Guidance

Company Directors Disqualification Act 1986 and failed companies

Updated 21 June 2022

1. What is director disqualification?

Director 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 permission from the court. The Company Directors Disqualification Act 1986 (CDDA) applies. The Insolvency Service may bring proceedings on behalf of the Secretary of State if the alleged unfit conduct falls within its remit and it is instructed (authorised) to do so.

Disqualification proceedings are a civil, not criminal, process.

Disqualification orders are made by the court. Alternatively, directors may offer to give a disqualification undertaking. Disqualification can last for up to 15 years.

The CDDA aims to maintain the integrity of the business environment; those who become directors of limited companies should:

• carry out their duties honestly and responsibly
• make sure they or the company complies with the law and all relevant regulations
• exercise adequate skill and care with proper regard to the interests of the company’s creditors, customers, shareholders, employees and, in some circumstances, the general public.

The majority of directors do this effectively. However, where they do not, director disqualification is a powerful tool which can be used to protect the public from those who abuse the privilege of limited liability.

In addition to companies, the disqualification regime also applies to the following organisations and their officers to the extent provided for in the CDDA or other legislation:

• limited liability partnerships (LLPs)
• general partnerships
• building societies
• incorporated friendly societies
• NHS foundation trusts
• registered societies
• charitable incorporated organisations
• further education bodies
• protected cell companies

2. What is a disqualification undertaking?

An undertaking is the administrative equivalent of a disqualification order and can be entered into, voluntarily, without the need for court proceedings. Once accepted by the Secretary of State it has the same effect as a court order and can only be amended by the court.

A director can offer to give an undertaking at any time during the investigation; however, the Secretary of State will refuse the offer if he is not satisfied that, taking all known information into account, it would be appropriate for him to accept the offer.

If an undertaking is accepted before court proceedings are commenced then the Insolvency Service will not recover any costs of their investigation from that director.

Once court proceedings have been commenced, a director may still offer to give an undertaking. If accepted, this will put a stop to the court proceedings. However, the director may be required to pay the costs and expenses incurred in the proceedings up to the date of the undertaking.

Many directors prefer to offer an undertaking at the earliest opportunity if they accept that the conduct alleged did happen. An undertaking allows them to ‘put the matter of disqualification behind them’ and move on.

It is important that a director obtains their own independent professional advice if they are uncertain whether they should offer an undertaking.

3. What are the effects of a disqualification order or disqualification undertaking?

Unless they have court permission, the person is disqualified by the CDDA for the period stated in the order or undertaking from:

• acting as a director of a company
• taking part, directly or indirectly, in the promotion, formation or management of a company or limited liability partnership
• being a receiver of a company’s property

That person also cannot act as an insolvency practitioner.

In addition to the above many other restrictions are placed on disqualified people by other legislation and regulations. Organisations known to apply restrictions or other requirements include:

• charities
• schools
• pension trustees
• police and police authorities
• registered social landlords
• health boards and social care bodies
• solicitors, barristers, accountants and other professionals

More information about the effects of a disqualification order or undertaking is available in our publication Effect of a disqualification. More information on our work.

4. Where does the order apply?

The ban on being a director applies to all registered and unregistered companies formed in England, Wales and Scotland.

It also applies to foreign companies if the company:

• is registered in England, Wales and Scotland
• has sufficient connection to England, Wales or Scotland (for example, if it carries on business or has assets here) even if it is not registered here.

The above restrictions also apply in Northern Ireland. For more information visit nibusinessinfo.co.uk.

Other regulations may impose different geographic restrictions and other countries and/or their organisations may impose their own restrictions on people disqualified by the CDDA.

5. Penalties for contravention of a disqualification order or undertaking

Anyone contravening a disqualification order or undertaking is committing a criminal offence and can be fined and/or sent to prison for up to 2 years. They could also be disqualified for a further period.

When someone contravenes an order or undertaking, they might also become personally liable for any debts of a company that are incurred during that period.

If the disqualified director asks somebody to act on their behalf then that person could also be prosecuted and/or disqualified and become personally liable for the company’s debts.

If it is a corporate director that is disqualified, then its officers or managers can be punished as if the order or undertaking applied to them personally for any contravention of the order or undertaking by the corporation.

6. When can the court make a disqualification order?

The court can do this for example, for:

• unfit conduct in the promotion, formation, management or liquidation of a company
• wrongful trading (such as trading while insolvent)
• failure to comply with filing requirements under the Companies Act legislation
• breaches of competition law
• following conviction for criminal offences (either in the UK or abroad) related to the promotion, formation, management or liquidation of a company.

7. What is unfit conduct?

There is no finite list of conduct which may lead to disqualification; however, examples include:

• conduct that seeks to deprive creditors of assets
• continuing to trade to the detriment of creditors when a company is insolvent
• fraudulent behaviour
• failure to keep proper accounting records
• failure to prepare and file accounts or make returns to Companies House
• failure to submit tax returns or fairly pay the tax due
• failure to comply with other regulatory requirements
• failure to co-operate with the official receiver and/or insolvency practitioner.

Unfit conduct in overseas companies after 1 October 2015 may also be taken into account.

8. Who can be disqualified?

The law applies not only to a person (or other legal entity) who has been formally appointed as a director but also to those who have acted as a director without being legally appointed, to shadow directors and to others who have instructed a director, who is subsequently disqualified, to act in an unfit manner. A shadow director is “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”.

9. What is the Insolvency Service’s role?

When a company has entered into formal insolvency proceedings, the official receiver, liquidator, receiver or administrator must submit to the Secretary of State a report on the conduct of all directors who were in office during the last 3 years of the company’s trading.

If a company has been dissolved without entering into formal insolvency proceedings, complaints about the conduct of a company’s directors can be made to the Insolvency Service.

Where we receive information to suggest serious corporate abuse either from the public or other regulators, our investigations teams have the power to conduct investigations into limited companies and limited liability partnerships which are actively trading, or which have ceased trading without entering into insolvency proceedings and have not been dissolved.

The Insolvency Service, acting on behalf of the Secretary of State, receives these reports and must decide whether it is in the public interest to investigate further and, ultimately, whether to seek a disqualification order.

To preserve the integrity of this process, this decision making function is exercised by a separate department to that carrying out the investigation and reporting function.

Except where settled by undertaking, any application for a disqualification order will be heard and decided by the court.

10. How will a director know if a disqualification order is to be sought?

Where we are investigating the conduct of a director, best efforts will always be made to contact that individual as early as possible to seek an explanation of the situation.

Where a final decision has been made to seek a disqualification order, the director will be notified in writing. If the director does not respond or a disqualification undertaking cannot be agreed then proceedings will be started at court. At this stage the director will be formally served with (sent) notice of the proceedings.

11. How long does the Secretary of State have to apply for a disqualification order?

The majority of applications made by the Service, on behalf of the Secretary of State, are made under section 6 of the CDDA. In such cases, the Secretary of State must make an application within 3 years of the first date of insolvency (such as the first winding-up order, voluntary liquidation, administrative receivership or administration) or the date of dissolution. In certain relatively rare circumstances, the court may extend that time.

Applications can also be made by the Service under sections 2, 5A and 8 of the CDDA. These applications can be made at any time and can be in relation to companies that are still trading or have not entered any formal insolvency procedure.

12. What happens when an application for disqualification is made?

The proceedings are usually brought by the Insolvency Service acting on behalf of the Secretary of State for Business and Trade. The matter is heard, and decided by the court.

Directors (defendants) have the opportunity to respond to the allegations raised and to give both the court and the Insolvency Service/Secretary of State reasons for their actions and, if they think the allegations are wrong, explain why they think that. They must do so by way of an affidavit (a written account of the relevant facts which is sworn on oath or affirmed, usually before a solicitor). There may also be affidavits sworn by other people (such as the company’s bankers, accountants and creditors) presented as evidence to support the case for or against the directors. These people may also be called as witnesses at any hearing. The court will then decide whether the alleged conduct makes the directors unfit to act in the management of a company and, if so, for how long they should be disqualified.

A disqualification order usually carries with it an order to pay the costs and expenses of the Secretary of State.

At any stage in the proceedings a director may give an undertaking to the Secretary of State that has the same effect as a disqualification order and, if accepted, will put a stop to the court proceedings. The director may be required to pay the costs and expenses incurred in the proceedings up to the date of the undertaking.

At all stages in the proceedings any new information provided to the Service or the court is reviewed. In the event that the proceedings are no longer considered to be in the public interest then the proceedings will be discontinued (stopped).

13. When will the order or undertaking come into force?

A disqualification order usually comes into effect 21 days after the date of the order.

An undertaking usually commences 21 days after the date that it is signed as accepted by an authorised person within the Insolvency Service acting on behalf of the Secretary of State.

14. What other action might be taken?

The disqualification, or absence of a disqualification, does not prevent any other investigation, action or legal proceedings, whether civil or criminal, from being conducted against a director or any other party by or on behalf of the Secretary of State (including through the Insolvency Service), any other agency, body, authority, person or interested party.

This includes any action that may be taken by or on behalf of any office holder such as a liquidator or administrator.

Compensation orders may be sought in cases where the conduct for which a person has been disqualified has led to a direct loss to creditors and no, or insufficient repayment has resulted from any insolvency process, or the company has been dissolved. Compensation proceedings may also be settled by undertaking. The relevant misconduct must have occurred after 1 October 2015.

Where appropriate the Service will also bring matters of possible unfit conduct to the attention of any other relevant regulator for them to consider.

15. How to obtain permission to act as a director whilst disqualified

A person who is subject to an order or undertaking may apply to the court under section 17 of the CDDA for permission to act as a director or to take part in the promotion, formation or management of a named company. The court cannot give permission to a disqualified person to act as an insolvency practitioner.

The applicant will usually have to satisfy the court that they have a reasonable need to do what they are asking, not just that they want to be a director.

They must also satisfy the court that, if it gives the permission requested, the public will be adequately protected and therefore the court may require safeguards and may impose conditions/restrictions on the applicant.

Anyone considering such an application should contact the Insolvency Service at legalservices@insolvency.gov.uk for further general information and guidance. However, it is important that they also consider obtaining their own independent professional advice.

16. How to find out if somebody is a disqualified director

Companies House maintains the disqualified directors register. The register includes details of directors disqualified by the courts or by undertaking within the provisions of the CDDA.

This register will also tell you if the individual has obtained permission from the court to act in relation to specified companies.

The Insolvency Service also offers an online facility which provides details of recent disqualification results obtained by us including details of the unfit conduct that led to the disqualification. It is also possible to request details of the unfit conduct for older cases.

In addition, it is an offence for an undischarged bankrupt, somebody subject to a debt relief order or somebody subject to a bankruptcy or debt relief restrictions order or undertaking to act as a director of, or directly or indirectly to take part in or be concerned in the promotion, formation or management of a company, except with leave of the court. The Insolvency Service maintains the Individual Insolvency Register (IIR) which contains details of these individuals.

You can access all these at www.gov.uk/search-the-register-of-disqualified-company-directors.

17. How to complain about a director

To access our complaint forms or to find out more about disqualification and how to complain about a company director or a disqualified director visit our website at

www.gov.uk/insolvency-service/investigation-enforcement.

18. Where can I get more information?

For more information on our investigation and disqualification work, visit our website at www.gov.uk/insolvency-service/investigation-enforcement.

Further information regarding enforcement action including statistical data can be found within the Insolvency Service’s Annual Report and Accounts.

All our publications are available at https://www.gov.uk/guidance/guidance-on-personal-debt-relief-options-company-liquidation-investigation-and-enforcement.

HM Courts & Tribunals Service publishes a series of information publications and contact details:

HM Courts and Tribunals Service

Contact form http://www.gov.uk/hmcts

For enquiries relating to Courts or Tribunals.

For general insolvency enquiries, contact the Insolvency Service helpline:

Insolvency Service helpline

Contact form http://www.insolvencyd...

Insolvency Service helpline 0300 678 0015

Please only attend our offices if you have an appointment.

For information about the insolvency process contact the Insolvency Service helpline. The helpline is open 9am to 5pm Monday to Thursday, and 9am to 3pm on Friday.

We can give you information about processes administered or regulated by the Insolvency Service. This includes bankruptcy, debt relief orders and company liquidations.

We cannot give you: legal or financial advice, information on specific insolvency cases, information or advice about other government departments or information about redundancy payments.

If you are contacting about an existing bankruptcy or compulsory company liquidation case, use our ‘contact an official receiver’ guidance.

Contact an official receiver

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