and Regulatory Reform (BERR). 

 The Secretary of State has to commence court proceedings for disqualification within 2 years of the date that the company in question entered administration, administrative receivership or liquidation. Such proceedings are taken in either the Companies Court in London or in certain local County Courts and can be brought against both formally appointed directors and 'shadow directors'; those individuals who have held themselves out as being a director, albeit they are not registered as directors. Disqualification proceedings are a civil law action taken under the Company Directors Disqualification Act 1986 and a disqualification order can be made against the director for a period of between 2 and 15 years. The length of disqualification is a matter of discretion for the court, with more serious misconduct attracting a disqualification order in the top bracket of over 10 years. 

Disqualification figures for 2007 to 2008 indicate that 60% of disqualification orders were for 5 years, 33% were for 6 to 10 years and the remaining 7% were in the top bracket. There are a wide variety of types of conduct which may result in a disqualification Order being made. Examples include: 1. Continuing to trade to the detriment of creditors (either trade creditors or Revenue and Customs) at a time when the company was insolvent 2. Failing to keep proper books and records and persistently breaching company legislation 3. The director allows the company to use a prohibited name 4. 

The director fails to co-operate with a liquidator / administrator of the company Disqualification proceedings are only commenced after a report has been sent to BERR by the official receiver, liquidator or administrator indicating that they have concerns about the director's conduct. BERR then conducts its own investigations. What happens if you find yourself in this situation? It is possible to defend these proceedings, particularly if the director can prove that the insolvency of the company resulted from commercial misjudgement rather than negligence or incompetence on their part. Alternatively, a settlement can be negotiated with the Secretary of State, without the need to proceed to a trial. 

This is done by way of an undertaking whereby the director agrees to be disqualified for a period that is shorter than that sought by the Secretary of State in the proceedings. It is possible for a director who is subject to a Disqualification Order or who has undertaken to be disqualified, to obtain leave of the court to act as a director of a specific company by virtue of section 17 of the Company Directors Disqualification Act. A final point: Beware those that claim, "of course you can defend this," because often the time and money spent on building a defence would be better applied / spent on negotiating a shorter disqualification period. In summary, take advice from an experienced lawyer.Published - June 2009This article is provided for general information only. 

Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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