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Company directors disqualification act

1986
by David Kelly
04 Feb 2005

This article examines the way in which the law tries to prevent unsuitable individuals
from acting as company directors. Such an individual can be disqualified from acting as
a director for up to 15 years under the Company Directors Disqualification Act 1986
(CDDA).

The Act was introduced in an attempt to prevent the misuse of the company form. One
of its specific aims was the control of the 'phoenix company'. This is a company set up
by a director of a very similar company which ceased trading due to extensive debts.
The new company carries on essentially the same business, but with no liability to the
creditors of the former company. Such behaviour is reprehensible and is clearly an abuse
of limited liability. The CDDA1986 seeks to remedy this practice by preventing certain
individuals from acting as company director, but the ambit of the Act's control is much
wider than this one instance.

Categories of conduct
The CDDA1986 identifies three distinct categories of conduct which may, and in some
circumstances must, lead the court to disqualify certain persons from being involved in
the management of companies. These are:

a. General misconduct in connection with companies


Misconduct is defined as:
o a conviction for an indictable offence in connection with the promotion,
formation, management or liquidation of a company or with the
receivership or management of a company's property (S2 of the
CDDA1986). The maximum period for disqualification under S2 is five
years where the order is made by a court of summary jurisdiction, and 15
years in any other case.
o persistent breaches of companies legislation in relation to provisions
which require any return, account or other document to be filed with, or
notice of any matter to be given to, the registrar (S3 of the CDDA1986).
Section 3 provides that a person is conclusively proved to be persistently
in default where it is shown that, in the five years ending with the date of
the application, he has been adjudged guilty of three or more defaults
(S3(2) of the CDDA1986). This is without prejudice to proof of persistent
default in any other manner. The maximum period of disqualification
under this section is five years.
o fraud in connection with winding up (S4 of the CDDA1986). A court
may make a disqualification order if, in the course of the winding up of a
company, it appears that a person:
i. has been guilty of an offence for which he is liable under S458 of
the Companies Act 1985, that is, that he has knowingly been a
party to the carrying on of the business of the company either with
the intention of defrauding the company's creditors or any other
person or for any other fraudulent purpose
ii. has otherwise been guilty, while an officer or liquidator of the
company or receiver or manager of the property of the company,
of any fraud in relation to the company or of any breach of his
duty as such officer, liquidator, receiver or manager (S4(1)(b) of
the CDDA1986). The maximum period of disqualification under
this category is 15 years.
b. Disqualification for unfitness
This covers:
o disqualification of directors of companies which have become insolvent,
who are found by the court to be unfit to be directors (S6 of the
CDDA1986). Under S6, the minimum period of disqualification is two
years, up to a maximum of 15 years
o disqualification after investigation of a company under Pt XIV of the
CA1985 (S8 of the CDDA1986).

A disqualification order may be made as the result of an investigation of a company


under the companies legislation. Under S8 of the CDDA1986, the Secretary of State
may apply to the court for a disqualification order to be made against a person who has
been a director or shadow director of any company, if it appears from a report made by
an inspector under S437 of the CA or Ss94 or 177 of the Financial Services Act 1986
that 'it is expedient in the public interest' that such a disqualification order should be
made. Once again, the maximum period of disqualification is 15 years.

The CDDA1986 sets out certain particulars to which the court is to have regard where it
has to determine whether a person's conduct as a director makes them unfit to be
concerned in the management of a company (S9). The detailed list of matters to be
considered is set out in Schedule 1 to the Act.

In addition, the courts have given indications as to what sort of behaviour will render a
person liable to be considered unfit to act as a company director. Thus, in Re Lo-Line
Electric Motors Ltd (1988), it was stated that: '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... in an extreme case
of gross negligence or total incompetence, disqualification could be appropriate.'

A 'lack of commercial probity', therefore, will certainly render a director unfit, but, as
Vinelott J stated in Re Stanford Services Ltd (1987): '...the public is entitled to be
protected, not only against the activities of those guilty of the more obvious breaches of
commercial morality, but also against someone who has shown in his conduct of a
company a failure to appreciate or observe the duties attendant on the privilege of
conducting business with the protection of limited liability.'

Consequently, even where there is no dishonesty, incompetence may render a director


unfit. Thus, in Re Sevenoaks Stationers Ltd (1990), the Court of Appeal held that the
director was unfit to be concerned in the management of a company on the basis that:
'His trouble is not dishonesty, but incompetence or negligence in a very marked degree,
and that is enough to render him unfit; I do not think it is necessary for incompetence to
be "total" to render a director unfit to take part in the management of a company.'

c. Other cases for disqualification


This relates to:
participation in fraudulent or wrongful trading under S213 of the Insolvency Act 1986
(S10 of the CDDA1986)
undischarged bankrupts acting as directors (S11 of the CDDA1986)
failure to pay under a county court administration order (S12 of the CDDA1986).

Disqualification orders
For the purposes of most of the CDDA1986, the court has a discretion to make a
disqualification order. Where, however, a person has been found to be an unfit director
of an insolvent company, the court has a duty to make a disqualification order (S6 of the
CDDA1986).

The precise nature of any such order is set out in S1, under which the court may make an
order preventing any person (without leave of the court) from being:

• a director of a company
• a liquidator or administrator of a company
• a receiver or manager of a company's property
• in any way, whether directly or indirectly, concerned with or taking part in the
promotion, formation or management of a company.

However, a disqualification order may be made:

i. with leave to continue to act as a director for a short period of time, in order to
enable the disqualified director to arrange his business affairs (Re Ipcon Fashions
Ltd (1989))
ii. with leave to continue as a director of a named company, subject to conditions
(Re Lo-Line Electric Motors Ltd (1988))
iii. with leave to act in some other managerial capacity but not as director (Re Cargo
Agency Ltd (1992)).

Period of disqualification
With regard to the period of disqualification, in Re Sevenoaks Stationers (Retail) Ltd
(1990), Dillon LJ in the Court of Appeal divided the potential maximum 15 year period
of disqualification into three distinct brackets:

i. over 10 years for particularly serious cases (for example, where a director has
been disqualified previously)
ii. two to five years for 'relatively not very serious' cases
iii. a middle bracket of between six and 10 years for serious cases not meriting the
top bracket.

Penalty for breach of a disqualification order


Anyone who acts in contravention of a disqualification order is liable for either:

i. imprisonment for up to two years and/or a fine, on conviction on indictment


ii. imprisonment for up to six months and/or a fine not exceeding the statutory
maximum, on conviction summarily (S13 of the CDDA1986).

Under S14 where a company is guilty of an offence under S13, then any person who
consented or contributed to its so doing will also be guilty of an offence. In addition S15
imposes personal liability for company debts arising during a period when a person acts
as a director while disqualified, either under an order or while personally bankrupt. The
Secretary of State is required to maintain a register of disqualification orders which is
open to public inspection (S18).

Re Uno, Secretary of State for Trade and Industry V Gill


The operation of the CDDA1986 was considered extensively in Re Uno, Secretary of
State for Trade and Industry v Gill (2004). This case related to a group of two furniture
companies which, although in severe financial difficulties, continued to trade while the
directors investigated possible ways of saving the businesses. During this period one of
the companies, Uno, continued to raise its working capital from deposits taken from
customers to secure orders that were never to be met, as the company eventually went
into liquidation.

Although the directors were advised that they could have safeguarded the deposits by
placing the money in a trust account for the customers, they decided not to do so, as they
needed the money to keep the business going in the short term. An application from the
Department of Trade and Industry for the disqualification of the directors on the basis of
this behaviour was unsuccessful. In refusing the application, the court emphasised the
fact that in order to justify disqualification there had to be behaviour that was either
dishonest, or lacking in commercial probity. Moreover, that behaviour had to be such as
to make the person concerned unfit to be involved in the management of a company.
Under the circumstances of the case the court found that the directors had pursued
realistic opportunities to save the businesses and consequently were blameless for the
eventual failure of the businesses and the loss to the customers.

David Kelly is examiner for Paper F4