Company Directors Disqualification: A Recent Review

Author: Simon Hill
In: Bulletin Published: Tuesday 30 March 2021

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This Bulletin will look at Company Directors Disqualification and Re Keeping Kids [2021] EWHC 175 (Ch)

The disqualification of company directors is governed by the Company Directors Disqualification Act 1986 (“CDDA”). The CDDA contains sections: (1) granting the Court powers to impose a disqualification order (for instance, section 8 - disqualification after investigation); and (2) placing duties on the Court to impose a disqualification order where the criteria is made out. Section 6 of the CDDA places a duty on the Court to impose a disqualification order in certain circumstances, for a period between 2 and 15 years (Section 9A of CDDA contains a separate duty for imposing a (competition) disqualification order). Pursuant to section 7(1) of the CDDA, if it appears to the Secretary of State that it is 'expedient in the public interest' that a disqualification order should be made, the Secretary of State (or Official Receiver following Secretary of State direction) may make an application to the Court, seeking an order, a disqualification order, from the Court, against an allegedly unfit company director. 

Since the coming into force on 1 October 2015 of the Small Business, Enterprise and Employment Act 2015 amendments, section 6, entitled ‘Duty of court to disqualify unfit directors of insolvent companies’, has read:

‘(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied—

(a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and

(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of one or more other companies or overseas companies) makes him unfit to be concerned in the management of a company.

(1A) In this section references to a person's conduct as a director of any company or overseas company include, where that company or overseas company has become insolvent, references to that person's conduct in relation to any matter connected with or arising out of the insolvency.

(2) For the purposes of this section, a company becomes insolvent if—

(a) the company goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up,

(b) the company enters administration,

(c) an administrative receiver of the company is appointed.

(2A) For the purposes of this section, an overseas company becomes insolvent if the company enters into insolvency proceedings of any description (including interim proceedings) in any jurisdiction.

(3) In this section and section 7(2), “the court” means—

(a) where the company in question is being or has been wound up by the court, that court,

(b) where the company in question is being or has been wound up voluntarily, any court which has or (as the case may be) had jurisdiction to wind it up,

(c) where neither paragraph (a) nor (b) applies but an administrator or administrative receiver has at any time been appointed in respect of the company in question, any court which has jurisdiction to wind it up.

(3A) Sections 117 and 120 of the Insolvency Act 1986 (jurisdiction) shall apply for the purposes of subsection (3) as if the references in the definitions of “registered office” to the presentation of the petition for winding up were references—

(a) in a case within paragraph (b) of that subsection, to the passing of the resolution for voluntary winding up,

(b) in a case within paragraph (c) of that subsection, to the appointment of the administrator or (as the case may be) administrative receiver.

(3B) Nothing in subsection (3) invalidates any proceedings by reason of their being taken in the wrong court; and proceedings —

(a) for or in connection with a disqualification order under this section, or

(b) in connection with a disqualification undertaking accepted under section 7,

may be retained in the court in which the proceedings were commenced, although it may not be the court in which they ought to have been commenced.

(3C) In this section and section 7, “director” includes a shadow director.

(4) Under this section the minimum period of disqualification is 2 years, and the maximum period is 15 years.’

Schedule 1 [1]contains some matters the Court is to have particular regard to.

Re Keeping Kids
This area has recently been surveyed by Falk J in Re Keeping Kids [2021] EWHC 175 (Ch)(‘Keeping Kids’), though she considered section 6 prior to the amendments introduced by the Small Business, Enterprise and Employment Act 2015.

Falk J’s review can be found at paragraphs 172 to 185 of her judgment. It pays to set it out in full as it is illuminating:

172. The application for disqualification is made under the CDDA as in force prior to the amendments made by the Small Business, Enterprise and Employment Act 2015.

173. Section 6 provided:

“(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied-

(a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and

(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.”

174. Under s 6(2) a company becomes insolvent if, relevantly, it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities. Under s 6(4), the minimum period of disqualification is two years and the maximum period is 15 years.

175. Section 9 required the court to “have regard in particular” to the matters mentioned in Schedule 1, which relevantly included at paragraph 6:

“The extent of the director’s responsibility for the causes of the company becoming insolvent.”

176. Section 1 sets out what is meant by a disqualification order, stating that it is an order that, for the period specified, the person against whom it is made: 

“…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.”

177. The principles to be applied by the court have been discussed in a number of cases. They were helpfully brought together by Jonathan Parker J in section IIIA of his judgment in Re Barings plc (No. 5) [1999] 1 BCLC 433 (“Re Barings (No. 5)”) at pp.482-486. In summary:

18. Section 6 CDDA imposes a duty on the court to make a disqualification order where the conditions are satisfied, in contrast to the discretion conferred by s 8 (disqualification after investigation) which applies in circumstances where a company may not have become insolvent.

19. Although on the face of it the expression “unfit to be concerned in the management of a company” would appear to mean unfit to be concerned in the management of any company without qualification, the court’s ability to grant a respondent leave to be concerned in the management of a company under s 17 CDDA means that s 6 cannot have the wholly unqualified meaning that it appears to have.

20. The primary purpose of the jurisdiction under s 6 is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to others. The fact that s 6 imposes a duty to disqualify, coupled with the fact that any disqualification under that section must last for a minimum of two years, highlights the significance attached by Parliament to the fact that the company in question has become insolvent.

21. Jonathan Parker J described the test of being “unfit” as follows:

“‘Unfitness’ may be shown by conduct which is dishonest (including conduct showing a want of probity or integrity) or by conduct which is merely incompetent. In every case the function of the court in addressing the question of unfitness is to ‘decide whether [the conduct of which complaint is made by the Secretary of State], 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’ (see Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276 at 284 , sub nom Re Grayan Building Services Ltd (in liq) [1995] Ch 241 at 253 per Hoffmann LJ). This has been described as 'a jury question' (see Re Sevenoaks Stationers (Retail) Ltd [1991] BCLC 325 at 330 , [1991] Ch 164 at 176 per Dillon LJ).” (p.483a-c)

22. The court is required by s 9 CDDA to have regard to the various matters listed in Parts I and II of Schedule 1 to the CDDA. However, the list in Schedule 1 is not exhaustive. In relation to paragraph 6 of Schedule 1, the relevant enquiry is to what extent were the respondent’s failings responsible for the causes of the insolvency, rather than applying a test based on legal concepts of causation.

23. Conduct must be evaluated in its context. It follows that the only extenuating circumstances which may be taken into account in addressing the question of unfitness, as opposed to the length of any disqualification order, are those which accompanied the conduct in question.

24. Where a case is based solely on allegations of incompetence, the burden is on the Secretary of State to satisfy the court that the conduct complained of demonstrates “incompetence of a high degree”. The burden is a heavy one, as explained by the serious nature of a disqualification order.

25. The requirement to assess conduct in context (or “in its setting”) means that:

“…the court will assess the competence or otherwise of the respondent in the context of and by reference to the role in the management of the company which was in fact assigned to him or which he in fact assumed, and by reference to his duties and responsibilities in that role. Thus the existence and extent of any particular duty will depend upon how the particular business is organised and upon what part in the management of that business the respondent could reasonably be expected to play (see Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2) [1993] BCLC 1282 at 1285 per Hoffmann LJ). For example, where the respondent was an executive director the court will assess his conduct by reference to his duties and responsibilities in that capacity.” (p.484c-d)

1. It follows that, while the requisite standard of competence does not vary according to the nature of the company’s business or the respondent’s role in management, and may therefore be said to be a “universal” standard, the standard must be applied to the facts of each particular case.

2. It is no defence to a charge of unfitness based on incompetence for the respondent to contend that, even if the director was grossly incompetent in discharging the management role in question, he or she has not been shown to be unfit to be concerned in the management of any company, that is a “lowest common denominator” approach. The issue is not whether the respondent could have performed in some other management role competently: the court is concerned only with the conduct in respect of which complaint is made, set in the context of the actual management role that the respondent had in the company.

3. It is not a prerequisite of a finding of unfitness that there has been some misfeasance or breach of duty, and nor does misfeasance or breach of duty necessarily make an individual unfit. In particular, the fact that errors could be characterised as errors of judgment rather than negligent mistakes is not necessarily an answer to a charge of unfitness based on incompetence, because it might be demonstrated that the individual has shown him or herself “so completely lacking in judgment as to justify a finding of unfitness” (p.486f).

178. Jonathan Parker J’s analysis in Re Barings (No.5) was approved by the Court of Appeal decision in its decision in that case, Baker v Secretary of State for Trade and Industry [2001] BCC 273 (CA) (“Barings CA”). In a judgment of the court, Morritt LJ said this at [35]:

“35. In Section IIIA the judge made a number of observations on the proper construction and application of the Act to which we refer, not because we disagree with the judge, but because we wish to emphasise the propositions to which he referred. First, the court must consider the question of ‘unfitness’ by reference to the conduct relied on by the Secretary of State and decide whether ‘viewed cumulatively and taking into account any extenuating circumstances, [it] has fallen below the standards of … competence appropriate for persons fit to be directors of companies’ ([1999] 1 BCLC 433 at p.483b). Thus it is no answer to the allegations of the Secretary of State that separately and individually none of them is sufficiently serious to demonstrate the requisite unfitness. Secondly, the matter referred to in Sch. 1, para. 6, namely, ‘the director’s responsibility for the causes of the company becoming insolvent’, requires a broad approach and is not to be assessed by reference to nice legal concepts of causation (p.483f-g). Thus it matters not that others may also have been responsible for the causes of the insolvency whether more or less proximately. Thirdly, where the allegation is incompetence without dishonesty it is to be demonstrated to a high degree (pp.483j-484b). This follows from the nature of the penalty. Nevertheless the degree of incompetence should not be exaggerated given the ability of the court to grant leave, as envisaged by the disqualification order as defined in s. 1, notwithstanding the making of such an order. Fourthly, it is not necessary for the Secretary of State to show that the person in question is unfit to be concerned in the management of any company in any role. This test, described by the judge as the lowest common denominator approach, is not what the Act enjoins. As the judge observed, the court is concerned only with the respondent’s conduct in respect of which complaint is made set in the context of his actual management role in that company. If his conduct in that role shows incompetence to the requisite degree then a finding of unfitness and a consequential disqualification order should be made (p.485d-h). Fifthly, a finding of breach of duty is neither necessary nor of itself sufficient for a finding of unfitness (p.486d-g). As the judge observed, a person may be unfit even though no breach of duty is proved against him or may remain fit notwithstanding the proof of various breaches of duty.”

179. It is also worth setting out the following extract from paragraph [43] about the role of the trial judge:

“…we would adopt the views of Mr Jules Sher QC in Re Hitco 2000 Ltd [1995] BCC 161 at p.163D-H which were approved by this court in Re Grayan Building Services Ltd [1995] BCC 554 at p.575; [1995] Ch 241 at p.255 that:

‘The ultimate determination for the trial judge is whether the proven “charges” render the director unfit to manage a company. That determination is not one of primary fact. It is a determination which involves the evaluation of the seriousness of the “charges” which have been proved and a judgment of the trial judge as to whether, taking all the circumstances into account, including all matters of mitigation and extenuation, the director is or is not unfit. The subjective evaluation of all this material by the trial judge is emphasised by the opening words of the section: “The court shall make a disqualification order against a person in any case where … it is satisfied … that his conduct … makes him unfit” (my emphasis). Nonetheless, the ultimate conclusion as to fitness or otherwise is itself a conclusion of fact….’”

180. It is not necessary for the purposes of this judgment to set out an exhaustive review of earlier case law authority on the disqualification legislation, so I will confine myself to a few additional specific comments.

181. In Re Blackspur Group plc [1998] 1 WLR 422 Lord Woolf MR said this about the purpose of the legislation at p.426F:

“The purpose of the Act of 1986 is the protection of the public, by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by encouragement of higher standards of honesty and diligence in corporate management, from those who are unfit to be concerned in the management of a company.”

182. Lord Woolf MR also emphasised at p.427D that applications under the CDDA are not ordinary private law proceedings. The effect of s 7(1) CDDA is that applications can only be made if it appears to the Secretary of State that it is “expedient in the public interest” that a disqualification order should be made. When made, an order has serious penal consequences.

183. In Re Living Images Ltd [1996] 1 BCLC 348 at pp.355-356, Laddie J discussed the fact that the standard of proof that applies is the civil standard, that is a balance of probabilities, and also said this about the risk of using hindsight:

“I should add that the court must also be alert to the dangers of hindsight. By the time an application comes before the court, the conduct of the directors has to be judged on the basis of statements given to the Official Receiver, no doubt frequently under stress, and a comparatively small collection of documents selected to support the Official Receiver’s and the respondents’ respective positions. On the basis of this the court has to pass judgment on the way in which the directors conducted the affairs of the company over a period of days, weeks or, as in this case, months. Those statements and documents are analysed in the clinical atmosphere of the courtroom. They are analysed, for example, with the benefit of knowing that the company went into liquidation. It is very easy therefore to look at the signals available to the directors at the time and to assume that they, or any other competent director, would have realised that the end was coming. The court must be careful not to fall into the trap of being too wise after the event.”

184. In Re Continental Assurance Co of London plc, Secretary of State for Trade and Industry v Burrows [1997] BCLC 48 Chadwick J made some comments about the role of a non-executive director, in that case an investment banker who had joined the board of a client. He made the point at p.58a that those dealing with the client company were entitled to expect that external directors appointed on the basis of their apparent expertise would exercise the competence required by companies legislation (then the Companies Act 1985), extending in the case of a corporate financier at least to reading and understanding statutory accounts. He also commented on the use of the phrase “cause or allow” in the allegation against the director (a phrase also used in this case), and said at p.58e that a director who failed to appreciate the obvious “allows” the consequences of what he has overlooked just as much as if he appreciated the position and did nothing about it, adding that unfitness includes incompetence in allowing something to happen that the legislation is designed to prevent (in that case a breach of the prohibition on financial assistance being provided for the acquisition of shares in the company).

185. However, as Jonathan Parker J recognised, context is critical, and the competence or otherwise of individuals will be determined by reference to the role they actually played, and the responsibilities they assumed. The fact that directors had non executive roles is a relevant part of the context. As Hoffmann LJ said in Bishopsgate Investment Management v Maxwell [1993] BCC 120 at 139 in the context of the duty to participate in management, the extent of the duty “must depend upon how the particular company’s business is organised and the part which the director could reasonably have been expected to play”.

SIMON HILL © 2021

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

[1] Within Schedule 1 of the CDDA, there is now:

Under the heading 'Matters to be taken into account in all cases'

1. The extent to which the person was responsible for the causes of any material contravention by a company or overseas company of any applicable legislative or other requirement;

2. Where applicable, the extent to which the person was responsible for the causes of a company or overseas company becoming insolvent;

3. The frequency of conduct of the person which falls within paragraph 1 or 2;

4. The nature and extent of any loss or harm caused, or any potential loss or harm which could have been caused, by the person's conduct in relation to a company or overseas company.

Under the heading 'Additional matters to be taken into account where person is or has been a director'

5. Any misfeasance or breach of any fiduciary duty by the director in relation to a company or overseas company;

6. Any material breach of any legislative or other obligation of the director which applies as a result of being a director of a company or overseas company.

7. The frequency of conduct of the director which falls within paragraph 5 or 6.

8. Subsections (1A) to (2A) of section 6 apply for the purposes of this Schedule as they apply for the purposes of that section.

9. In this Schedule “director” includes a shadow director.