Directors' disqualification proceedings
With statistics from the 'Companies Annual Report 2000-2001' revealing that 1,548 disqualification proceedings were issued against unfit directors and a total of 1,700 directors were disqualified during that year, recent company law litigation has continued to focus on directors' duties and liabilities. Disqualification of directors is now one of the most prominent areas of modern company law.
The enactment of the Insolvency Act 2000 in April 2001 implemented a new regime for the disqualification of directors. This allows disqualification proceedings to be settled outside the courts by the Secretary of State for Trade and Industry by way of the offer and acceptance of an undertaking on the part of the director. The director must refrain from acting in a prohibited capacity and consent to being disqualified. Agreement must also be reached between the parties on the period of disqualification.
The courts are bound to assist the Secretary of State in implementing the new regime in accordance with the terms of the Company Directors Disqualification Act 1986 (CDDA) and ensuring that the deterrences and standards of the CDDA functions are not compromised. In Secretary of State for Trade and Industry Vernon John Everleigh Davies & 4 ors sub nom in the matter of Blackspur Group plc (2001), the Court of Appeal held that the decision of the Secretary of State – that it was inexpedient in the public interest to accept a disqualification undertaking without an accompanying statement of unfit conduct – was lawful and not ultra vires. It was held that, as a matter of statutory construction, there was no fetter on the matters that the Secretary of State could take into account in considering whether a course of action was in the public interest.
In Bairstow & Ors Queens Moat Houses plc (2001), the Court of Appeal upheld the directors' liability to restore unlawfully paid dividends. The issue central to the appeal was a claim for payment to the company of preference and ordinary shares paid out unlawfully on the strength of the company's accounts for 1990 and 1991. The Court of Appeal held that a corporation was a legal person separate from persons who were from time to time its members. The basic rules about lawful and unlawful dividends existed not only for the protection of creditors, but also for shareholders. If directors caused a company to pay a dividend that was ultra vires and unlawful because it infringed the relevant rules, the fact that the company was still solvent should not be a defence to a claim against the directors to make good unlawful distribution. The judge found that the directors were dishonest in the preparation of the 1991 accounts, in order to deceive the market into the belief that the group was much more profitable than it actually was. Honesty and reasonableness were necessary preconditions for relief under Section 727 of the Companies Act 1985, and it was not therefore open to the judge to find that the appellants had acted honestly and reasonably in paying any dividends on the strength of those accounts.
Companies Annual Report 2000-2001
Over the next few years, UK company law is due to undergo the most extensive reorganisation ever proposed. This follows the completion of a three-year review of company law managed by the Department of Trade and Industry (DTI), examining the legal changes needed to carry out efficiently business activity in the modern UK. The DTI Steering Group has published its final report and the Government is commencing its own consultative process with a view to legislation in the 2002-2003 parliamentary session. The report focuses on four key issues as priorities for reform: reporting and accounting, auditing, smaller/private companies and corporate governance, with a focus on simplifying the law, particularly for small businesses.
Reporting and accounting
A timetable for the publication of accounts for quoted companies is set out, as well as proposals obligating listed companies to publish annual operating and financial reviews (OFRs) to include business objectives, strategy, dynamics, a review of corporate governance, key relationships, policies and performance on a wide range of issues. In addition, the annual OFR would be subject to regulated reviews by the company's auditors to ensure consistency with audit processes and correct processes and standards.
The Steering Group is planning a new Ethics Standards Board to assess appropriate standards of auditor independence. On the issue of auditors' responsibility, the Steering Group is proposing to allow auditors to limit their exposure with shareholder consent, providing practice guidelines as to what extent this will be allowed.
It is proposed that legal processes required for the running of small businesses will be simplified, with notice periods reduced for shareholder meetings and written shareholder resolutions no longer having to be unanimous. Other suggestions include allowing private company directors to allot shares without shareholder permission and dropping the requirement for company secretaries. The most far-reaching reform suggested is that, for a private company, the prohibition on providing financial assistance related to the acquisition of its own shares should be abolished.
One of the priorities of the Steering Group is to establish clear guidelines for the accountability of company directors. While the report does not change the law relating to directors' duties extensively, it is proposed that the duties should be set out in a single accessible place, with much more clarity given to the accountability of directors to both the company and its shareholders. There are also recommendations for draft legislative provisions outlining issues that directors should have regard to, such as the long-term consequences of their actions, the impact on community and environment, and upholding high standards of conduct.
Fixed or floating charges?
(1) Richard Dale Agnew (2) Kevin James Bearsley (1) Inland Revenue Commissioner (2) Official Assignee for the Estate in Bankruptcy of Bruce William Birtwhistle & Mark Lesley Birtwhistle (2001) is a Privy Council case described by Lord Millett as being of “great commercial importance in the UK”. It provides persuasive authority for determining whether a charge over the uncollected book debts of a company free to collect them and use the proceeds in the ordinary course of its business is a fixed or a floating charge. The court strongly criticised the decision in Re New Bullas Trading Ltd (1994) 1 BCLC 449. The decision said that it was open to the parties, provided that their agreement was lawful, to make whatever bargain they chose as to whether uncollected book debts should be subject to a fixed or a floating charge, reducing any question as to the effect or meaning of the charge simply to one of construction.
The question was not merely one of construction. In deciding whether a charge was fixed or floating, the court was engaged in a two-stage process. First it had to construe the charge, not by deciding whether a fixed or floating charge had been intended to be granted, but by looking at what rights and obligations the parties had conferred upon one another. Having done so, it was then for the court to categorise the charge in question, according to those rights and obligations and not by reference to the intention of the parties. While a debt and its proceeds were two separate assets, the latter were merely the traceable proceeds of the former and represented its entire value. Any attempt to separate the two made no commercial sense.
Joanna Goldsworthy is specialist group editor at Lawtel
Directors' disqualification proceedings