St Pauls Counsel in Novel Director Disqualification Decision

The High Court decision in Secretary of State for Innovation & Skills v PP [2015] EWHC 2626 (Ch) has been published.

Company Director Disqualification

As a company director, if you do not maintain your legal responsibilities, you can potentially become disqualified from your role, including the carrying out of company director duties and tasks. The legal responsibilities you must uphold to prevent disqualification include, but are not limited to; following the company’s rules as per your articles of association, maintaining up-to-date company and accounting records, filing both accounts and Company Tax Returns wholly and successfully, making it known to all stakeholders if a company transaction has the potential to provide you with personal gain, making timely Corporation Tax payments or reports in lieu of these payments, and filing company tax return by the end of your accounting period.

Essentially, failure to comply with the above stipulations, amongst others, and allowing your company to keep operating regardless, is grounds for, and will largely result in, company director disqualification. Company director disqualification can therefore be characterised as disqualification due to the wrongful use or reporting of company assets and revenue.

Once a complaint has been made, the Insolvency Service will investigate either yourself or your company, depending on the circumstances, and present their findings to you in writing. This matter will subsequently be addressed in court where you will be given a chance to defend the Insolvency Service’s findings, or, if you choose to voluntarily disqualify yourself, no court action will ensue. Additional parties do have the means to seek company director disqualification also, including the Competition and Markets Authority, and the courts themselves.

Disqualification can last for up to 15 years, with a minimum of 2 (see s. 6 of Company Directors Disqualification Act), and can result in jail time if the terms of the disqualification are broken. Other limitations apply to the disqualified party too, including the undertaking of roles across several governmental boards, within legal professions and in trustee positions (please note that these are situation-dependent, and not the case for all disqualified individuals). During this time, the disqualified party may not direct any UK-registered or UK-affiliated company. Taking advice from a disqualified company director for your own company can also result in prosecution, and personable liability for any company debts occurred. All disqualified company directors are listed in the Insolvency Service’s publicly available records.

Company Directors Disqualification Act of 1986

Company director disqualification stems from the Company Directors Disqualification Act of 1986. According to the aforementioned s. 6 of the Company Directors Disqualification Act of 1986, company director disqualification may be established providing there is substantial evidence that the individual ‘has been director of a company which has at any time become insolvent’, and ‘that his conduct makes him unfit to be concerned in the management of a company’.

Secretary of State for Innovation & Skills v PP

In this case from 2015, which resulted in disqualification through the Company Directors Disqualification Act, Jeremy Barnett represented a Chartered Accountant who was the main director of 9 companies which had been wound up in the public interest. The companies had been formed as a vehicle for the promotion of recovery schemes, following the collapse of a number of landbanking collective investment schemes. PP was found guilty by Judge Hodge under s. 458 of Companies Act 1985 (fraudulent trading), and consequently disqualified for 8 years as company director.

9 companies were set up by PP, all featuring the prefix ‘recovery’, and with PP as the sole director of each. Each company executed the same unlawful collective investment schemes, essentially cheating investors by overcharging for plots of land, and promising high investment returns upon planning permission approval, which was at best highly unlikely to materialise, and at worst potentially impossible to achieve in the long run. Valueless shares with zero voting power were sold to fund the creation and upkeep of the company, creating unethical financial benefits for PP.

Section 6 v Section 8

The case of Secretary of State for Innovation & Skills v PP was incredibly unusual as it was brought under s. 8 of the Company Director Disqualification Act 1986 rather than s. 6. To employ company director disqualification under s. 8 is a discretionary power that only arises in very limited circumstances, where the usual allegations of trading whilst insolvent without sufficient regard to the creditors (in particular HMRC) does not apply (as it would under s. 6). In this instance, none of the 9 companies in question were insolvent at the time of the winding up orders, meaning that the disqualification was executed under s. 8.

The key differences between s. 6 and s. 8 of the Company Directors Disqualification Act is that within s. 6 disqualification is mandatory, whereas in s. 8 this is not the case. The purpose of s. 8 is therefore lighter than s. 6, with the goal of improving the standard of conduct of the company director(s), rather than to execute immediate disqualification. Where disqualification is seen as a suitable outcome under s. 8, no minimum limitation period is prescribed. Within s. 6 however, the court possesses a specified duty to make disqualifications ‘where unfitness is shown’ and these must last a minimum of 2 years, highlighting the significance given to insolvency in the eyes of the courts. Duty is not stressed within s. 8, which is entirely dependent on the circumstances at hand.

Therefore, as the case of Secretary of State for Innovation & Skills v PP was not strictly an insolvency case, the accuser used public interest grounds found within s. 8 to call for disqualification, due to the case’s highly immoral nature. As per s. 8, ‘the Secretary of State may apply to the court for a disqualification order… if it appears to him from investigative material that such an order is expedient in the public interest’ and a disqualification may be granted where the court feels the conduct of the director ‘makes him unfit to be concerned in the management of a company’ (s. 8.2).

Only due to the extremity of this case, which showcased not just incompetence but serious misconduct, and a breaching of commercial morality through severe dishonesty, did Judge Hodge use his discretion under s. 8 as grounds for disqualification, as serious failures have to have been committed for a director to be classed as unfit to this extreme.

For full details of the effects of a disqualification order, and how to abide by company director disqualification rules and regulations, please see the Insolvency Services’ official guide.