Directors Disqualification Report
The rules for removing a director due to unsuitability in company management are not clearly defined in case law, indicating a potential need for additional guidance from legislation.
The Companies Act of 1986 aims to protect the public from corporate misconduct. The court can bar an individual from holding various positions in a company for a specific period through a disqualification order based on the offence committed.
Lord Hoffmann emphasised the need to protect the public interest in cases of directors’ misconduct, and the CDDA and Disqualification Act 1986 address this issue together. The proposed regime includes court-ordered disqualifications.
It is crucial to examine the two forms of disqualification, as outlined in the Disqualification Act of 1986. Section 2 of the legislation states that the court has the authority to potentially issue a disqualification order against individuals found guilty of a range of offences connected to company promotion, establishment, and administration. This covers situations where a director consistently fails to adhere to legal notification requirements to the registrar or is engaged in fraudulent activities. A disqualification order can be issued if an individual is found to be unfit by a DTI investigation to manage a company, in order to protect the public interest.
On the flip side, it is crucial to take into account the court-issued compulsory disqualification orders, which offer no opportunity for directors to remedy their actions, as demonstrated in the Migration International Services Ltd. case.
This form of disqualification is rooted in the general unsuitability of the director to engage in the administration of any business, as opposed to being restricted to a particular company or their behaviour within another company (including international companies, SBEA 2015).
Directors, including shadow or de facto directors at the time of insolvency, are subject to Section 6. In assessing a person’s suitability, the court must take into account the SCHI list and adhere to a balance of probabilities. The individual in question must be proven unfit for the court to be satisfied.
Courts have also given guidance on what constitutes "unfitness." In the case of Electric Motors Ltd., Sir Nicholas stated that commercial misjudgment, such as gross negligence or total incompetence, and a lack of commercial probity are not enough to establish unfitness. The decision in Secretary of State vs. Sullivan determined that the directors’ duty could not be accepted and should not be allowed to, as it would influence others. Meanwhile, in Secretary of State vs. Pawson, the court held that incompetence is not enough and probity should also be taken into account. Consequently, both common law and a disqualification regime are applied to prevent or stop a director from abusing the company and the public interest by taking advantage of their power.
Despite the efforts of SBEEA 2015 to provide ways to identify abusive behaviour and disqualify a director, the disqualification regime still requires further improvement. The 2013 BIS report suggested the need to extend disqualification periods, particularly for directors of overseas companies, in order to ensure their education. However, the SBEEA did not implement all the recommendations. At the same time, a positive outcome of the adopted developments is that non-executives would now also be subject to disqualification if they exerted influence over a director.
The effect of a disqualification order is that a person may not, without the court's permission, act as a director, liquidator, administrator, receiver, or manager of the company. Additionally, they may not be involved in the promotion, formation, or management of the company for a specific period starting from the date of the order. In addition, he may also be subject to a compensation order, in which creditors assess the losses and evaluate the nature of the director's conduct in order to protect themselves. The requirement that only the Secretary of State can apply for a compensation order from the court is a flaw in the law. In normal circumstances, the court should have discretion to issue the order based on the results of its investigation.
Despite the challenges in determining "unfitness," the legislature made a serious effort to assist courts in clarifying whether a person is unfit to be involved in the management of a company through Schedule 1 of SBEEA 2015 and CA 2006. At the same time, case law has provided a series of cases in which the issue of unfitness was sufficiently determined. This guidance allows the courts to identify cases in which unfitness exists and decide on the potential disqualification of directors who have abused their power to harm the company and the general public.Both the legislature and case law have attempted to address the issue by providing guidance on the concept of unfitness, despite facing difficulties in the process.