The Company Directors Disqualification Act 1986 (CDDA 1986) is a UK law that enables the courts to disqualify individuals from acting as directors of companies.
The purpose of the CDDA 1986 is to protect the public by preventing unfit individuals from being involved in the management of companies. Disqualification can be sought by the Secretary of State, the Insolvency Service, or a creditor of a company.
The CDDA 1986 sets out the grounds on which an individual can be disqualified, which include failing to comply with a director’s duties, being involved in fraudulent or reckless trading, and being involved in the management of a company while it is insolvent.
Disqualification can last for a minimum of two years and a maximum of 15 years
An overview of the Company Directors Disqualification Act
Procedures for investigating and disqualifying company directors suspected of misconduct are outlined in the Company Directors Disqualification Act (CDDA) 1986, a key aspect of UK company law.
Section 1 of the Company Director Disqualification Act 1986
Section 1 of the CDDA addresses the basic guidelines and restrictions concerning disqualification orders. Interestingly, the CDDA isn’t solely focused on company directors. Over time, its scope has broadened to include members of bankrupt partnerships, limited liability partnerships, and shadow directors. We delve deeper into this aspect in the subsequent sections.
Section 1A of the Company Director Disqualification Act 1986 – Undertakings
S1A of the CDDA, incorporated within the overarching guidelines of Section 1, stands as a significant amendment introduced by the Insolvency Act 2000.
This amendment marked a pivotal shift, enabling the Secretary of State and the concerned director to mutually agree on a disqualification duration through an undertaking (a contractual agreement). Before this change, the process to settle on a voluntary disqualification was more intricate, known as the ‘Carecraft’ procedure. This method necessitated a court order, leading to additional legal expenses. However, with the introduction of the undertaking reforms via S1A of the CDDA 1986, the Carecraft procedure has become obsolete.
For directors contemplating future permissions to serve as a company director while disqualified, an undertaking proves beneficial, especially in light of S17 of the CDDA, which we will explore further.
Section 2 of the Company Director Disqualification Act 1986 – Indictable Offences
Section 2 of the CDDA pertains to the disqualification of directors following a conviction for a serious crime, known as an indictable offence. Such offences include grave crimes like murder. Unlike summary offences, indictable offences are addressed in the Crown Court. The CDDA’s Section 2 allows for the disqualification of directors involved in criminal activities, either by the criminal court or through a separate application. However, this disqualification is discretionary based on CDDA section 2(1), and the director doesn’t necessarily have to be deemed ‘unfit’.
It’s notably challenging for a director disqualified under Section 2 to obtain court permission to act as a director again, as per CDDA section 17, due to the severity of their criminal actions. The Small Business, Enterprise and Employment Act 2015 further strengthened Section 2 of the CDDA, enabling UK courts to disqualify directors based on misconduct in foreign companies. Directors should be cautious of this expanded power of the Secretary of State.
Section 3 of the Company Director Disqualification Act 1986 – Persistent Breaches
Section 3 of the CDDA 1986 addresses disqualification due to consistent violations of company laws. It aligns with Section 5 of the CDDA, which permits court disqualification for those convicted of minor company law offences if they have similar convictions twice or more within the last five years.
Frequent non-compliance, especially neglecting annual account filing instructions from Companies House, is a common issue. As per Section 3, if a director defaults three or more times within five years, it’s deemed persistent. The director must show a clear neglect of legal obligations for action to be taken. Often, Companies House seeks disqualification in such cases.
While Section 3 mandates companies to file documents, the responsibility doesn’t solely lie with the company. Even with limited liability, a director can be held accountable for non-compliance, leading to the company’s breach and the director’s subsequent conviction.
Section 5 of the CDDA 1986 – Summary Conviction
CDDA Section 5 addresses director disqualification upon summary conviction. While it shares similarities with Section 3, the key difference is that orders under Section 3 are primarily made by courts with winding-up jurisdiction, like the High Court. In contrast, violations of company law are typically prosecuted under Section 5, allowing courts to disqualify directors for ‘persistent default’.
Section 5A of the CDDA allows for disqualification based on conduct related to foreign companies. It aligns with Section 2 but focuses on disqualification following a summary conviction, including those overseas as per CDDA Section 5A.
A summary conviction is handled in the magistrate’s court, but if contested, the Crown Court may oversee the disqualification.
Section 6 – Unfit Directors
The court is required to issue a director disqualification order when a director’s actions in relation to one or more companies or overseas companies demonstrate that they are unsuitable for involvement in company management. The length of disqualification, which can range from a minimum of two to a maximum of 15 years, is also outlined in this section.
Section 7 of the CDDA 1986
Section 7 of the CDDA 1986 delves into the overarching guidelines concerning disqualification orders, disqualification commitments, and reporting procedures related to disqualification.
Section 8 of the Company Director Disqualification Act 1986
Section 8 of the CDDA 1986 addresses the provisions for director disqualification following a company investigation. Unlike Section 6:
- There’s no need for insolvency or dissolution. The Secretary of State can act based on any relevant director information.
- While a finding of unfitness in a Section 6 claim mandates a minimum two-year disqualification, Section 8 offers the court discretion in ordering disqualification.
- Due to the prevalent misconduct stemming from insolvency (as in Section 6), claims under Section 6 are more frequent.
- Only the Secretary of State can apply under this section, not the official receiver.
- No time limits exist for filing claims.
The SBEEA 2015 added sections 8ZA – 8ZE, introducing grounds for disqualification for ‘directing or instructing’ a previously disqualified director.
Section 8A of the Company Director Disqualification Act 1986
Section 8A of the CDDA 1986 focuses on the modification of director disqualification durations. It offers a form of appeal for disqualified directors who’ve accepted a disqualification undertaking, ensuring compliance with Human Rights legislation. This section permits these directors to request the court to either shorten the disqualification duration or end it entirely.
Only the disqualified director can make this request, and importantly, there’s no risk of extending the disqualification. The period can only be reduced or terminated. For instance, if a 12-year disqualification is cut to 3 years and the director has already served 5 years, the extra two years served can lead to termination. However, the court cannot nullify the disqualification entirely.
Directors have presented various reasons to reduce their disqualification period. It’s also worth noting that Section 8A is one of two avenues for disqualified directors seeking relief. The other option is an application under section 17 of the CDDA.
Section 9A of the CDDA 1986 – Competition Orders
Section 9A of the CDDA 1986, introduced by the Enterprise Act 2002, focuses on competition disqualification orders. It allows the court to disqualify directors who violate competition law. The primary consideration is whether the director’s actions deem them unfit for company management. If found unfit, disqualification is obligatory, similar to section 6 of the CDDA 1986.
Unlike section 6, section 9A doesn’t have a minimum disqualification period, doesn’t consider solvency, and doesn’t refer to schedule 1 of the CDDA, which lists factors determining unfitness.
Section 9B permits the Competition and Markets Authority to accept competition undertakings. These undertakings are essentially equivalent to orders, as seen in section 6 claims.
Section 11 of the CDDA 1986 – Undischarged Bankrupts
Section 11 of the CDDA 1986 pertains to undischarged bankrupts. Under this section, undischarged bankrupts, or those subject to bankruptcy restrictions, are prohibited from serving as company directors or being involved in the company’s promotion, formation, or management. This is similar to a disqualification order.
Violating this section results in criminal liability, with no defense even if the individual believed they were discharged from bankruptcy. Additionally, anyone can report a bankrupt individual violating this provision to the government’s report line.
Section 12A of the CDDA 1986 – Northern Ireland
Section 12A of the CDDA 1986 addresses the provisions concerning director disqualification orders in Northern Ireland.
An order issued by a Northern Ireland court holds equivalent weight to one from any other part of the UK. Breaching such an order results in similar civil and criminal consequences and penalties.
Section 13 – Criminal Penalties
Criminal penalties, including fines and a potential prison sentence of up to two years, are outlined in Section 13 for those who violate a disqualification order or undertaking. This section emphasises the serious civil and criminal consequences that can result from breaching such an order or undertaking.
Section 14 of the CDDA 1986 – Body Corporate
Section 14 of the CDDA 1986 delves into the provisions concerning director disqualification offences committed by corporate entities.
It outlines the offences by a corporate body and its leadership. A corporate body encompasses companies incorporated outside of Great Britain but doesn’t include Scottish firms or a corporation sole. The latter refers to an individual representing an official role with its own distinct legal identity, such as bishops, vicars, or mayors.
This section is connected to sections 12A and 12B, which address the Northern Ireland aspect of disqualification.
Section 15 of the CDDA 1986 – Personal Liability
Section 15 outlines the civil penalties for breaching a disqualification order or undertaking, including personal liability for all relevant debts of a company. This includes any debts incurred while the disqualified director was involved in the company’s management or while any other person was acting on the instructions of a disqualified individual.
Relevant debts include those incurred while a disqualified director was involved in the company’s management or while any other person was acting on the instructions of a disqualified individual. It is worth noting that personal liability may arise even if the disqualified director was not directly involved in the management of the company, as indirect involvement can also result in liability under this section.
Liability may be joint and several with the offending party and the company. It is important to note that a disqualified director does not have to be directly involved in the company’s management to be held liable under this section, as indirect involvement can also result in personal liability.”
Section 15A of the CDDA 1986 – Compensation Orders & Undertakings
This section was introduced by section 110 of the Small Business Enterprise and Employment Act 2015. It provides that a director subject to a disqualification order or undertaking may also have a compensation order made against them on the application of the Secretary of State. A compensation order is an order made by the court which reflects the loss allegedly suffered by the company as a result of the director’s misconduct.
In order for an application for a directors compensation order to be successful, the conduct of the person subject to the order or undertaking must have caused a quantifiable loss to one or more creditors of an insolvent company. When making a compensation order, the court will take various factors into account such as:
- The nature of the creditors and their other options for recourse
- The ease of identifying and quantifying the loss to each creditor or group of creditors
- Any potential repayment to creditors through the insolvency process, such as liquidation
If you are facing disqualification proceedings, you will receive a “section 16 letter” outlining the Secretary of State’s intention to seek a disqualification order against you. According to this section, at least 10 days’ notice must be given to the individual targeted by the order. If you receive a section 16 letter, it is crucial that you seek legal advice as soon as possible.
Section 17 of the CDDA 1986 – Application for Leave
Section 17 of the CDDA is crucial, addressing requests for permission to continue as a director or to reassume the role despite facing a director disqualification order or having given a disqualification undertaking.
Section 22 of the CDDA 1986 – Interpretation
Section 22 of the CDDA 1986 defines terms used within the Act. A key area of debate is the definition of a “shadow director.” Typically, shadow directors argue they don’t fall under the Act’s provisions before defending any misconduct. The term generally refers to individuals who control a company’s actions indirectly, often through a puppet board.
The distinction becomes blurry with consultancy advice. The line between offering consultancy and influencing company decisions can be thin. To safeguard one’s position, it’s essential to have a comprehensive consultancy agreement, document board decisions, and maintain written records of the relationship.
For clarity on definitions in the CDDA 1986 or concerns about an Insolvency Service investigation, consider consulting ourselves for guidance.
The Company Director Disqualification Act 1986 is a comprehensive piece of legislation that governs the disqualification of directors in various scenarios, from breaches of competition law to insolvency-related issues. Its numerous sections, each addressing specific circumstances and provisions, underscore the importance of understanding one’s responsibilities and potential liabilities as a director.
The Act’s intricacies, especially around shadow directors and consultancy roles, highlight the potential pitfalls that directors can encounter. If you find yourself navigating the complexities of the CDDA 1986 or facing potential disqualification, it’s crucial to seek expert advice. Don’t hesitate to complete our online enquiry form for tailored assistance and guidance.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.