The Number of directors disqualified in 1994/95 showed an 80% increase over the previous year (annual report of the Insolvency Service 1994/95) and with the DTI promising that 1995/96 will see even more directors facing disqualification it is high time for solicitors to consider the sort of safeguards the courts are looking for before they will exercise their discretion to allow a director to continue in post.

Accordingly Re Gibson Davies Ltd [1995] BCC 11, with its selection of the terms and conditions that a court might think appropriate, is most timeous.Practitioners know that upon an application by the secretary of state for trade and industry under s.7 of the Company Directors Disqualification Act 1986 the court has the power (s.6) to make a disqualification order against a person if satisfied (a) that he is or has been a director of a company which has at any time become insolvent; and (b) that his conduct as a director...makes him unfit to be concerned in the management of a company.In addition to the more regular complaints such as deliberately deferring the payment of Crown debts; failing to file annual accounts and returns; overpaying themselves at the expense of their creditors; failing to keep proper records etc, directors ha ve increasingly found themselves stigmatised for abusing their bank facility.

Several recent cases refer to 'bouncing' cheques as unfitting conduct.

It extends the period of credit and delays creditors even when the cheques have eventually been met.Akin to that, several recent cases have dubbed it unfit conduct to prejudice creditors by continuing to trade after the Inland Revenue has distrained and taken walking possession of company assets.

At that stage many clients have turned to their solicitors for advice.

Some have not taken that important opportunity to warn the client of the risks.Similarly, surely it is culpable to watch the client salvage what he or she can from the liquidator and continue trading using the same name.Solicitors know that the IA 1986 dealt with the 'phoenix' syndrome.

Some do not realise that it refers to any name, including a trading name, which is similar enough to suggest an association with the company in liquidation.

Unless the client has leave of the court or has actively been trading with the similar name for more than a year it is an offence.

The difference is that the client faces not only a fine but imprisonment (up to two years on indictment (s.216(4) and sched 10 to the IA 1986).

If practitioners stand by unquestioningly as clients start up again using the old failed financial formulae at least stop them trading on the old goodwill.The resulting ban can be for between two and 15 years, although the maximum is applied rarely and then only in the most serious of cases.

According to statistics just published, five years seems to be the sort of figure most awarded.

It represents the top of the lowest range of three brackets laid down by Dillon LJ (mostly for the guidance of the county courts) in Re Sevenoaks Printers Ltd [1991] Ch 164, viz: (i) two to five years -- relatively not serious; (ii) six to ten years -- serious, but not deserving of the maximum disqualification and (iii) ten to 15 years most serious.Although the exact extent of the ban is still open to some doubt it is clear that the disqualification is far more extensive and all-embracing than is generally realised.

It starts 21 days after imposition (Company Directors Disqualification Procedures 1987) and it is not easy to see how it is in any way to be circumvented.The order is that the person disqualified shall not without leave of the court be(a) a director; or(d) in any way, whether directly or indirectly, be concerned or take part in the...management of a company (CDDA 1987 SI).

Few, I believe, realise just how wide the prohibition actually is.

The ban relates to 'a company' and 'company' is defined as 'any company which may be wound up under pt V of the Insolvency Act' (idem s.22(2)).

Pt V deals with the winding up of 'unregistered companies' and the latter are defined in wide and rather unhelpful terms as including 'any trustee savings bank, any association and any company' (s.220 of the Companies Act 1986).The section (which still owes something to the Partnership Act 1890) derives from s.665 of the Companies Act 1985.

That section specifically defined an unregistered company as including 'any partnership (whether limited or not)' and then continued by way of exception to exclude a partnership of fewer than eight people.By contrast, in the definition in the Insolvency Act which replaced that in the Companies Act there is no including or excluding of partnerships.

A partnership surely is an association.

It may be fanciful or extending matters too far to consider whether a disqualified director can be a partn er with his wife (such a result would seem to be contrary to public policy and I doubt it could have been intended), but the position is far from clear where the banned director becomes one of several partners, since it is surely arguable that such a relationship would well come within, rather than without, the prohibition of 'any association and any company'.Where the client faces a ban there is scope for possibly protecting him or her from its full rigours.

First, there is a form of plea-bargaining finally approved in Carecraft (Re Carecraft Ltd, Construction Co Ltd [1995] BCLC 1259), when the parties can agree the range and possibly the period.Secondly, s.1(1) provides that the delinquent may yet seek the leave of the court to act as director.

It is common for a director, the respondent in the application, to have been a director of companies other than the insolvent one, since proceedings can be brought for within anything up to two years from the date his or her company went into liquidation, or to have taken up fresh directorships since the event which triggered the SSTI's application.

What is he or she to do?Those who argued that the section is not penal and that if there was no risk of the delinquent being a director (eg because aged or infirm) then there was no need to disqualify him or her, have been confounded.

The recent appeal by the SSTI (SSTI v Gray [1995] 1BCLC 276) has confirmed that where a court is satisfied that a person's conduct makes him unfit it shall disqualify him.

S.300 of the Companies Act 1985 only provided that it 'may' disqualify him.The course remaining is for the client to throw him or herself on the mercy of the court.

Harman J has ruled that it is not appropriate to grant leave in general or on a hypothetical case.

He said that for himself he would prefer to consider the question in relation to specific circumstances (Re Cargo Agency [1992] BCLC 686).The object of disqualification is twofold -- to mark the court's disapproval and to protect the public.

It may be that in the interim the director has made good.

He or she may at last be running a profitable show.

If the client contributes irreplaceably to a company affording employment to significant numbers he or she is in an even better position.

The court seems more concerned with protection than punishment.Accordingly if the respondent can show that, although he or she remains a director there is no risk to the public (and that latter term curiously must in this case include the Crown, generally the first casualty in an insolvency) the court is not unmindful of the needs of the individual (Re Cargo Agency [1992] BCLC 686 and Re Lo-Line Electric Motors Ltd [1988] 4 BCC 415) nor is it astute to remove his livelihood.The recently reported appeal Re Gibson Davies Ltd [1995] BCC 11 sets out some of the safeguards found acceptable by the court.

The appellant's case was supported by no fewer than seven affidavits and there were ten stringent conditions volunteered.They included an undertaking by the director that:-- no cheque or financial agreement on behalf of the company be signed or executed by the appellant alone;-- any director's loan owed by the company to the appellant shall not be repaid unless all creditors of the company are paid first;-- the appellant shall not be granted or accept any security over the company assets;-- the appellant's total emoluments from the company shall not exceed £380 pw or such greater sum as shall hereafter be agreed in writing by the SSTI, such consent not to be unreasonably withhel d;-- the appellant shall procure the company to file annual returns and accounts within the time limits set out in the Companies Act 1985;-- the appellant will procure the implementation of the accounting controls recommended by its auditors (these referred to cheque signatories, internal controls and such matters);-- the appellant will procure the preparation of monthly management accounts and their submission to the company's auditors for the time being;-- the company's auditors for the time being shall be instructed to report to the board of directors in writing any matters of concern relating to the management or financial control of the company and in default of prompt and appropriate action by the directors of the company will bring these matters to the attention of the SSTI;-- in the event that the company seeks to change the identity of its auditors (sic) the appellant will procure the company only to instruct auditors who are willing to accept and act upon the obligations set out above; and-- the appellant will take no step as a shareholder or director of the Irish company which would in any way impede, direct or control the activities of the company.

(The Irish company was 50% owner of the UK company.)In Gibson Davies the court accepted that the appellant was essential to the profits of his new company (operating in Ireland, a mail-order franchise) and had considered as an alternative that the appellant might have been appointed its chief salesman.

However, the court came to the pragmatic conclusion that such an appointment was too colourful a device.

This appellant acting as a chief salesman would inevitably have been acting as a shadow director, ie taking part in the management etc -- the very activity enjoined.Sir Mervyn Davies held that disqualification was appropriate and so too was leave to be and to remain a director of the company for the duration of the operation of the disqualification order upon condition the appellant do abide by the conditions set out above.Mr Gibson Davies paid the costs of the SSTI (on a standard basis pace Harman J) and walked away successful, albeit with his authority much circumscribed.

There appears to be no other case yet reported with such detailed restrictions.

Leave is not easy to obtain, but lesser safeguards, eg appointing the firm's accountant or solicitor to the board, have been seen as acceptable guarantees.As disqualifications increase (the reported cases are legion) such applications will become more frequent.

It is as well to be prepared.