Reasons for Director Disqualification

Historically, directors have always had a duty of trust, confidence and fidelity to the company which employs them. This is better known as a fiduciary duty and exists to ensure that directors, as the most senior individuals within a company, always continue to act in the company’s interest and do not abuse this position of responsibility.

These fiduciary duties were recognised legally for well over a century but, following the commencement of the Companies Act 2006, these duties were codified and now sit as Sections 171-177 of the Companies Act 2006.

In summary, a director must continue to act in the company’s and its shareholders’, or members’, interests. In most circumstances this refers to ensuring the company is profitable and continues to grow, although this is not always the company’s objective (for example, charities and companies set up for other non-profit purposes).

Other fiduciary duties include avoiding personal conflicts of interest, exercising independent judgement, exercising reasonable care, skill and diligence in the execution of the director’s function, a positive duty to declare an interest in any company transaction or arrangement and the obligation not to seek personal gain from this position.

The benefit and risk of limited liability status

The appearance of limited companies more regularly from the mid-1980s was twinned with the UK’s economic growth as individuals could effectively start up companies free of any personal risk.  

If the business failed then the company was wound up. If it was successful, the directors (who were and still remain also the shareholders) would benefit.

However, with the advent of such “risk-free” entrepreneurship (as we now refer to it) came the concern that fraud could be more easily perpetrated and the general public interest – particularly customers approached by these companies who may consequentially dispose of large funds on the basis of promises by such companies – could be at grave risk.

While criminal fraud was an offence at this time, on the commercial (or civil) side – where the behaviour was not necessarily criminal but may instead be reckless or negligent – there was little or no protection.  

The Company Directors Disqualification Act 1986

Accordingly, the Company Directors Disqualification Act 1986 was introduced one year after the changes introduced by the Companies Act 1985.

This legislation lead to the possibility that a director being disqualified in circumstances where fraud had been perpetuated or any degree of misconduct leading to a company’s insolvency, or even where certain legal requirements to file documents at Companies House had not been complied with.

Dependant on the nature of the offence and the proceedings brought, a director can be disqualified for any period between 1 – 15 years and the record of the individual’s disqualification as a director will appear on a public database. With the advent of the Internet this later became a lot more accessible.

This regime continues to act today, with perhaps considerably more emphasis on seeking to ensure that directors act in a transparent fashion and do not abuse the privilege of limited liability status.

Legal changes

Until the late 1990s, a director targeted for disqualification had to face court proceedings even if s/he accepted that they were guilty of misconduct.  In such circumstances, the court was required to intervene to determine the period of disqualification (known as Carecraft proceedings).

However, following legal changes, from 2000, disqualification undertakings were introduced, enabling directors to voluntarily undertake to be disqualified for an agreed period of time (between 2-15 years for disqualification proceedings brought where a company has been placed into insolvency).  

This enabled the administratively more convenient processing of director disqualification proceedings and simultaneously provided directors with the opportunity to avoid the legal costs of a director disqualification claim.

More recently, following the Small Business, Enterprise and Employment Act 2015 (commencing from October 2015), the Secretary of State has sought even further director transparency and has introduced a requirement for identification of all beneficial owners of a company (at Companies House), extended the limitation period for bringing disqualification proceedings (to 3 years from insolvency) and, more importantly, the advent of the Compensation Order which can be sought against any person disqualified as a director, whether by Order of Court or by Undertaking.

This would appear to undermine the benefit of signing a Disqualification Undertaking and from 2018 we expect to see a considerable push by the Secretary of State to seek Compensation Orders.

At Francis Wilks & Jones we are specialists in director disqualification and have many years of experience in this field in the High Court and Court of Appeal. We also have lawyers with previous experience in the Insolvency Service and Treasury Counsel as well as a dual qualified Chartered Accountant with expertise in arguing accounting matters. Against this background we are the UK’s leading firm of director disqualification defence lawyers and will be able to provide you with timely, appropriate and value-added legal advice and assistance.

Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.