The document discusses issues around directors being disqualified in the UK. It notes that there has been a 25% increase in disqualifications last year, with 1 in 20 directors of insolvent companies being disqualified. It outlines the various ways a director can be disqualified, such as being bankrupt, criminal offenses, or civil court rulings for breaches of conduct. Defences against disqualification are also discussed, such as claiming one was not truly a director or that the conduct was a commercial misjudgment. The length of disqualification orders and factors for mitigating the length are also covered.

1. DirectorsDirectors
DisqualificationDisqualification
Mark Watson-GandyMark Watson-Gandy

2. Why is this an issueWhy is this an issue
now?now?
 25% increase in disqualifications last25% increase in disqualifications last
yearyear
 1 in 20 directors of insolvent1 in 20 directors of insolvent
companies are disqualifiedcompanies are disqualified
 Impact of Small Business EnterpriseImpact of Small Business Enterprise
and Employment Act 2015and Employment Act 2015

3. When can you beWhen can you be
disqualified?disqualified?
 Automatically if bankruptAutomatically if bankrupt
 By the criminal courtsBy the criminal courts
– for offences relating starting running andfor offences relating starting running and
ending companiesending companies
 By the civil court’sBy the civil court’s
– Breaches of CA 2006Breaches of CA 2006
– Unfit conductUnfit conduct
– Company in breach of competition orCompany in breach of competition or
other lawother law

4. Small BusinessSmall Business
Enterprise &Enterprise &
Employment Act 2015Employment Act 2015
 And conduct in overseas companies: sAnd conduct in overseas companies: s
6(1A) CDDA 19866(1A) CDDA 1986

5. Who has the power toWho has the power to
start proceedings?start proceedings?
 UsuallyUsually
– The ORThe OR
– The Secretary of StateThe Secretary of State

6. But others tooBut others too
 the CMA , OFT and regulators wherethe CMA , OFT and regulators where
breach in their purviewbreach in their purview
 The liquidator or any past or presentThe liquidator or any past or present
member or creditor of the companymember or creditor of the company
– (Asegaai [2014]: liquidator v liquidator for(Asegaai [2014]: liquidator v liquidator for
offence or other default)offence or other default)

7. Who is a director?Who is a director?
 Anyone occupying the position of a directorAnyone occupying the position of a director
by whatever name calledby whatever name called
– De iure (the list at Companies House)De iure (the list at Companies House)
 288 not conclusive:288 not conclusive: SEM ConnectionsSEM Connections
– De facto (assumes functions of a director)De facto (assumes functions of a director)
– Shadow (on whose directions directors areShadow (on whose directions directors are
accustomed to act)accustomed to act)
 Title doesn’t matterTitle doesn’t matter
– Director PSU Sales: No: SMC ElectronicsDirector PSU Sales: No: SMC Electronics
 No difference between executive and noNo difference between executive and no
executive directorsexecutive directors

8. But shurely notBut shurely not
shareholders?shareholders?
 Mr Justice Parker highlighted that veryMr Justice Parker highlighted that very
problem inproblem in Secretary of State for Trade andSecretary of State for Trade and
Industry v JonesIndustry v Jones in 1999 when he saidin 1999 when he said
““if a substantial shareholder wishes, asif a substantial shareholder wishes, as
well he may, to take an active part inwell he may, to take an active part in
running the affairs of the company inrunning the affairs of the company in orderorder
to protect his investment, thatto protect his investment, that raises theraises the
very question of whether invery question of whether in doing so hedoing so he
may not be constitutingmay not be constituting himself a dehimself a de
facto director of thefacto director of the companycompany””

9. Director of Directors?Director of Directors?
 Holland v HMRC [2011], SCHolland v HMRC [2011], SC
 Not de factoNot de facto
 Lord Hope: Three stage enquiryLord Hope: Three stage enquiry
– What did the person actually do?What did the person actually do?
– Did he assume the responsibility of a director?Did he assume the responsibility of a director?
– Was it referable to some other capacity?Was it referable to some other capacity?
 CHANGE: new s.8ZA CDDA 1986CHANGE: new s.8ZA CDDA 1986
(nyif)(nyif)
– If conduct “as a result of directions orIf conduct “as a result of directions or
instructions” but not “advice”instructions” but not “advice”

10. How does one attract the OR’sHow does one attract the OR’s
attention in the first place?attention in the first place?
 ““D” noticesD” notices

11. Time is against theTime is against the
directordirector
 The OR may have taken 2 years toThe OR may have taken 2 years to
prepare his case (soon to be 3 years:prepare his case (soon to be 3 years:
s198 SBEEA 2015)s198 SBEEA 2015)
 Once proceedings are issued theOnce proceedings are issued the
director has 28 days to file itsdirector has 28 days to file its
evidenceevidence

12. Prior warningPrior warning
 OR expected act reasonably and discussOR expected act reasonably and discuss
case with the director before issue:case with the director before issue: ReRe
FinelistFinelist
 OR expected to give early warning so theOR expected to give early warning so the
director can preserve his records:director can preserve his records: Re UnoRe Uno
 No obligation to send out letter but failing toNo obligation to send out letter but failing to
do so may amount to unreasonable conductdo so may amount to unreasonable conduct
by OR:by OR: Re City Truck, SoS v GeeRe City Truck, SoS v Gee

13. Use the prior warningUse the prior warning
time wiselytime wisely
 Use the prior warning time toUse the prior warning time to
– Buy timeBuy time
– Take instructionsTake instructions
– Visit the evidenceVisit the evidence
– Prepare your affidavitPrepare your affidavit
– Negotiate with the ORNegotiate with the OR
 UndertakingsUndertakings
 Bullet proof defencesBullet proof defences
 Public interest argumentsPublic interest arguments

14. When is one unfit?When is one unfit?
 Grounds includeGrounds include
– Commercial impropriety or incompetenceCommercial impropriety or incompetence
– Trading at the risk of creditorsTrading at the risk of creditors
– Phoenix tradingPhoenix trading
– Failure to maintain adequate accounting recordsFailure to maintain adequate accounting records
– Failure to file returnsFailure to file returns
– Breach of fiduciary dutyBreach of fiduciary duty
– Transferring assets at an undervalueTransferring assets at an undervalue
– Breach of Competition or regulatory lawBreach of Competition or regulatory law

15. Other matters justifyingOther matters justifying
disqualificationdisqualification
 Director’s disregard for consumer law:Director’s disregard for consumer law: OR vOR v
MitchellMitchell [2006][2006]
 Non payment of Crown debtsNon payment of Crown debts
– Not more serious than other debts:Not more serious than other debts: SevenoakSevenoak
StationersStationers
– Issue = Policy of discrimination in favour of tradeIssue = Policy of discrimination in favour of trade
creditors:creditors: Re Verby PrintRe Verby Print
– Short period may be a policy but less likely to beShort period may be a policy but less likely to be
unfit:unfit: OR v DhalliwallOR v Dhalliwall
– Promises kept / brokenPromises kept / broken
– HMCR shouts loudestHMCR shouts loudest

16. Other companiesOther companies
 Can take conduct in relation to otherCan take conduct in relation to other
companies into account but there hascompanies into account but there has
to be a probative link:to be a probative link: Green v SoSGreen v SoS
[2006][2006]
 But not as a defenceBut not as a defence

17. OR affidavit – mud sticksOR affidavit – mud sticks
 But seeBut see Re City Truck, SoS v GeeRe City Truck, SoS v Gee
 D must know allegations AND facts that supported themD must know allegations AND facts that supported them
– The evidence must distinguish between facts andThe evidence must distinguish between facts and
inferenceinference
– SoS must not overstate its caseSoS must not overstate its case
– SoS must not omit significant evidence that favours theSoS must not omit significant evidence that favours the
defencedefence
– Fraud and serious accusations must be clearly set outFraud and serious accusations must be clearly set out
– Where there is more than one director, the OR mustWhere there is more than one director, the OR must
identify what matters relate to each directoridentify what matters relate to each director
– If OR is to allege fraud, it has a high duty of fairnessIf OR is to allege fraud, it has a high duty of fairness

18. DefencesDefences
 Examples
– weren’t a director / other capacity
(Goldberg [2003])
– time barred (+ no extension given)
– not sufficiently serious conduct
(Wimbledon Village [1994]
– Mere commercial misjudgement: Watson
[2008].
– Hindsight is not expected: Dhalliwall
[2006].

19. The Advice defenceThe Advice defence
 McNulty’s InterchangeMcNulty’s Interchange
 3 reasons3 reasons
– Someone else’s fault = director substituted theSomeone else’s fault = director substituted the
professional’s perceived superior and expertprofessional’s perceived superior and expert
views for his own.views for his own.
– Evidence of a responsible reaction of a directorEvidence of a responsible reaction of a director
who recognises and wishes to remedy thewho recognises and wishes to remedy the
limitations in his own skills.limitations in his own skills.
– Reasonable in the light of how matters wereReasonable in the light of how matters were
independently perceived to be at the time.independently perceived to be at the time.

20. LimitsLimits
 Not if advice obviously wrong:Not if advice obviously wrong: ParkPark
HouseHouse
 Clear failure to observe properClear failure to observe proper
commercial standards:commercial standards: Re KeyparkRe Keypark
 Abdication of responsibility:Abdication of responsibility: ReRe
BradcrownBradcrown

21. How long for?How long for?
 Starts 21 days after the orderStarts 21 days after the order
 Sevenoaks StationersSevenoaks Stationers: 3 bands: 3 bands
– 2-5 years2-5 years
– 5-10 years5-10 years
– 11-15 years11-15 years
– Old case law not relevant:Old case law not relevant: DTI V ZwirnDTI V Zwirn

22. MitigationMitigation
 AgeAge
 HonestyHonesty
 Absence of personal gainAbsence of personal gain
 delays in the disqualificationdelays in the disqualification
proceedingsproceedings

23. Permission to actPermission to act
If asked,If asked, the court can give permissionthe court can give permission
to a defendant to remain as a directorto a defendant to remain as a director
of a company provided he can assureof a company provided he can assure
the court that there are adequatethe court that there are adequate
safeguards in place.safeguards in place.

24. UndertakingsUndertakings
 The Insolvency Act 2000The Insolvency Act 2000 - disqualification- disqualification
undertakingsundertakings
 Introduction on 2nd April 2001Introduction on 2nd April 2001
– 24% increase in director disqualifications since24% increase in director disqualifications since
– 57% have been by way of undertakings given.57% have been by way of undertakings given.

25. Statement of reasonsStatement of reasons
 Secretary of State for Trade andSecretary of State for Trade and
Industry v Vernon Davies (In theIndustry v Vernon Davies (In the
matter of Blackspur Group)matter of Blackspur Group)
 Secretary of State was entitled toSecretary of State was entitled to
refuse to accept a disqualificationrefuse to accept a disqualification
undertaking without an accompanyingundertaking without an accompanying
statement of unfit conduct.statement of unfit conduct.

26. But once accepted,But once accepted,
binding on bothbinding on both
 Undertaking can be reduced or setUndertaking can be reduced or set
aside on the basis that the agreedaside on the basis that the agreed
statement of facts:statement of facts: Re INSRe INS
Realisations Ltd, SoS v JonklerRealisations Ltd, SoS v Jonkler [2006][2006]

27. The effect ofThe effect of
disqualificationdisqualification
 On disqualification, s 1, CDDA 1986:-On disqualification, s 1, CDDA 1986:-
– (a)(a) he shall not be a director of ahe shall not be a director of a
companycompany, act as receiver of a company’s, act as receiver of a company’s
propertyproperty or in any way, whether directly oror in any way, whether directly or
indirectly, be concerned or take part inindirectly, be concerned or take part in
thethe promotion, formation orpromotion, formation or management ofmanagement of
a company unless (in each case) he hasa company unless (in each case) he has
the leave of the courtthe leave of the court , and, and
– (b)(b) he shall not act as an insolvencyhe shall not act as an insolvency
practitionerpractitioner

28. Management: grey areaManagement: grey area
 You don’t have to be a director or anYou don’t have to be a director or an
employee to manage:employee to manage: R v CampbellR v Campbell

29. Risk for accountants: FDRisk for accountants: FD
 The court is harder on accountantsThe court is harder on accountants
– Blamed by other directorsBlamed by other directors
– Should have known betterShould have known better
 ““I’ll go back to the profession”I’ll go back to the profession”
– Prima facie, professional misconductPrima facie, professional misconduct
– Not “fit and proper”Not “fit and proper”
 Can’t work in auditCan’t work in audit
 Can’t work in insolvencyCan’t work in insolvency

30. The price of not gettingThe price of not getting
permissionpermission
 Sentencing benchmark:Sentencing benchmark: R v AttenburyR v Attenbury
– immediate custodial sentence even– immediate custodial sentence even
where no dishonestywhere no dishonesty

31. Section 15 CDDASection 15 CDDA
– Whilst disqualified, is involved in theWhilst disqualified, is involved in the
management of the company, ormanagement of the company, or
– Is involved in the management of the companyIs involved in the management of the company
and acts or is willing to act on instructions givenand acts or is willing to act on instructions given
by a person whom he knows at that time isby a person whom he knows at that time is
disqualifieddisqualified
 Jointly and severally liable with the companyJointly and severally liable with the company
and anyone else caught by section 15and anyone else caught by section 15
 All debts and other liabilities of the companyAll debts and other liabilities of the company
as are incurred whilst involved in theas are incurred whilst involved in the
management of the companymanagement of the company
 Presumption willing if acted on anyPresumption willing if acted on any
instructions given by a disqualified person.instructions given by a disqualified person.

32. Compensation orders /Compensation orders /
undertakings – new ssundertakings – new ss
15A-D15A-D
(nyif)(nyif)
On application of SoS onlyOn application of SoS only
within 2 years of DDQ orderwithin 2 years of DDQ order
PaidPaid to the SoD for the benefit of
– a creditor or specified class of creditors or
– as a contribution to the assets of a
company so specified.

33. The endThe end
Mark Watson-Gandy is a barrister at Thirteen Old Square ChambersMark Watson-Gandy is a barrister at Thirteen Old Square Chambers
Telephone 0207 831 4445, email: mwg@13oldsquare.comTelephone 0207 831 4445, email: mwg@13oldsquare.com