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Directors’ disqualification

30 January 2017 by Lorraine Young

Directors’ disqualification - read more

The first case of disqualification for breach of competition law

The Competition and Markets Authority (CMA) announced in early December 2016 that it had secured the first disqualification of an individual (Daniel Aston) as a director for a breach of competition law.

In August 2016, the CMA found two online resellers − Trod Limited and GB eye Ltd, trading as GB Posters − to be in breach of competition law for agreeing not to undercut each other’s prices when selling posters and frames on Amazon. They achieved this by using automated repricing software.

Mr Aston, who was the managing director of Trod Limited when it used the anti-competitive practice, was disqualified from acting as a director for five years as he had personally contributed to the breach. He gave a disqualification undertaking which meant that court proceedings did not have to be brought and the period of disqualification was lower than would have been if proceedings had gone ahead and resulted in a disqualification order (which has the same legal effect as a disqualification undertaking).

GB Posters applied for and obtained immunity under the CMA’s leniency policy because it had reported the cartel to the authority. If an organisation does this then it may not be fined, or penalties may be reduced and directors of the organisation will not be disqualified provided they cooperate with the process.

The law in this area is governed by the Company Directors Disqualification Act 1986 (CDDA). The CDDA was amended in 2003 by the Enterprise Act 2002 to provide that directors could be disqualified for breaches of competition law and where their conduct as a director makes them unfit to be concerned with the management of a company. This is in addition to the other reasons for disqualification (see below).

The CMA has indicated that it is prepared to use this power again where individual directors can be shown to have been involved in a breach of competition law.

Scope of the rules

The disqualification regime applies to the following organisations and their officers, as well as to limited companies: limited liability partnerships (LLPs), building societies, incorporated friendly societies, NHS foundation trusts, open-ended investment companies, registered societies and charitable incorporated organisations. The rules apply to shadow directors as well as to those who have been formally appointed as directors.

Disqualification

A director can be disqualified for:

  • Unfit conduct in the promotion, formation, management or liquidation of a company
  • Wrongful trading (trading while insolvent)
  • Failure to comply with filing requirements under the Companies Act 
  • Breaches of competition law
  • Following conviction for criminal offences (either in the UK or abroad) related to the promotion, formation, management or liquidation of a company.

Anyone who is under restrictions from a bankruptcy order or a debt relief order is also not normally allowed to be a company director.

Unfit conduct

Unfit conduct is not defined; however, the following would be considered unfit conduct:

  • Conduct that seeks to deprive creditors of assets
  • Continuing to trade to the detriment of creditors when a company is insolvent
  • Fraudulent behaviour
  • Failure to keep proper accounting records
  • Failure to prepare and file accounts or make returns to Companies House
  • Failure to submit tax returns and/or fairly pay the tax due 
  • Failure to comply with other regulatory requirements
  • Failure to cooperate with the official receiver and/or insolvency practitioner 
  • Unfit conduct in relation to overseas companies after 1 October 2015 may also be taken into account.

The instigator

When a company has entered into formal insolvency proceedings, the official receiver, liquidator, receiver or administrator must submit a report to the Secretary of State on the conduct of all directors who were in office during the last three years of the company’s trading. Depending on the outcome of such investigations, the directors concerned may be disqualified. A disqualification may also result from a complaint about a director.

Other parties who can apply for a director to be disqualified, apart from the insolvency service, are Companies House, the CMA, the courts or a company insolvency practitioner.

The process

Under CDDA section 6 (insolvency), there is a three-year time limit from when the insolvency proceedings commenced, for a disqualification application to be made (for events before October 2015, the limit was two years). Under sections 2 and 8 of CDDA, applications can be made at any time. The individual will be notified as soon as possible, to give them the opportunity to explain the situation, but if they cannot be contacted court proceedings may be started and they will be notified of this at their last known address.

Whether or not disqualification proceedings go ahead, any other civil or criminal action will be carried out separately and is not dependent on the disqualification.

If the worst happens and an investigation starts, if the director accepts that the alleged misconduct did occur then it may be beneficial to offer to give an undertaking. If this is done before legal proceedings commence, then the director will not have to pay costs. However, directors being investigated should take their own professional advice.

The consequences

The effect of disqualification is that an individual cannot be involved in the formation, promotion or management of a company or act as a director, receiver or insolvency practitioner for a specified period without leave of the court. Other restrictions include not being able to sit on the board of a charity, school or police authority, be a pension trustee, be a registered social landlord, sit on a health board or social care body or be a solicitor, barrister or accountant. Directors who have been disqualified are also prevented from being involved in the management of overseas companies with links to the UK.

A list of disqualified directors can be accessed from the Companies House website. The Insolvency Service also publishes the names of those who have been recently disqualified and the reasons for their disqualification.

Compensation

The Small Business, Enterprise and Employment Act 2015 introduced changes to the director disqualification regime for those found guilty of wrongful or fraudulent trading in relation to an insolvent company. The change takes account of conduct since 1 October 2015. Courts now have the power to make compensation orders against such directors. This is to provide greater accountability of directors if creditors have suffered loss due to the director’s misconduct.

When a director has been disqualified, the secretary of state has two years from the date of the disqualification order or undertaking to apply for a compensation order. Alternatively, the director may give a compensation undertaking which closes the matter more quickly. The director makes a one-off payment to the secretary of state as compensation to the creditors involved. No court orders are then needed, and the payment is passed directly to the creditors.

How to avoid it

When advising boards, company secretaries should ensure that directors carry out their duties honestly and responsibly, and ensure they and the company comply with the law and all relevant regulations. Directors must also exercise adequate skill and care with proper regard to the interests of the company’s creditors, customers, shareholders, employees and, in some circumstances, the general public. Company secretaries should advise directors to take professional advice if they consider the company is in financial difficulties and in danger of becoming insolvent.

In February 2016, the Insolvency Service issued guidance on this area which is available on the Government website.

Lorraine Young is Company Secretarial Director at Shakespeare Martineau

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