DIRECTORS’ DISQUALIFICATION

Isn’t directors’ disqualification just limited to one or two high profile cases?

There have been a number of very high profile directors who have faced disqualification applications like Terry Venables, some of the directors from Barings plc, TLL Realisations Ltd (the company behind the Lotus Formula One team), Atlantic Computers plc and British & Commonwealth Holdings plc.

To suggest that this is limited to one or two cases that hit the limelight is wrong though. The Department of Trade and Industry has been actively pursuing directors of failed small and medium sized businesses…and frankly they make much easier pickings.

Is this a criminal thing?

There is a lot of confusion about this in the public’s mind. The answer (like the response to any question about the law) is a bit of ‘Yes’ and ‘No’.

Yes, the criminal courts have power to disqualify directors, and breaching an order carries criminal sanctions.

No, in practice most disqualifications are made in the civil courts. There is a separate civil procedure to disqualify directors who have been inept or negligent but not criminal. This takes place in the Companies Court. The Companies Court is part of the Chancery Division of the High Court.

Come on, if a businessman’s business has failed, then his creditors deserve the sympathy – not him?

Businesses fail for all sorts of reasons. The businessman has lost his livelihood. He has probably staked everything he owns in the venture. Orders under the Company Directors Disqualification Act 1986 disqualifying a businessman from acting as a director can have a crippling impact on him and his family.

But surely an order just means he can’t be a director?

No. The order not merely disqualifies him from being a director but from being involved in the management of a company at all. For a person who has spent his life self employed and running his own business the impact of a disqualification can be colossal.

Can’t he just get someone else to run his business for him?

There are no short cuts to escape a disqualification order’s effect. Directorship includes what is known as ‘shadow directorship’ – that is to say influencing the business of a company like a director might. Ignore the disqualification order and you will be liable to be prosecuted. The offence carries a maximum two year prison sentence and an unlimited fine. You will also be made personally liable for the debts of the company concerned.

Helping a friend out by letting him use your name ‘on the letterhead’ whilst he runs the business during the period of his disqualification can be a serious mistake too. You can be prosecuted for this. The offence again carries a maximum two year prison sentence and an unlimited fine. You will also run the risk of being made personally liable for the debts of the company concerned.

So how long a period of disqualification is given usually?

The Court of Appeal has already set guidelines of as much as three to five years disqualification for ‘not so serious’ cases. More serious cases attract disqualifications in the bracket of six to ten years with the top bracket of seriousness (such as those who are being disqualified for a second time) facing a ban of ten to fifteen years.

How does one attract the DTI’s attention?

There is no mystery to that. If your company goes bust, the insolvency practitioner, as a matter of course will submit a ‘D’ form commenting on the role of the directors in the insolvency of the company. It does not necessarily follow that the Department of Trade and Industry will investigate each insolvency or apply for disqualification every time.

Are there a lot of disqualification applications in the courts at the moment?

A lot of applications are made, but not many are fought. Most ex-directors just roll over and play dead when the DTI hits them with an application. Many directors let the proceedings go through, feeling that there is nothing that they can do to stop the application being made against them. Others attend the hearing unrepresented or without adequate preparation or even with no evidence at all.

The truth is that a lot can be done for them if only they get proper advice quickly. There is no reason why disqualification applications cannot or should not be fought.

How does one know whether one is likely to be disqualified or not?

The issue is whether the director was unfit to be involved in the management of a company. That is quite a different test from whether the company went bust or not; companies go under for a wide variety of reasons. Unfitness is a question of fact. The judge approaches the question (i.e., that whether the complaints found proven against the director show he was unfit) in a common sense way.

What do they take into account?

Factors which the Court may be taken into account include:

• misuse of company funds;
• the director’s responsibility for the company’s insolvency;
• whether the director let the company enter into transactions to defraud its creditors;
• the extent of the director’s responsibility for any failure by the company to:

1. – keep accounting records
2. – retain records
3. – keep a register of directors and secretaries
4. – keep and enter up the shareholders’ register
5. – retain the shareholders’ register – make annual returns on behalf of the company
6. – submit annual returns on behalf of the company in a timely fashion
7. – register any charges it creates; o the director’s responsibility for any failure by the company to supply goods or services paid for;

• the extent to which the director was responsible for failing to call a creditors’ meeting in a creditors’ voluntary winding up;
• the extent to which the director failed to comply with his obligations in respect of:

1. – the company’s statement of affairs in administration
2. – the statement of affairs to the administrative receiver
3. – the attendance of meetings and the statement of affairs in the creditors’ voluntary winding up
4. – the company’s statement of affairs in a court winding up
5. – duty to deliver up the company’s property
6. – duty to cooperate with the company’s liquidator

The list is not exhaustive. Isolated failures will not attract disqualification but persistent failures will. The best thing a director can do is to seek professional advice at the first sign of trouble.

Are there any defences a director can rely on?

Where allegations are that the director breached his trust or acted negligently, the director probably can be relieved of liability where he acted honestly, reasonably and ought generally to be excused of liability. Reliance on an accountant that the company’s statutory obligations were complied with may amount to a defence. Other matters that the Court will have regard to are whether the director has sought professional advice promptly.

And if one doesn’t have a defence, just roll over?

No. Even where the case is obviously hopeless, all is not lost and there is plenty that can be done to limit the consequences for the director.

How so?

There is something call a Carecraft procedure (Re: Carecraft Construction Co). This enables the director’s lawyers to approach the DTI to negotiate and agree a written statement of facts and the appropriate penalty.

Will the court take mitigating factors into account when making its order?

Of course. The court takes into account any relevant mitigating factors when assessing the appropriate penalty. So for example, the Court will also have regard to the fact that an incompetent director acted honestly and without personal gain. Delays in the disqualification proceedings coming to court are also substantially mitigation.

And then the director just waits out his time?

Not necessarily. It is also possible for a director to be given leave by the court to remain as a director of a company which is trading successfully where he can assure the court that safeguards are in place.

So the moral of the story is to get yourself a good lawyer?

The moral of the story is to take the responsibility of directorship seriously. But you should always be aware that if something does go wrong there is much that can be done to assist a director in difficulty.

Mark Watson-Gandy April 2000