The following essay has been requested to analyse the question of “The standard of fitness
applied to company directors, is not that high and does nothing to prevent the rogue
director from surfacing time and time again”. The purpose of the essay is to determine
whether the writer agrees with the above-mentioned statement and what evidentiary proof
they have sourced to prove or disprove their stance on the subject.
There are several sources that the writer has determined that best suit the requirements
requested under this question and as such has decided to use the company’s act 2006,
which outlines the duties required of the director, the Company Directors disqualification
act 1985 is applied when these duties are not adhered to, case law to show how these have
been applied in law, and textbooks which have provided further case information in which
to clarify writer’s stance.
First and foremost, there is no formal qualifications to be a director and in fact anyone over
the age of 16 can become a director. Thus, being said there have been provisions put in
place to ensure that directors follow guidelines under S.170 CA 2006 are the newly codified
duties of directors and these are still relevant even when a person stops being a director,
these are based on previous common law practices and state that the duty of the director is
to the company for which he is employed. they will find a breakdown of what is expected
of a director upon entering that position. There are seven main provisions which are
expected of a director.
S.171 CA 2006 – duty to act within powers previously known as proper purpose rule - this
advises that the director can only act in the remit of the company and of the position of
which he has been employed so for example unless authorised cannot issue cheques.
Taking in the fact that common law has been the basis for this provision the writer feels the
appropriate case law example would be the case Hogg V Cramphorn Ltd (1967) Ch 254
Chancery division – the facts of the case was where the company issued shares to prevent
takeover which they believed was not in the best interests of the company and although
they must act for the benefit of the company the fiduciary duties were inappropriately used
thus bringing the validity of the shares into question this was then held by judge J Buckly to
be the case and that the company had indeed issued the shares incorrectly.
S.172 CA 2006 – duty to promote the success of the company. This section advises that they
must adhere to the six factors in which to do so. The six factors include consideration as to
the likely consequences of the decision and how this will affect long term, also includes be
in the interests of the employees, fostering of relationships on behalf of the company e.g.
suppliers and customer to name a few. How the company operations may affect the
community and environment, company reputation must be maintained with a high business
conduct and fair treatment between members of the company.
Section 173 companies Act 2006 – duty to exercise independent judgement – this implies
that yes you can take advise but the advice does not necessarily have to be taken on board
using own judgement is exactly that deciding that as a director whom has taken all the facts
on board believes in the decision made. The best case to analyse this would be Westmid
Packing Services Ltd where lord Woolf advised that no one individual should dominate a
person and as two of the respondents failed to keep on top of the financial situation they
had not exercised independent judgement
Section 174 companies act 2006 – duty to exercise reasonable care, skill and diligence – this
again implies that all decisions should be based with all the facts examined and that the
director would be expected to have a certain level of expertise for the role of which he is
Section 175 companies act 2006 – duty to avoid conflicts of interest -this is here to see that
all decisions are made in the best interests of the company and should there be a conflict
this is brought to the attention or removed from the situation altogether so the director is
not gaining an advantage for himself or others within his circle this however can be
mitigated if the directors are made fully aware and authorised the transaction to continue
upon full receipt of the facts.
Section 176 companies Act 2006 – duty not to accept benefits from third parties – this is
where they cannot accept gifts or monetary gain from a person in return for favourable
Section 177, companies act 2006 – duty to declare interest in proposed transaction or
arrangement – this again falls in with the remit of avoiding conflict and as mentioned if such
conflict does exist this should be made fully aware to all parties concerned.
This being advised the list of requirements is comprehensive but does allow the opportunity
for the rogue director the opportunity in which to operate after all if he can prove he has
followed the legislation and can provide evidence to state this then he has done what has
been expected of him and as such will be more likely to remain as a director. There is one
way in which to get the rogue director and that is by having him disqualified under the
director’s disqualification act 1985. This act has several processes in place in which to
remove a director of which the writer will now discuss
Disqualification of directors
In 2008 the cork committee recommendedthatthe legislationhadtogofurther for a directorwhom
islackinginabilitytoperformthe role requiredof him. Thiswasbroughtinmainlyas the committee
wantedtotry and preventrogue tradersbeingable tohide underthe guise of alimitedliability
company. Firstly, tounderstandthatthere isthree waystoremove a directorfrompositionfirstly
wouldbe underthe articlessetoutat the time of settingupof the companywhichonlyallowsfor
renewal fromthe companypositionnot necessarily fromthe companydependantonwhatisin the
articles. Secondlyisunderthe insolvencyactwhichagaincan heraldissuesasthere wasa consensus
was to how rigorously wouldthisbe presentedandactioned. The thirdwayisobviouslyunderthe
court inwhichto get a directorremovedfromthe register. There are several reasonsastowhy a
directorcan be disqualified. Firstly, theycanbe disqualifiedonthe groundsof unfitnessunder
section6 and 7 the secretaryof state or official receivercanapplytothe court to have a directorand
shadowdirectordisqualifiedif inthe publicsintereststodoso. B undersection6 of the CDDA 1986
statesthat a directorcan be disqualifiedif the companyof whichtheyare the directorbecomes
insolventorhisconductisprovento be unfitthusbeingthe case the directorwill be disqualifiedfor
a minimumof twoyearsand a maximumof 15 yearswhere the directorwill not be allowedto be a
director,act as a directorin anyway.Unfitnesscanbe deemedasdirectors’responsibilityforthe
failure of the company,breachof dutyand misapplicationof companypropertytoname buta few.
Commercial moralitycanalsobe lookedatinregards to a requestfordisqualificationof adirector
thisisundera veryfine balance asthe courts will meetthe needtoprotectthe publicagainstthe
unreputable directorwhomisabusingthe limitedliabilitysystem.
The issue with disqualification guidelines are they are for UK based companies and if
someone whom has been disqualified in another country can become a director here
The writer feels the best cases to look at would be Ipcon Fashions Ltd (1989) 5 B.C.C. 773
where the director allowed the company to incur further debts after realising the company
was insolvent and as he had previously had businesses that had been insolvent judge
Hoffman had disqualified him for 5 years as the commercial morality was severely lacking on
the opposite side of the scale was Dawson print limited (1987) 3 bcc 322, again judge
Hoffman was listening to this case and felt that the director was unlucky as had issues with
employees and some bad luck but the commercial morality wasn’t an issue so no
disqualification was imposed.
The writer has looked at both the directors duties as they are noted under the Companies
act 2006 where the writer feels these need to be more exhaustive by this the writer deems
that there has to be more practices in place for someone to become a director at this
moment in time to become a doctor you have to study and go through numerous exams
where as there is no formal qualification for a director in fact anyone over the age of 16 can
become a director which allows for scrupulous people to take advantage of the processes in
place as they haven’t had to prove themselves fit and capable of undertaking such an
important position within the company and in fact the CA 2006 only stipulates they should
have some relevant experience for the position of which they are looking to undertake. The
term good faith is the persons believe he is doing what is best for the company but again
this can be incorrect as this based on the person’s judgement and if things are going wrong
for the company they could have a flawed vision of what is in the best interests as stress can
affect a person’s view on any given situation. Also, the fact that conflicts of interest can still
arise due to the fact the company can be made aware and the director still be in the
position if the company agrees to this. The writer would like to see an academy set up so
that directors have to go through a similar process to say that of a teacher or a doctor,
where they have to prove competence prior to taking up the role and prove that they have
the relevant skills and expertise and although some people feel this would hinder enterprise
in the long run the writer believes it would be less detrimental than that of having to
disqualify a director or the company going out of business and potential losses to the other
stakeholders of the company which in turn could have a detrimental effect on them
whether it be a business, employee or the community as a whole as there is nothing worse
than job losses or companies losing money due to mishandling of the company assets and
finances. In regards to the Company director’s disqualification act 1986 the writer believes
this could also be tightened up firstly as there is nothing in the provision on which states
that a disqualified director must go through any skills enhancement once the term for his
disqualification is discharged he can immediately set himself up again. As previously
mentioned there is no formal training to become a director and this can also be said there is
nothing in place after they have been disqualified to prove they have learned from the
previous issues which caused them to be disqualified in the first place so for example if you
lose your driving licence in some instances you will have to undertake your test to prove you
are fit and capable to get back behind the wheel of a car but that’s where the law falls down
there is nothing to show a disqualified director is fit and capable to take on that role again.
The second failing of the disqualification act would be that it only relates to UK directors so
there is nothing to stop a disqualified director setting up a business outside the UK and
operating within the UK. The writer would like for a list to be openly available so we can
search for people whom have done such a task and for their companies not be allowed to
operate in the UK. The third problem the writer has found noticeable there is no
international register so there is nothing stopping and international person whom is
disqualified in their country coming over here and setting up a company and becoming a
The writer was asked for an essay and to make and analysis as to whether the provisions in
place would prevent a rogue director resurfacing time and time again.
The writer has proved the case that nothing is there to prevent it from happening and that
further recommendations would be justifiable in being made in regards to this, the writer
feels that to become a director is great in theory but without knowing the mindset or skillset
of someone this could lead to the company failing and although widely recognised in the ca
2006 that they should have some level of expertise there is nothing in the provision in which
to examine this and as such the writer has obviously come to the conclusion that there is
nothing in the current provisions which prevent this from happening the writer has also
advised potential remedies to this firstly a formal qualification being applied to become a
director and should you become disqualified resitting that qualification to show
improvement on issues that caused the disqualification in the first instance also a UK wide
and international register so someone whom has been disqualified here cannot then set up
international company and operate here with his base elsewhere or the same can be said if
disqualified internationally not be able to operate as director in UK.
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WestlawUK log in (2016c) Availableat:
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Citations, Quotes & Annotations
CompaniesAct(SI 2006).Availableat:http://www.legislation.gov.uk/ukpga/2006/46/contents(Accessed:7 October
Note: chapter 2 sections170 - 177