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Director Disqualification Proceedings Overview

Director disqualification proceedings are much like any piece of litigation. There are two adversaries, the Director(s) on one side and the Insolvency Service on the other.

The Insolvency Service investigate for the Secretary Of State of Department for Business, Energy & Industrial Strategy. It has the power to bring Director disqualification proceedings. It will look into a range of conduct matters such as irresponsible spending of company money, treatment of creditors and HMRC tax compliance for example only.

What Is The Purpose Of The Company Director Disqualification Act 1986?

The Company Directors Disqualification Act 1986 aims to maintain the integrity of the business environment. Those who become directors of limited companies should:

• Carry out their duties with responsibility; and
• Exercise adequate skill and care with proper regard to the interests of the company’s creditors and employees.

The Director disqualification regime has been repeatedly referred to as a protect the public regime following the well known case of Re Lo-Line Electric Motors Ltd [1988] Ch. 477:

What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies has shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. 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 that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.

Three Key Ways For The Secretary Of State To Bring Disqualification Proceedings

Three common mechanisms for the Secretary of State to launch disqualification proceedings are:

  1. Section 2 of the Company Directors Disqualification Act 1986 where a person is convicted of an indictable offence in connection with the promotion, formation, management, Liquidation or striking off of a company.
  2. Section 6 of the Company Directors Disqualification Act 1986 where a person has been a Director of either an insolvent company or one that has been dissolved.
  3. Section 8 of the Company Directors Disqualification Act 1986 where it appears in the public interest for a Director to be disqualified.

Section 6 is by far the most common as you can see from the graph below so this article has an insolvency focus.

Director Disqualification Orders and Undertakings 1 April 2009 to 31 March 2022

If you examine the Insolvency Service Enforcement Outcomes 2021/22 (Official Statistics) for Director disqualification data for the last ten years you will note that there are far more Director disqualification undertakings than Director Disqualification Orders. But Why?

Director Disqualification Orders and Undertakings 1 April 2009 to 31 March 2022

The reason is probably because obtaining Director disqualification orders are resource intensive, time consuming and potentially expensive. Whereas Director disqualification undertakings are entered into by agreement.

What Is A Director Disqualification Undertaking?

A disqualification undertaking is an agreement between the Secretary of State and the Director to a period of disqualification. It saves the expense, time and formality of a Court process.

The effect is that of a ‘deal’ being done by consent. It is possible that a Director might be able to negotiate a discount on the period of disqualification for not putting the Secretary of State through the trouble of formal disqualification proceedings. A Director may also save themselves the legal costs associated with a Court process. This would appear likely to be a substantial incentive for many people to opt for a disqualification undertaking as opposed to disqualification proceedings.

What Is A Director Disqualification Order?

A disqualification order is a Court order that arises if the Secretary of State is successful and in effect wins its case against a Director when it is found that he or she is deemed unfit to be a Director due to prior conduct.

Defending Director Disqualification Proceedings

Director disqualification proceedings can be defended. The burden of proof is on the Insolvency Service to prove the unfitness allegation that it puts forward is such that a Director merits being taken out of the business community for a period of time.

The Insolvency Service that investigates starts its review as a stranger to the affairs of the company. It is possible that their view on matters will not be shared by the Court. This has notably happened in a number of high profile cases and one of the more recent examples of this was the case of Kids Company Directors Win when the Court expressed itself in strident terms:

The public need no protection from these Trustees. On the contrary, this is a group of highly impressive and dedicated individuals who selflessly gave enormous amounts of their time to what was clearly a highly challenging trusteeship.

Matters That Can Determine Unfitness

The Court will assess the unfitness of a Director with reference to certain criteria:

Determining Director Unfitness

The following matters must be used to determine the unfitness of Directors in disqualification proceedings set out in Schedule 1 of the Company Directors Disqualification Act 1986:

  • The extent to which the person was responsible for the causes of any material contravention of regulations.
  • The extent to which the person was responsible for the causes of insolvency.
  • The frequency of the conduct.
  • The nature and extent of any loss or harm caused.
  • Any misfeasance or breach of any fiduciary duty by the director in relation to a company or overseas company.

Are Director Disqualification Proceedings Expensive For Insolvency Service?

Director disqualification proceedings can potentially be expensive for the Insolvency Service.

The Insolvency Service is an executive agency for the Department for Business, Energy & Industrial Strategy and as a government department, it will inevitably have deep pockets. However, that does not mean they will be in a position to pursue disqualification proceedings unfettered.

An Impact Assessment dated 14 April 2014 called “Widening the scope of material that can be used in director disqualification proceedings” highlighted the cost of an investigation into an insolvent company after receiving Director Conduct Reporting In a Liquidation or Administration from an Insolvency Practitioner. The Impact Assessment noted that some ten years ago this was costed at £24,591.

What Can Go Wrong For The Insolvency Service?

When the Insolvency Service brings director disqualification proceedings someone has to be prepared to go into the witness box and put their professional reputation on the line. A defending Director’s barrister will typically look to test and unpick the work of the employee representing the Secretary of State if the evidence or the conclusions drawn from that evidence could be properly challenged.

The burden of proof is on the Secretary of State to prove their case of alleged unfitness; it is not the burden on the defendant Director in the first instance. The Director who ran the company ought to have a greater insight into the conduct issues and this can potentially put a Director in a strong position.

All litigation is somewhat speculative and occasioned by uncertainty. There is no such thing as a case that is a guaranteed win. The only case that is won before it gets to Court is one where a deal is done with one party in a better position to the other.

The winner in litigation can usually anticipate that the loser will pay their legal costs (or most of them). Even if the Insolvency Service wins the main arguments in a case it is a general rule of thumb that costs recovered from a Director will be typically limited to around 70% of the costs claimed. That means that in many cases the Insolvency Service may not be able to recover something into the region of 30% of its legal costs. So there is a potential incentive for the Insolvency Service to see if they can settle a case without having to go to Court and incur such costs.

Length Of The Ban

A notable issue that might arise from director disqualification proceedings is even if the Insolvency Service has solid grounds and is likely to win its case the length of the ban is still a matter that can be contested.

For example, only in the case of a travel agent banned for 7 years the Insolvency Service was seeking an 11 year ban but when the matter went to court the Director was disqualified for a considerably shorter period of time.

What Next?

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If you have any questions in relation to Director Disqualification Proceedings then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

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Disclaimer: Director Disqualification Proceedings

This page Director Disqualification Proceedings is not legal advice and should not be relied upon as such. This article is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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