Directors’ duties – what you need to know, part 2

Disqualification and removal of directors

Under the provisions of the Companies Act 2006 a company may, by ordinary resolution at a meeting, remove a director before the expiration of their period of office.

Section 81 provides that the office of a director shall be vacated if:

• they cease to be a director by virtue of any provision of the act or he becomes prohibited by law from being a director
•  they become bankrupt or make any arrangement or composition with their creditors generally
• they are, or may be, suffering from mental disorder and either they are admitted to hospital under the Mental Health Act or an order is made by a court in matters concerning mental disorder
• they resign their office by notice to the company
• they shall for more than six consecutive months have been absent without permission of the directors from meetings of directors held during that period and the directors resolve that their office be vacated.

A court may make a disqualification order under the Company Directors Disqualification Act 1986 (CDDA 1986).

CDDA 1986

Examples of conduct which may lead to disqualification include:

• continuing to trade to the detriment of creditors at a time when the company was insolvent
• failure to keep proper accounting records
• failure to prepare and file accounts or make returns to Companies House
• failure to submit tax returns or pay over to the Crown tax or other money due
• failure to cooperate with the insolvency practitioner.

Disqualification proceedings are handled by the courts or the Insolvency Service. In some cases, the director could also face criminal charges, fines or be made personally liable for the company’s debts.

The effect of a disqualification

 Unless the individual has permission from the courts it prevents them from:

• being a director of a company
• acting as receiver of a company's property
• directly or indirectly being concerned or taking part in the promotion, formation or management of a company
• being a member of or being concerned or taking part in the promotion, formation or management of a limited liability partnership.

If a person contravenes the order, they are committing a criminal offence that makes them liable to a fine or a prison sentence of up to two years.

The act applies not only to a person who has been formally appointed as a director but also to those people who have carried out the functions of a director and to shadow directors. A shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act. In order to be classified as a shadow director the person must effectively control the running of the company.

Conclusion

Setting up a company is now a cheap and easy process but there are governance laws that need to be understood. As the regulatory environment has become more and more onerous, a newly appointed director needs to understand the full extent of the legislation and how it impacts on their responsibilities.

It is important that any director, whether of a big or small company, is familiar and complies with their duties.

In particular, in small companies where family members are appointed just to make up numbers, they must ensure that they are aware that they cannot simply sit back and have no involvement in the company.

All directors are jointly responsible for the company and the duties towards it. Ignorance is no defence and the consequences can be severe both for the company and directors personally.