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Company director disqualification

Luke Oliver explores the strict requirements for company directors who apply for a debt relief order, and the consequences for failing to follow them.

Published June 2024

DRO advice tops the charts

At the Specialist Debt Advice Service, debt relief orders are the main enquiry topic for our professional clients. They account for over a third of all enquiries into our service. The complexity of the legislation, the interpretation of guidance, and the official status held by DRO intermediaries all contribute to anxieties for debt advisers.

A particularly thorny issue is the stringent rules governing company directors under DRO restrictions. People who continue acting as directors in ignorance or contempt of the rules risk prison, on top of hefty fines.

Let's explore the details and ensure your clients stay on the right side of the law.

Prohibition for company directors

A company director who applies for a DRO must request permission from a judge before they continue in their role, or start a new one. Failure to do so is a criminal offence that can be punished by a prison sentence of up to two years, plus a fine.

Direct and indirect involvement

When you advise a client who runs a limited company, it's safest to assume that any activity that may amount to "taking part in or being concerned with it" is forbidden. The prohibition's wide scope covers any involvement in company management by a debtor under a debt relief order.

This extends beyond official titles to any form of indirect management, including via third parties. A client who asks their partner or family member to replace them as a director and act on their instructions is breaking the rules, and putting that person at risk of criminal enforcement.

Inactive directors

The ban also extends to people who are inactive in their roles as director. One key source on this topic, Mithani's Director Disqualification, states:

'It is not merely positive acts of incompetence which may lead to a finding of unfitness. Incompetence may also be established from inactivity or failure to act'.

A client could be named as a director on company records as a result of historic activity, and still break the law unless they have taken steps to formally terminate it.

Impact of advice on insolvency options

Applications for permission to be a director are not guaranteed to succeed. Similar caselaw on bankrupt directors suggests a high chance it will be refused.

Debtors whose livelihoods depend on their being appointed or acting as a director, or being directly or indirectly involved in the promotion, formation, or management of a company might want to consider alternative debt solutions. This would avoid the adverse consequences of potential refusal.

How the application might be treated

The official receiver must be notified of the application and oppose it at the hearing if it is in the public interest to do so.

Applications for permission are uncommon. Mithani's Director Disqualification comments that there is no reported English case dealing with it directly.

Mithani's commentary explores the factors the court is likely to consider, outlining the main principles:

  • the court can take into account any relevant factor, its discretion is broad and unfettered

  • each case is decided on its individual facts

  • protection of the public is of paramount importance

  • the reason for entering the DRO and whether that affects the applicant's ability to run a company is relevant

  • the reason for the imposition of any debt relief restrictions is relevant

  • the needs of the debtor are relevant in the balancing exercise

  • it is unlikely permission will be granted without conditions

  • the court has the power to grant permission retrospectively but is unlikely to exercise it save in extreme cases

Details of one application were reported in the February 2018 Insolvency Service DRO Team Newsletter. The Insolvency Service opposed the application in line with the DRO team's stated policy. Nonetheless, the court granted permission with some restrictions on the director's role during the moratorium.

The facts of the case were arguably exceptional. Debtors who intend to apply must be advised that success is by no means guaranteed and outcomes difficult to predict. Each case turns on the judge's interpretation of the facts and their application of the relevant principles.

Shelter summary of company director disqualification case

Debtor granted permission by the County Court to act as director following a debt relief order.

In 2017, the County Court heard the first application from a company director following a debt relief order.

Background of the case

The debtor applied for permission to be a director of a company that provided nursery services. She had planned to take part in the formation of the company before the debt relief order was approved. She ceased the activities upon the order being made.

The circumstances presented to the court were:

  • local authority funding for nursery services was about to be withdrawn, meaning the debtor could not wait until the end of the moratorium to resume duties

  • the DRO was granted in respect of a single qualifying debt of £2,000 that the debtor could not pay due to unforseen circumstances

  • the debtor's proposed role in the company was essential to its success

  • the nature of any employment with the company could constitute a breach of the disqualification rules

  • there were two other experienced directors

  • funding was to be obtained from charities, not members of the public

The official receiver opposed the application. The Insolvency Service stated in its evidence that parliament has decided a restriction is imposed on debtors during the moratorium. The judge pointed out that provision had been made for the debtor to obtain the court's permission.

The court's decision

The court granted leave to act as a director, imposing restrictions for the period of the moratorium.

The restrictions imposed were:

  • the debtor could not be paid more than minimum wage

  • any organisation the company requested funding from would be notified of the DRO in writing

The debtor signed an undertaking agreeing to the restrictions.

This is a summary of the DRO Newsletter report, February 2018.

Where to find more information

Advisers examining the Insolvency Act looking for evidence of the intricacies described here will be disappointed. That's because the details draw heavily from other areas of law, in particular, bankruptcy and the Company Directors Disqualification Act.

Shelter's Specialist Debt Advice Service has access to key sources, such as Mithani's Directors Disqualification on LexisNexis, which has informed the content of this article.

New content on Shelter Legal

A new Shelter Legal page, Permission for company directors in a DRO, contains all the information with legal references, where available. It covers the rules for company directors, the application process, and what the court might take into account.

Second tier support from SDAS

Shelter's Specialist Debt Advice Service supports professionals giving free debt advice to clients in England and Wales.

Find out how to contact Specialist Debt Advice.

Legal advice for company directors

Questions about a client's status as a director, or the potential implications of terminating a directorship should be directed to a specialist in company law.

About the author

Luke Oliver is a Specialist Debt Adviser at Shelter, providing expert second tier advice to debt professionals in England and Wales.