How is a Director Disqualified

A Liquidator cannot disqualify company directors. They submit a report on director conduct. The Insolvency Service then decides if further investigation is necessary. Then an application for disqualification may be made to the Court.

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The Liquidator’s Report

A company may be closed voluntarily using Members or Creditors Voluntary Liquidation. Alternatively it could be forced to close with a Winding Up Order. In each case a Liquidator is appointed.

In addition to closing the company the liquidator must report on the conduct of the directors. This gives their view on how the directors have acted in the run up to the failure of the company.

The liquidator must submit their report to the Insolvency Service. If they believe that a director has acted correctly the report will be submitted using a D2 form. If they feel the individual may not be fit to continue to act as a director the report will be submitted using a D1 form.

A report is made on all current directors of the company. The Liquidator must also report on anyone who has been a director in the last 3 years. Lastly a report also has to be made on any person who seems to have acted in the capacity of a director in all but name.

Insolvency Service Investigation into Director Conduct

If a D1 report is submitted by the Liquidator this does not lead to automatic director disqualification. It simply highlights their concerns. The Insolvency Service must then decide whether they will carry out a more in depth investigation of the director’s conduct. They may or may not do so.

The result of any investigation may lead the Insolvency Service to believe that a director has acted improperly. However they have no power to disqualify a director themselves. They must then apply to the Court for a Disqualification Order.

The Insolvency Service investigation may show that a Director has acted correctly. In this case no further action will be taken.

Who decides if a Director should be Disqualified?

Once an application for a Disqualification Order is made a date for a Court Hearing will be set. At the Hearing a Judge will listen to arguments from both the Director and the Insolvency Service.

The Judge will then decide whether or not the Director should be disqualified. They will also decide how long any disqualification should last for. Normally for first time or minor offences this will be 2-3 years. The maximum time a director can be disqualified for is 15 years.

The Court will also decide whether the Director should be held personally liable for any of the company debt.

A director can only be held liable for debt incurred after they knew that the company was insolvent. In addition only if there was no reasonable prospect of improving the position of the creditors by continuing to trade. This can be difficult to prove.

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