New powers in relation to company directors are now in force
In this article, Peter Doyle QC considers the changes.
The Small Business, Enterprise and Employment Act 2015 (the Act) has by amending the Company Directors Disqualification Act 1986 (CDDA 1986) introduced new measures to (i) strengthen the directors’ disqualification regime (ii) target individuals who have exerted “requisite influence” over a director who has himself been disqualified and (iii) provide a compensation regime against culpable directors in favour of creditors who have suffered loss.The provisions came into force on the 1 October 2015.
Amendment to the CDDA 1986 now extends the matters which the court must consider when determining whether to disqualify or not. It will consider conduct in relation to more than one company as well as in relation to companies overseas.
A new Schedule 1 to the CDDA 1986 identifies the additional factors that the court must consider when deciding (i) whether a person is unfit to act as a director (ii) whether to disqualify such a person and if so (iii) what the length of the disqualification should be.
These factors include in all cases (i) the extent to which the individual was responsible for the causes of any material breach by a company or an overseas company of any applicable legislation or other requirement (ii) the extent to which he was responsible for such a company becoming insolvent and (iii) the frequency of the relevant conduct in relation to such a company as well as the nature and extent of any loss or harm caused by such conduct or any potential loss or harm attributable to it.
Compensation for creditors
The Secretary of State may now apply for a compensation order against a disqualified director where loss has arisen from that director’s conduct. The application can be made at any time up to two years from the making of the original disqualification order. The court must have regard to the amount of the loss caused as well as the nature of the director’s proven conduct. It will of course be relevant if the director has already made some other financial contribution in compensation for his conduct.Instead of a formal application to the court the Secretary of State may accept an undertaking to pay compensation.
There is now power under the CDDA 1986 to disqualify a person who although not a director nor a shadow director is someone who has exerted “requisite influence” over a director who has in fact been disqualified. The new power is available with a view to increasing the accountability of those who seek to control directors for reasons that are not in the interests of the company.
The non-director can himself be disqualified if any of the conduct for which the director was disqualified was because the latter followed the instructions or directions of the former.
Note a non-director will not have exercised the requisite influence over the director if the instructions or directions were given by him in a professional capacity.
Any application must be made by the Secretary of State but such an application must be in the public interest. In an appropriate case a disqualification undertaking may be accepted. The maximum period of disqualification is 15 years.
These provisions will plug the gap in cases where hitherto a non-director could not be disqualified as he was not a “shadow director” and his instructions or directions were only followed by one director and not by the board or the majority of the board.
The CDDA 1986 has been amended to permit an application for disqualification to be made by the Secretary of State where the person in question has been convicted of a specified offence outside Great Britain.
The offence must be one that is indictable here and must be in connection with (i) the promotion, formation, management, liquidation or striking off of a company or any similar procedure (ii) the receivership of a company’s property or any similar procedure or (iii) a person being an administrative receiver of a company or holding a similar position.
The Act amends the CDDA 1986 so as to increase the period for applying to the court for disqualification of an unfit director of an insolvent company. It was formerly 2 years but is now 3 years.
By amendments to the Insolvency Act 1986 an administrator or liquidator is able to assign a right of action to another party if such a right accrues as a result of (i) fraudulent trading (ii) wrongful trading (iii) transactions undertaken at an undervalue (iv) preferences and (v) extortionate credit transactions.
The Act gives administrators a new power under the Insolvency Act 1986 to bring an action for fraudulent or wrongful trading; actions that previously were only available to a liquidator.
Peter Doyle QC
This document is for information purposes only and does not constitute legal advice. Such professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.