What Constitutes Unfit Conduct by Directors - 21 Commonly Asked Questions
Disqualification for unfit conduct pursuant to Section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”) is the most common ground used by the Secretary of State to bring proceedings against someone.
This handy booklet answers some of the most common questions relating to Section 6 disqualifications for unfit conduct by a director.
For a complete copy of the questions and answers below, please download the following booklet.
1. Is Disqualification under Section 6 of the CDDA 1986 Mandatory?
The Answer is Yes.
If a court finds that the complaints alleged against the director constitute unfitness, the making of a disqualification order is mandatory. There is no judicial discretion to avoid the imposition of a disqualification order. The Minimum period of disqualification is 2 years.
2. What conditions must be satisfied under section 6 to lead to a disqualification order?
Section 6(1) of the CDDA 1986 states -
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.
The conduct referred to under Section 6(1)(b) above are prescribed under Section 9(1) of the CDDA 1986 which states
9. Where it falls to a court to determine whether a person’s conduct as a director of any particular company or companies makes him unfit to be concerned in the management of a company, the court shall, as respects his conduct as a director of that company or, as the case may be, each of those companies, have regard in particular-
- a. to the matters mentioned in Part 1 of the Schedule to this Act, and
- b. where the company has become insolvent, to the matters mentioned in Part II of that Schedule.
Accordingly, disqualification claims brought under Section 6 of the CDDA 1986 are usually specifically by reference to matters of fitness as set out in Parts 1 and 2 of Schedule 1 to the CDDA 1986 (set out below). However, case law has established that these schedules are not exhaustive and the Secretary of State may bring a disqualification claim on the basis of matters of unfitness not referred to in these schedules.
3. Who is able to bring a claim under section 6 of the CDDA 1986?
Ordinarily it is the Secretary of State, although it can direct that the Official Receiver of the liquidated company brings the claim instead.
4. What must the Secretary of State do to prove unfitness?
On a general level, proving unfitness falls in to 2 stages:-
- a. Firstly the Secretary of State needs to establish as facts (to a requisite standard of proof), the matters on which the allegation of unfitness is based.
- b. Secondly, the court must be satisfied that the conduct alleged is sufficiently serious to warrant disqualification.
The second element involves a decision by the court as to whether the conduct relied upon by the Secretary of State (and taking in to account any extenuating circumstances) falls below the standards of commercial probity and competence appropriate for persons fit to be directors. Essentially it is a three stage process:
- (i) Do the matters relied upon amount to misconduct?
- (ii) If they do, do they justify a finding of unfitness?
- (iii) If so, what period of disqualification is appropriate?
5. What happens if the Court doesn’t believe the misconduct amounting to unfitness justifies a minimum 2 year period of disqualification?
It doesn’t matter. Once the court makes a finding of misconduct amounting to unfitness in respect of a disqualification claim under Section 6 of the CDDA 1986, it has to apply the mandatory 2 year minimum of disqualification.
However, the Court may consider that such conduct whilst worthy of criticism is not sufficient to warrant a finding of unfitness and in such circumstances a disqualification claim may be dismissed.
6. What kind of conduct would not amount to unfitness?
There are numerous cases covering this subject, although all of them are particular to (and turn upon) their own individual facts.
Examples of conduct not amounting to unfitness (and hence not leading to a disqualification order being made), are as follows:
- a. Where a single “lapse of judgment” had occurred by a director who had otherwise run his business very well.
- b. Where a failure by the directors to understand his/her responsibilities had damaged trade creditors as a result of a combination of circumstances which were beyond his/her control.
- c. Overreliance by a sales director on another director who assured him that the problems in the business were being dealt with when in fact they were not, provided such reliance is reasonable and would be expected of someone with a sufficient level of commercial probity.
- d. Non-payment of taxes to HMRC, without any evidence of a deliberate policy of non-payment.
- e. Not seeking proper advice regarding the sale of specific assets of the business – leading to its insolvency.
- f. Not filing 2 quarters of VAT returns prior to the company entering in to liquidation.
- g. Where allegations of trading to the detriment of the crown and a specific creditor could not be supported as in fact the company (via its director) had treated all creditors in broadly the same way.
- h. Allowing other directors/employees to be paid whilst HMRC went unpaid.
Whilst the above cases found the conduct of the directors was below the usual standards expected, it was still not such as to amount to findings of unfitness.
IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.
ALTERNATIVELY, CONTACT THE DISQUALIFICATION TEAM ON 020 7841 0390
7. What approach do the courts take when deciding if someone is “unfit” to be concerned in the management of a company pursuant to Section 6 of the Company Director Disqualification Act 1986?
8. Will the court consider the question of unfitness in the context of how the company was run at the time pursuant to Section 6 of the Company Director Disqualification Act 1986?
9. Will the court take in to account any current director / management roles when considering unfitness in the former company?
10. What is the standard of proof required to succeed in obtaining a disqualification order pursuant to Section 6 of the Company Director Disqualification Act 1986?
11. Are there any statutory guidelines the courts take in to account when determining unfitness pursuant to Section 6 of the Company Director Disqualification Act 1986?
12. If a number of allegations of unfitness have been made against me pursuant to Section 6 of the Company Director Disqualification Act 1986?, does the court have to disqualify me on every one?
13. Is it relevant that I have other failed companies when considering disqualification pursuant to Section 6 of the Company Director Disqualification Act 1986?
14. What happens if the Secretary of State’s evidence is unfair or simply trying to damage my credibility without justification?
15. Can my Conduct as Director of other Companies be used as evidence when considering a disqualification pursuant to Section 6 of the Company Director Disqualification Act 1986?
16. Is there any way to stop an analysis of my conduct in previously failed companies in Section 6 Director Disqualification proceedings?
17. Does there have to be a connection between the conduct in the lead company and conduct in the collateral company in Section 6 Director Disqualification proceedings??
18. Can “good” conduct in a collateral / current company be taken into account in defending a claim in Section 6 Director Disqualification proceedings??
19. Is commercial misjudgement sufficient to justify disqualification for unfitness in Section 6 Director Disqualification proceedings??
20. Will my conduct be judged with the benefit of hindsight in Section 6 Director Disqualification proceedings??
21. What extenuating circumstances can be taken into account in Section 6 Director Disqualification proceedings?
At Francis Wilks & Jones we have a wealth of experience dealing with disqualification proceedings pursuant to Section 6 of the Director Disqualification Act 1986. We have the expertise, experience, tactical skills and commercial understanding to help you through what can be a difficult area of the law.
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