All company directors have a legal obligation to act in the best interests of the company and its shareholders. They must also exercise reasonable diligence and do all they can to avoid conflicts of interest. If they do not comply with these responsibilities, they could find themselves facing a fine or even imprisonment for more extreme circumstances.
Another potential punishment is that they could be disqualified from owning another business for an extended period of time. While this should prevent the individual from operating another company, there exists a legal grey area that could enable them to still exert influence within a firm.
Can Directors and Shareholders be the Same Person?
Before we discuss if a disqualified director can be a shareholder, it is important to address if directors and shareholders can be the same person. The answer to this is yes.
When it comes to limited companies, it is extremely common for a company director to also act as a shareholder of the firm. This is because it is a legal requirement for a director and shareholder to be nominated when the firm is initially set up. To avoid having to find another person to invest in the company, the law does allow for a sole director to also act as a shareholder.
It is also possible for the same person to act as a company secretary, although this appointment is not required by law.
What is the Difference Between Shareholders and Directors?
Now that we understand that an individual can hold at least two simultaneous roles, we will now look at the difference between shareholders and directors. These are two distinctive positions within a company, with the director responsible for running the business but the shareholders actually owning it.
A shareholder invests in the business by buying shares, which represent a certain percentage of the firm. If the company has just one shareholder, they will control the entire operation. In return for owning shares, shareholders (also known as members) are able to vote on significant decisions and will receive a portion of any profit that the company generates.
While members cannot make day-to-day decisions (unless they are also a director), they are able to make decisions about exceptional matters, including:
- Issuing or transferring shares
- Amending the articles of association
- Changing the name of the company
- Removing and appointing directors
- Approving a director’s loan
Company directors (also known as officers) are appointed by shareholders to manage the day-to-day running of the business and try to make it a success. As we have already seen, they may or may not also be a member.
To become a director, an individual must be over the age of 16. They cannot be appointed as director if they are an undischarged bankrupt, a disqualified director of a different company, or the auditor of the business. It is also possible for a corporate enterprise, such as a limited company, to be the director of another firm.
A company director has many important responsibilities, such as:
- Employing staff
- Running payroll
- Registering the company for VAT and Corporation Tax
- Preparing annual accounts and tax returns
- Paying business taxes to HMRC
- Ensuring all creditors and service providers are paid
Directors must also carry out their duties in line with the “Directors Responsibilities” laid out in Section 171-177 of the Companies Act 2006.
Can a Disqualified Director be a Shareholder?
Under the Company Directors Disqualification Act 1986, it is quite clear that a disqualified director cannot legally form another company. Breaching these rules could lead to a custodial sentence of up to two years, plus a further period of disqualification. The individual could also find themselves responsible for any company losses that were incurred during the time where the disqualification order was not being adhered to.
A disqualified director is also not permitted to act as a trustee, sit on the board of a charity, police authority or school, or act as a registered social landlord. In addition, they are unable to sit on a health board or social care body – or even work as an accountant, solicitor or barrister. But can a disqualified director be a shareholder?
The answer, surprisingly, is seemingly yes. This is because the Companies Act 2006 requires subscribing shareholders to agree to ‘form a company’. While they are clearly not permitted to actually run or carry out marketing activities for the firm, they are actually able to part-own it. As long as the other business owners have not been disqualified, they will be able to carry out the day-to-day running of the company.
As a result, the disqualified director will still be able to hold some influence in the company, provided they are not taking on any responsibilities that they shouldn’t.
Points for Consideration
Now that we have established that a disqualified director can be a shareholder, it is important to highlight different actions that could see you breach your disqualification order and land you in serious trouble. These include:
- A ‘shadow director’ that instructs and directs another company director on how to perform their duties
- A corporate director that is allowed to sit on the firm’s board
- A ‘de facto director’ who acts as a director but has not be formally appointed or recorded as a director with Companies House
- A non-executive director who is no different from a formally-appointed director in terms of management or direction of the company, such as managing the financial affairs of the business
How Inquesta can Help
If you are unsure about your rights or restrictions as company director, you can rely on Inquesta to help. We take the time to understand your individual circumstances and offer professional and expert advice to ensure you always stay within the rules.
We have worked with clients from all areas of industry and have amassed decades of experience, meaning we are perfectly placed to help. At Inquesta, our customers are our number one priority- so you can be confident that we will always act with your best interests at heart.
To find out more about how Inquesta can assist you, contact a member of our team today or request a free, no obligation, consultation.