Companies are as strong as their staff. The role of a director holds a heavy burden of confidence, trust, and transparency. Directors should comply with the company’s interests and not implement their own or abuse their position of responsibility. The members and shareholders, as well as business partners, constitute a major part of the interest of any company. This is achieved in terms of the company’s profitability, growth, objective realization, and stability. Other directional duties will include exercising independent judgment, dismissing personal interest, offering personal diligence, care, and skill while implementing a director’s decision. So, as complex and critical such a position is, directors should beware of disqualifications. Here are some common causes of a director’s disqualification.
The Consequences of a Director’s Disqualification
Disqualification is serious business and must not be taken lightly. In a nutshell, if a company’s director fails to meet their responsibilities, an investigation is conducted, and they can get disqualified. It is typically a process of banning the director, which means that this person cannot be a director in any other company. This also includes being banned from marketing, running, or forming other companies. Additionally, if a person acts as a director during the disqualification period, they can be imprisoned because this is a criminal offense. The default period of disqualification normally ranges from five to fifteen years; this means that the banned director should comply with this period.
Other restrictions will include the prevention of sitting on a board of any institution, such as schools, police authority, or even charity. The disqualified director cannot work as an accountant, solicitor, or barrister. They are also not allowed to act as pension trustees.
The Reasons for the Ban
There are numerous reasons for a director to be disqualified. Here are some of the causes to deem a director unfit to retain their position.
Insolvency is defined as the financial state of the inability to pay debts on their due dates; this applies to businesses of all sizes. If a director allows a trade where the company cannot pay its debt, then they are held accountable for such solvency. A director is always queued whenever a compulsory, voluntary, or administrative liquidation occurs. This is a standard process that will be examined during the investigation. The insolvency service or secretary of state is the fundamental authority threatening a director for disqualification and overseeing the investigation. In case you are being questioned and at risk of a ban, you should always lawyer up to see your options.
Abuse of Loan Account
The loan accounts of directors are typically utilized to amount to all the money drawn by directors as expenses for the company. Such funds are not paid as salaries; they are used for aspects such as remunerations and dividends. Without the permission of creditors, a director cannot draw such funds. If a director does so, this will be proven as theft and a valid reason for disqualification. This is one of the ways directors use company money for their benefit. This act can also deprive creditors of their assets, resulting in litigation and disputes.
As previously explained, a disqualified director has committed major breaches of their responsibility. This can include failing to hand in the documentation of the statutory period of confirmation statements and financial accounts. Fortunately, there is an adequate period where a director can file such documents to the public as well as the company’s shareholders. Failing to do so deprives the company of the liability status that protects its financial affairs. Besides, if the company fails to keep the proper books even after the disqualification, the director may then be criminally liable. Moreover, a director is disqualified if they fail to submit tax returns or pay the owed tax upon request. Being involved in fraudulent or insolvent dealings can hold the director liable for all the debts owed by the entire company.
Running a company is undeniably fraught with challenges, especially when it comes to financial aspects. While the main purpose is to reach the company’s targets and realize its objectives, the huge responsibility remains on the shoulders of a company director. Because companies are legal entities, every employee owes it a lawful responsibility. Failing to meet the legal need, especially with those on top of the hierarchy, can lead to serious consequences. The director’s disqualification is a critical issue, which aggravates fast if not dealt with properly. Since prevention is better than cure, the guide provided here has summarized the most common causes of directors’ disqualification.