Regulations have now been published which bring into effect, from October 1, 2015, a number of amendments to the Company Directors Disqualification Act 1986 (CDDA 1986)2. These include the following:
Matters to be taken into account in determining unfitness
The CDDA 1986 provides for the disqualification of directors, either by court order following the application of the Secretary of State, or a director offering, and the Insolvency Service (on behalf of the Secretary of State) accepting, an undertaking not to act in the management of a company for a period. Currently the court must take account of the matters in Schedule 1 to the CDDA 1986 when determining whether a director is unfit under the grounds for disqualification in sections 6 and 8 of that Act.
With effect from October 1, 2015, Schedule 1 is being replaced with a new, broader and more generic, provision extending the factors which will be considered when assessing conduct to include matters such as breach of any applicable legislation (including legislation applying outside the UK) or other requirement (previously the Schedule referred only to breaches of particular Companies Act provisions); responsibility for a company's, or an overseas company's, insolvency; the materiality and frequency of a director’s conduct, and the loss or potential harm to the company caused by that conduct. A key change is the addition of references to conduct in relation to other companies, including those overseas. The court or the Insolvency Service will have to take these into account in determining whether an individual should be disqualified and, if so, for how long. Generally, as a result of transitional provisions, these new factors will need to be considered in relation to a person’s conduct as a director where that conduct occurs on or after October 1, 2015.
Directors’ accountability for misconduct overseas
Currently a person who has been disqualified as a director overseas or has been convicted of a criminal offence in connection with the promotion, formation, management, liquidation or striking off of a company overseas is not prevented in law from acting as a director of a UK company.
As a result of changes to the CDDA 1986 from October 1, 2015, the courts will be required to take any overseas misconduct of this nature into account when deciding whether or not to disqualify a director in the UK.
In addition, the Secretary of State will now have the power to disqualify an individual from acting as a director in the UK if that person has been convicted of a criminal offence in connection with the promotion, formation or management of an company overseas.
Extension of disqualification regime to person instructing an unfit director
Where a director has been disqualified or has provided a disqualification undertaking to the Secretary of State, the court will also be able to disqualify anybody who the court determines has exercised “the requisite amount of influence” over that director. This will be the case where the court is satisfied that the conduct for which the director was disqualified or in relation to which the disqualification undertaking was accepted, resulted from that director acting in accordance with the person’s directions or instructions (other than in relation to advice given in a professional capacity). The maximum period for disqualification for such a person will be 15 years.
Again, as a result of transitional provisions, this new provision will only apply where the director’s conduct and the exercise by the third party of the requisite amount of influence occur on or after October 1, 2015.
Compensation awards against disqualified directors
The Secretary of State will now have the power to apply to court for a compensatory order to be made against a director who has been disqualified, where that director’s actions have caused identifiable loss either to specific creditors or to creditors generally. Compensation can be sought for conduct that occurs on or after October 1, 2015.
The Secretary of State will also be able to accept a compensation undertaking from a director against whom disqualification proceedings have been brought, or are proposed to be brought, where the director opts to offer an acceptable compensation settlement as an alternative to going to court.
The Secretary of State will be able to apply for a compensation order at any time before the end of the period of two years beginning with the date on which the disqualification order was made or the disqualification undertaking was accepted and the court and the Insolvency Service (acting on behalf of the Secretary of State) will have discretion to make any compensation award to a particular creditor, or group or class of creditors or the creditors as a whole.
The amount of compensation will be determined in accordance with guidelines having regard to the loss caused and any other contribution in redress.
Compensation awards will serve as a deterrent to directors and, at the same time, improve the position of creditors.
Increased time period for disqualification proceedings
Currently, proceedings to disqualify a director under the CDDA 1986 must be commenced within two years of the date of the first insolvency event, unless the court orders otherwise. With effect from October 1, 2015 that period is being increased to three years.
Reports on directors' conduct
Currently, liquidators and administrators of insolvent companies only submit a report on the conduct of a director to the Secretary of State if they consider a director has acted in a way which makes them unfit to be concerned in the management of a company. Under the new section 7A of the CDDA 1986, it will become obligatory to report on all directors in relation to matters which may assist the Secretary of State in deciding whether it is in the public interest to apply for the making of a disqualification order, within three months of the insolvency date together with further updates if new information comes to their attention.
Assignment of actions
As well as introducing compensation orders, further measures aimed at promoting accountability and improving returns to creditors in corporate insolvencies will come into effect from October 1, 2015. For example, the existing power for a liquidator to bring fraudulent or wrongful trading actions is being extended to administrators, to dispense with the need to place a company into liquidation for the purpose of pursuing such actions. Office-holders will also be able to assign rights to bring such actions, as well as clawback rights of action, including transactions made at an under value or preferring a particular creditor. It can often be the case that the time and costs involved in a liquidator or administrator litigating such a claim, which may or may not be successful, would not be in the interests of all the creditors, but where a particular creditor, or third party, is interested in taking that claim on, the office-holder will be able to assign the right to do so for a fee which the general creditor group can receive the immediate benefit of.