The Company Directors Disqualification Act 1986
1986 c. 46 forms part of
UK company law
The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...
and sets out the procedures for
company director
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
s to be disqualified in certain cases of misconduct.
History
Lord Millett
Peter Julian Millett, Baron Millett, , (23 June 1932 – 27 May 2021) was a British barrister and judge. He was a Lord of Appeal in Ordinary from 1998 to 2004.
Biography
Early life
The son of Denis and Adele Millett, he was educated at Har ...
, in the opinion he gave in , summarized the history of disqualification orders in British company law, noting that they were originally created under s. 75 of the ''
Companies Act 1928'' (subsequently consolidated as s. 275 of the ''
Companies Act 1929
The Companies Act 1929 (19 & 20 Geo.5 c.23) was an Act of the Parliament of the United Kingdom, which regulated UK company law. Its descendant is the Companies Act 2006.
Provisions
Forms made under the 1929 Act introduced the term "Companies Cou ...
''), which was enacted on the recommendation of the ''Report of the Company Law Amendment Committee'' (1925-1926) under the chairmanship of Mr Wilfred Greene KC (Cmd 2657). It gave the
official receiver
An officer of the Insolvency Service of the United Kingdom, an official receiver (OR) is an officer of the court to which they are attached. The OR is answerable to the courts for carrying out the courts' orders and for fulfilling their duties ...
, the
liquidator or any
creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
or contributary the ability to apply to the court having jurisdiction to wind up the company, for an order to disqualify a director from being concerned in the management of a company for a period up to five years. Such order was up to the discretion of the court.
The scope of that provision was subsequently expanded as follows:
:* S. 33 of the ''
Companies Act 1947
The Companies Act 1947 was a United Kingdom Act of Parliament, that updated UK company law after the Companies Act 1929.
It covered issues such as winding up and bankruptcy.UK Legislation http://www.legislation.gov.uk/ukpga/Geo6/10-11/47/content ...
'' (subsequently consolidated as section 188 of the ''
Companies Act 1948
The Companies Act 1948 (11 & 12 Geo.6 c.38) was an Act of the Parliament of the United Kingdom, which regulated UK company law. Its descendant is the Companies Act 2006.
Cases decided under this Act
*''Bushell v Faith'' 970AC 1099
*''Scottish ...
''), following the ''Report of the Committee on Company Law Amendment'' (1945) under the chairmanship of Cohen J (Cmd 6659), extended the grounds upon which a disqualification order could be made.
:* S. 28 of the ''
Companies Act 1976
A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...
'' provided for the case where a person had been persistently in default in relation to statutory requirements for returns, accounts or other documents. Such an order could only be sought by the
Secretary of State, as it was not a requirement that the company should be insolvent or in the course of winding up.
:* S. 9 of the ''
Insolvency Act 1976
In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet inso ...
'' covered the case where a person had been a director of more than one company which had gone into liquidation while insolvent and his conduct as a director of any of those companies made him unfit to be concerned in the management of a company.
:* S. 93 of the ''
Companies Act 1981
A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...
'' extended the maximum period of disqualification to 15 years.
The CDDA consolidated the law relating to disqualification orders and introduced the concept of mandatory disqualification, following up on
Sir Kenneth Cork's recommendations in the ''
Insolvency Law and Practice, Report of the Review Committee
''Report of the Review Committee on Insolvency Law and Practice'' (1982) Cmnd 8558, also known as the "Cork Report" was an investigation and set of recommendations on modernisation and reform of UK insolvency law. It was chaired by Kenneth Cork and ...
'' (1982) (Cmnd 8558). That report recommended that application for a mandatory order should be made by the liquidator or, with the leave of the court, by a creditor. This was not acceptable to Parliament, which understandably considered that greater safeguards are necessary in the case of a mandatory order than are required where the court retains a discretion to decline to make an order.
Disqualification orders and undertakings
A court may, and under section 6 shall, make against a person a disqualification order, for a period specified in the order, providing that:
:* he 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, and
:* he shall not act as an insolvency practitioner.(s.1)
The
Secretary of State may also accept disqualification undertakings from such persons in specified circumstances, which will have similar effect.(s.1A)
Disqualification at the discretion of the court
The court may make a disqualification order where:
:* the person is convicted of an
indictable offence
In many common law jurisdictions (e.g. England and Wales, Ireland, Canada, Hong Kong, India, Australia, New Zealand, Malaysia, Singapore), an indictable offence is an offence which can only be tried on an indictment after a preliminary hearing ...
(whether on indictment or summarily) in connection with the promotion, formation, management, liquidation or striking off of a company with the receivership of a company’s property or with his being an administrative receiver of a company.(s. 2)
:* it appears to the court that he has been persistently in default in relation to provisions of the companies legislation requiring any return, account or other document to be filed with, delivered or sent, or notice of any matter to be given, to the
registrar of companies
A company register is a register of organizations in the jurisdiction they operate under.
A statistical business register has a different purpose than a company register. While a commercial/trade register serves a purpose of protection, accounta ...
.(s. 3)
:* in the course of the
winding up
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistrib ...
of a company, it appears that he—
::(a) has been guilty of an offence for which he is liable (whether he has been convicted or not) under s. 458 of the ''
Companies Act 1985
The Companies Act 1985 (c. 6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their d ...
'' (
fraudulent trading
In company law, fraudulent trading is doing business with intent to defraud creditors.
Law
Where during the course of a winding-up, it appears to the liquidator that fraudulent trading has occurred, the liquidator may apply to the court for an or ...
), or
::(b) has otherwise been guilty, while an officer or liquidator of the company receiver of the company’s property or administrative receiver of the company, of any fraud in relation to the company or of any breach of his duty as such officer, liquidator, receiver or administrative receiver.(s. 4)
:* a person is convicted (either on indictment or summarily) in consequence of a contravention of, or failure to comply with, any provision of the companies legislation requiring a return, account or other document to be filed with, delivered or sent, or notice of any matter to be given, to the
registrar of companies
A company register is a register of organizations in the jurisdiction they operate under.
A statistical business register has a different purpose than a company register. While a commercial/trade register serves a purpose of protection, accounta ...
(whether the contravention or failure is on the person’s own part or on the part of any company).(s. 5)
The maximum period of the order is 15 years under ss, 2 and 4, and 5 years under ss. 3 and 5.
The court may also make an order for a period of up to 15 years where a person has participated in
wrongful trading
Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the inso ...
.(s. 10)
Mandatory disqualification
By order of the court
The court shall make a disqualification order against a person in any case where 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.(s. 6(1))
A "director" is deemed to include a "
shadow director
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
", which is defined as a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity).(s. 9(2) and s. 22(5))
The maximum period for such and order is 15 years, and the minimum period is 2 years.(s. 6(4))
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) an administration order is made in relation to the company, or
::(c) an administrative receiver of the company is appointed;
and references to a person’s conduct as a director of any company or companies include, where that company or any of those companies has become insolvent, that person’s conduct in relation to any matter connected with or arising out of the insolvency of that company.(s. 6(3))
Standard for assessing unfitness
The following factors must be considered in determining whether a director is unfit (s. 9 and Schedule 1):
''In all cases''
:* Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company.
:* Any misapplication or retention by the director of, or any conduct by the director giving rise to an obligation to account for, any money or other property of the company.
:* The extent of the director’s responsibility for the company entering into any transaction liable to be set aside under Part XVI of the ''
Insolvency Act 1986
The Insolvency Act 1986c 45 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.
History
The Insolvency Act 1986 followed the publication and ...
'' (provisions against debt avoidance).
:* The extent of the director’s responsibility for any failure by the company to comply with any of the following provisions of the ''
Companies Act 1985
The Companies Act 1985 (c. 6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their d ...
'', namely—
::(a) s. 221 (companies to keep accounting records);
::(b) s. 222 (where and for how long records to be kept);
::(c) s. 288 (register of directors and secretaries);
::(d) s. 352 (obligation to keep and enter up register of members);
::(e) s. 353 (location of register of members);
::(f) s. 363 (duty of company to make annual returns);
::(h) ss. 398 and 703D (duty of company to deliver particulars of charges on its property).
:* The extent of the director’s responsibility for any failure by the directors of the company to comply with—
::(a) s. 226 or s. 227 (duty to prepare annual accounts), or
::(b) s. 233 (approval and signature of accounts).
''Where the company has become insolvent''
:* The extent of the director’s responsibility for the causes of the company becoming insolvent.
:* The extent of the director’s responsibility for any failure by the company to supply any goods or services which have been paid for (in whole or in part).
:* The extent of the director’s responsibility for the company entering into any transaction or giving any preference, being a transaction or preference—
::(a) liable to be set aside under s. 127 or ss. 238 to 240 of the ''
Insolvency Act 1986
The Insolvency Act 1986c 45 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.
History
The Insolvency Act 1986 followed the publication and ...
'', or
::(b) challengeable under s. 242 or s. 243 of that Act or under any rule of law in Scotland.
:* The extent of the director’s responsibility for any failure by the directors of the company to comply with s. 98 of IA1986 (duty to call creditors’ meeting in creditors’ voluntary winding up).
:* Any failure by the director to comply with any obligation imposed on him by or under any of the following provisions of IA1986—
::(a) s. 22 (company’s statement of affairs in administration);
::(b) s. 47 (statement of affairs to administrative receiver);
::(c) s. 66 (statement of affairs in Scottish receivership);
::(d) s. 99 (directors’ duty to attend meeting; statement of affairs in creditors’ voluntary winding up);
::(e) s. 131 (statement of affairs in winding up by the court);
::(f) s. 234 (duty of any one with company property to deliver it up);
::(g) s. 235 (duty to co-operate with liquidator, etc.).
Assessment is considered to be an objective standard in determining what is ordinarily expected of people fit to be directors of companies. Directors must inform themselves of company affairs and join in with other directors to supervise those affairs. The courts have identified relevant factors for determining the length of the disqualification period:
:* a company director should realise that his statutory and fiduciary obligations are personal responsibilities
:* the primary purpose of disqualification is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others
:* the period of disqualification must reflect the gravity of the offence
:* the period of disqualification may be fixed by starting with an assessment of the correct period to fit the gravity of the conduct, and a discount is then given for mitigating factors
:* a wide variety of factors, including the former director’s age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may have been ordered by other courts, may be relevant and admissible in determining the appropriate period of disqualification
The courts have also provided guidance as to what constitutes an appropriate length for a disqualification period:
:* periods over ten years should be reserved for particularly serious cases, which may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.
:* six to 10 years should apply for serious cases which do not merit the top category.
:* two to five years’ disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.
Automatic disqualification
The following persons are automatically disqualified:
:* undischarged bankrupts, persons subject to a moratorium period under a
debt relief order
Debt relief orders (DROs) are a simplified, quicker and cheaper alternative to bankruptcy as an bankruptcy in the United Kingdom, insolvency measure in the United Kingdom, which came into effect in England and Wales on 6 April 2009, and are also of ...
, and persons subject to a bankruptcy restrictions order or a debt relief restrictions order(s. 11)
:* those who have failed to make a payment under a county court administration order(s. 12)
:* those subject to a disqualification order under corresponding Northern Ireland legislation(s. 12A)
Subsequent amendments
''Enterprise Act 2002''
Effective 20 June 2003, the ''
Enterprise Act 2002
The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy.
It made cartels illegal with a maximum pri ...
'' added ss. 9A - 9E to the Act, which expand the mandatory disqualification régime to cover the following breaches of competition law under the ''
Competition Act 1998
The Competition Act 1998 is the current major source of competition law in the United Kingdom, along with the Enterprise Act 2002. The act provides an updated framework for identifying and dealing with restrictive business practices and abuse of ...
'' or the
Treaty establishing the European Community
The Treaty of Rome, or EEC Treaty (officially the Treaty establishing the European Economic Community), brought about the creation of the European Economic Community (EEC), the best known of the European Communities (EC). The treaty was signe ...
:
:* agreements preventing, restricting or distorting competition
:* abuse of a dominant position
The factors for determining unfitness in this case relate solely to behaviour concerning the breach of competition law, and the other factors listed in Schedule 1 do not apply. Disqualification may be made through an order of the court or through an undertaking.
''Small Business, Enterprise and Employment Act 2015''
In March 2015, the ''Small Business, Enterprise and Employment Act 2015'' received
Royal Assent
Royal assent is the method by which a monarch formally approves an act of the legislature, either directly or through an official acting on the monarch's behalf. In some jurisdictions, royal assent is equivalent to promulgation, while in other ...
. On 1 October 2015, Part 9 of the 2015 Act came into force, which amended the 1986 Act to introduce:
:* inclusion of relevant foreign offences as grounds for disqualification (s. 104)
:* extension of the régime to persons instructing unfit directors of insolvent companies (s. 105)
:* revision of the procedure for determining the unfitness of directors and shadow directors (s. 106)
:* requirements for official receivers, liquidators, administrators and administrative receivers to report to the Secretary of State on the conduct of each person who was a director of a company on the insolvency date or within the three years before (s. 107)
:* provision for compensation orders and undertakings on persons who are subject to disqualification orders or undertakings, where the person's conduct as a director caused loss to one or more creditors during the time he was a director of an insolvent company (s. 110)
Consequences
Under the Act
:* where a person acts contrary to a disqualification order, undertaking or automatic disqualification without the leave of the court, he is guilty of an offence, and is subject on indictment to a sentence of up to 2 years in prison and/or a fine, or on summary conviction to a sentence of 6 months and/or a fine at the statutory maximum.(s. 13)
:* where a body corporate is convicted of acting contrary to a disqualification order, and it is shown that a person has contributed to the offence through consent, connivance or neglect, both parties are equally liable.(s. 14)
:* a person is liable for the debts of a company where he acts contrary to a disqualification order or undertaking, or where he acts or is willing to act on the instructions of another person who is similarly subject to the same.(s. 15)
Other effects
A person subject to a disqualification order or undertaking will also be disqualified from acting as:
:* a charity trustee without permission of the court or the
Charity Commission for England and Wales
, type = Non-ministerial government department
, seal =
, seal_caption =
, logo = Charity Commission for England and Wales logo.svg
, logo_caption =
, formed =
, preceding1 =
, d ...
(as the case may be)
:* a
school governor
In England, Wales and Northern Ireland, school governors are the overseers of a school. In state schools, they have three main functions:
*Giving the school a clear vision, ethos and strategic direction
*Holding the headteacher to account for the ...
:* a trustee of an occupational pension scheme without leave from the
Pensions Regulator
The Pensions Regulator (TPR) is a non-departmental public body which regulates work-based pension schemes in the United Kingdom. Created under the Pensions Act 2004, the regulator replaced the Occupational Pensions Regulatory Authority (OPRA) fro ...
:* a member of a
police authority
A police authority in the United Kingdom is a public authority that is responsible for overseeing the operations of a police force. The nature and composition of police authorities has varied over time, and there are now just four dedicated "police ...
:* a director, trustee or committee member of a
registered social landlord
In Ireland and the United Kingdom, housing associations are private, non-profit making organisations that provide low-cost "social housing" for people in need of a home. Any budget surplus is used to maintain existing housing and to help fin ...
:* a member of the
Council for Healthcare Regulatory Excellence
The Professional Standards Authority for Health and Social Care (PSA) oversees the nine statutory bodies that regulate health professionals in the United Kingdom and social care in England. Where occupations are not subject to statutory regulation ...
and various other health commissions and social care bodies
Membership in certain professional bodies may also be affected, and members may be required to notify the fact of such disqualification to the body in question.
''Effect of a Disqualification''
/ref>
Further reading
*
See also
* Insolvency Act 1986
The Insolvency Act 1986c 45 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.
History
The Insolvency Act 1986 followed the publication and ...
* UK insolvency law
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the ...
References
{{Reflist
External links
Disqualified Director Database
from the Insolvency Service
The Insolvency Service is an executive agency of the Department for Business, Energy and Industrial Strategy with headquarters in London. It has around 1,700 staff, operating from 22 locations across Great Britain.
The Insolvency Service admin ...
United Kingdom company law
United Kingdom Acts of Parliament 1986
Corporate directors