The Company Directors Disqualification Act 1986 was a piece of legislation introduced to protect the public interest from directors who may otherwise take the benefit of the limited liability status of a company to run a profitable business without paying proper attention to the simultaneous requirement to ensure that such trading does not prejudice stakeholders, including members of the public.
Stakeholders can include fellow directors, government institutions, financial institutions, employees, creditors and customers. One of the most common parties to suffer from a company default, or even insolvency, is Her Majesty’s Revenue & Customs (“HMRC”) who are often the last to be paid where a company is suffering cash flow problems.
However, director disqualification is primarily for the purpose of protecting the public interest, not punishing the guilty. Accordingly, directors who are disqualified are often not criminals, but may be merely negligent or even, dare we say it, disorganised (and as a result present a risk to the public as a director of a limited company).
Most commonly, director disqualification proceedings are brought where a company is placed into insolvency proceedings. See a more comprehensive explanation of the most common grounds of misconduct which could merit disqualification as a director.
Other circumstances of director disqualification
Outside these circumstances, directors may be disqualified where they are considered a risk to the public or found liable for criminal offences including where a company is wound-up in the public interest, where a director is found guilty of a criminal offence or where a director/the company have persistently breached the filing requirements of the Companies Act 2006.
However, and potentially far more serious, are circumstances where a director is liable for fraud.
Why disqualify for fraud?
There is a separate and distinct provision within the relevant legislation that permits the Secretary of State to seek the disqualification of a director if they can be shown to have been involved in acts of fraud while appointed a director of a company and those acts of fraud have led to losses to creditors.
This provision is set out separately as a result of the serious concern that fraud presents to the integrity of the UK marketplace, where directors of all limited companies hold a position of trust and fidelity to all parties with whom they deal.
While companies are essentially private enterprises set up (in most circumstances) to make a profit for its shareholders, this profit cannot be gained through deception designed solely for the purpose of financial gain without any intention to deliver what is promised.
Consequences of being disqualified for fraud
Where director disqualification proceedings are threatened or issued as a result of allegations of fraud, the disqualification period sought will almost always be within the top bracket of director disqualification, being a period in excess of 10 years up to the maximum disqualification period of 15 years.
Fraud is considered extremely serious and, no matter whether a director signs a Disqualification Undertaking or is disqualified in proceedings, s/he is unlikely to be able to then seek leave to be a director under section 17 of the Company Directors Disqualification Act 1986.
Circumstances of disqualification for fraud
The number of directors disqualified solely for fraud (although fraud can pervade under many different headings leading to disqualification as a director) are few because of the high threshold required to prove such offences and the evidential burden of proving the fraud.
Fraud generally refers to an abuse of a trusted position and, in respect of director disqualification proceedings, this refers to circumstances of fraudulent trading, where a company’s business is run with the knowledge that a company has no likelihood of avoiding insolvency and with the intent to defraud third parties (usually creditors) during this period.
The common grounds for a director to be disqualified for fraud is in criminal proceedings for fraudulent trading under the Companies Act 2006, although rarely a conviction may not be required and a disqualification claim can be brought on its own.
At Francis Wilks & Jones we are able to advise on any risk you or your business may face as a result of being subject to a disqualification claim for fraud.
Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.