Directors Disqualification - Lecture notes on Incompetence or Lack of Probity

The incompetence principle

 

The Company Directors Disqualification Act 1986 - Disqualification proceedings - Disqualification orders - Legal Principles - Should an incompetent director be disqualified for that incompetence?

 

In the fourth 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 from 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 minimum 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 if 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."

 

In summary, cases where directors have been disqualified under the Company Directors Disqualification Act 1986 for incompetence are extremely rare.