Personal Liability for Directors and Disqualification Flashcards
What are directors personally liable for?
1) Fraudulent Trading S 213 IA 86
On winding up and petition by a liquidator, parties conducting business knowingly with intent to defraud creditors liable to contribute to ‘assets’ of company.
Also a criminal offence – s 993 CA 2006 [formerly s 458 CA 85].
2) Wrongful Trading - S 214 IA 86
On winding up and petition by liquidator, if director ‘knew or ought to have’ known ‘no reasonable prospect’ of avoiding ‘insolvent liquidation’, liable to contribute to ‘assets’ of company.
(We saw this under Exceptions to Limited Liability.)
Defence – ‘took every step’ to minimise creditors’ losses. (s 214(3) IA 86).
3) Misfeasance (ie, breaches of duty) - S 212 IA 86
A ‘procedural provision giving a right to bring proceedings against, amongst others, a ‘company officer’ (eg, director), or a ‘liquidator’, or someone else involved in a company’s ‘promotion, formation or management’ for breach of duty or other wrongful conduct. Normally, it is a liquidator bringing a claim against a director for breach of duty.
Thus, the provision creates no new cause of action: see Re MDA Investment Management Ltd [2003] EWHC 2277 (Ch); [2005] BCC 783, 805, para 71, referring to Re Continental Assurance Co of London plc (in liq) (also known as Singer v Beckett) [2007] BCLC 287; [2001] BPIR 433, para 393.
See also Revenue and Customs Commrs v Holland (also known as Re Paycheck Services Ltd) [2010] UKSC 51; [2010] 1 WLR 2793; [2011] Bus LR 111; [2011] 1 All ER 1430; [2011] BCC 1, para 55, where Lord Collins said:
‘Section 212 is a procedural provision which does not create any substantive obligations, and consequently for a person to be made liable under section 212 that person must be guilty of breach of an independent duty.’
*Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, [1994] BCC 161
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S 216 IA 86
Preventing ‘the phoenix’ rising again - cannot re-use a company’s name for 12 months after liquidation. See too s 217 IA 86.
CDDA ‘86
Applies to former directors and shadow directors, as well as current directors
Re Lo-Line Electric Motors Ltd [1988] 2 All ER 692.
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What is the aim of the disqualification rules of directors?
- Public ‘protection’ is main ‘purpose’;
- Can also ‘be deterrent elements’.
Re Westmid Packaging Services Ltd v Griffiths [1998]
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What are the grounds for disqualification?
(a) Conviction of an indictable offence (s 2 DDA 86).
Period - max of 5 yrs (summary); 15 yrs otherwise.
(b) Persistent breaches of companies legislation (ss 3 and 5 DDA 86).
Period - 5 yrs max.
(c) Fraud, fraudulent trading, breach of duty revealed in winding up (s 4 DDA 86).
Period - 15 yrs max.
(d) Fraudulent and wrongful trading (s 10 DDA 86).
As in ss 213 and 214 IA ‘86(above).
Period - 15 yrs max.
(e) Unfit directors of insolvent companies (s 6 DDA 86) – ‘Unfitness’
On complaint of Sec of State within 2 years following report of insolvency officer regarding a director of an insolvent company (ie, one in liquidation, receivership or administration), whose ‘conduct as a director of’ the ‘company’ concerned ‘(either taken alone or together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.’, ie, has to be, ‘or has been a director of the company which has at any time become insolvent (whether while he was a director or subsequently)
Ss 6(1), (2) DDA 86
*Secretary of State for Trade v Blackwood 2003 SLT 120, at paras [6]-[8]
p 122 (IH), where the court acknowledged that it is not enough to disqualify someone for a “‘commercial misjudgement … or mere mismanagement’”. Also, there is no definitive test regarding “unfitness”: it depends on the facts, although the court is looking to see if the conduct “‘has fallen below the standards of probity and competence appropriate for persons to be … [company] directors’”
The court said:
‘[6] It is not in dispute that Schedule 1 to the Act does not exhaust the matters on which a disqualification order may be founded. It is also not in dispute that the fact that a director has caused or permitted the company to trade where there was no reasonable prospect of its creditors being paid in full, does not necessarily mean that he is “unfit to be concerned in the management of a company”. If, however, he is unfit, a disqualification order for at least the minimum length of two years is mandatory (In re Grayan Building Services Ltd (In Liquidation) [1995] Ch241).
[7] The Act does not lay down any test as to what constitutes such unfitness. Whether the conduct of the director is sufficiently serious to merit that description plainly depends on the circumstances of the particular case, whether it is regarded as a question of fact (In re Sevenoaks Stationers (Retail) Ltd [1991] Ch164, per Dillon L.J. at p. 176) or as a question of mixed fact and law (Grayan Building Services Ltd per Hoffmann L.J. at p.254). However, it is useful to bear in mind a number of significant statements as to what is or may be involved in unfitness. In Grayan Building Services Ltd Hoffmann L.J. observed at p. 253:
“It [the court] must decide whether that conduct, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies”.
In Re Dawson Print Group [1987] B.C.L.C. 601 he said, as Hoffmann J., at page 604:
“There must, I think, be something about the case, some conduct which if not dishonest is at any rate in breach of standards of commercial morality, or some really gross incompetence which persuades the court that it would be a danger to the public if he were to be allowed to continue to be involved in the management of companies, before a disqualification order is made.”
[8] It follows that it is not enough that there has been ordinary commercial misjudgment (Sevenoaks Stationers (Retail) Ltd, per Lord Dillon L.J. at p. 176) or mere mismanagement (In re McNulty’s Interchange Ltd [1989] B.C.L.C. 709 at p. 712), and that not every breach of duty or impropriety calls for a disqualification order (Re Deaduck (In Liquidation) [2000] 1 B.C.L.C. 148 and Re Wimbledon Village Restaurant Ltd [1994] B.C.C. 753). If, on the other hand, a director knew or ought to have known that there was no reasonable prospect of the company avoiding going into insolvent liquidation, he may well be held to be unfit (Secretary of State for Trade and Industry v Creegan [2002] 1 B.C.L.C. 99 , per Sir Martin Nourse at p. 101). This is particularly the case where he must actually have known this to be the position (Re Cargo Agency Ltd [1992] B.C.L.C. 686).’
What are the grounds for unfitness?
Court must be satisfied on one of various grounds (s 9 and Sch 1 of DDA 86)
The main grounds are:
(i) ‘misfeasance, breach of fiduciary duty or another duty … the director’ owes the company.
(ii) misapplying or retaining company assets, or conduct making him/her (director) accountable to the company (secret profits etc).
(iii) his/her part in improper transfers of assets to defraud creditors.
(iv) failure to keep proper records, make annual returns, etc.
(v) failure to prepare accounts, directors and auditors reports, etc.
(vi) no keeping or maintaining a shareholders’ ‘register’.
(vii) his/her part in causes of company’s insolvency.
(viii) his/her part in company’s failing to supply goods and services which have been paid for wholly or partially (sanction against irresponsible use of consumer prepayments to boost ailing cash flow).
(ix) his/her part in transactions which are gratuitous alienations or which are voidable as preferences.
(x) his/her part in failure to summon a creditors’ meeting in a creditors’ voluntary winding up.
(xi) his/her part in any failure to comply with procedural obligations imposed upon directors in an insolvency.
What happens if the court is satisfied on one of the grounds for unfitness?
If so, then disqualification for between 2 and 15 years.
*Re Seven Oaks Stationers Ltd [1991] Ch 164 p 174
‘Tariffs’ laid down in this case
(i) 10-15 years for ‘particularly serious cases’;
(ii) 6-10 years for ‘serious’ conduct not within ‘the top bracket’; and
(iii) 2-5 years for ‘not very serious’ conduct.
Most orders for 5 years or less.
What are some mitigating factors?
In *Re Westmid Packing Services Ltd v Griffiths [1998] 2 All ER 124, pp 131-134, the Court of Appeal said, amongst other things:
correct ‘to fix period to fit gravity of conduct, and then allow . . . for mitigating factors . . .’ (p 132).
Egs (p 134):
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length of time [director] has been in jeopardy
’
.
- ‘age and . . . health’.
- ‘conduct before and after the offence’.
- ‘whether . . . admitted the offence’. - ‘periods of disqualification of his co-directors’.
S 17 CDDA 86
can apply for leave of court where disqualified
Re Lo-Line Electric Motors Ltd [1988]
Court may give disqualified director leave to act.
