Insolvency is not the only fear for a director of a troubled company. If a company becomes insolvent, its director may be disqualified from being a director, or taking part in the promotion, formation or management of a company under the Company Directors Disqualification Act 1986.
Director disqualification has been around since 1929, but courts’ powers to make disqualification orders were extended under the Company Directors Disqualification Act 1986.
All insolvency office holders must prepare a report for the DTI (known as a D-Form) on the conduct of directors, giving the Secretary of State for Trade and Industry the opportunity to consider whether to pursue director disqualification proceedings.
The most commonly pursued section under the act is section 6. Under this section, a director may be disqualified for a period of between two and 15 years.
One problem is the uncertainty surrounding the length of disqualification periods. The courts have repeatedly emphasised that each case must be looked at individually, and that the courts derive little assistance from disqualification periods given in previous cases.
The Court of Appeal recently attempted to give guidance on what was relevant and admissible evidence in disqualification cases in Secretary of State for Trade and Industry v Griffiths & Others 1998 2 All ER 124.
For the first time the court acknowledged that assessing a period of disqualification is little different from any sentencing exercise; that it is, to an extent, similar to a punishment; and that it must reflect the gravity of the offence and contain deterrent elements.
The DTI has increased the number of disqualification proceedings brought against directors. In 1993/94 262 directors were disqualified under section 6 of the act. The figure had increased to 1,040 by 1996/97.
It is unclear whether the increased incidence of disqualification proceedings is widely appreciated by company directors. But one thing is certain. Those advising directors facing disqualification proceedings, still face difficulties in advising upon the likely disqualification period which may result from such proceedings.