DirectorsDirectors DisqualificationDisqualification

Mark Watson-GandyMark Watson-Gandy

Why is this an issue Why is this an issue now?now? 25% increase in disqualifications last 25% increase in disqualifications last

yearyear 1 in 20 directors of insolvent 1 in 20 directors of insolvent

companies are disqualifiedcompanies are disqualified Impact of Small Business Enterprise Impact of Small Business Enterprise

and Employment Act 2015and Employment Act 2015

When can you be When can you be disqualif ied?disqualif ied? Automatically if bankruptAutomatically if bankrupt By the criminal courts By the criminal courts

– for offences relating starting running and for 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 or Company in breach of competition or

other lawother law

Small Business Small Business Enterprise & Enterprise & Employment Act 2015Employment Act 2015 And conduct in overseas companies: s And conduct in overseas companies: s

6(1A) CDDA 19866(1A) CDDA 1986

Who has the power to Who has the power to start proceedings?start proceedings? UsuallyUsually

– The ORThe OR– The Secretary of StateThe Secretary of State

But others tooBut others too

the CMA , OFT and regulators where the CMA , OFT and regulators where breach in their purviewbreach in their purview

The liquidator or any past or present The 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)

Who is a director?Who is a director?

Anyone occupying the position of a director Anyone 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 are Shadow (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 no No difference between executive and no

executive directorsexecutive directors

But shurely not But shurely not shareholders?shareholders? Mr Justice Parker highlighted that very Mr Justice Parker highlighted that very

problem in problem in Secretary of State for Trade and Secretary of State for Trade and Industry v JonesIndustry v Jones in 1999 when he said in 1999 when he said

““if a substantial shareholder wishes, as if a substantial shareholder wishes, as well he may, to take an active part in well he may, to take an active part in running the affairs of the company in running the affairs of the company in order order to protect his investment, that to protect his investment, that raises the raises the very question of whether in very question of whether in doing so he doing so he may not be constituting may not be constituting himself a de himself a de facto director of the facto director of the companycompany””

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 1986 CHANGE: new s.8ZA CDDA 1986 (nyif)(nyif)– If conduct “as a result of directions or If conduct “as a result of directions or

instructions” but not “advice”instructions” but not “advice”

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

Time is against the Time is against the directordirector The OR may have taken 2 years to The 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 the Once proceedings are issued the director has 28 days to file its director has 28 days to file its evidenceevidence

Prior warningPrior warning

OR expected act reasonably and discuss OR expected act reasonably and discuss case with the director before issue: case with the director before issue: Re Re FinelistFinelist

OR expected to give early warning so the OR 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 to No obligation to send out letter but failing to do so may amount to unreasonable conduct do so may amount to unreasonable conduct by OR:by OR: Re City Truck, SoS v Gee Re City Truck, SoS v Gee

Use the prior warning Use 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

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

Other matters justifying Other matters justifying disqualif icationdisqualif ication Director’s disregard for consumer law: Director’s disregard for consumer law: OR v OR 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: Sevenoak Sevenoak StationersStationers

– Issue = Policy of discrimination in favour of trade Issue = Policy of discrimination in favour of trade creditors: creditors: Re Verby PrintRe Verby Print

– Short period may be a policy but less likely to be Short 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

Other companiesOther companies

Can take conduct in relation to other Can take conduct in relation to other companies into account but there has companies 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

OR aff idavit – mud sticksOR aff idavit – mud sticks

But see But see Re City Truck, SoS v Gee Re 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 and The evidence must distinguish between facts and inferenceinference

– SoS must not overstate its case SoS must not overstate its case – SoS must not omit significant evidence that favours the SoS 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 must Where 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

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].

The Advice defenceThe Advice defence

McNulty’s InterchangeMcNulty’s Interchange 3 reasons3 reasons

– Someone else’s fault = director substituted the Someone else’s fault = director substituted the professional’s perceived superior and expert professional’s perceived superior and expert views for his own.views for his own.

– Evidence of a responsible reaction of a director Evidence of a responsible reaction of a director who recognises and wishes to remedy the who recognises and wishes to remedy the limitations in his own skills. limitations in his own skills.

– Reasonable in the light of how matters were Reasonable in the light of how matters were independently perceived to be at the time. independently perceived to be at the time.

LimitsLimits

Not if advice obviously wrong: Not if advice obviously wrong: Park Park HouseHouse

Clear failure to observe proper Clear failure to observe proper commercial standards: commercial standards: Re KeyparkRe Keypark

Abdication of responsibility: Abdication of responsibility: Re Re BradcrownBradcrown

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

MitigationMitigation

AgeAge HonestyHonesty Absence of personal gainAbsence of personal gain delays in the disqualification delays in the disqualification

proceedingsproceedings

Permission to actPermission to act

If asked,If asked, the court can give permission the court can give permission to a defendant to remain as a director to a defendant to remain as a director of a company provided he can assure of a company provided he can assure the court that there are adequate the court that there are adequate safeguards in place. safeguards in place.

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.

Statement of reasonsStatement of reasons

Secretary of State for Trade and Secretary of State for Trade and Industry v Vernon Davies (In the Industry v Vernon Davies (In the matter of Blackspur Group)matter of Blackspur Group)

Secretary of State was entitled to Secretary of State was entitled to refuse to accept a disqualification refuse to accept a disqualification undertaking without an accompanying undertaking without an accompanying statement of unfit conduct.statement of unfit conduct.

But once accepted, But once accepted, binding on bothbinding on both Undertaking can be reduced or set Undertaking can be reduced or set

aside on the basis that the agreed aside on the basis that the agreed statement of facts: statement of facts: Re INS Re INS Realisations Ltd, SoS v JonklerRealisations Ltd, SoS v Jonkler [2006] [2006]

The effect of The effect of disqualif icationdisqualif ication On disqualification, s 1, CDDA 1986:-On disqualification, s 1, CDDA 1986:-

– (a)(a) he shall not be a director of a he shall not be a director of a companycompany , act as receiver of a company’s , act as receiver of a company’s property property or in any way, whether directly or or in any way, whether directly or indirectly, be concerned or take part in indirectly, be concerned or take part in the the promotion, formation orpromotion, formation or management of management of a company unless (in each case) he has a 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 insolvency he shall not act as an insolvency practitionerpractitioner

Management: grey areaManagement: grey area

You don’t have to be a director or an You don’t have to be a director or an employee to manage: employee to manage: R v CampbellR v Campbell

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

The price of not gett ing The price of not gett ing permissionpermission Sentencing benchmark: Sentencing benchmark: R v AttenburyR v Attenbury

– immediate custodial sentence even – immediate custodial sentence even where no dishonestywhere no dishonesty

Section 15 CDDASection 15 CDDA

– Whilst disqualified, is involved in the Whilst disqualified, is involved in the management of the company, ormanagement of the company, or

– Is involved in the management of the company Is involved in the management of the company and acts or is willing to act on instructions given and acts or is willing to act on instructions given by a person whom he knows at that time is by a person whom he knows at that time is disqualified disqualified

Jointly and severally liable with the company Jointly 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 company All debts and other liabilities of the company as are incurred whilst involved in the as are incurred whilst involved in the management of the companymanagement of the company

Presumption willing if acted on any Presumption willing if acted on any instructions given by a disqualified person.instructions given by a disqualified person.

Compensation orders / Compensation orders / undertakings – new ss undertakings – new ss 15A-D15A-D(nyif)(nyif)On application of SoS onlyOn application of SoS onlywithin 2 years of DDQ orderwithin 2 years of DDQ orderPaid Paid 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.

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