Avoiding director disqualification restrictions

In the recent case of Hobson v Secretary of State for Business, Energy and Industrial Strategy, [2021] EWHC 1317 (Ch) the court considered the relevant considerations to give permission for an individual to act as a director, notwithstanding a current disqualification order or undertaking.

Disqualification orders and undertakings

Under the Company Directors Disqualification Act 1986 (CDDA), a person can be disqualified from acting as a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without permission from the court.

Disqualification orders are made by the court, but a disqualification undertaking agreed between the director and the Secretary of State has the same effect.

Permission for a disqualified director to act

There are exceptions to the restrictions placed on directors by CDDA, whereby a director can apply to the court to give them permission to act as a director in a defined set of circumstances. In making such an application, the disqualified director must demonstrate to the court the necessity for them to act as a director.

In deciding whether to allow a disqualified director to act, the court must balance the need for the company to have them as a director against the need for the public to be protected against the kind of conduct which led to the disqualification order.

In Hobson v SoS , the director made such an application.  Mr Hobson had been disqualified as a director for a period of 3 ½ years in relation to an aircraft replica manufacturing company, which he was found to have severely financially mismanaged as a joint director. However, Mr Hobson had specific expertise which was essential to the success of his other two companies, manufacturing and repairing wind turbines and manufacturing replica aircraft and vehicles for use in exhibitions, displays and films. 

Mr Hobson offered a range of conditions to be attached to any permission, including the appointment of a qualified finance director, involvement by accountants, regular board meetings, and reporting. These conditions were designed to allow the companies to operate while minimising the risk of repeating the same financial problems. The Insolvency Service did not oppose the application.

The judge considered three questions in particular:

• Was it necessary for the disqualified individual to act as a director?
  • In a small specialist business, such as those in question, it is important for those dealing with the business to be dealing with a director
  • A disqualified director is not just prohibited from acting as a director, but is prohibited from being, among other things, concerned in the management of a company. The application related to small specialist businesses where it was Mr Hobson who had the required knowledge for the businesses to operate. It would be almost inevitable that he will be involved in management and therefore it was preferable for him to be a director and subject to the relevant conditions.

• Should the court insist that a third director be appointed in addition to the disqualified director and a finance director
  • This was the approach in Hennelly v The Secretary of State for Trade & Industry [2004] EWHC 34 (Ch)
  • The businesses in question were very much smaller than was the case in Hennelly; there was simply not the funding to pay for an additional director.
  • In Hennelly the director was disqualified for 8 years as a result of 5 companies collapsing owing c.£10m. Mr Hobson had given a disqualification undertaking for 3 years 6 months, being the middle of the lowest band of culpability. However it was noted in cases where the company could afford it, it might well be a proper price for the company to pay.

• Should the permission be limited in time, for example for one year, and then for the court to assess or renew?
  • This was the approach in Re Chartmore [1989] 10 WLUK 126
  • Here, the time elapsed since the liquidation had effectively provided a probationary period and so there was no need to provide for a further period, and incur the additional time and expense of a renewal application in one to two years’ time.

If appropriate protection could be secured, the court found that there was no good reason not to allow Mr Hobson to continue to be involved in the management of the companies.

This was not a case of a dishonest director, who ought not to be allowed to run any company. This was a case of someone with specialist knowledge and experience, with an apparently successful business model, who had failed in that business simply because of lack of financial acumen and experience. Having brought in that financial acumen and experience, the current businesses were now working well.

Comment

As can be seen from this case, there must be a good reason to persuade the court that acting as a director is in the best interests of the public and the company(ies) concerned, however it is possible to obtain the court’s permission to act as a director, despite a disqualification order/undertaking under CDDA.

There are a number of restrictions that can be placed on directors following a company’s liquidation, however there are means of continuing to act as a director (or indeed to use a prohibited name – as set out in our article here), so long as the relevant legislation is complied with.

For further information on this article, please contact Olivia Reader or another member of our Restructuring & Insolvency team.