Law

Company Directors Disqualification Act 1986 is an act that combines certain enactments concerning the disqualification of people from being managers of companies or else being concerned with the way a companys affairs are run. This Act combined the previous disqualification laws and further introduced new provisions that were tougher aimed at those involved or responsible for a companys failure and whose behaviour raises concern and questions on their fitness to take management roles in other companies.

    The function of the Company Directors Disqualification Act is to uphold the business environments integrity. This Act seeks to ensure that those who get to hold managerial positions or rather become directors of companies (limited) conduct their duties in a responsible manner and implement adequate skill as well as care with appropriate regard to the concerns of the companys creditors. Most directors perform this role effectively but the few who abuse the limited liability privilege are subject to the penalties of Company Directors Disqualification Act. This Act is not limited only to those who have formally been appointed as directors. It also applies to persons who have conducted the roles of a director.

    There are several situations that can call for a disqualification orders. This include criminal offences related with the Companies Act law, incompetent behaviour in insolvent companies, wrongful trading and not complying  with Companies House filing  requirements. Disqualification orders that have been made by the courts due to unfit behaviour in insolvent companies since the enaction of the Act in 1986 are more than 2,500 up to a statutory maximum period of fifteen years. 

    According to section six of the Company Directors Disqualification Act, an insolvent company is one that goes into administrator receivership, into creditors liquidation that is voluntary or is the court has wound it up compulsorily or has an order which is administrative made against it.

    For the disqualification proceedings to commence it is the role of the liquidators administrator, official receiver or administrative receiver to send a report on conduct and behaviour of persons who acted as directors in office for the last three years of the organizations businesstrading to the Secretary of State for Trade and Industry. It is then up to the Secretary of State to determine whether it is in the public interest that a director should be issued with a disqualification order.

    There are several kinds of conduct that are often reported to the Secretary of State. Examples include not keeping proper and updated accounting records, continuing to trade the time when the company is insolvent, not preparing and filing accounts or failure to submit returns to Companies House and failure to take returns to the Crown or pay it tax that may be due. The proceedings concerning a failed company are usually brought to the court by the Secretary of State or in their absence by the Official Receiver directed by the Disqualification Unit of the Insolvency Service in winding up cases that are compulsory.

    Disqualification order has serious effects on the person to whom it is issued against. Once made, the person will be barred from taking a director role or being a manager, an administrative receiver, a liquidator and from taking part either directly or indirectly in the management or promotion formation of any company during this period. Section 6 provides that the minimum period for disqualification is two years while the maximum is 15 years. Moreover, the disqualification order requires the expenses of the Official Receiver or Sectary of State to be covered by the company.

    Breaching of the disqualification order by the disqualified person is considered a criminal offence which can lead to the prosecution of the individual. The individual may also be regarded as legally responsible for the any debts the company incurs after their involvement in any role or function from which they are considered disqualified.

    However, it is possible for one to continue being a director during this period without it being considered a breaching of the law. One can do this by applying for leave from the court to act while disqualified. The court can grant this leave but only if it is satisfied that there exist adequate safeguards that have been put in place to protect the publics interest and will usually impose certain conditions that must be met for one to continue acting as a director during this period. 

    The courts of England as well as those ones of Wales usually keep a record of all disqualification orders and inform the Registrar of Companies of any Director served with the order. This data is stored in a register of disqualified directors which the public is allowed to inspect.

    There are various ways through which Directors can avoid disqualification events. Directors need to control the company properly ensuring that they comply with Companies laws and other legislation such as making certain that accounting records are correctly kept and are up to date and preparing annual accounts and filing them. They should also ensure that there exists a financial control as well as supplies system that is effective, and that the crown departments together with other creditors are dealt with in a proper manner. A Director should ensure that early corrective measures are taken where there are signs of the company heading towards experiencing financial difficulties. This includes taking the necessary financial advice early enough before the company is plunged into a financial crisis.

    The role of the Company Directors Disqualification Act 1986 is basically to protect the interests of the public, by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by the encouragement of higher standards of honesty and diligence in corporate management. This paper seeks to analyse how the Company Directors Disqualification Act 1986 performs these roles by evaluating the Re Blackspur Group Plc, Secretary of State for Trade and Industry v Davies 1998 1 BCLC 676, 680 per Lord Woolf MR case.

The Circumstances of the Re Blackspur Group Plc, Secretary of State for Trade and Industry v Davies 1998 1 BCLC 676, 680 per Lord Woolf MR case

    The Blackspur group is a collection of companies that was formed by the applicant of this case and other people in the September of 1987 with the applicant acting as the companys director as well as chairman at various times. In July of 1990, the company went into receivership with an approximate deficit of 34 million. On the first day of July 1982, the last day of the two year limitation period that is usually applicable, the applicant and four of his colleagues were issued with disqualification proceedings by the Secretary of State for Trade and Industry. This was done following the provisions and requirements of section six of the Company Directors Disqualification Act 1986. However, the Secretary of State did not have complete evidence at the time he begun the proceedings which compelled him to apply for additional time due to serving of evidence. The defendants together with the two others however refused to give consent to granting of an extension and instead applied to the court to strike out the proceedings.

    By December 14th 1992, the Secretary of state completed his evidence and served it to the applicant. The application by the Secretary of State seeking to be allowed to file the evidence later and the applicants cross-application to have the court strike out the proceedings were not until 20th of May 1993 by the Registrar who approved the Secretary of States application for more time to gather evidence and dismissed the application to have the a strike-out of the proceedings by the applicant. The applicant reacted to this decision by appealing to the High Court.

    Apart from the applicant, four other defendants had been accused of similar criminal charges in the companys (Blackspur) proceedings on 1st July 1992. The trial was conducted between March and June of 1994 during which period there was generally adjournment of disqualification proceedings, but with liberty to restore. When the trial was concluded, two of the defendants were convicted while the other two were acquitted. The two convictions were later nullified in February 1995 on appeal.

    In July and September of 1994, the defendants to the Blackspur disqualification proceedings wrote to the Secretary of State and invited him to reconsider carrying on with the disqualification proceedings through letters. The Treasury Solicitor however replied on 15th December of the same year explaining that the Secretary of State had determined that it was convenient and in the public interest to let the proceedings continue.

    After the criminal trials conclusion, the applicants earlier appeal to the High Court proceeded and was rejected on 2nd of May 1995. In November of 1995, the applicant was permitted leave to appeal out of time to the Court of Appeal. This appeal was also rejected by that court in May 1996. While the Court of Appeal found that the Secretary of States reasons for failure to conclude his evidence on time were unsatisfactory, it decided that the proceedings should continue as it was in the public interest to resolve the specifically serious allegations of deceptive accounting as well as trading. The court also noted that the defendants had caused insolvent of the company. It was also observed that the Secretary of States delay had neither affected the hearing timing nor bigoted the applicant. The Court of Appeal also noted that once the proceedings began, respondents main worry was to have the proceedings delayed rather than to hurry them on until after the criminal trial was concluded.

    On 1st of July 1996, the Registrar ordered the defendants to serve their evidence in reaction and response to that compiled by the Secretary of State by 29th November of the same year. The defendants did not however comply with this order. On 9th December, the registrar pointed out that unless the defendants served their evidence by 17th January of the following year, they would be excluded from adducing any proof.

    The defendants did so on 17th and the Registrar directed the Secretary of State to do the same in reply by 17th March of 1997. The Secretary of State did not beat the headline and was granted time-extension by the Registrar until 30th June. This evidence was however served on 10th July. At another directions hearing on 4th of August, the defendants were allowed to adduce more evidence by 1st of December. The applicant did not comply with this order and was granted time-extension until 9th February of 1998.

    Eventually, the Blackspur disqualification proceedings against the applicant were stopped on 12th January 1998 after the applicant reached a Carecraft agreement with Secretary of State in additional proceedings under the 1986 Company Directors Disqualification Act. The applicant agreed to cover the Secretary of States cost of operation and expenses 94, 000 as part of the agreements settlement.

    In spite of the procedural complexity of this case, it is clear that any one who claims a breach their article 6 rights due to the length of the proceedings can get very little or  at times no relief unless they add that a fair trial is impossible because of these delays. This is particularly if the case involves serious allegations such as those that are a risk to the publics interests

Domestic Law that is Relevant to the Case
    As earlier explained, the Company Directors Disqualification Act gives the court authority in some specific situations to disqualify an individual from being a liquidator, director, a companys administrator, a companys property receiver or manager in any way, be it directly or indirectly and to be involved in the formation, promotion or management of a company for a certain period of time that is specified beginning from the date the order is issued.

    Section 6 of the Company Directors Disqualification Act provides that the court has the duty of making a disqualification order against an individual in any situation where it is satisfied on an application under this section of the Act that the person is or has been a director of a company which turned to be insolvent at any time ( whether the  person was the director at the exact time of the insolvent or was a subsequent director), and that the persons conduct and behaviour as a Director of the specific company (viewed alone or viewed from the time he was a director of any other company) that makes them unfit and incompetent to be involved in the management and running of a company. The minimum disqualification period is two years under this section while the maximum is fifteen years.

    Under the provision of section 7(1) of the Company Directors Disqualification Act, inter alia, the Secretary of State is allowed to apply for a section 6 order to be served to a person in the event it appears that such an order would be convenient in the public interest.  Section 7 (2) of the Act however provides that the proceedings provided by section 6 can not be commenced two years after the company undergoes insolvency.

    According to rule 3 of the Disqualification of the Unfit Directors in the Insolvent Companies Proceedings Rules enacted in 1987, evidence that supports application of a disqualification order has to be filed in court when summons is issued with copies of it as well as the summons served on the respondent. It also reads that this evidence has to be by at least one affidavits unless the applicant is the official receiver of the proceedings in which case the affirmative may take the form of a written report (whether it is accompanied by affidavits by other people or not) which shall be regarded as having been verified by affidavit by the applicant and shall be considered prima facie evidence of any matter it contains. The rule also directs that there has to be an affidavit or affidavits depending on the case, a statement of the matters being referred to which the applicant (respond) is suspected of being unsuitable in being involved in the management of a company has to be included un the official receivers report.

How the Company Directors Disqualification Act 1986 protects the interests of the public, by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by the encouragement of higher standards of honesty and diligence in corporate management.

    Directors of a company have various responsibilities which include establishing the companys strategic goals and policies, monitoring development towards achieving these goals and strategies, appointing the companys senior management and accounting for the organizations activities to the relevant parties such as shareholders. The managing director or rather chief executive is charged with the responsibility companys performance as dictated by the board of directors overall strategy. They report to the chairman or in other cases to the board of Directors.

    As overall managers of the company, directors are in a position to exercise all the company powers.  The extent to which they can exercise their authority may at times be constrained by the articles of association and the Companies Act. The articles of association usually include provisions as well as restrictions on borrowing by the company.

    Generally, directors are expected to bind the company by acting collectively as a board. However, at times the articles of associations usually allow the board to delegate duties as well as powers to individual directors as is regarded appropriate. Practically, individual directors normally conduct most of the companys activities.

    As such, company directors are in a position to abuse their power and authority if not well checked. Most directors often use their power diligently for the benefit of the company they run and its shareholders. A few others however often abuse this power and use it for their personal interests putting the organization in financial problems. Company Directors Disqualification Act 1986 was enacted to address such issues and deal with such directors so as to protect the public particularly the shareholders of the company from facing the consequences of such directors.

    The Company Directors Disqualification Act 1986 is based on the statutory duties of a company director. The state requires a director not to be in a position where their personal interests or their duty to a third party conflict with the companys interests. A director should also not use their position as a companys director to make personal profits unless they are permitted by the company. The statutory also requires a director to act bona fide in what they regard is in the companys interests as a whole and not for purpose of security of their position.
    Directors have the role of ensuring that the company performs its statutory duties. As such, they may be liable in the event the company fails to conduct its statutory duties. The directors main statutory responsibility is preparation of the companys accounts and the directors reports.  The directors are responsible for ensuring that the company maintains accurate and updated accounting records. This involves preparing a balance sheet as well as a profit and loss account for each of the companys financial period, presenting these reports to the companys shareholders and depending on various exemptions, filing the directors report as well as the accounts to the Registrar of companies.

     In addition, the directors as individuals are expected to disclose to the rest of the board their personal interests in transactions with the company. This is with particular respect to the following an interest to enter into a contract with the company, an interest to own shares of the company and dealings as well as transactions in options of the companys shares.     

    The various provisions of Company Directors Disqualification Act 1986 require directors to display skill and care in their responsibilities. Directors are required to demonstrate some skill and exercise a certain amount of care as they perform their duties.

    Directors may encounter civil as well as criminal liability for their actions or omissions in managing the company. The effects of Company Directors Disqualification Act 1986 can result to the disqualification of a person from acting as a companys director for a period of up to fifteen years and a minimum of two.
    The Company Directors Disqualification Act 1986 main function is to protect the puyblics interests through the already mentioned ways. This Act can disqualify a person from being a director if they are found guilty of more than three defaults in adhering to companies legislation concerning the filing of certain documents particularly to do with the companys accounting with the Registrar of Companies during the previous five years. Failure to submit these documents is usually due to some irregularities that the director does not want the Registrar of Companies to detect. This indicates a degree of dishonesty and lack of diligence on the directors part. Disqualification of such individuals from being directors saves a companys shareholders from having the company plunged into debts hence receivership which costs them their investment. It also discourages companies from employing such individuals to be managers of companies due to the risk they may expose the company to. In the case of Re Blackspur Group Plc, Secretary of State for Trade and Industry v Davies 1998 1 BCLC 676, 680 per Lord Woolf MR case, though the Secretary of State violated the applicants right to a timely prosecution due to delays in completion of evidence, the High Court denied the applicant an appeal because the magnitude of the case against them (giving false accounting reports and trading at a time when the company is not supposed to be trading). By continuing with the disqualification proceedings on the applicant, the court was using section 6 of the Company Directors Disqualification Act 1986 to protect Bluckspur group of companies from future financial problems caused by the dishonest actions of the applicant as the companys director. Disqualifying these individuals also prevents them from repeating the same actions in future in the vent they get an opportunity to act as company directors again. This is because it damages ones reputation and can be an obstacle when one is seeking another job even one that is not necessarily managerial. The fact that the names of disqualified directors are stored in a register that is open to public view and scrutiny makes it worse as one might never get employment again as no company would want to risk employing such an individual. Through this prohibitory remedial action, the Company Directors Disqualification Act 1986 encourages honesty and diligence among company directors which protects the public interests particularly shareholders as honesty and diligence ensures that the director does not use their position  for personal benefits.

    Under the Company Directors Disqualification Act 1986, a person may also be disqualified as a director if they are or were directors of a company that has faced insolvency and that their conduct as that companys director makes them unfit to be involved in the management of any other company. A company is said to be insolvent when its assets are insufficient to cover its debts as well as expenses hence is forced to go into liquidation resulting to the appointment of administrative receiver. A director is said to be unfit to be concerned with the running of a company when they breach their duties or get involved in misapplication of the companys property. Directors are also considered unfit when they fail to protect the company from getting into debts. It is their responsibility to seek early financial advice the moment they detect future financial problems, failure to do so is regarded unfit. Unfitness is also considered relevant when a director fails to meet their responsibility of keeping correct accounts records and making annual returns. Failure to assign or approve accounts of the company is also considered unfit. Lastly, a director is considered unfit if they enter transactions that give preference to what has been set aside under section 127 IA or that result to an undervalue (according to sections 238-240 IA 1986). The unfitness category described by the Act protects the interests of the public as it ensures that only those who are competent run companies. This act enhances the standards that must be met by company directors as they encourage honesty and diligence. The prohibitory function of the Act in which it exempts some individuals from concerning themselves with the management of a company ensures that only those with the required qualities manage companies, a measure that reduce the possibility of companies going into liquidation as the individuals in charge have the skills and competence to prevent this hence protecting the shareholders interest. 

    Another reason as to why a person may be disqualified from being a director under the Act is if they as directors are found guilty of carrying out fraudulent and wrongful trading as described by the Insolvency Act of 1986. Before a company is forced into insolvent liquidation a director is expected to know and take every measure possible before the liquidation to reduce the potential loss the companys stakeholders and creditors are likely to incur. In wrongful trading, in the event the director knows that liquidation is going to happen and they do nothing about it, they are held personally liable and could be asked to personally contribute to the companys assets. Fraudulent trading refers to a situation in which a director knowingly takes part in conducting the companys business with the sheer intention of defrauding its creditors. In such a case, the court may also order them to personally pay. Persons found guilty usually can face up to 15 years of disqualification as directors and in extreme cases particularly where fraud is involved face criminal charges and be imprisoned. This provision by the Company Directors Disqualification Act 1986 encourages honesty and diligence on company directors part as they would not want to face the harsh consequences of such conducts.

    The consequences of certain conducts of directors as provided by the Act also protects the interest of the public by anticipated deterrent effect on further misconduct and by the encouragement of higher standards of honesty and diligence in corporate management. Section 10 of the Act provides that in the event of being involved in wrongful or fraudulent trading, the director can be disqualified for a period of up to 15 years and be required to contribute to the assets of the company if it goes into liquidation. Section 11 provides that one can not be a director in the vent of a bankrupt that is still undercharged. This is because such individuals are more likely to get tempted to use their position for personal benefits particularly being involved in fraudulent trading so as to get money to remove them from their bankruptcy situation. Section 12 provides that any director who fails to a make a payment needed by an administration order can face disqualification of up to two years. This section ensures that the company pays all its debts on time and prevents it from accumulating debts which could cause it to become insolvent. As such, this section of the Act prevents the companys stake holders who are members of the public from losing their investments if the company was to be put under receivership due to insolvent as a result of debts accumulation. Under section 13, a person who breaches a disqualification order is guilty of a criminal offence and is liable to face two years in prison, be fined up to the statutory maximum amount and is liable to be punished on summary prison conviction for a period of not more than six months. However, section 14 of the Act provides that if a company is the one guilty offending any of the provisions in section 13, any neglect or act of any one of its directors causes them to be liable. This section encourages directors to work honestly and diligently without neglect of their responsibilities to avoid being held personally liable.  Section 15 provides that if a disqualified person continues to be a director, they become personally liable for any debts the company might incur as they act as directors.

    Based on the provisions of the various sections of the Company Directors Disqualification Act 1986, it is clear that it seeks to protect the interests of the public. This fact is emphasized in the Re Blackspur Group Plc, Secretary of State for Trade and Industry v Davies 1998 case in which though it was clear that the applicant right of having his prosecuted in a timely manner was violated by the Secretary of State who took long in compiling evidence against the applicant, the Court of Appeal could not allow the applicants appeal to have the proceedings discontinued due to delays States side. This is because of the seriousness of the case in which the applicant was alleged to have presented false accounts and conducted false trading. Based on the above definition and discussion of situations in which a person can be disqualified from being a companys director and categorised as being unfit to be involved in the running and management of a company under the Act, it is clear that the Acts main function is to protect the interests of the companys stakeholders who are members of the public by means of by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by the encouragement of higher standards of honesty and diligence in corporate management.