Governance Explainer Director Disqualification

Chappell had pledged to save the struggling retail business in a deal that saw him pay just £1 to take if off the hands of the billionaire, Sir Philip Green, in March 2015.

But the ‘white knight’ failed to live up to his promises and the company collapsed in April 2016 with the devastating loss of 11,000 jobs.

His decade long ban is a stark reminder to directors of the huge reputational cost that can be inflicted when things go dramatically wrong.

The 1986 Act 

Banning orders for directors are covered by the Company Directors Disqualification Act 1986. The process, overseen by the Insolvency Service, can result in bans ranging from 2 to 15 years.

The details of disqualified directors are kept on public display in the Companies House database – with significant professional and reputational consequences. Moreover, a director can be fined or sent to prison for up to 2 years if they break the terms of the disqualification.

One of the more high-profile cases currently in the system is that of Carillion, the construction and outsourcing company, which collapsed in January 2018 with debts of £1.5bn.

The high-profile corporate meltdown resulted in thousands of job losses and left hundreds of suppliers and creditors with unpaid invoices.

In January 2021, the Secretary of State for Business, Energy and Industrial Strategy commenced proceedings seeking to disqualify eight former directors under section 6 of the 1986 Act.

And on 3rd July 2023, Zafar Khan, who served as Carillion’s finance director, was disqualified for 11 years for providing “false and misleading financial information” in the run up to the collapse.

Proceedings against a number of other former Carillion directors remain ongoing.

Unfit to serve 

Section 6 of the Act is where it considers that a director has acted in a way that makes them “unfit” to be concerned in the management of a company.

‘Unfit conduct’ covers a wide range of wrongdoings, such as allowing a company to continue trading when it can’t pay its debts; not keeping proper company accounting records; not sending accounts and returns to Companies House; not paying tax owed by the company; or using company money or assets for personal benefit.

This is, by far, the most common reason why directors are banned, and often comes to light after a company enters insolvency.

The insolvency practitioner handling the case may submit a report to the Insolvency Service concerning a director’s conduct, and the Secretary of State for Business and Trade may then choose to seek a disqualification order from the court.

However, anyone can report a company director for alleged unfit conduct – either to Companies House, the Competition and Markets Authority, the Insolvency Service or, for more serious and complex fraud, the Serious Fraud Office.

Aside from being unable to run a company, other restrictions that may arise from a disqualification include not being able to sit on the board of a charity, school or police authority, serve as a pension trustee, be a registered social landlord, sit on a health board or social care body, work as a solicitor, barrister or accountant.

What are the annual figures? 

During 2022/23, 932 directors were disqualified under the Company Directors Disqualification Act, according to the Insolvency Service. This was higher than the 804 that were banned from acting as a director in the previous year.

Before the coronavirus pandemic, the number of disqualifications had been stable at between 1,200 and 1,300 cases per year. But numbers declined during the three years of the pandemic, mainly due to the lower number of insolvencies as businesses received unprecedented financial support from the government and certain insolvency duties were temporarily suspended.

However, that extra support for companies has come back to bite less scrupulous directors.

The average length of director disqualification in 2022/23 was 7 years and 4 months. This was far higher than in previous years due to an increase in the number of banning orders relating to Covid-19 financial support scheme abuse, including Coronavirus Business Interruption Loans and Bounce Back Loans.

More than half of section 6 bans in 2022/23 (459 out of 893) included an allegation relating to Covid support scheme abuse.

It seems likely that more high profile Covid-related director disqualifications are on the cards, and that numbers of disqualifications will climb back to pre-covid levels during the next few years.