Directors' Disqualification: Punishment or Protection and time scales

Directors disqualification is an interesting area to mull on from a policy perspective. What is it all about? Does the jurisdiction exist to punish errant directors, or, are the regulatory provisions in place so as to protect creditors from directors who abuse the statutory privilege of limited liability through phoenixism and other miscreant activities? (as Professor Sir Otto Kahn Freund QC FBA might hope). In the alternative do the provisions, when coupled with s.214 Insolvency Act 1986 (IA86) wrongful trading, provide a compensatory device, or finally, are we dealing with a device or set of provisions which help to raise standards of business conduct and entrepreneurship?

Some commentators would argue that the Company Directors Disqualification Act 1986 (CDDA86) regulatory jurisdiction exists to provide a protection mechanism for the general public. Protection comes from the removal of, inter alia, 'unfit' (s.6 CDDA) directors from the corporate world for a period of between 2 and 15 years depending on the degree of unfitness and how this sits on the late Dillon, LJ's Re Sevenoaks Stationers (Retail) Ltd [1991] BCLC 325, [1991] Ch 164, scale. 


Other commentators would argue that the jurisdiction exists as a form of punishment for the miscreant director, especially when accompanied by culpability for s.213 IA86) fraudulent trading (with that provision's attendant mens rea for dishonesty) or wrongful trading contributions to the company's assets as a result of s.214 IA86 culpability. The corollary removal from one's professional body as a result of disqualification (i.e. being struck off as a solicitor) and the subsequent inhibiting of one's ability to earn may also be viewed as a form of punishment. 


Professor Sally Wheeler's essay on directors disqualification (Wheeler, S. Disqualification of Directors: A Broader View, in: Rajak, H (Ed). Insolvency Law: Theory and Practice. Sweet and Maxwell Ltd, London, 1991) provides an interesting discussion of the area, particularly from the perspective of how civil provisions are used to punish directors and how judges may be using inappropriate policy mechanisms when coming to their decisions. 


In the wider context of disqualification it is interesting to mull on the wide range of case law and the terms of disqualification that were given out depending on the type of behaviour that was exhibited by the directors. Let us look at a brief sample of case law to determine what conduct gets what sort of period of disqualification. First though here is the pertinent element of s.6 CDDA86 on unfitness:


"6 Duty of court to disqualify unfit directors of insolvent companies  


(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."


Here are some cases of note that may help us with a smooth navigation through what has been referred to as the “murky waters of both law and…facts” (Secretary of State for Trade and Industry v. Goldberg and another [2003] EWHC 2843 (Ch), [2004] BCLC 597, at paragraph 6) of unfitness within the jurisdiction of directors’ disqualification:


Re Sevenoaks Stationers (Retail) Ltd [1991] BCLC 325, [1991] Ch 164
Period of disqualification: 5 years
Conduct:

• failing to keep proper accounting records of one of the companies, 
• failing, in respect of two companies, to ensure that annual returns were filed with the Registrar of Companies, 
• failing, in respect of all five companies, to ensure that audited accounts were prepared and delivered to the Registrar of Companies, 
• causing loan, debt guarantee and debt payment transactions to be made between companies when the director knew or ought to have known that there were severe financial difficulties, 
• causing certain of the companies to continue to trade while insolvent, 
• and failing to pay Crown debts in respect of P.A.Y.E., national insurance contributions and VAT. 

Re Lo-Line Electric Motors Limited [1988] Ch 477
Period of disqualification: 3 years
Conduct:

• director who had traded through limited companies when he knew them to be insolvent 
• using unpaid Crown debts to finance such trading 
• In re Lo-Line Electric Motors Ltd. [1988] Ch. 477 , 486, Sir Nicolas Browne-Wilkinson V.-C. said:

"Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt in an extreme case of gross negligence or total incompetence disqualification could be appropriate."


Re Stanford Services Limited [1987] BCLC 607
Period of disqualification: 2 years
Conduct:

• where the use of Crown debts to finance a company’s trading activities, 
• continuing to trade while the company was insolvent 
• and receiving excessive remuneration

Re Rolus Properties Limited (1988) 4 BCC 446.
Period of disqualification:  2 years
Conduct:

• absence, among other things, of adequate books and accounting records for the companies in question 
• substantial mitigation by the fact that a Chartered Secretary had been appointed to look after the accounting affairs of the companies.

Re Western Welsh International System Buildings Limited (1988) 4 BCC 449.
Period of disqualification: 5 years
Conduct:

• failure to keep proper books or produce proper accounts, 
• trading while insolvent, 
• continuing to accept customers' payments on account of the cost of chalets at a time when the company was in such financial straits that it would be unable to supply the chalets, and 
• failing to pay Crown debts

Re Majestic Recording Studios Limited [1989] BCLC 1.  
Period of Disqualification: 3 years
Conduct:

• the director shirked his duties as director by leaving everything to others and had, therefore, failed to appreciate the duties attendant on conducting business with limited liability 

Re McNulty’s Interchange Limited [1989] BCLC 709.
Period of disqualification: 18 months
Conduct:

• director’s conduct in incurring debts, 
• receiving remuneration
• failing to pay PAYE at a time when the company in question unable to market any product

Re J and B Lynch (Builders) Limited [1989] BCLC 376.
Period of disqualification: 3 years
Conduct:

• substantial unpaid Crown debts, 
• continuing to trade when company was insolvent, issuing cheques that were dishonoured, 
• failing to file returns and accounts and failing to keep adequate accounting records.

Picture Credit: http://www.tomharris.org.uk/files/2009/12/man_in_prison1.jpg