Director Disqualification
Layout of Seminar;
1. Directors disqualification; purpose of the act, circumstances, processes, tests the court
applies, thereafter, leave to act as a director following disqual.
2. The extent to which the act meets its aim.
3. Evidence used obtained under compulsion.
4. Phoenix Trading - stop trading within the company within a company which has been
insolvent.
General company law sections
There are changes put into the act by the SME act - the main things they've done is change the
section numbers. Section 6/9 schedule 1 -? section 6/12C and Schedule 1. Note this when
reading textbooks.
The main legislation in the area is the CDD Act 1986 as amended by the SMBE.
When can an individual be targeted for disqualification?
- s.6 - an individual when a company has gone into insolvent.
- Complaints by general public to the insolvency services - they will decide whether they think
the directors should be targeted for disqualification.
s.8
Here the sec of state has the power to investigate the conduct of directors where companies are
being used as vehicles not in the interests of the public.
- new one; where a director has been disqaulfied and the third party he was following - s.8zA.
-failure to comply with company legislation - s.5 et seq
s.4 –
s.10
- wrongful trading/fraudulent trading - s.214/s.213 - can also disqualify the director at the same
time. One of the reasons why they're less common in this process however, is that the insolvency
practitioner is not interested in disqualifying the director - he wants money for creditors.
The two most likely cases will be s.6/8 - Here where a disqualification order is granted, is it
absolute.
The act prohibits directors for specific period of times, max 15 years and solely for UK
companies. Following this however, a director can apply for leave to act.
,What is the purpose of the CDD Act?
What is the intention?
It is to protect the public - all the cases come back to this. It will do this by raising standards.
Through being a deterrence factor - if the court is setting up minimum standards, that should
raise standards;
Re Grayan Building Services Ltd - 1993
Extracts from the judgement;
- ‘It must decide whether that conduct, viewed cumulatively and taking into account any
extenuating circumstances, has fallen below the standards of probity and competence
appropriate for persons fit to be directors of companies.’
- ‘It follows that I agree with the approach of Vinelott J in Re Pamstock Ltd, when he said that it
was his duty to disqualify a director whose conduct fell short of the standard of conduct which
is today expected of a director of a company which enjoys the privilege of limited liability even
though he did so with regret’
- The court of appeal had regard to purpose of the legislation - 315. They found that limited
liability must not be misused, and that it must be carried out with proper sense of responsibility.
This act amounted to an important sanction, and acted basically as a safeguard laid down by
parliament to benefit others who would be dealing with their companies.
-So it raises standards, and deals with the abuse of limited liability.
How does the act try and carry out the balancing act of protecting the public and not too
detrimental to entrepreneurship?
- The result of each case depends on the facts of each case. It focuses on the individual conduct
of management. It doesn’t ignore collective responsibility. If other directors fail to stop fraud -
they will try and uncover and determine whether the conduct was carried out - each director is
focused on separately. The court is looking at each particular director and their conduct and
whether it merits disqualification.
- Another way it avoids being too detrimental to entrepreneurship is that the ban is a fixed period
of time, not forever.
-In addition, even when they have been disqualified, there is the ability to apply to the court to
act as a director,
The purpose of the act is key in determining how well the other provisions operate or interpreted.
You always do that through the lens of the act.
When will proceedings be brought under s.6?
, - practical point; s.6 is the usual section that proceedings will be brought: where a company has
entered into liquidation.
-There will be a report on each director regardless – they(I think the liquidator) will tell the
insolvency service all the relevant conduct and leave it up to them to target the conduct/director
further or not.
-One of the reasons for concern around that is that the insolvency service felt that some
reports for disqualification were very mundane. Also the liquidator can be appointed by the court
or the directors themselves in some cases. The professional bodies wanted to avoid any
criticisms on that ground. - There will always be a conduct report.
- They will put forward the report and someone may go into investigation. The law firms will
form a view if they should proceed to a disqualification hearing.
-(DON’T KNOW IF THIS IS RELEVANT)
-Once the investigator report is made there is an authorisations team, which is a different part
of the IS - they look at all the cases. They see a lot of cases, so can work out exactly where it fits.
They review the report, and normally they’ll just make a final decision. If they take the view that
it should be disqualified - it goes to another team in the IS. The idea of passing the report to the
defence liaison team, will be a key point as they issue a letter to the director - s.16 - sets out the
terms of the allegations being made. What conduct has been set to amount to misconduct - the
period of time that has been suggested as well.
- Things can go one of three ways 1. The defence liaison team can be convinced that
proceedings should not be put forward.
- 2.It could result in a voluntary director undertaking for a fixed period of time. It has the
force of court order, and details. There will be a schedule attached to that undertakings to which
he admits to, which will be relevant for leave to act. The benefit of undertaking is that it is
cheaper
- 3. Raise proceedings - the case will be handed to a panel of solicitors.
There is a case; Kiyani v Sec of State - you can JR the sec of state's decision. Provided they have
gone through the correct processes - it will be very rare that they will raise the proceedings. They
will probably just go through the disqualification process.
- This is not going to be examinable - probably just something to be aware.
Unfitness under s.6 of the 1986
- mandatory to determine.
How do we determine unfitness?
s.12C -> Schedule 1 (revised by SME 2015).
It used to be the case that the schedule had very specific items of misconduct - all very specific -
the case law made it clear that there was no one single case. Parliament was concerned that
individuals wouldn’t understand, so Schedule 1 was revised to take into account all cases - or to
specific cases for directors.
See schedule 1 - "Matters ot be taken into account"
Layout of Seminar;
1. Directors disqualification; purpose of the act, circumstances, processes, tests the court
applies, thereafter, leave to act as a director following disqual.
2. The extent to which the act meets its aim.
3. Evidence used obtained under compulsion.
4. Phoenix Trading - stop trading within the company within a company which has been
insolvent.
General company law sections
There are changes put into the act by the SME act - the main things they've done is change the
section numbers. Section 6/9 schedule 1 -? section 6/12C and Schedule 1. Note this when
reading textbooks.
The main legislation in the area is the CDD Act 1986 as amended by the SMBE.
When can an individual be targeted for disqualification?
- s.6 - an individual when a company has gone into insolvent.
- Complaints by general public to the insolvency services - they will decide whether they think
the directors should be targeted for disqualification.
s.8
Here the sec of state has the power to investigate the conduct of directors where companies are
being used as vehicles not in the interests of the public.
- new one; where a director has been disqaulfied and the third party he was following - s.8zA.
-failure to comply with company legislation - s.5 et seq
s.4 –
s.10
- wrongful trading/fraudulent trading - s.214/s.213 - can also disqualify the director at the same
time. One of the reasons why they're less common in this process however, is that the insolvency
practitioner is not interested in disqualifying the director - he wants money for creditors.
The two most likely cases will be s.6/8 - Here where a disqualification order is granted, is it
absolute.
The act prohibits directors for specific period of times, max 15 years and solely for UK
companies. Following this however, a director can apply for leave to act.
,What is the purpose of the CDD Act?
What is the intention?
It is to protect the public - all the cases come back to this. It will do this by raising standards.
Through being a deterrence factor - if the court is setting up minimum standards, that should
raise standards;
Re Grayan Building Services Ltd - 1993
Extracts from the judgement;
- ‘It must decide whether that conduct, viewed cumulatively and taking into account any
extenuating circumstances, has fallen below the standards of probity and competence
appropriate for persons fit to be directors of companies.’
- ‘It follows that I agree with the approach of Vinelott J in Re Pamstock Ltd, when he said that it
was his duty to disqualify a director whose conduct fell short of the standard of conduct which
is today expected of a director of a company which enjoys the privilege of limited liability even
though he did so with regret’
- The court of appeal had regard to purpose of the legislation - 315. They found that limited
liability must not be misused, and that it must be carried out with proper sense of responsibility.
This act amounted to an important sanction, and acted basically as a safeguard laid down by
parliament to benefit others who would be dealing with their companies.
-So it raises standards, and deals with the abuse of limited liability.
How does the act try and carry out the balancing act of protecting the public and not too
detrimental to entrepreneurship?
- The result of each case depends on the facts of each case. It focuses on the individual conduct
of management. It doesn’t ignore collective responsibility. If other directors fail to stop fraud -
they will try and uncover and determine whether the conduct was carried out - each director is
focused on separately. The court is looking at each particular director and their conduct and
whether it merits disqualification.
- Another way it avoids being too detrimental to entrepreneurship is that the ban is a fixed period
of time, not forever.
-In addition, even when they have been disqualified, there is the ability to apply to the court to
act as a director,
The purpose of the act is key in determining how well the other provisions operate or interpreted.
You always do that through the lens of the act.
When will proceedings be brought under s.6?
, - practical point; s.6 is the usual section that proceedings will be brought: where a company has
entered into liquidation.
-There will be a report on each director regardless – they(I think the liquidator) will tell the
insolvency service all the relevant conduct and leave it up to them to target the conduct/director
further or not.
-One of the reasons for concern around that is that the insolvency service felt that some
reports for disqualification were very mundane. Also the liquidator can be appointed by the court
or the directors themselves in some cases. The professional bodies wanted to avoid any
criticisms on that ground. - There will always be a conduct report.
- They will put forward the report and someone may go into investigation. The law firms will
form a view if they should proceed to a disqualification hearing.
-(DON’T KNOW IF THIS IS RELEVANT)
-Once the investigator report is made there is an authorisations team, which is a different part
of the IS - they look at all the cases. They see a lot of cases, so can work out exactly where it fits.
They review the report, and normally they’ll just make a final decision. If they take the view that
it should be disqualified - it goes to another team in the IS. The idea of passing the report to the
defence liaison team, will be a key point as they issue a letter to the director - s.16 - sets out the
terms of the allegations being made. What conduct has been set to amount to misconduct - the
period of time that has been suggested as well.
- Things can go one of three ways 1. The defence liaison team can be convinced that
proceedings should not be put forward.
- 2.It could result in a voluntary director undertaking for a fixed period of time. It has the
force of court order, and details. There will be a schedule attached to that undertakings to which
he admits to, which will be relevant for leave to act. The benefit of undertaking is that it is
cheaper
- 3. Raise proceedings - the case will be handed to a panel of solicitors.
There is a case; Kiyani v Sec of State - you can JR the sec of state's decision. Provided they have
gone through the correct processes - it will be very rare that they will raise the proceedings. They
will probably just go through the disqualification process.
- This is not going to be examinable - probably just something to be aware.
Unfitness under s.6 of the 1986
- mandatory to determine.
How do we determine unfitness?
s.12C -> Schedule 1 (revised by SME 2015).
It used to be the case that the schedule had very specific items of misconduct - all very specific -
the case law made it clear that there was no one single case. Parliament was concerned that
individuals wouldn’t understand, so Schedule 1 was revised to take into account all cases - or to
specific cases for directors.
See schedule 1 - "Matters ot be taken into account"
