A directors disqualification order under the Company Directors Disqualification Act 1986 can have a destructive and life changing effect. A disqualification order can prevent you from acting as a Company Director and in the process destroy your reputation and the ability to earn a living. In most cases it effectively ends your business career. Therefore It is important to ensure that you have high quality and assertive representation right from the outset of the proceedings when it counts the most. It is also important to make sure your legal representatives have expertise in this area and are willing to leave no stone unturned in your defence. They must consider all options including, where advised appropriate, rarely deployed legal arguments such as strike out and abuse of process applications designed to have the proceedings dismissed or discontinued before any trial takes place.
What is a Directors Disqualification Order?
A disqualification order is made by the court under the Company Directors Disqualification Act 1986. The Act applies not only to a person who has been formally appointed as a director but also to those people who have carried out the functions of a director and to shadow directors. If there is any unfit conduct, then the liquidator, administrative receiver, administrator or Official Receiver has a duty to send the Secretary of State for Business, Innovation & Skills a report on the conduct of all directors who were in office in the last 3 years of the company’s trading.
What are Directors Disqualification Proceedings?
The Secretary of State has to decide whether it is in the public interest to seek a disqualification order against a director. The proceedings are brought by the Secretary of State for Business, Innovation & Skills or, usually in compulsory winding-up cases, by the Official Receiver at the direction of the Secretary of State.
The matter is heard, and decided by the court, unless the Secretary of State accepts a disqualification undertaking from a director. This is effectively an undertaking that the director will not be a director again for a period of an agreed number of years. The minimum period of disqualification under the legislation is 2 years and the maximum is 15 years.
Usually the disqualification undertakings can be negotiated to contain a discount in the length of the undertaking not to be a director in return for giving the Secretary of the State the ability to avoid costly and uncertain legal proceedings. We can assist in the negotiation process.
Basis for determining Disqualification of Directors
The court can disqualify for many reasons, for example:
- certain criminal offences connected with the Companies Acts legislation;
- wrongful trading (such as trading while insolvent;
- failure to comply with filing requirements under the Companies Act Legislation;
- unfit conduct in insolvent companies.
However, the majority of the orders have been made because of the unfit conduct of those running failed / insolvent companies. The question for the Court is whether the conduct of the director in relation to the company is such as to make him/her unfit to be concerned in the management of the company. The approach to be taken by the Court in order to determine this question is to consider the allegations, including issues of fact, to see if those allegations are made out. The Court should then consider whether the allegation or allegations as a whole amount to unfitness
The Court’s Approach to Directors Disqualification
The Company Directors Disqualification Act 1986 (1986 c. 46) forms part of UK company law and sets out the procedures for company directors to be disqualified in certain cases of misconduct. Section 6 of the Company Director Disqualification Act 1986 is mandatory and stipulates that a court shall make against a person a disqualification order, for a period specified in the order, providing that:
- he shall not be a director of a company, act as receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court, and
- he shall not act as an insolvency practitioner. (s.1)
- The Secretary of State may also accept disqualification undertakings from such persons in specified circumstances, which will have similar effect. (s.1A)
If a director’s conduct is found to be unfit, the Court must disqualify. In Landhurst Leasing Plc  1 BCLC 286 (page 344) Hart J. stated:
‘If conduct below the relevant standard is proved to have occurred the Court has a duty to impose disqualification even if satisfied that there is no present reason to disqualify…where the Court has found that relevant misconduct has occurred disqualification must follow even if the Court is of the opinion that the director has recognised his past errors and is not, at the date of the hearing, unfit.’
The standard of proof is the ordinary civil standard on the balance of probabilities. The question of unfitness is a question of fact. The concept of unfairness is to be given its ordinary meaning. In re: Sevenoaks Stationers  Ch page 164:
‘The test laid down in Section 6 – apart from the requirement that the person concerned is or has been a director of the company which has become insolvent – is whether the person’s conduct as a director of the company or companies in question ‘makes them unfit to be concerned in the management of a company’. These are ordinary words of the English language and they should be simple to apply in most cases. It is important to adhere to those words in each case.’
The Court must be satisfied that the director has been guilty of a serious failure or serious failures, whether deliberately or through incompetence to perform duties which go with the privilege of trading with limited liability (see Re: Bath Glass Limited  4 BCC at page 133 and Landhurst Leasing Plc).
However, it is not necessary for a Court to be satisfied that a director acted dishonestly and it is no defence that a director did his best. See Secretary of State for Trade and Industry v Goldberg  1 BCLC 597 at 611 and Lo-Line Electric Motors Ltd  1 Ch 477 at 486:
‘Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate’
Statutory guidance is given in Schedule 1 to the Act of matters which the Court should have regard to in particular in making a finding of unfitness but the matters are 11 not comprehensive and the Court is not limited in assessing the conduct of the defendant. Paragraph 6 of Part II of Schedule 1 allows the Court to take into account the extent of the director’s responsibility for the causes of an insolvency. Further, failure to comply with section 221 CA 1985 (as from 6.4.08, sections 376-7 Companies Act 2006) is included in part 1 of Schedule 1.
In relation to the question of whether a director ‘caused or allowed’ something to happen, see Re: Continental Insurance Co of London Plc  1 BCLC p48 at 58e, Chadwick J:
‘In my view a director who fails to appreciate the obvious ‘allows’ the consequences of what he has overlooked just as much as if he did appreciate the position and did nothing about it’.
The need to maintain and deliver up adequate accounting records, and in particular adherence to section 221 CA 1985/section 386 CA 2006 (the Company’s obligations came under both statutes), arises for a number of reasons:
(1) As set out in Secretary of State for Trade and Industry v Arif  BCC p586 at 593
‘Section 221 has, at the least, two purposes. First, to ensure that those who are concerned in the direction and management of companies which trade with the privilege of limited liability, do maintain sufficient accounting records to enable them to know what the position of the company is from time to time. Without that information, they cannot act responsibly in making decisions whether to continue trading.’
(2) The need to be able to scrutinize and verify transactions, once in insolvency:
‘But equally important is a second purpose. If the company fails, a licensed insolvency practitioner will become office holder, as liquidator or as administrator or as administrative receiver. The office holder requires information as to the company’s trading and transactions which is sufficient to enable him to identify and recover or exploit the company’s assets. His task is made extremely difficult, if not impossible, if the company has failed to comply with its obligations under s221 of the 1985 Act’
A disqualification order normally carries with it an order to pay the costs and expenses of the Secretary of State or the Official Receiver or both. Equally if your successful normally you are entitled to your costs.
Instructing Expert Directors Disqualification Solicitors & Barristers
We take an assertive approach right from the outset. We consider all the options and all the possible legal applications. We only instruct expert counsel or barristers who have a winning track record and who we have personally seen perform in Court. We recognise that your livelihood, business future and reputation is on the line in these proceedings and so we ensure that you are entirely in the best possible hands available to defend yourself from such allegations.