Directors' disqualification

Disqualification background and grounds for disqualification

How can a director be disqualified?

The privilege of trading with limited liability is something that may be removed from an individual for a period of time if they are found to be wanting as a director of a limited company or a member of a limited liability partnership (LLP) whether or not they participate in the management of the LLP. References to directors in this context also includes members of LLPs.

The reasons why a director may be disqualified can vary from negligence or incompetence, through to criminal behaviour and repeat offending. For further reading, see Practice Notes:

  1. How can a director be disqualified as a company director?

  2. Directors' disqualification orders in the criminal courts

Director disqualification proceedings are often referred to as 'quasi-criminal' as they have a penal element to them. They are classed as civil proceedings, but in reality they are a hybrid.

There are various ways in which a director can be disqualified from acting as a director of a limited liability company. The most common of these is to be disqualified for 'unfit conduct' as a

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Insolvency–fraudulent trading and dishonest assistance (Bilta and others v Tradition Financial Services)

Restructuring & Insolvency analysis: The Supreme Court held that liability for fraudulent trading under section 213 of the Insolvency Act 1986 (IA 1986) is not limited to directors or other persons exercising management or control over the company in question. Rather, liability can attach (as the natural meaning of section 213 admits) to any person who is knowingly party to the carrying on of the company's business in a fraudulent manner. The Supreme Court further restated that an isolated act of fraud in an otherwise legitimate business would not amount to fraudulent trading. The Supreme Court was also asked to determine whether claims in dishonest assistance, parasitic on the directors' breaches of their fiduciary duties, were statute barred under the Limitation Act 1980 (LA 1980). The claims were issued more than six years from the dates of those breaches. The claimants sought to postpone the accrual of the limitation period under the LA 1980, s 32, ie until the time the claimants either discovered the fraud or could with reasonable diligence have discovered it. On the assumed facts, and notwithstanding the intermediate dissolution and restoration of the companies, the claimants could not rely on LA 1980, s 32 and were consequently stature barred. Written by Sam Fenwick, partner, Suleika Horrocks, trainee solicitor, and Isabelle Burnett, solicitor apprentice at Wedlake Bell LLP.

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