Bankruptcy disqualification – what does it mean and how long does it last?

A company going bankrupt does not automatically disqualify the chair, the directors or the general manager. Disqualification requires its own assessment and its own ruling from the district court. The general rule is two years.

When can you be disqualified?

Section 142 of the Bankruptcy Act gives two alternative grounds. A person can be disqualified where there is reasonable cause to suspect them of a criminal offence in connection with the bankruptcy or the business that led to the insolvency, or where unsound management means they must be regarded as unfit to form a new company or to be a director or general manager of one. The court also has to consider whether, taken as a whole, disqualification is reasonable. So not every poor decision, failed investment or bankruptcy is enough. The Brønnøysund Register Centre explains disqualification and what is registered.

Bankruptcy does not automatically mean disqualification

A business can go bankrupt because a large customer does not pay, the market collapses, financing disappears, costs move differently from what was expected, or the business simply does not succeed commercially. None of those in itself leads to disqualification. The rules require an individual assessment of the person's conduct. To understand what other personal consequences can arise, see Directors' liability – when do you become personally liable?.

What will be examined?

The trustee examines among other things how the business was run, the bookkeeping, the handling of taxes and duties, transactions with owners and related parties, what led to the bankruptcy, possible criminal offences, and whether there are grounds for disqualification. Serious and long-standing accounting failures or very unsound trading can therefore matter. But it is the overall picture that decides.

Who can be disqualified?

In the bankruptcy of a limited company, the rules can reach anyone who in the year before bankruptcy was opened was a director, an alternate director or the general manager – or who in reality carried out one of those functions without necessarily being registered. So putting someone else in as the formal manager does not necessarily help where another person is in fact running the company.

How long does disqualification last?

The general rule is two years. The period normally runs from the day bankruptcy was opened. The court can, however, decide that the two years should run from the date of its own decision instead. The ruling takes effect when it is handed down. An appeal does not automatically suspend the disqualification, but the court or the appeal court can decide that the appeal should have suspensive effect.

What can you not do while disqualified?

Disqualification can prevent the person from forming new companies covered by the Act, taking new board appointments, becoming a general manager, or in reality acting in such new roles through someone else. Disqualification is not meant to be circumvented by using a front. As a general rule the ordinary disqualification applies to new appointments. Where it rests on suspicion of a criminal offence under section 142(1)(1), the court can also decide that the person be removed from appointments they already hold.

Can you own shares or run a sole proprietorship?

Disqualification does not in itself prohibit passive shareholding. But the shareholding cannot be used to circumvent the prohibition by the person in reality running the company. Nor does disqualification under section 142 in itself impose a general prohibition on running a sole proprietorship. Other sanctions can reach further – a loss of rights under the Penal Code, for instance, can restrict business activity in a different way.

How is it decided, and can it be reversed?

The trustee examines the circumstances and considers whether there are grounds, but does not decide the outcome. It is the district court that decides the question by ruling, and the person at risk of disqualification must be given the opportunity to comment before the decision is made. The ruling can be appealed, and the Act also allows it to be reversed in whole or in part if new information comes to light. A criminal case being dropped later does not automatically lift the disqualification, but can be relevant new information in a reversal. Breaching a disqualification is a criminal offence.

Disqualification is not the same as personal liability for debts

Disqualification does not make the person automatically liable for the company's unpaid debts. That is a different assessment from personal liability in damages, guarantee liability, criminal liability for economic crime, loss of rights, and repayment of unlawful distributions. Several of these can occur in the same bankruptcy, but they have different conditions. If bankruptcy has only just been petitioned for and not yet opened, see Served with a bankruptcy petition – what now?.

This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.

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