1st May 2014

Director Disqualification – A Government Proposal

A recent Government response to a consultation paper, involving the transparency of company ownership in the UK,touched upon extending the scope of directors’ disqualification legislation, currently contained in the Company Director Disqualification Act 1986 (CDDA). The response described the role of a director as crucial and acknowledged that it “warrants a robust system” for removing those deemed unfit to occupy such a position.

Under the CDDA, a director can be disqualified from holding that position within any company for up to 15 years and any breach will constitute a criminal offence. Schedule 1 of the CDDA currently sets out the issues which a court must consider before granting an order for disqualification. The Government has proposed to replace the schedule with a “broader and more generic” provision to have regard to. It was suggested that any amendment should include the following additional factors:-

  • material breaches of sectoral regulations (for example in the energy, media or public sectors);
  • the wider social impact of the failed company;
  • the nature of the creditors and the level of loss suffered by them; and
  • directors’ previous failures.

If the proposal is passed by parliament, either the courts or an insolvency service (on behalf of the Secretary of State) will have to take these factors into account when deciding whether to disqualify a director, and for determining for how long.

The Government’s proposals go further than widening the scope of points within the schedule. The government Insolvency Service (on behalf of the Secretary of State) will also be empowered to apply for a disqualification order in respect of a director on the basis that they have been convicted of a criminal offence in relation to the operation of a company or otherwise been guilty of director misconduct in respect of companies located outside the UK. There is to be further consultation as to whether there can be a restriction on people who are disqualified in a different jurisdiction from becoming directors in the UK.

As mentioned above, the planned amendments are to broaden the provisions in order to increase the reach of the director disqualification regime. The scope of the information that the Insolvency Service can gather during investigation of a director’s conduct will be widened and such information will become easier to share with other regulatory and enforcement bodies. Specifically, the aim is to enhance collaboration between the Insolvency Service, the Financial Conduct Authority and the Prudential Regulation Authority, allowing cohesive investigation, and ensuring compliance with company law is fully integrated across the UK economy.

In order to increase the chances of action being taken against a director, third parties will be sold or assigned the power to pursue the case against a director. The Secretary of State will also be given the power to apply for compensation orders against disqualified directors in order to compensate creditors for identifiable losses attributed to directors’ misconduct.

Finally, the time period for proceeding with a disqualification case following an insolvency event, under section 6 of the CDDA, is to be increased from 2 to 3 years.

Ellis Walls
Trainee Solicitor

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