Risk of not seeking leave

A Director may be disqualified from acting as a Director by either of the following mechanisms:

  1. By Order of Court – whether this be in Director Disqualification Proceedings issued by the Secretary of State or in criminal proceedings.
  2. By offering a Disqualification Undertaking.

Dependant on the Director’s personal circumstances, it quite common for the Disqualification (or proposed disqualification) to raise additional risks as regards other business interests, earnings and investments.

If a Director is disqualified but makes no plans to organise the other parts of his/her business interests, including seeking leave to act as a Director or in the management of a company, then risks may arise with far more severe consequences.  We address some of these risks below

Disqualified Directors and Company Shareholdings

When a Director is disqualified, one of the most common questions revolves around their financial interests and in particular shareholdings in their successor or other companies – particularly as regards family-owned companies.

However, disqualification is not intended to restrict the holding of financial investments – particularly shareholdings.  Director Disqualification only refers to the management of limited companies (or Limited Liability Partnerships) and the decision-making this entails.

A Disqualified Director may continue to hold such shares and indeed receive dividends as per the entitlement of any shareholder.  It is only where s/he seeks to become involved in the company, whether it is on a daily basis or in terms of the company’s business direction, can they be at risk of acting whilst disqualified.

That aside, they remain (as with any other shareholder) capable of voting on shareholder resolutions including dividends, director’s loans, the appointment or removal of directors or any change to the company’s constitution (some of which are arguably company decisions).

The area is very grey and it is a matter for analysis of the individual circumstances to determine whether such risks exist.

Acting as Employee

For most employees, it is a fact that they are not Directors of the company which employs them.  Even for employees acting as a manager, or even a senior manager, the existence of a management structure, the limitation of their role and their personal accountability means they are almost certainly not acting as a Director of the company.

However, for smaller companies (which are sometimes referred to as “close companies”), acting as an employee is not as clear and, particularly where the employee is also a substantial shareholder, there is a considerable risk that they are taking part in the company’s decision-making and acting as a Director.

For this reason it is important to keep lines of responsibility distinct and ensure clear communication. 

Whilst for a bigger company one particular role (e.g. cheque signatories) may be appropriate for an employee, for a smaller company (especially one with a disqualified Director) the distinction may not be so clear.

Sales and Marketing

It is often the case that a Director’s misconduct addressed in disqualification proceedings arises from communications made to third parties, particularly customers.

This is often the case with Public Interest Winding-Up Petitions and the Director Disqualification proceedings that arise following the Winding-Up Order.

For Directors facing disqualification, especially those with successor companies, it is important to seek leave to continue acting as otherwise, even if they resign it is often the case that they hold the contacts and profile necessary for the new business to continue trading.

In such circumstances it is often very difficult to separate the Director from the business and accordingly, without an Order granting them leave, from experience we often see that same Director making decisions, agreeing key contracts or otherwise engaging clients/prospective customers and thus acting as a Director.

In the event a Director acts despite being disqualified they face the risk of criminal proceedings and, ultimately, committal for this offence.

At Francis Wilks & Jones we can advise on such risks and your personal circumstances – and any alternate applications you should consider.  Managed correctly a Director will obtain leave to act notwithstanding his/her disqualification.

Please call any member of our Director Services Team for your free consultation now on 0207 841 0390. Alternatively email us with your query at info@franciswilksandjones.co.uk and we will call you back at a time convenient for you.