The top-tier designation of a business company is a director. With big positions comes even bigger responsibilities followed by serious consequences, if not handled legitimately.
There are multiple authorities involved in the director disqualification procedure. Right from liquidators, creditors, investors, and finally, the house of court. Here are elaborate answers to all the basic queries about the whole process of disqualification of a company’s director.
How can a director be disqualified?
A director is disqualified if the company becomes insolvent during his tenure or there is evidence of the director’s misconduct.
A company is declared insolvent in any of the following situations:
- If the company has insufficient funds along with inappropriate assets that do not liquidate to the required amount to pay off the company’s debt.
- Incomplete management of balance sheets.
- The administration calls for the insolvency of the firm.
What are the standard parameters to assess misconduct?
There are set parameters defined to assess the director’s misconduct. The following conditions depict it:
- History of default income tax return filings of the company
- When the account sheets are not well maintained, and the trading data is mismanaged
- Non- submission or late reporting of the company’s audit statements to the company’s house
- In cases where the company lacks cash flow, and the debt value is larger than the assets of the company
- If a director uses the company’s liabilities for fulfilling private requirements
- Fraudulence or tradings even in cases of bankruptcy situation of the company
- Indulgence in wrongful tradings overseas
- Incompetent behavior with creditors over assets
- Hiring disqualified staff to mislead the company
Which government act legalizes a director’s disqualification?
The Company Director Disqualification Act, 1986(CDDA) certifies Director Disqualification. The law allows a liquidator or a creditor to file a complaint against directors’ unfit bearings. Since then, two amendments have taken place.
First, The Enterprise Act, 2005 that holds legal recommendation for cases of dismantling the competitive nature of trading and abuse related to designation. Second, The Small Business, Enterprise, and Employment act 2015 revised the already laid rules and inclusion of wrongful trading done overseas, rectifications in the assessment of unfitness, and introduction of voluntary disqualifications and compensation orders.
When is the notice released to the director?
After some administrative authority files a legal complaint against the director in the insolvency services or the companies house, a thorough examination of the report is done.
Initially, the Secretary of the state is represented by the insolvency service that investigates the case and checks for allegations and evidence.
If the report is found appropriate, a future course of action begins, and a Section 16 Letter is issued that is the ice breaker notice in the process of a director’s disqualification. Usually, it takes a year for the court to analyze the lodged complaint. This gives the director ample time to prepare a solid defense.
What help can a director receive in such a situation?
The very first thing to do in such a dire situation is to consult a corporate lawyer. The legal team will introduce the director to the legal proceedings and prepare for the emergency protocol. The litigators will guide in dealings with the insolvency team and their interviews.
Direction disqualification experts ensure that law and order are harnessed in the best possible ways to retain the director’s position or at least try to persuade the opposition to hold back on the lodged complaint. An expert legal team ensures that all solutions are taken up to escape punishment. So, hire them with due diligence.
Can a director still hold the position?
When the legal process of multiple applications begins, the Secretary of state gives many opportunities to the director to prove his/her innocence. A ‘statement of truth’ is demanded in writing from the defense.
If the legal team manages to ensure a valid reason to stress the presence of a director in uplifting the strategic performance of the company then, the court may allow the position to be designated to the same person.
The competition disqualification also allows the director to stay on the grounds to regulate the company’s management.
What are the rescue solutions to escape director disqualification?
In such cases, a stitch in time saves nine. Few rescue techniques are listed below.
- Know the exclusion and inclusion details of CDDA: The act takes special consideration when it comes to an insolvent company. It is valid in cases of Company Voluntary Liquidation (CVL) and does not take account of Company Voluntary Arrangement (CVA). Both protect the director from severe legal punishments.
CVL allows justifying trading issues, and CVA manages to provide sufficient time for the company to bounce back in terms of growth and cash flow.
- Voluntary Disqualification: This is applicable only before the issuance of the Section 16 Letter. It gives the director advantage of saving on legal costs and early resolution of the case in the house of the court. All court proceedings stop immediately after the voluntary disqualification undertaking. The disadvantage includes paying certain financial penalties and compensations in return.
What are the punishments if the director is found to be guilty?
When a director fails to stand against the allegations, he/she is entitled to certain punishments and penalties.
- Disqualification for almost 15 years for convicted directors
- A complete ban on holding any major position in any corporate firm in the country or overseas. Doing it will be considered a crime.
- No authority to establish a new business
- The convict may be asked to pay off all debts of the company from personal assets and liabilities.
- Penalties and imprisonment will be imposed if found breaking the set rules.
Where is all the data stored about directors who are disqualified?
An online database keeps track of all disqualified directors. There most famous depository isThe Companies House Database of Disqualified Directors. A detailed report about directors’ misconduct and trading faults is displayed along with previous records. If no serious mishappening occurs in the disqualification period, the name is removed at the end of it.