Safeguards leave door open for directors

Director disqualifications may be rising rapidly, but there are ways to help directors remain on the boards of companies, writes Leslie Wise

In Sevenoaks Stationers (Retail) Ltd [1991] BCLC 325 at 329/Ch 164 at 176, Lord Justice Dillon said: 'It is beyond dispute that the purpose of section 6 [of the Company Directors Disqualification Act 1986] is to protect the public and, in particular, potential creditors of companies, from losing monies through companies becoming insolvent when the directors of those companies are people unfit to be concerned in the management of a company.'

He continued: 'The test laid down in section 6...

is whether the person's conduct as a director of the company...

in question makes him unfit to be concerned in the management of a company.

These are ordinary words of the English language and they should be simple to apply in most cases.'

The Department of Trade and Industry (DTI), with more funds at its disposal, is now increasing the number of actions for disqualification.

From an initial hesitant start - there were only 3,150 disqualifications between 1986 and 1994 - the DTI reports that there were 3,000 disqualified last year and the number is increasing.

The rate is still, some may think, unsatisfactory.

Only one in four directors reported is targeted.

However, once selected, more than 82% find themselves disqualified.

Getting back on board

To save duplication and expense, the application to remain a director of a company or to be concerned in its management (under section 17 of the Act) should normally follow immediately on the disqualification proceedings (Re TLL Realisations Ltd [2000] BCC 998).

Rough guidelines on this subject were provided by Mrs Justice Arden in 1998 (Tech Textiles Ltd Re SSTI v Vane [1998] 1 BCLC 259).

The case is authority for the following:

- The purpose of disqualification is protective rather than penal;

- Whether the public was adequately protected involved consideration of many factors (and here it may be noted that in SSTI v Griffiths [1998] BCC 836 it was held that those factors need not be restricted to the reason for disqualification);

- 'Need' in 'need to be a director' had to be interpreted as a practical need (in a recent case tax advantages provided the motivation);

- The court can grant permission to act as director limited to so long as and while certain conditions obtain;

- The court can grant permission for a limited period, extendable after review;

- And as a reminder that the court can grant permission to be involved in management while denying the applicant a directorship (quoting from Re Cargo Agencies).

There was a time when courts giving leave for directors to continue in post were willing to accept a string of conditions and safeguards.

Thus, in 1995, in Re Gibson Davies Ltd [1995] BCC 11 the court was prepared to allow Mr Davies to continue under no fewer than ten stringent conditions.

These included the usual limitation on cheque signing and an undertaking that the auditors would report any disquiet first to the board and, if not promptly remedied, then directly to the Secretary of State for Trade and Industry.

However, thinking has altered radically since then.

Nowadays courts are considerably less willing to give leave.

Mr Justice Ferris referred to their being unpoliceable and it was recently suggested by Mrs Justice Arden that if a director cannot be granted leave without its being festooned with conditions, perhaps he ought not to be granted it at all.

What are the courts now looking for?

Nevertheless, the door is not closed.

Courts are still prepared to find that leave to remain a director may be appropriate.

The approach to be adopted is a practical one (SSTI v Rosenfeld 1999 BCC 65 per Judge Roger Cooke).

Curiously, while judgments always seem to refer to the need to protect the public, the courts mostly seem to have the Crown in mind.

Thus, a certificate from the Customs & Excise and from Inland Revenue that there are no arrears of VAT and PAYE is a helpful start, but the true key to a successful application is a simple guarantee: a personal guarantee to each of those bodies in a form acceptable to the court.

Counsel is then able to argue that, at least to that extent, the proposed director is quite as exposed as if he were not operating behind the shelter of limited liability.

That constitutes a major safeguard and the courts I have been before have been impressed by it.

The guarantee can help a sympathetic tribunal to overcome any lingering doubts.

The cases I have personally been concerned with have the common feature that the court insisted on the safeguard, as indeed it did in Gibson Davies, of the auditors' involvement.

In practice, since that undertaking is usually coupled with a requirement for regular management accounts, it is an onerous (and expensive) undertaking.

Furthermore, some auditors are reluctant to commit themselves.

Alternatively, a financial expert on the board may suffice, perhaps coupled with a duty to report to the Secretary of State for Trade and Industry if creditors remain unpaid or are preferred.

Lastly, disqualification proceedings can take a long time to come to court.

The DTI has two years from the winding up within which to bring them.

That delay can be turned to good account.

Has the applicant made good? He may, for instance, be able to demonstrate current success.

It may help if the client is able to offer further assurances.

As I heard a district judge once say in an application to discharge from bankruptcy: 'You cannot buy justice.' But you can oil the wheels.

Can he offer to subordinate repayment of dividends on his directors loan account to the other creditors or to limit his remuneration during a certain period? Behaviour while a director and even at court in the instant proceedings are further factors the court is entitled to take into account.

If, as happened in one recent case, he can secure the endorsement of the liquidator, that too must be helpful.

The court will be anxious to keep the conditions few, simple and easy to supervise.

The prime concern must be to protect the public.

The hurdles the applicant for leave faces are high, but the court is not keen to deprive someone of a livelihood, still less to jeopardise the living of others dependent upon him or the company.

With adequate safeguards, leave can be obtained even in the current climate.

Leslie Wise is a commercial barrister at 10 King's Bench Walk, London, and a former chairman of the North London Society of Chartered Accountants