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Application of the company directors disqualification act 1986

Document Cited authorities 62 Cited in Related
Vincent
AuthorElspeth Berry/Rebecca Parry
Pages563-586

Chapter 10


Application of the Company Directors Disqualification Act 1986

The system of company director disqualification under the CDDA has, as its primary aim, the protection of the public and, in particular, potential creditors.1

It has generally been regarded as being aimed at those who abuse the privilege of trading with limited liability.2In the light of this aim it might be thought that such a system should not apply to officers of partnerships, in view of the unlimited liability of partnerships.3This impression would be reinforced by the use of the term ‘Company Directors’ in the name of the Act. However, although partners do not enjoy limited liability in cases where a general partnership becomes insolvent, and therefore dealing with a partnership presents less risk for creditors and greater personal risk for partners, the conduct of officers of partnerships in some instances may present some cause for concern, indicating that these officers are not appropriate persons to be directors, receivers or managers of companies or LLPs and that they present a risk to potential creditors of companies/LLPs. This conduct might, for example, be the misappropriation

1Secretary of State for Trade and Industry v Bannister [1996] 1 All ER 993 at 998G per Morritt

LJ: ‘The whole purpose of the 1986 Act is to protect the public from the future activities of those who for the prescribed reasons have shown themselves unfit to act as directors of a company’. See also Re Blackspur Group plc [1998] 1 BCLC 677 at 681, [1998] 1 WLR 422 at 426F per Lord Woolf MR; and R v Seager (Mornington Stafford) [2009] EWCA Crim 1303. A further aim is the encouragement of higher standards among directors: Re Grayan Building Services Ltd [1995] Ch 241 at 253G and 257–8. For a detailed discussion of the director disqualification regime, see A Mithani (ed), Mithani: Directors’ Disqualification (LexisNexis, looseleaf).

2See e.g. Re Bath Glass Ltd (1988) 4 BCC 130 at 133; Re Swift 736 Ltd [1993] BCLC 896 at

899; Re Grayan Building Services Ltd [1995] Ch 241 at 257; Secretary of State for Trade and Industry v Walker [2003] EWHC 175 (Ch), [2003] 1 BCLC 363.

3Although in Re Polly Peck International plc [1993] BCC 890 at 895, Lindsay J noted that the disqualification regime was not confined to those who breached duties attendant upon the privilege of trading with limited liability.

564 Law of Insolvent Partnerships and Limited Liability Partnerships

of assets, the misuse of customer deposits, or taking deposits at a time when there was no reasonable prospect of supplying the goods or services requested. Accordingly, in cases where an insolvent partnership is wound up as an unregistered company under Part V of the IA 1986 (see 6.4), proceedings may be brought against a person who is, or who has been, an officer of the partnership and whose conduct as an officer of the partnership, makes him unfit to be concerned in the management of a company. The proceedings may be based on the officer’s conduct in relationship to that partnership alone4or alongside his conduct as an officer of any other partnership(s) or as a director of any company or companies. Proceedings may be brought regardless of whether the person was an officer of the partnership at the time when it became insolvent, reflecting the fact that unfit conduct may have damaged the interests of the company or its creditors prior to the onset of insolvency. In cases where an officer of a partnership is disqualified, he will be subject to restrictions on a range of activities in relation to limited companies and LLPs, notably company/LLP direction/management, but arguably this disqualification will not restrict further involvement in general partnerships or limited partnerships. See further 10.8.1.

A disqualification regime also applies to LLPs (see 10.3), and there are strong parallels between this regime and that which applies to companies.

10.1 GENERAL PARTNERSHIPS

Provisions of the CDDA are applied with appropriate modification to general partnerships by article 16 of the IPO. Limited partnerships are discussed separately at 10.2. Unfortunately, the legislation that deals with the disqualification of partners suffers from the complexity that is typical of legislation in the area of insolvent partnerships and it is occasionally

4This is not the only example under the CDDA of a disqualification from a particular activity applying to a person who has never carried out the activity which is prohibited. Other examples are the disqualifications of undischarged bankrupts from company directorship, regardless of whether they have acted as a company director in the past, and the inclusion, among the activities in respect of which a disqualified person is disqualified, of a prohibition against acting as an insolvency practitioner: CDDA, s 1. This disqualification applies regardless of whether a person has acted as an insolvency practitioner or is qualified to do so and, indeed, most disqualified persons will already be a long way from meeting the conditions of eligibility that must be met if a person is to act as an insolvency practitioner: see IA 1986, s 390, and the Insolvency Practitioners Regulations 2005 (SI 2005/524).

ambiguous or anomalous,5and there have been few instances of disqualification proceedings being brought against partners, resulting in a lack of case law.

10.1.1 Application of the Company Directors Disqualification Act 1986 by the Insolvent Partnerships Order 1994

It is necessary, when considering the potential disqualification of partners, to read the IPO alongside the CDDA, since the IPO applies a modified version of the CDDA.6The power to enact secondary legislation dealing with the disqualification of partners is section 420 of the IA 1986. Such provisions were included in the Insolvent Partnerships Order 1986, which has now been superseded by the IPO. A modified version of the CDDA is applied to partnerships by this Order. In fact the disqualification regime in relation to partners in general partnerships is not extensively dealt with in the original text of the CDDA itself – partnerships are referred to in section 21 of that Act, which deems various sections of the Act to be included in the IA 1986 for the purposes of section 420 of the IA 1986. In respect of procedural aspects of the disqualification proceedings, reference should be made to the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987,7

which are applied by article 18 of, and Schedule 10 to, the IPO.

The relevant provisions of the CDDA apply where a partnership is ‘wound up as an unregistered company under Part V’ of the IA 1986,8wording that gives rise to some exceptions and some ambiguities, not least in relation to partnerships which are in administration. See further 6.4 regarding the winding up of partnerships as unregistered companies under Part V of the IA 1986 and Chapter 4 regarding partnerships in administration.

It appears relatively clear that the CDDA provisions do not apply to solvent partnerships, nor to partnerships which are being informally wound up, outside the framework of Part V of the IA 1986. The regime does not appear to apply where the individual partners jointly present a petition under article 11 of the

5For example, the regime does not apply to all insolvent partnerships, only those which are wound up under Pt V of the IA 1986. See 6.4. It is also notable that the disqualification regime does not contain provisions enabling the disqualification of a sole trader whose conduct indicates that he is unfit to be involved in the management of a limited liability company. Such a person will only be disqualified if he becomes bankrupt or the subject of a BRO or BRU or one of the other personal insolvency disqualification provisions (see 10.10).

6IPO, art 16 and Sch 8.

7SI 1987/2023.

8IPO, art 16. See 6.4 as to the circumstances when a partnership may be wound up as an unregistered company.

566 Law of Insolvent Partnerships and Limited Liability Partnerships

IPO in their capacities as members of the partnership for their own bankruptcies and the winding up of the partnership.9This will not, without more, result in the partnership being wound up under Part V as an unregistered company, which presents a possible loophole to evade the disqualification regime. The partners will be disqualified during the periods of their undischarged bankruptcies (see
10.10). However, this is likely to result in a disqualification of a relatively short duration compared with the 2–15-year period of a disqualification on grounds of unfitness (see 10.4).

The IPO applies several provisions of the CDDA to insolvent partnerships, with appropriate modification: sections 1 (disqualification orders, general), 1A (disqualification undertakings, general), 6–10 (unfitness, disqualification for competition infringements, disqualification for fraudulent or wrongful trading), 13–15 (consequences of contravention), 17 (application for permission to act in spite of the disqualification), 19(c) (exclusion of liquidations prior to 28 April 1986) and 20 (admissibility in evidence of statements), and Schedule 1 (matters for determining unfitness). The IPO includes, in Schedule 8, a revised text of some of these provisions (sections 6, 7, 8, 9, 13, 14, 15, 17 of, and Schedule 1 to, the CDDA), whereas in other instances (sections 1, 1A, 10, 19(c) and 20) the sections must be read with appropriate revisions, as discussed in the next paragraph.

10.1.2 Interpretation

When reading the CDDA and the IA 1986 provisions which are applied to...

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