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1. The aim of this paper is to provide a general outline of the statutory provisions relating to the disqualification of company directors. The paper is not an exhaustive legal treatment of the subject, but simply an introduction to it for those not familiar with the provisions.
2. The legislation relating to director disqualification is principally in the Company Directors Disqualification Act 1986 and the Insolvency Act 1986, and applies to England, Wales and Scotland but not Northern Ireland. Disqualification may arise on the following grounds:
3. In the case of 2(a) - Personal bankruptcy - the disqualification is automatic upon the status of bankruptcy (or other similar status described below) arising.
4. In the case of 2(b) - Misconduct - a disqualification order will, if considered appropriate, be issued by the court which is adjudicating on the misconduct. The court may make such an order of its own volition or in response to an application by the Department of Trade and Industry (DTI) or by the liquidator, a shareholder or creditor of the company concerned. Within this category, a disqualification order may be made against any person who merits it, regardless of whether he is a director or not.
5. In the case of 2(c) - Unfitness - an application has to be made to the court and this will be on the grounds that the relevant director is unfit to manage the affairs of a company. This group of provisions applies to directors, and here 'directors' includes shadow directors'. For a definition of these terms, see paragraph 21.
These are now dealt with in more detail.
Disqualification on grounds of personal bankruptcy
6. Neither an undischarged bankrupt, nor a debtor who fails to pay under a County Court administration order - so that the order is revoked and a disqualification order made - may act as a director or take part, directly or indirectly, in the management of a company, unless he obtains the permission of the court. The maximum period of disqualification arising from the revocation of a County Court administration order is two years.
Disqualification on grounds of misconduct in connection with a company.
7. Disqualification may arise as follows:
Fraudulent trading
8. Fraudulent trading is the carrying on of any business of a company with intent to defraud creditors of the company, or creditors of any other person, or for any fraudulent purpose. Any person who is knowingly a party to such misconduct is liable to imprisonment or a fine or both, and this applies regardless of whether the company goes into liquidation.
9. A further factor in regard to fraudulent trading, in addition to its being a criminal offence, is a provision to the effect that if in the course of a winding up, it appears that such trading has taken place, the court, on the liquidator's application, may make a declaration that any person who was knowingly a party to such trading shall make a contribution to the company's assets.
Wrongful trading
10. The term 'wrongful trading' may be said to cover the same area as fraudulent trading, but with the absence of the ingredient of intent to defraud. The provisions relating to wrongful trading apply to a person who has been a director of a company which has gone into insolvent liquidation and, at some time before the winding up, while he was a director of the company, he knew or ought to have known that there was no reasonable prospect that the company would avoid insolvent liquidation. A declaration to make a contribution (paragraph 7(d)) shall not be made if the director took every possible step with a view to minimising the loss to the company s creditors.
Disqualification on grounds of 'unfit' conduct
11. Under this heading it is necessary for the formal disqualification process to be initiated by an application being made to the court for a disqualification order. Such applications may be made only by the DTI - that is, either by the Secretary of State or by the official receiver - as indicated below. Applications for disqualification may arise in three ways:
Reports made by inspectors appointed by the Secretary of State
12. If it appears to the Secretary of State from a report made by inspectors whom he has appointed that it is in the public interest that a disqualification order should be made against any person who is or has been a director or shadow director of any company, he may apply to the court for such an order. The court may make a disqualification order against such a person where it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company. The maximum period of disqualification in this respect is 15 years.
Information obtained from the Serious Fraud Office
13 As from 12th October 1988 the Company Directors Disqualification Act 1986 was amended by the Criminal Justice Act 1988 so that information obtained by the Serious Fraud Office could enable the Secretary of State to apply to the court for a disqualification order against a director or shadow director.
Reports made by insolvency office holders
14. These are the provisions which - within the field of director disqualification - have received the widest publicity and which are the source of most disqualification orders - although bankruptcies are the source of the greatest number of (automatic) disqualifications. Where a person has been a director of a company which goes into a formal insolvency and the court, on hearing an application for disqualification, is satisfied that his conduct as a director makes him unfit to be concerned in the management of a company, the court shall make a disqualification order. 'Formal insolvency' means that these provisions apply if a company goes into liquidation, becomes the subject of an administration order, or has an administrative receiver appointed in respect of it. The minimum period of disqualification under this head is two years and the maximum 15 years.
15. For the purpose of possible applications to the court for such disqualification orders, the relevant 'office holder' in relation to the formal insolvency must report to the DTI upon the conduct of the company's directors. It is stressed that disqualification is not automatic in respect of a director who is the subject of an adverse or 'unfit' report. An application for disqualification must be heard by the court.
Matters for determining unfitness
16. The Company Directors Disqualification Act provides guidelines for the purpose of determining unfitness. The guidelines constitute a list (which is not exhaustive) of the matters which the court shall take into account when deciding whether a person's conduct renders him unfit to be involved in the management of a company. This list, which is in two parts, is summarised below.
17. Part I - Matters applicable in all cases (that is, whether the relevant company has become insolvent or not):
18. If a person acts as a director while disqualified - whether disqualified by a disqualification order or by his being an undischarged bankrupt - he is liable on conviction to imprisonment or a fine or both.
Offences by bodies corporate
19. A body corporate - a company - may be a director of another company and may have a disqualification order made against it. If a body corporate contravenes a disqualification order and the contravention arose with the connivance of or from some neglect by an officer or purported officer of the body corporate, he, as well as the body corporate, is guilty of an offence and liable to punishment accordingly. 'Officer' includes a director, manager or secretary.
Contravention - personal responsibility for a company's debts
20. If a person involves himself directly or indirectly in the management of a company in contravention of disqualification, he is personally responsible for all the 'relevant' debts of the company. This provision applies not only to a person who has had a disqualification order made against him or is an undischarged bankrupt, but also to a person who acts or is willing to act on instructions given by another person whom he knows to be the subject of a disqualification order or to be an undischarged bankrupt. The 'relevant' debts are the debts incurred by the company during the period of involvement or conduct, as indicated above, of the person concerned.
Definitions of 'director' and 'shadow director'
21. The term 'director' includes any person occupying the position of director, by whatever name called. 'Shadow director', in relation to a company, means a person in accordance with whose directions or instructions the directors of a company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity).
Restriction on re-use of company names
22. Although they do not constitute an absolute bar to a person acting as a director, these provisions create restrictions which arise out of insolvencies, and it is therefore relevant to include them here. They apply to any person who was a director or shadow director of a company in the year before it went into insolvent liquidation. Within five years of such liquidation, the person concerned shall not, without leave of the court, be a director of, or take part in the management of, a company or business which is known by a 'prohibited name'.
23. The term 'prohibited name' means any name by which the company was known during the year before it went into liquidation, or a name which is so similar to such a name as to suggest an association with that company.
24. There are exceptions to these restrictions. First, a director or shadow director need not obtain the leave of the court where he has acquired the business of an insolvent company from the insolvency practitioner administering the insolvency and the successor company gives notice, as prescribed, to the creditors of the liquidating company. Second, although the 'continuing' company may have a name which appears to be prohibited, the person concerned may nonetheless be involved in that company if it was known by that name for at least the whole of the year immediately prior to the liquidating company going into liquidation, and was not dormant during that time.
Contravention of restrictions on re-use of company name
25. If a person contravenes these provisions, he is liable to imprisonment or a fine or both. It is further provided that a person is personally responsible for all the relevant debts of a company if, in contravention of the above provisions, he is involved in the management of a company, or acts or is willing to act on instructions given by a person whom he knows at that time to be in contravention of the provisions in relation to the relevant compahy. Again, the relevant debts of the company are the debts incurred by the company during the period of involvement or conduct (as indicated above) of the person concerned.
The rate at which disqualificatlons arise
26. In 1987 the number of bankruptcy orders made in England and Wales was 6,994. The figure for 1988 was 7,717. A bankruptcy order normally remains in effect for three years or, if it is a small - or 'summary' - case, for two years. The normal period of three years may be extended if the bankrupt fails to comply with the obligations which bankruptcy places upon him. In Scotland 826 sequestration orders were made in 1987, and 1,409 in 1988.
27. It is rare for such an order to be made in connection with a county court administration order.
Finding out if a person is disqualified
28. To find out if a person is disqualified from acting as a director, it is necessary to search three registers - an index of bankruptcy orders, an index of sequestration orders, and the register of disqualification orders. No fee is payable.
29. The index of bankruptcy orders (for England and Wales) is situated at the Bankruptcy Search Room, Department of Official Receivers, Atlantic House, Holborn Viaduct, London ECi. For Scotland there is an index of sequestration orders at the office of the Accountant of Court in Bankruptcy, Meldrum House, 15 Drumsheugh Gardens, Edinburgh EH3 7QG. These indices contain thousands of names because deletions are not made after a bankrupt obtains his discharge.
30. The register of disqualification orders is situated at Companies House, 55-71 City Road, London EC1 and a duplicate register may be inspected at the Bankruptcy Search Room (mentioned above) London, and at Companies House, Crown Way, Maindy, Cardiff, and also at Companies House, 102 George Street, Edinburgh. In contrast with the system relating to bankruptcy orders, particulars of disqualification orders are removed from the register as the disqualification periods expire. More information on the current numbers of disqualifications can be found at this web site.
31. Inspection of the above registers is by personal visit only. There are no facilities for postal, telephone or computer-linked enquiries, except that the Accountant of Court in Bankruptcy in Edinburgh will deal with postal enquiries for a fee of £5. Consideration is being given to a scheme whereby, although the existing public access will be maintained, copies of the registers will be sold to a separate agency which would make them available to its subscribers on a commercial basis. It seems likely that the commercial register would show only current bankruptcies.
The System in Perspective
32. For various reasons, it is difficult to compare the number of disqualification orders, either with the total number of directors of companies which have become insolvent, or with the total number of company insolvencies. One of the factors is the time lag (maximum of two years) between the start of an insolvency and an application for a disqualification.
33. In 1987 insolvent liquidations in England and Wales numbered 11,439. The corresponding figure for 1988 was 9,427. Using the available figures as a very rough guide, it might be said that disqualification orders will be equal to something like 5 per cent of insolvent liquidations. Some sectors of the business community apparently think the percentage should be higher. Whether they are right or not, is difficult to say. However, there now exists a substantial framework of disqualification law, and it remains to be seen whether the DTI and the courts can provide the resources and the time required to prepare and process the necessary cases.
(Please note that while every effort is made to ensure the accuracy of this paper, neither the publishers, nor the author or his employers accept any responsibility to any person who acts, or refrains from acting, on the basis of anything contained in this paper. Readers are recommended to obtain specific professional advice in respect of each individual case.)
This paper was produced by The Credit Services Association. The Credit Services Association is the professional association for companies specialising in debt collection, credit reporting and ancilliary services.