The daunting prospect of disqualification acts as a key deterrent to safeguard both the public and financial institutions from corporate misconduct.
This article focuses on directors' disqualification in England and Wales, examining the causes and consequences under the Company Directors Disqualification Act 1986 (CDDA), including the impact of Schedule 13 of The Finance Act 2024 and The Economic Crime and Corporate Transparency Act 2023 (ECCTA).
What is the Effect of Directors' Disqualification?
A disqualification order is a wide-ranging ban from engaging in several pivotal company activities, including:
The duration of this professional exile can last up to 15 years, with the consequences extending into other realms: a disqualified person may not act as a trustee of an incorporated or unincorporated charity without the necessary permissions. They may also face restrictions in school governance and require permission to act as a pension trustee.
The CDDA also applies to non-executive (NED), de-facto and shadow directors, who can find themselves caught in the crosshairs of a disqualification order. The Carilion 'test' case should serve as a warning here; whilst the Insolvency Service's case was ultimately discontinued on the eve of trial, it was alleged that the Carilion NEDs were in breach of a strict duty to know the true financial position of the company at all times. Should a strict liability test become relevant for NEDs in the future, it would represent a shift in responsibility and is likely to have a significantly detrimental impact on the number of people prepared to contribute to corporate governance.
Even without a change in the current law, the implications remain clear: disqualification isn't merely about losing a title; it's about being barred from the very essence of directorial functions, even in an informal capacity.
A glimmer of opportunity remains. A disqualified director may still work for a company in a non-directorial role, operate as a sole trader, or partner with others, provided they steer clear of the activities listed above. They can also serve as a company secretary, so long as they avoid management duties, and can hold shares in a company.
How is a Director Disqualified?
Disqualification can be the result of an order on mandatory or discretionary grounds, each with its own set of criteria.
Mandatory Grounds for Disqualification
Under section 6 CDDA, the court is compelled to issue a disqualification order if:
Discretionary Grounds for Disqualification
Whilst Sir Philip Green is the household name most frequently associated with the failed department store chain BHS, it was in fact Dominic Chappell, who bought BHS for £1 in March 2015, who was disqualified under a discretionary ground (s.8 CDDA) for 10 years for 'abusing his responsibilities'. Green escaped a ban, but his reputation, particularly following his 2008 Knighthood for services to retail, was severely damaged, with a parliamentary investigation concluding that personal greed and leadership failures had contributed to the collapse of BHS.
What Is a Director Disqualification Undertaking?
To avoid proceedings, it is possible to provide a disqualification undertaking under section 1A CDDA. Following the high-profile collapse of construction giant Carillion, such undertakings were given by former Carillion CEO Richard Howson (8 years), Finance Director Zafar Kahn (11 years) and Group Finance Director Richard Adam (12.5 years). Despite the lack of court process, anyone who has given a disqualification undertaking can only act in a company director role (whilst the undertaking remains in place) with the permission of the court.
The Finance Act 2024 and Director Disqualification
The Finance Act, which received Royal Assent on 22 February 2024, introduced significant changes to the director disqualification regime, specifically targeting those involved in promoting tax avoidance and extending powers to HMRC, rather than solely relying on the Insolvency Service.
The key provisions introduced by the Finance Act 2024 were:
Section 8ZF (CDDA 1986)
Allows the court to make a disqualification order against a person who was a director or manager of a company wound up by HMRC on a just and equitable basis in the public interest. This wide definition extends the Secretary of State's previous powers, as well as allowing HMRC to challenge wider forms of financial misconduct.
Section 8ZG (CDDA 1986)
Allows the court to disqualify a person who is or has been a director, shadow director, or manager of a company that carries on a business as a promoter of a tax avoidance scheme, where their conduct renders them unfit to be concerned in the management of a company.
It is too early to conclude what impact the Finance Act 2024 will have, although a significant increase in tax-related director disqualifications is predicted. The legislation provides for the continuation of disqualification undertakings as discussed above. The shift to empower HMRC reflects the government's wider approach to tackle tax avoidance.
How ECCTA 2023 Impacts Director Disqualification and Duties
ECCTA is already having an impact on directors (such as new identity verification requirements, a 14-day notification period at Companies House and an expanded disqualification regime) and more provisions will be introduced during 2025 and 2026. The scope of these will be examined in a future article, with a new offence of failing to prevent fraud (due to be introduced from 1 September 2025) of particular interest to directors.
What is the Risk of Disqualification to Directors?
Whilst the impact of the Finance Act and ECCTA is currently unknown, in 2023/4, 1,222 directors were disqualified following enforcement activity by the Insolvency Service under Sections 2, 6 and 8 of CDDA 1986. For those who have been disqualified, breaching such an order is a criminal offence under section 13 CDDA, carrying the threat of fines and/or imprisonment of up to two years: Andrew Brian, who had voluntarily accepted disqualification in 2009 when his previous company ran up a significant tax debt, and who went on to 'exercise control' over Met Euro Ltd, found himself in this very position. The court extended his disqualification for a further 12 years, handed him a 12-month suspended sentence and ordered him to complete 150 hours of unpaid work.
The financial implications can also be dire, with personal liability for any company debts incurred during the breach. The legal costs of defending against disqualification proceedings can further compound the financial strain.
Beyond the legal implications, disqualification can obliterate employment and business prospects, leaving a trail of professional and personal embarrassment.
How Directors Can Respond to a Disqualification Threat
For those facing the looming threat of disqualification, there is a lifeline: seek immediate legal advice. Those who have already been disqualified or who have given a disqualification undertaking, may also consider applying for permission from the court to act as a director under section 17 of the CDDA. This application is often recommended if you are considering working with a company: given the wide range of management tasks (in particular) that can fall under a disqualification order, it is relatively easy to breach a ban inadvertently.
Three questions are posed by the court when deciding whether permission could be given under s.17 to act as a director, notwithstanding a ban in place:
Whilst case law does provide examples of where permission is given under s17, it should be noted that the court will need strong persuasion, justified by the need to protect public interest.
How Can Directors Mitigate This Risk?
Prevention is always better than cure. Directors should conduct thorough due diligence before accepting a directorial position to ensure they understand the company's risks. Staying well-informed about the company practices and compliance protocols is critical. Given the increased focus on tax avoidance following recent amendments, directors would be well-advised to ensure they are fully tax-compliant and alert to any potential tax avoidance schemes. Reading all board papers, and asking questions where necessary, maintaining detailed records of board meetings and decision-making processes are essential to demonstrate the rationale behind decisions. As noted in our previous article examining misfeasant trading, a paper trail should always be kept, even when decisions are made outside of a board meeting.
Whilst directors may feel alarmed by the scope of the legislation, they should take some comfort from a recent judgment, where it was recognised that directors often make decisions in pressurised circumstances which are not 'clear cut'.
In conclusion, while the path of a director may be fraught with potential pitfalls, understanding the risks of disqualification and taking proactive steps will help mitigate any potential risks, ensuring that directors can continue to lead with confidence and integrity. Keeping abreast of developments will also be key; time will tell if recent legislation results in a significant shift in the landscape and a flurry of disqualifications.