Is the landscape changing for directors?

With the rise in the number of directors being disqualified for unfit conduct, are we moving into an era where there should be more legislation governing who can act as a director?

In order to be a director, the Companies Act 2006 simply provides that the person is over the age of 16 and is not disqualified from being a director. Other than that, anyone is eligible to become a director.

Directors have various duties and responsibilities to uphold and failure to properly undertake those duties can result in them facing disqualification proceedings once a company is dissolved or in liquidation or administration.

The Insolvency Service reports that for the period 2023/2024, 892 directors were disqualified from acting as directors in accordance with the Company Directors Disqualification Act 1986 (“CDDA”). The average length of disqualification is currently 8.4 years, whereas in previous years it was between five-and-a-half to six years.

Before the Covid-19 pandemic, the number of disqualifications had been stable; 1,200 – 1,300 between 2013/14 and 2019/20. The Insolvency Service has explained that the lower numbers in the past three years are a result of equally low numbers of company insolvencies during the pandemic, along with the time gap between insolvency and the completion of investigations and subsequent proceedings.

Of the 892 disqualifications, 850 of those related to Section 6 disqualifications. Section 6 of the CDDA permits the court to disqualify a person where it considers their conduct to be unfit to be concerned in the management of a company.

There is no clear definition of what makes a person’s conduct unfit, however, The Insolvency Service provide the following examples:

• 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
• Using company money or assets for personal benefit
• Abusing the Covid-19 financial support.

Over half the current disqualifications relate to allegations regarding abusing the Covid-19 financial support scheme and 30 relate to dissolved companies.

Given the end of the financial support provided by the Covid-19 support schemes, the number of insolvencies is on the rise, which in turn will lead to more disqualifications in the coming months. It is anticipated that we will see pre-pandemic levels of disqualification in 2024. With the increase in disqualification, perhaps we should ask if the government should be looking at regulating the appointment of directors!