Acting whilst disqualified
Where a director has been disqualified, whether that be as a result of Bankruptcy, criminal proceedings, issued disqualification proceedings or following the provision of a Disqualification Undertaking, they are prohibited from acting as a director or acting in the management of any company in the UK.
The statutory prohibition that applies to disqualified directors states as follows:
“he shall not be a director of a company, act as receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court,”
The above restrictions apply to all forms of management and being “a director of a company” includes acting as a shadow director, where other directors are instructed on all or key issues by a third party who sits “in the shadows” and is not listed on Companies House or otherwise formally recognised as a director.
Subsequent Company Insolvency
Where a company has been placed into insolvency, the Secretary of State will carry out the required investigation via the Insolvency Service before it then decides, after following its own internal procedures as to whether Directors Disqualification proceedings can be commenced against the director which then have ultimately lead to disqualification proceedings being issued or a Director Disqualification Undertaking being sought.
Where these investigations reveal that either the appointed director or another party (often not recorded formally as a director) have previously been disqualified as a director, then the investigations may also focus on the allegation that an individual acted as a director or in the management of that company, despite being prohibited as a result of their previous disqualification.
Acting whilst Disqualified
We often see circumstances where a director is subject to disqualification proceedings some years after a previous company failure and this adversely affects his/her ability to run their new company, which is often more successful (perhaps off the back of their recent experience).
In a majority of scenarios that director will resign their position and cease to act as a director or in any way in the management of their new company, although it is important to note that disqualification does not prohibit you from being a shareholder of a company or in any way having a financial interest in a company
However, where it is difficult for that director to completely cut him/herself off from the day-to-day affairs (or any part) of the company’s business, then it is often the case that the director will continue to be acting in the management or as director of that company, in breach of the statutory disqualification restrictions.
Acting as a Shadow Director or De Facto Director
As stated above, a shadow director sits in the shadows instructing directors of the company (in whole or part) on issues which fall within the director’s responsibilities. This is very different from a professional advisor, although disqualified directors face a risk in seeking the protection of “professional advisor” status when attending board meetings or in any way supporting directors fulfil their duties.
In acting as a “shadow director” the director will be in effect integrally involved in the management of the company without being listed as a director on Companies House (the law no longer differentiates between a director registered at Companies House and someone who directs the company without holding him/herself out as a director).
Equally, an individual acting as a director, signing off documents or in any way holding him/herself out as a director, but not being formally recognised as one, is de facto a director and will be treated no different to a formally appointed director.
Consequences of Acting whilst Disqualified
In disqualification proceedings if a director is disqualified for acting in breach of a previous disqualification then the period of disqualification sought will have to reflect the very serious nature of the offence (which is also a criminal offence).
The Secretary of State takes such breaches very seriously and will almost always seek a disqualification period in the top bracket, i.e. up to 15 years.
In addition to this the Insolvency Service could open a criminal investigation into such misconduct and, under Section 13 of the Company Directors Disqualification Act 1986, seek a prison sentence of up to 2 years against the offending director, along with other charges that may relate to their company’s business (particularly where fraud is alleged to have occurred).
At Francis Wilks & Jones we have considerable experience of director disqualification matters, dealing with representations on the above and many other issues that you may not have previously considered, as well as acting for directors in litigated Disqualification proceedings.
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.