New legislation on company directors
May 15, 2015
By Chris Jones
One of the last Acts that Parliament passed before it was dissolved was the Small Business, Enterprise and Employment Act 2015 (‘SBE’ for short). This brings in various measures with regard to employment, company transparency and insolvency, in particular Directors’ Disqualification – which is what I want to cover. Anyone with any interest in corporate governance (so that should mean anyone who is a director of a limited company or pursuing a limited company and hence its directors) should take note.
The main piece of legislation dealing with disqualification from being a director of a company is the Company Directors Disqualification Act 1986 (‘CDDA’). That enables the Courts, on the application of the Secretary of State, to disqualify errant directors for anything between 2 and 15 years. The test is that the director in question is unfit to be a director and the grounds mostly centre around his/her role in the downfall of a particular company or companies, e.g. misapplying company money, taking deposits when they knew they wouldn’t be able to fulfil orders, through to outright fraud.
The SBE now extends the reach of the CDDA in several ways:
- The Court can now make a Disqualification Order against someone if that person wasn’t a director but “exercised the requisite amount of influence” over an unfit director so that the conduct of the unfit director was a result of the person’s instructions. In effect this is aimed at someone pulling the unfit director’s strings or more technically, a shadow director. This excludes someone giving professional advice to the unfit director.
- The Court can now order a person who is subject to a Disqualification Order or disqualification undertaking to compensate creditors if their conduct has caused loss to one of more creditors of an insolvent company. The Application can only be made by the Secretary of State. The SoS can apply for a Compensation Order within two years of a Disqualification Order. This is fairly radical as until now, the compensation element has had to be pursued by the Liquidator of the company in separate and specific proceedings. Those aren’t always possible if there are insufficient funds to take them forward, so hopefully this should be advantageous to creditors who would otherwise miss out.
Of course, most directors I know are happy that they won’t fall foul of these provisions but even so, even transactions which seem innocuous at the time have attracted the ire of the Disqualification Unit later on (not that they’re always successful). Similarly, creditors have often felt disenfranchised in those cases where directors and their associates have clearly caused loss and seemingly got away with it, so this new Act should hopefully address that.