4/19/2017 Companydirectorsdisqualificationact1986|ACCAQualification|Students|ACCAGlobal

Theglobalbodyforprofessionalaccountants Aboutus Contactus Findanaccountant Technicalactivities Help&support Global

Search... myACCA

Learning Professional
Home Ourqualifications Employers Members Students
providers insights

Home > Students > Examresources > Fundamentalslevel > F4CorporateandBusinessLaw > Technicalarticles

COMPANY DIRECTORS DISQUALIFICATION

ACT 1986
75

RELATED LINKS

StudentAccountanthub

Thisarticleexaminesthewayinwhichthelawtriestopreventunsuitableindividualsfromactingas
companydirectors.Suchanindividualcanbedisqualifiedfromactingasadirectorforupto15years
undertheCompanyDirectorsDisqualificationAct1986(CDDA).

TheActwasintroducedinanattempttopreventthemisuseofthecompanyform.Oneofitsspecificaims
wasthecontrolofthe'phoenixcompany'.Thisisacompanysetupbyadirectorofaverysimilar
companywhichceasedtradingduetoextensivedebts.Thenewcompanycarriesonessentiallythesame
business,butwithnoliabilitytothecreditorsoftheformercompany.Suchbehaviourisreprehensibleand
isclearlyanabuseoflimitedliability.TheCDDA1986seekstoremedythispracticebypreventingcertain
individualsfromactingascompanydirector,buttheambitoftheAct'scontrolismuchwiderthanthisone
instance.

Categoriesofconduct
TheCDDA1986identifiesthreedistinctcategoriesofconductwhichmay,andinsomecircumstances
must,leadthecourttodisqualifycertainpersonsfrombeinginvolvedinthemanagementofcompanies.
Theseare:

a.Generalmisconductinconnectionwithcompanies
Misconductisdefinedas:

aconvictionforanindictableoffenceinconnectionwiththepromotion,formation,managementor
liquidationofacompanyorwiththereceivershipormanagementofacompany'sproperty(S2ofthe
CDDA1986).ThemaximumperiodfordisqualificationunderS2isfiveyearswheretheorderismadebya
courtofsummaryjurisdiction,and15yearsinanyothercase.

persistentbreachesofcompanieslegislationinrelationtoprovisionswhichrequireanyreturn,account
orotherdocumenttobefiledwith,ornoticeofanymattertobegivento,theregistrar(S3ofthe
CDDA1986).Section3providesthatapersonisconclusivelyprovedtobepersistentlyindefaultwhereit
isshownthat,inthefiveyearsendingwiththedateoftheapplication,hehasbeenadjudgedguiltyof
threeormoredefaults(S3(2)oftheCDDA1986).Thisiswithoutprejudicetoproofofpersistentdefaultin
anyothermanner.Themaximumperiodofdisqualificationunderthissectionisfiveyears.

fraudinconnectionwithwindingup(S4oftheCDDA1986).Acourtmaymakeadisqualificationorderif,
inthecourseofthewindingupofacompany,itappearsthataperson:
hasbeenguiltyofanoffenceforwhichheisliableunderS458oftheCompaniesAct1985,thatis,that
hehasknowinglybeenapartytothecarryingonofthebusinessofthecompanyeitherwiththeintention
ofdefraudingthecompany'screditorsoranyotherpersonorforanyotherfraudulentpurpose
hasotherwisebeenguilty,whileanofficerorliquidatorofthecompanyorreceiverormanagerofthe
propertyofthecompany,ofanyfraudinrelationtothecompanyorofanybreachofhisdutyassuch
officer,liquidator,receiverormanager(S4(1)(b)oftheCDDA1986).Themaximumperiodof

http://www.accaglobal.com/gb/en/student/examsupportresources/fundamentalsexamsstudyresources/f4/technicalarticles/Companydirectors.html 1/3
4/19/2017 Companydirectorsdisqualificationact1986|ACCAQualification|Students|ACCAGlobal
disqualificationunderthiscategoryis15years.

b.Disqualificationforunfitness
Thiscovers:

disqualificationofdirectorsofcompanieswhichhavebecomeinsolvent,whoarefoundbythecourttobe
unfittobedirectors(S6oftheCDDA1986).UnderS6,theminimumperiodofdisqualificationistwoyears,
uptoamaximumof15years

disqualificationafterinvestigationofacompanyunderPtXIVoftheCA1985(S8oftheCDDA1986).

Adisqualificationordermaybemadeastheresultofaninvestigationofacompanyunderthecompanies
legislation.UnderS8oftheCDDA1986,theSecretaryofStatemayapplytothecourtfora
disqualificationordertobemadeagainstapersonwhohasbeenadirectororshadowdirectorofany
company,ifitappearsfromareportmadebyaninspectorunderS437oftheCAorSs94or177ofthe
FinancialServicesAct1986that'itisexpedientinthepublicinterest'thatsuchadisqualificationorder
shouldbemade.Onceagain,themaximumperiodofdisqualificationis15years.

TheCDDA1986setsoutcertainparticularstowhichthecourtistohaveregardwhereithastodetermine
whetheraperson'sconductasadirectormakesthemunfittobeconcernedinthemanagementofa
company(S9).ThedetailedlistofmatterstobeconsideredissetoutinSchedule1totheAct.

Inaddition,thecourtshavegivenindicationsastowhatsortofbehaviourwillrenderapersonliabletobe
consideredunfittoactasacompanydirector.Thus,inReLoLineElectricMotorsLtd(1988),itwas
statedthat:'Ordinarycommercialmisjudgementisinitselfnotsufficienttojustifydisqualification.Inthe
normalcase,theconductcomplainedofmustdisplayalackofcommercialprobity,although...inan
extremecaseofgrossnegligenceortotalincompetence,disqualificationcouldbeappropriate.'

A'lackofcommercialprobity',therefore,willcertainlyrenderadirectorunfit,but,asVinelottJstatedinRe
StanfordServicesLtd(1987):'...thepublicisentitledtobeprotected,notonlyagainsttheactivitiesof
thoseguiltyofthemoreobviousbreachesofcommercialmorality,butalsoagainstsomeonewhohas
showninhisconductofacompanyafailuretoappreciateorobservethedutiesattendantontheprivilege
ofconductingbusinesswiththeprotectionoflimitedliability.'

Consequently,evenwherethereisnodishonesty,incompetencemayrenderadirectorunfit.Thus,inRe
SevenoaksStationersLtd(1990),theCourtofAppealheldthatthedirectorwasunfittobeconcernedin
themanagementofacompanyonthebasisthat:'Histroubleisnotdishonesty,butincompetenceor
negligenceinaverymarkeddegree,andthatisenoughtorenderhimunfitIdonotthinkitisnecessary
forincompetencetobe"total"torenderadirectorunfittotakepartinthemanagementofacompany.'

c.Othercasesfordisqualification
Thisrelatesto:

participationinfraudulentorwrongfultradingunderS213oftheInsolvencyAct1986(S10ofthe
CDDA1986)
undischargedbankruptsactingasdirectors(S11oftheCDDA1986)
failuretopayunderacountycourtadministrationorder(S12oftheCDDA1986).

Disqualificationorders
ForthepurposesofmostoftheCDDA1986,thecourthasadiscretiontomakeadisqualificationorder.
Where,however,apersonhasbeenfoundtobeanunfitdirectorofaninsolventcompany,thecourthas
adutytomakeadisqualificationorder(S6oftheCDDA1986).

TheprecisenatureofanysuchorderissetoutinS1,underwhichthecourtmaymakeanorder
preventinganyperson(withoutleaveofthecourt)frombeing:
adirectorofacompany
aliquidatororadministratorofacompany
areceiverormanagerofacompany'sproperty
inanyway,whetherdirectlyorindirectly,concernedwithor
takingpartinthepromotion,formationormanagementofacompany.

However,adisqualificationordermaybemade:

i.withleavetocontinuetoactasadirectorforashortperiodoftime,inordertoenablethedisqualified
directortoarrangehisbusinessaffairs(ReIpconFashionsLtd(1989))
ii.withleavetocontinueasadirectorofanamedcompany,subjecttoconditions(ReLoLineElectric
MotorsLtd(1988))
iii.withleavetoactinsomeothermanagerialcapacitybutnotasdirector(ReCargoAgencyLtd(1992)).

Periodofdisqualification

Withregardtotheperiodofdisqualification,inReSevenoaksStationers(Retail)Ltd(1990),DillonLJin

http://www.accaglobal.com/gb/en/student/examsupportresources/fundamentalsexamsstudyresources/f4/technicalarticles/Companydirectors.html 2/3
4/19/2017 Companydirectorsdisqualificationact1986|ACCAQualification|Students|ACCAGlobal
theCourtofAppealdividedthepotentialmaximum15yearperiodofdisqualificationintothreedistinct
brackets:

i.over10yearsforparticularlyseriouscases(forexample,whereadirectorhasbeendisqualified
previously)
ii.twotofiveyearsfor'relativelynotveryserious'cases
iii.amiddlebracketofbetweensixand10yearsforseriouscasesnotmeritingthetopbracket.

Penaltyforbreachofadisqualificationorder
Anyonewhoactsincontraventionofadisqualificationorderisliableforeither:

i.imprisonmentforuptotwoyearsand/orafine,onconvictiononindictment
ii.imprisonmentforuptosixmonthsand/orafinenotexceedingthestatutorymaximum,onconviction
summarily(S13oftheCDDA1986).

UnderS14whereacompanyisguiltyofanoffenceunderS13,thenanypersonwhoconsentedor
contributedtoitssodoingwillalsobeguiltyofanoffence.InadditionS15imposespersonalliabilityfor
companydebtsarisingduringaperiodwhenapersonactsasadirectorwhiledisqualified,eitherunderan
orderorwhilepersonallybankrupt.TheSecretaryofStateisrequiredtomaintainaregisterof
disqualificationorderswhichisopentopublicinspection(S18).

ReUno,SecretaryofStateforTradeandIndustryVGill
TheoperationoftheCDDA1986wasconsideredextensivelyinReUno,SecretaryofStateforTradeand
IndustryvGill(2004).Thiscaserelatedtoagroupoftwofurniturecompanieswhich,althoughinsevere
financialdifficulties,continuedtotradewhilethedirectorsinvestigatedpossiblewaysofsavingthe
businesses.Duringthisperiodoneofthecompanies,Uno,continuedtoraiseitsworkingcapitalfrom
depositstakenfromcustomerstosecureordersthatwerenevertobemet,asthecompanyeventually
wentintoliquidation.

Althoughthedirectorswereadvisedthattheycouldhavesafeguardedthedepositsbyplacingthemoney
inatrustaccountforthecustomers,theydecidednottodoso,astheyneededthemoneytokeepthe
businessgoingintheshortterm.AnapplicationfromtheDepartmentofTradeandIndustryforthe
disqualificationofthedirectorsonthebasisofthisbehaviourwasunsuccessful.Inrefusingthe
application,thecourtemphasisedthefactthatinordertojustifydisqualificationtherehadtobebehaviour
thatwaseitherdishonest,orlackingincommercialprobity.Moreover,thatbehaviourhadtobesuchasto
makethepersonconcernedunfittobeinvolvedinthemanagementofacompany.Underthe
circumstancesofthecasethecourtfoundthatthedirectorshadpursuedrealisticopportunitiestosave
thebusinessesandconsequentlywereblamelessfortheeventualfailureofthebusinessesandtheloss
tothecustomers.

Backtotop

Lastupdated:17Feb2016

http://www.accaglobal.com/gb/en/student/examsupportresources/fundamentalsexamsstudyresources/f4/technicalarticles/Companydirectors.html 3/3