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All change for director disqualification law

Seismic Changes to Director Disqualification Law are Imminent Under the Company Directors Disqualification Act 1986

The Small Business, Enterprise and Employment Act 2015 (‘SBEE’), which gained Royal Assent on 26th March 2015 – do not be fooled by the innocuous name – covers topics as diverse as the regulation of pub ownership to child care. It also introduces major changes to director disqualification law and practice, all of them weighted against the director in favour of the State. This article looks at what some of these changes are and what the implications are for company directors faced with director disqualification, as well as the professional companies – Accountants, Insolvency Practitioners, Lawyers, etc. – who might advise and represent such directors.

What is the Likely Catalyst for These Changes to Director Disqualification Law?

The former coalition government of 2010 – 2015, through the Department for Business, Innovation and Skills published a document entitled ‘Directors’ Disqualification and creditor compensation fact sheet’ which aims to:

“Modernise and strengthen the Director Disqualification regime to give the business community and consumers confidence that wrongdoers will be barred as directors… and strengthen mechanisms that compensate creditors for director misconduct.”

The result is The Small Business, Enterprise and Employment Act 2015 (‘SBEE’).

When Will These Changes to Director Disqualification Law Come into Effect?

All of the changes to director disqualification law detailed below are not yet in force. Our understanding is that the changes are expected to be phased in from October 2015 through to early 2016. They are significant changes which all directors, as well as the professional companies and bodies who advise them – Insolvency Practitioners, Accountants, Independent Financial Advisers, Banks, local law societies and other solicitors – need to be aware of.

The Major Changes Are:

  1. New and additional grounds for the disqualification of directors. 

Persons instructing unfit directors will now be targeted for director disqualification. There are 2 new grounds for disqualification:

Where a person has been convicted of a company related offence overseas. For example an offence committed in connection with the promotion, formation, management, liquidation or striking off of a company, which corresponds to an indictable offence under the law in England and Wales.

Where a person has instructed a disqualified director.  A person who gave directions or instructions to a director which resulted in the conduct that led to the director being disqualified, can also in future face director disqualification.  This could conceivably enable the Court to make Disqualification Orders against persons who nominate a director.

  1. Determining unfitness: new matters to be taken into account.

In the future, the Court will be required to have regard to a broader category of conduct, than currently, in determining whether a person is to receive director disqualification, and also the appropriate period of disqualification to be imposed.

This change necessarily extends the matters of Unfit Conduct to be taken into account, set out in Schedule 1, Part 1 of the CDDA. The misconduct is now expressed in far more general terms and now includes conduct in relation to other companies, including overseas companies, as referred to above.

Very importantly, the Court will now be required to take into account in all cases the extent to which a person was responsible for the failure of the company and any overseas companies and the extent to which loss or harm was caused by that person’s conduct. Civil Compensation Orders can be made by the Court against the director – see below.

Where the person against whom the civil compensation application is made, is or has been a director of such companies, the Court is also required to take into account:

  • Whether there was a breach of fiduciary duty by the director, in other words, Misfeasance;
  • A breach of any legislative or other obligation; and
  • The frequency of such conduct.  This change by itself potentially opens up an enormous new raft of matters, which the Secretary of State for Business, Innovation and Skills can rely on to pursue directors to director disqualification undertakings.
  1. Simplifying and amending the procedure for liquidators and administrators to report on the conduct of directors facing director disqualification

Under the new rules, the office holder will be required to submit a report on every director of an insolvent company, not only those in respect of whom the office holder decides to make a report. Those reports must describe any conduct that may assist the Secretary of State to decide whether to apply for a Director Disqualification Order and will need to be submitted within (the reduced period of) 3 months of ‘the insolvency date’.  Any new information (i.e. that comes to light after 3 months) must also be reported to the Secretary of State as soon as reasonably practical after that date.  That is a continuing obligation on the Insolvency Practitioner.

  1. Extending from 2 to 3 years the time in which the Secretary of State can apply to Court for a Director Disqualification

This is a significant change, giving the Secretary of State much more time to prepare a case against the director, as is the extension of the Secretary of State’s existing power to obtain information from the office holders in respect of a person’s conduct as a director and to produce or permit inspection of books and records relevant to that person’s conduct.

That power is now to extend (in relation to proposed director disqualification under the Company Directors Disqualification Act 1986) to allow that material to be obtained from ‘any person’, to enable the SOS to decide whether to commence disqualification proceedings.

This change to the legislation will potentially allow disqualification of a director of a solvent company on the grounds of unfitness.

  1. Civil Compensation.

This change justifies an article to itself. Briefly, the SBEE gives the Court the power to make a Compensation Order against a person who has been disqualified under the CDDA or who has given a director disqualification undertaking not to act as a director where his/her conduct caused loss to one or more creditors of an insolvent company of which he/she was a director.

The Secretary of State has has the power to accept a ‘Compensation Undertaking’ as an alternative to obtaining an Order. This particular change may cause a director to think twice before giving a Director Disqualification Undertaking or if he does give an undertaking, on what terms should he do so?  The wording of that undertaking will become ever more important.

In practice, does that mean that every director of every insolvent company is now open to the potential for a financial claim against a director, if that director is disqualified? Potentially yes.

Summary of These Major Changes to Director Disqualification Law

The above sets out some (but not all) major changes to the director disqualification landscape.   There are other changes that fall outside of the scope of this article.

NDP’s view is that the changes mentioned here will likely result in more director disqualification investigations and a greater number of proceedings being commenced by the Secretary of State against directors, in respect of much wider conduct issues than previously. In addition, we anticipate that the threat of director disqualification will hang over directors for an even longer period after the company insolvency.

It seems that it is now open season to pursue directors with the protection of the corporate veil becoming ever less effective.

NDP is well placed to advise on these seismic changes to the director disqualification landscape. Contact us for help and assistance on these and related issues, including Misfeasance Claims, or why not call us on 0121 200 7040 for a free, no obligation chat.

We are regularly referred director disqualification, misfeasance and permission cases by Insolvency Practitioners, Accountants, Independent Financial Advisers, Banks, local law societies and other solicitors.

As specialists in Director Disqualification, we are the safe pair of hands needed by directors who are facing director disqualification, especially in the new era ushered in by the new Small Business, Enterprise and Employment Act 2015.

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