What Makes a Director Fit? An Analysis of the Workings of Section 17 of the Company Directors Disqualification Act 1986

Published date01 September 2012
Date01 September 2012

Corporate collapses have long provoked questions about the behaviour that can be expected of directors, both executive and non-executive. The most obvious questions concern how people who have been presented as trustworthy have proved lacking, and how people who have been given power have come to abuse that power, either through action or inaction, including failures to keep themselves informed. The issues of “where were the directors?” and “what were they doing?” have become increasingly important in the context of a corporate governance climate where both systems and behaviours are scrutinised with the aim of avoiding past mistakes and closing obvious loopholes.

Measures designed to improve the quality of directors include recent changes to the UK Corporate Governance Code. Measures to protect the public from harmful directors include the possibility of disqualification under the Company Directors Disqualification Act 1986 (the CDDA). There are no positive attributes or qualifications required of company directors as a matter of law, but disqualification appears to be unequivocally negative. The CDDA, however, contains provisions that allow a disqualified director to apply to the court for leave to act in relation to a specific company, or companies, whilst disqualified. This article presents the results of the first detailed study of disqualified directors given leave to act.

A disqualification order is defined as:1

Company Directors Disqualification Act 1986 s 1(1), emphasis added.

…an order that for a period specified in the order –

(a) he shall not be a director of a company, act as receiver of a company's property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court, and

(b) he shall not act as an insolvency practitioner

Applications for leave to act as a director are made under section 17 of the CDDA, which specifies procedural matters. The phrase “unless (in each case) he has the leave of the court” and the section 17 procedural provision are the only references in the CDDA to “leave to act”. No further definitions or guidance on interpretation were provided by Parliament. This means that the courts have had to develop criteria and methods for approaching the issue of whether to grant leave

The main research questions addressed are: how often and in what circumstances do courts grant such leave and, if directors are granted such leave, what is the result? The first question is answered in an analysis of the reported section 17 cases. The analysis covers reported cases where leave is granted and, occasionally, cases where leave was requested but not granted. The second question is answered by an empirical analysis based on data held by Companies House.2

When a court grants leave a DO3 form is filed with Companies House. The study was funded by a small grant from the Institute of Chartered Accountants of Scotland that allowed form DO3 data to be purchased from Companies House.

This analysis covers only instances where leave has been granted by a court but does, however, cover cases from Scotland, England and Wales and Northern Ireland.3

In Northern Ireland directors are disqualified under the Company Directors Disqualification (Northern Ireland) Order 2002 (hereafter referred to as the “CDDO”).

The CDDA and its Northern Ireland equivalent contain a number of grounds for disqualification. A ground that is frequently used is provided in section 6 of the Act:4

Emphasis added.

(1) The court shall make a disqualification order against a person in any case where, on application under this section, it is satisfied –  (a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and (b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company…

It will be shown later that the vast majority of directors granted leave to act are subject to a disqualification arising out of “unfit” conduct

There has been growing public and media concern about directors’ remuneration, directors’ performance and the failure of systems of governance that rely on directors monitoring each other. The idea that a director formally pronounced “unfit” could also be officially given leave to continue directing is one that sits badly against this background. There is likely to be an expectation gap between the public perception of what it means to be legally “unfit” to act as a director and what it currently means in practice. It is therefore important to establish at least basic information about the workings of sections 1 and 17 of the CDDA, about the directors operating under the inconsistent categories of court approval in the form of “leave to act” and court disapproval in the form of disqualification.

A major motivation for this research was that virtually nothing was known about either the legal provision that permits leave to be granted to disqualified directors or the individual directors granted leave by the courts and their companies. Section 17 is a provision that has rarely been examined in the academic literature.5

See D Milman, “Partial disqualification orders” (1991) 12 Company Lawyer 224; A Hicks, Disqualification of Directors: No Hiding Place for the Unfit? (ACCA Research Report No 59, 1998); S Griffin, Personal Liability and Disqualification of Company Directors (1999); L Wise, “To be concerned in the management of a company: a review of the state of play re s.17 applications following disqualification from acting as a director” 2003 16 Insolvency Intelligence 17; D McKenzie Skene, “Insolvency” (2004) 68 Bus LB 6; A Dignam and J Lowry, Company Law, 6th edn (2010) 304–305; A Walters and M Davis-White, Directors Disqualification Undertakings and Insolvency Restrictions, 3rd edn (2010) ch 15.

A very recent exception to this is chapter 7 of Williams’ book, Disqualification Undertakings.6

R Williams, Disqualification Undertakings: Law Policy and Practice (2011).

Williams provides statistics that reveal just how rarely courts grant leave, based on a 2005 survey. The study reported in this article is more comprehensive, being based on Companies House records up to March 2010. Williams’ work has disqualification undertaking as its main focus. He argues that leave may be granted in too few cases because a director who is disqualified without court proceedings by undertakings, and therefore without incurring court costs, still has to go to court and incur costs if they want to ask for leave to act while disqualified. In contrast, the argument made in this article is that there is evidence of leniency in the granting of leave that suggests it may be granted too often. Also, this article argues that the regime needs attention as it is illogical to have directors labelled as “unfit” who at the same time are officially permitted to act

Possible rationales for the statutory provision that bans involvement in the management of a company “unless (in each case) [the director] has the leave of the court” can be seen in brief discussions in the earlier literature on directors’ disqualification. In his study of personal liability and disqualification of directors Griffin states that:7

Griffin, Personal Liability and Disqualification (n 5) 189.

…where the director is successfully involved in the management of another company… the imposition of a disqualification order may adversely affect the interests of the successful company, causing prejudice to the company's employees and creditors.


Ibid 191.

The director is, in effect, given a “second chance” in respect of the specified company on the premise that his involvement in the management of that company is considered to be in the “public interest”.

In the earliest coverage of section 17, Milman called disqualification coupled with leave a “partial disqualification order”; a phrase that has not been taken into general usage. He concluded that:9

Milman (n 5) at 224.

The balance between encouraging enterprise and consumer protection is a fine one and the judges have displayed caution in developing the context of a partial disqualification order. …in appropriate cases it may be a more promising strategy [for directors] to accept a disqualification and to seek leave to remain as a director of a particular company… rather than to try to bluff things out.

It is perhaps a shame that the “partial disqualification” terminology was not taken up. It does at least provide a shorthand way of expressing the fact of disqualification coupled with leave nevertheless to act

One of the arguments made in this article is that the media and the general public would not expect a disqualified director to be given official permission, by a court, to continue to act in that capacity. The article contrasts recent measures that may ensure or improve the quality of directors (positive aspirational standards) with the legal standards applied when disqualifying a director (negative standards by which a director is judged unfit). For this to be a valid exercise it would be useful to be able to view the granting of “leave to act” as a corporate governance issue.

The context for any application for leave to act is the disqualification order already imposed. The possible purposes of a disqualification order are therefore relevant. Hicks stated as long ago as 1987 that “English Parliamentary papers, including the Cork Report, are of course valuable sources confirming that protection of the public interest from the dishonest, incompetent or dilatory company manager is the primary purpose [of disqualification]…”10

A Hicks, “Making and resisting disqualification order” (1987) 8 Company Lawyer 243 at 246.

Also, in 2002 Griffin believed that “[t]he

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