There are actually very few rules on who can register a new company in the UK. However, one piece of legislation does prohibit disqualified directors from being a director of a new company and from forming a new company. The Company Directors Disqualification Act 1986 was implemented to prevent unfit directors from being an officer of a UK company.
However, this disqualification does not stop a person from holding shares in a company. This raises questions over who is forming a company and who is running the company.
What is a disqualified director?
All directors have a fiduciary duty to do their best for the good of the company and not just themselves. If a director is found to be unfit they may be disqualified from being a company director for 15 years.
When a person has been declared ‘unfit’ to be a director, they will be disqualified by one of several government bodies or the courts. Following a disqualification, the person is not permitted to be a director of a registered limited company in the UK and they are not allowed to form a new company.
Who can disqualify a director?
There are several bodies that can apply to have a director disqualified due to unfit conduct.
- The Insolvency Service
- Companies House
- The Competition and Markets Authority (CMA)
- The courts
- A company insolvency practitioner
Once a director has been disqualified they can no longer:
- be a director of any UK registered company
- be a director of an overseas company that has connections with the UK
- be involved in forming, marketing or running a company
It is this third point that creates a point of contention. A disqualified director is not banned from owning shares! They can purchase shares in public companies (e.g. BT, Lloyds Bank), but they can also hold shares in a UK registered private limited company. So, if they can hold shares in a UK private limited company are they involved in forming or running the company?
Forming a new company as a disqualified director
When a new company is formed in the UK it must have at least one shareholder. During the registration process the initial shareholders in a company are called the ‘subscribers’. In the memorandum of association, the subscribers must agree that they ‘wish to form’ a company. It is this point that appears to be in conflict with the Company Directors Disqualification Act 1986.
What does the Companies Act 2006 say?
Section 8 of the Companies Act states-
8 - Memorandum of association
(1) A memorandum of association is a memorandum stating that the subscribers—
(a) wish to form a company under this Act, and
(b) agree to become members of the company and, in the case of a company that is to have a share capital, to take at least one share each.
(2) The memorandum must be in the prescribed form and must be authenticated by each subscriber.
Companies Limited by Shares will typically use the following statement in their memorandum of association-
“Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share.”
Disqualified directors being subscribers
The Company Directors Disqualification Act 1986 is quite clear that a disqualified director cannot form a company. Yet the subsequent Companies Act 2006 requires subscribing shareholders to agree to ‘form’ a company. Unfortunately this creates a ‘grey area’ that has several unanswered questions-
- Should a disqualified director be allowed to be a subscriber if they are seen to be ‘forming’ a company?
- If the company is registered by a non-disqualified person and the shares are transferred afterwards to a person that is disqualified from being a director, is this OK? As the disqualified director did not actually ‘form’ the company, is the conflict between the laws removed?
- If section 8(a) of the Companies Act 2006 was removed or had been written differently there would be no conflict with the Company Directors Disqualification Act 1986. However, could a person be seen to be 'running' a company if they are the sole shareholder with someone else appointed as a director?
Legislation states that disqualified directors cannot be directors of UK companies. In addition, they cannot form a company, yet they can hold shares in one. Whilst there may be an ethical argument that a disqualified director should not be running a company, the law does not prevent ownership of a company. Until this point is addressed, it is possible for disqualified directors to hide behind other directors and maintain ownership of UK registered private limited companies.