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In the Forth Annual Leonard Sainer
Lecture (26/11/96), Lord Hoffmann summarised the position
as follows:
"In a recent case in the Court
of Appeal it was said that the question which the court had
to ask was whether a directors conduct had fallen below the
standard of probity and competence required by the law of
a person concerned in the management of a company. It did
not actually say what that was. But what that shows is that
the court is not concerned merely with probity. Incompetence
is also, at any rate in theory, a ground of disqualification.
And yet the cases in which directors have been disqualified
simply for incompetence have been extremely rare. The courts
tend to emphasise the importance of conduct which does not
constitute some breach of accepted commercial morality. This
attitude has been attacked by writers, or some of them, as
giving insufficient effect to the protective purpose of the
statute. To the creditors who lose their money, it does not
especially matter whether the people running the company were
dishonest or merely genially incompetent. It is said that
incompetent directors ought to be put off the road for a while
like incompetent drivers, simply for the protection of members
of the public. But the courts have never completely accepted
this philosophy and I want to explain why.
Firstly, disqualification is a
very serious matter. In theory it does not prevent the director
form going back into business as a sole trader but in practice
it may make it very difficult for him to earn a living. A
finding that a director was unfit carries with it a mandatory
2 year period of disqualification and it does not matter that
the unfortunate conduct in question happened several years
before and it had taken the intervening period for the Department
of Trade to wind itself up to bring the proceedings and that
since then the director has gone on to run a prosperous business.
The trouble with mandatory sentences, as was found when the
mandatory sentence for sheep stealing was death and no doubt
will also be found under the new mandatory sentences which
the Government proposes to introduce, is that the sentence
is too harsh, it will be very reluctant to convict at all.
Secondly, where the law does not
require any kind of qualification for becoming a director,
it is not easy to fix an ex-post facto standard of competence
for disqualification.
Thirdly, the process by which people
land up at the receiving end of an application for disqualification
is bound to be fairly arbitrary. It depends first of all upon
the directors incompetence having been followed by the insolvency
of the company. Whether or not this happens is very often
a matter of luck. A rise in the market can compensate for
the effect of some perfectly hair raising piece of incompetence.
One is very conscious of how thin is the line between success
leading to wealth and knighthood and failure leading to disqualification
or even imprisonment. Indeed, the defendants in the Guinness
case had landed on both the snakes and the ladders in the
course of their careers.
Fourthly, the disqualification
procedure is necessarily weighted against the defendants.
The applicants have all the resources of the State. The defendants,
as directors of insolvent companies, tend to be a bit short
of money and unless they are on legal aid they cannot afford
the considerable expense of instructing solicitors to defend
them. I had a case myself about a young printer whose company
had become insolvent and he decided to defend himself. He
struck me as honest and at least as intelligent as a number
of rich and successful businessmen who had given evidence
before me in the past. To his obvious astonishment. I dismissed
the summons.
So the cases under the Disqualification
Act are therefore directed to a special problem, that is to
say the abuse of limited liability. The points which they
raise are concerned mostly with fairness under the insolvency
law and the obligations of a businessman to his creditors
rather than general corporate government."
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