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Can A Disqualified Director Be A Shareholder?

This guide is for anyone considering the question can a disqualified Director be a shareholder of a Limited company.

In this article you’ll learn about:

  • What it means to be disqualified as a Director.
  • What is involved in being a shareholder.
  • Difference between Directors and shareholders.
  • Banned Directors being shareholders.

Let’s get started.

can a disqualified director be a shareholder

Can A Disqualified Director Be A Shareholder Overview

The separation of ownership from management would suggest a disqualified Director could be a shareholder of a company whilst banned. However, it is not a straightforward matter.

The reason there is a problem is because of the matter of formation, promotion or management of a company. When a Director is banned they are not permitted to form a Limited company.

Purpose For Disqualifying Directors

The main purpose behind the disqualification regime set out in the Company Directors Disqualification Act 1986 is NOT to penalise Directors.

director disqualification to protect the public

The primary purpose behind the disqualification regime is to PROTECT the public from Directors whose actions are a danger.

stopping a director acting

The effect of Section 6 of the Company Directors Disqualification Act 1986 is to take out a Director and stop them from acting for a period of time.

judges duty to disqualify directors

So serious is the matter the Court has a DUTY to disqualify unfit Directors. Legislation more often than not will give the Court discretion but here the Court has a DUTY to act in such cases.

What It Means To Be Disqualified As A Director

If you are disqualified from acting as a Director you cannot take part in the promotion, formation or management of a Limited company.

The aim is to stop a person from acting in accordance with how a Director of a company would act because even if a person is not registered as a Director at Companies House they could still be running a company or acting as if they were a Director.

Types Of Director

It is not unknown when it is suggested to someone they are a Director for them to say they were not a Director because they were not registered as one at Companies House. However, this position is not the end of the story because there are three categories of Director:

Registered Director

A Director who is registered at Companies House is an official Director and legally referred to as a De Jure Director. They are someone who is a Director because they have been formally recognised and recorded as a Director of a company. A person who is registered as a Director at Companies House will find it almost impossible to deny they were a Director absent identity fraud or some mistake.

De Facto Director

A De Facto Director is a Director who in effect holds themselves out as being a Director but they are not registered at Companies House as a Director. This will commonly be a person who may tell people they are running a company or exercise control over it. They may even be recorded as a Director other than at Companies House.

Shadow Director

A Shadow Director is a Director in accordance with whom the De Jure Director(s) are accustomed to act. The Shadow Director is one that in effect is said to operate in the shadows because they use the official Director(s) to act for them without typically appearing anywhere on company documents. There can be some overlap with De Facto Directors because a Shadow Director may act during some periods of time also as a De Facto Director.

When a person is disqualified they may not be any kind of Director of a Limited company.

Formation Of A Company

The formation of a company is its creation. This is known as the incorporation of the company.

In order to form a company, it has to be registered at Companies House. In order to incorporate a company two documents need to be filed:

  • Memorandum of Association – is the document that declares the formation of the company, the company’s purpose, and names of its shareholders required to bring about its creation.
  • Articles of Association – is the document that sets out the rules and procedures for running a company.
Can A Disqualified Director form a company

Why Is Company Formation Not Permitted?

Company formation is not permitted because it suggests the intention to become involved in another Limited company whilst banned. Why else would an individual who has been disqualified as a Director, for example, their company has gone into Liquidation, then attempt to set up another Limited company?

Promotion Of A Company

A disqualified Director cannot take part in the promotion of a company.

The promotion of a company tends to be a critical part of the management of a company. It is when important decisions are taken to secure its survival and enable it to thrive.

Can A Disqualified Director promote a company

A disqualified Director could be employed for example potentially to assist with the marketing of a company by handing out leaflets. However, he or she could not determine the market strategy for the company such as whether to spend money on certain marketing activities.

Why Is Company Promotion Not Permitted?

Company promotion is not permitted as an activity for a banned Director to participate in because it is part and parcel of key executive decisions involved in the running of a Limited company.

Management Of A Company

The management of a company is the process of making decisions for the day to day running of the company.

Can A Disqualified Director manage a company

Why Is Company Management Not Permitted?

Company management is not a permitted activity for a disqualified Director to participate in because it is central to the cause of loss that is likely to be have resulted in the harm suffered by creditors.

Why Might A Director Be Disqualified?

A Director might be disqualified for failing to fulfil their Director duties.

Critical to the assessment of unfitness of a Director that could be deserving of a ban would typically involve conduct that causes harm and leads to creditors suffering a loss. Examples of reasons why a Director might be banned could be:

  • Failure to keep adequate accounting and company records.
  • Trading to the detriment of the crown when collecting VAT and PAYE that is not handed over to HMRC.
  • Failing to file tax returns.
  • Not following correct procedures set out in the company’s Articles of Association.
  • Avoidance of declaring a material personal interest in a transaction.
  • Trading on and accepting credit from creditors without being able to pay them.
  • Trading without the necessary regulatory approval to engage in restricted business activities.
  • Not paying corporation tax.
  • Actions that deliberately harm or cause loss to the company.
  • Misleading creditors such as obtaining investment and or funds on a false premise.

Difference Between A Shareholder And Director

It is common in owner-managed businesses for the Directors and shareholders to be the same people. However, the roles are very different.

The difference between a shareholder and a Director is that a shareholder owns a Company whereas a Director runs the company.

Shareholders that are not also Directors have no power to control the operations of a company except for exceptional decisions such as those involving:

  • Appointing and changing Directors.
  • Amending the Articles of Association.
  • Transfer of and or issue of shares.
  • Ratifying a breach by a Director.
  • Approving a Director loan.

In order for a company to be formed, it has to have a shareholder otherwise, no one would own the company. Furthermore, the shareholders determine who is appointed as the Director(s).

Can A Disqualified Director Be A Shareholder?

Whilst a disqualified Director should be able to hold shares in a company as long as they do not involve themselves in the management and promotion of the company, nevertheless, being the first shareholder involved in its formation may amount to a breach of a disqualification order.

In practical terms acting in breach of a disqualification order as a Director by virtue of forming a new Limited company may not in itself be something that would necessarily lead to criminal prosecution. However, the concern and suspicion would be why would someone set up a new company whilst disqualified if they had no intention of running and or influencing the management of it?

Even if it might be possible for a shareholder to instruct Directors to run a company for them, there is a danger a disqualified Director who has any involvement day to day, could be considered a Shadow Director. Indeed any such involvement that strays towards involvement in the management of the company would be a criminal offence.

Transfer Of Shares After Formation

Disqualified Directors concerned about forming new companies and who acquire the shares in them shortly after formation should be under no illusions that this would not necessarily assist them in avoiding suggestions of being involved in the formation and therefore being in breach of the terms of their disqualification.

In fact, the problem with this position is that it could potentially have the somewhat suspicious appearance of trying to get around disqualification rules in an underhand way. It is therefore not to be recommended.

Permission To Act As A Director

One way of legally acting as a Director whilst disqualified is to seek permission from the Court.

In order to do this, you will need to present a convincing case backed by evidence and safeguards to give the Court confidence that you should be given permission to act as a Director.

If the reason you have been disqualified is due to suggestions of dishonesty or you have been disqualified for a long period of time then the chance of being granted such permission to act as a Director is perhaps remote. However, if that is not the case and you can provide a plan and proposals with suitable checks and balances, such as for example only, rigorous accountancy oversight monitoring your conduct, then it is possible you could be afforded permission.

Permission (or leave as it is sometimes referred to) is at the Court’s discretion. The Court is being asked to allow a person to act as a Director when otherwise their conduct would be a criminal offence. The Court will not readily grant such permission but it can do so.

What Next?

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Disclaimer: Can A Disqualified Director Be A Shareholder?

This page Can A Disqualified Director Be A Shareholder? is not legal advice and should not be relied upon as such. This article Can A Disqualified Director Be A Shareholder? And Very Worried? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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