Directors of insolvent companies are naturally concerned about the potential for disqualification and often ask about the criteria and what the impact will be. The answer is never straightforward and as shown below there are no hard and fast rules as to the grounds on which an Order will be sought or made.

Recent changes have introduced the concept of compensation, in addition to a period of disqualification, which is a step closer to knitting together the asset recovery and public interest roles that have previously been quite separate. It is not clear what impact, if any, this will have on the number of prosecutions, but it might result in an increase in the number of undertakings where there is a tangible financial consequence and will be something directors need to seriously consider.

Starting with the basics, the Company Directors Disqualification Act 1986 (“CDDA”) prescribes the circumstances in which a director can be prohibited from acting in the promotion, formation or management of a company and sets out the basis for making a disqualification Order or undertaking. A specialist department within The Insolvency Service known as the Disqualification Unit (“the Unit”) deals with these applications.

A company does not have to be insolvent for the provisions of the CDDA to apply – it just so happens that insolvency acts as a catalyst for investigations into a company’s affairs that leads to discovery of the misconduct, or falls into one of the Insolvency Act offences which then come under the umbrella of the CDDA. The vast majority of Disqualifications relate to insolvent companies, with around only 5% per year relating to non-insolvency convictions or applications. A Disqualification Order is an Order of the Court made on application of the Secretary of State, whereas a Disqualification Undertaking is a voluntary agreement to abide by the same sanctions, but without the cost (to both sides) of attending Court. An Undertaking will usually be made for a lesser term than an Order in recognition of the submission to proceedings and time and cost savings for both parties.

The implications for a director can be far reaching – a Disqualification Order or Undertaking will prohibit a person being a director, or being involved in the promotion, formation or management of a company for a term of a minimum 2 and a maximum of 15 years. Disqualification itself is a civil claim, but breach of an Order or Undertaking is a criminal offence, which on indictment can result in a custodial sentence.

In recent years the Unit has started to make Disqualification cases a much more public spectacle than ever before, with articles published on the Insolvency Service’s much improved website (www.gov.uk/the-insolvency-service) and pumped around weekly on its very own Twitter feed (@insolvencygovuk). These articles even “name and shame”, citing the director(s) concerned, the company name and the offences committed.

Furthermore, from 1 October 2015, provisions of the Small Business, Enterprise and Employment Act 2015, have come into play and allow for compensatory awards against disqualified directors – in short, the Court will make an assessment of the loss suffered as a result of the misconduct and make an immediate payable award.

However, financial loss is not necessarily the only factor taken into considered. Take for example…

  • A director of a fine wine investment club, who pocketed £9.3m of investors’ cash, forgetting to actually buy any wine along the way and was disqualified for the maximum term of 15 years. No real surprises there - we are talking a lot of money and a deliberate deception affecting members of the public.

  • However, compare that with the director of Castlebeck Care (Teesdale) Limited, which went down with a deficiency of some £174million but got only 6 years, and that was for breach of duty by failing act upon a whistle-blower’s report that the care home he was in charge of was breaching care quality standards.

  • Next example is the private tutor who duped students into buying course materials that were not delivered, resulting in a loss to creditors of £156k… relatively modest compared to the last two, but he was given 14 years.

  • Two mini cab drivers in Newcastle had it away with £150k and were given a 10 month prison sentence and a 5 year disqualification, although worth noting that the custodial was due to a breach of Section 216 following re-use of a prohibited company name.

  • A director of a claims management company was given a 6 year disqualification order for failing to act in a clear and transparent manner befitting of someone in his position… notwithstanding that the loss according to creditor claims in the liquidation was “just” £28k.

  • Finally, a used car salesman in Leicestershire selling “cut and shut” insurance write-offs without disclosing the vehicle’s true history was given a 10 year disqualification for breaches of trading standards; the loss was not a feature of this particular application; the danger he posed to the public was.

Whilst the CDDA lists a number of specific offences, which includes what most of us would consider minor misdemeanours, such as failure to file an annual return, it also includes the catchall offence: “Any misfeasance or breach of fiduciary or other duty by the director in relation to the Company” as a basis for disqualification. One of the Unit’s main drivers is protecting the public interest and it draws on this provision to bring in breaches of other legislation as grounds for prosecution, making each case truly subjective.

Any director facing disqualification proceedings might look at the 5% disqualification rate (in respect of all insolvencies) and conclude that there is a 95% chance of not being targeted… good odds maybe, but a gamble worth taking..?

Danny Allen
Senior Manager

 

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