Many directors assume that if a company enters liquidation they will automatically be banned from acting as a director again. This is a common concern, particularly for entrepreneurs who want to start another business after a failed venture.
In England and Wales, liquidation itself does not automatically prevent someone from becoming a director in the future. Many successful business owners have experienced a company failure at some point in their careers.
However, the position can become more complicated if concerns arise about the way the company was managed before it entered insolvency.
Does liquidation automatically disqualify a director?
No.
When a company goes into liquidation, the directors do not automatically lose the right to run another business. The fact that a company has failed does not by itself mean that the directors have done anything wrong.
Business failures occur for many reasons, including market conditions, loss of key customers or unexpected financial pressure.
In most cases, directors remain free to act as directors of other companies unless further action is taken by regulators.
Will the Insolvency Service investigate?
In most insolvent liquidations, the conduct of the directors will be reviewed.
The liquidator is required to submit a report on the conduct of the directors to the Insolvency Service. This allows the authorities to consider whether there is evidence of misconduct or unfit behaviour.
For many directors this process leads to no further action. However, if concerns arise about the way the company was managed, the Insolvency Service may decide to investigate further.
When can a director be disqualified?
A director may be disqualified if their conduct is considered unfit to manage a company.
This might arise where a director has allowed a company to trade irresponsibly, failed to maintain proper financial records or acted in a way that harmed creditors.
If the authorities decide to pursue disqualification, the director may be offered the opportunity to give a voluntary disqualification undertaking or may face court proceedings seeking a formal disqualification order.
Disqualification periods can range from two to fifteen years depending on the seriousness of the conduct involved.
Can a disqualified director still run a business?
A person who is disqualified cannot act as a director of a company or take part in the management of a company without court permission.
However, the law does allow a disqualified director to apply to the court for permission to act in certain circumstances. This is often done where a director wishes to remain involved in a particular business or where their expertise is considered important to the company.
The court will examine the circumstances carefully before granting such permission.
At FWJ we have 100% success record in applications for directors to remain a director despite disqualification – stretching over a 20 year period.
Starting again after a company failure
Many directors go on to establish new businesses after a company liquidation. Provided there has been no misconduct and no disqualification order is in place, there is usually nothing preventing a director from doing so.
It is important, however, to ensure that all legal requirements are followed, including any rules relating to the reuse of company names following liquidation.
For directors who are uncertain about their position, taking advice can help clarify what steps can safely be taken when moving forward.
