Isle of Man: the Company Officers Disqualification Bill 2008

Last year the Isle of Man's Financial Supervision Commission published a consultation paper proposing reforms to the law governing the disqualification of directors. A new Act is proposed which will bring together in one place all of the current grounds for disqualification. It will also introduce "disqualification undertakings" - agreements between the disqualified person and the Commission whereby that person acknowledges their unfit conduct and agrees certain restrictions with regard to the future involvement with companies. Following comments on a draft Bill a revised Company Officers Disqualification Bill 2008 has recently been published. 

For further information about other legislative changes, including amendments to companies law, click here. Information about the legal system on the Isle of Man is available here. Information about company law on the Isle of Man is available here.

UK: director disqualification orders in competition law cases

The Office of Fair Trading has published revised guidance on director disqualification orders in competition law cases: see here (pdf). The guidance sets out how, and when, the OFT will take action to disqualify directors where there is evidence that the director was responsible for, or ought to have known of, competition law breaches.

Australia: listed company directors - disqualification and deterrence

Last week, in Australian Securities & Investments Commission v Soust (No 2) [2010] FCA 388, the Federal Court ordered that a director should be disqualified from managing corporations for a period of 10 years under Section 206C of the Corporations Act (2001). In doing so the trial judge stressed the importance of deterrence in determining the period of disqualification and made these observations concerning the trust reposed in the directors of listed companies (at para. [71]):

I am satisfied that a significant period of disqualification is required and justified in the present circumstances. In particular there is a significant role for personal deterrence to play for the reasons to which I have referred. It is also important that there be a general deterrence component of the period of disqualification as it is necessary to make it clear to directors and other persons in the commercial community that personal dishonesty in acting as a director of a corporation will not be condoned by the Court and will be visited with severe sanctions. Directors of corporations and, particularly, directors of listed public corporations must realise that they have a considerable amount of trust committed to them not only by the shareholders in their company but also by the company’s creditors, the commercial community and the public generally. They occupy a position of trust which, if misplaced, in appropriate cases should disqualify them from further participation in the management of such corporations for significant periods".

UK: England and Wales: disqualification, directors' duties and regulatory responsibilities

Mrs Justice Proudman, sitting in the High Court, gave judgment last week in Secretary of State for Business, Innovation and Skills v Aaron & Ors [2009] EWHC 3263 (Ch). The case concerned a successful application by the Secretary of State for the disqualification of two directors under Section 7 of the Company Directors Disqualification Act (1986). 

It was argued on the directors' behalf that disqualification would be unfair because their breaches of FSA rules - on which the Secretary of State based his case - were unrelated to the general management of the company. The trial judge rejected this argument, observing (at paras. [102] - [103], italics in the original):

The fact that he [the director] has not shown himself unfit to manage any business, or to undertake a different management role, is, like the likelihood or otherwise of offending again ... a matter which goes to leave to be concerned in the management of a company under s. 17 CDDA and to length of disqualification. It is not a matter which goes to disqualification itself. Secondly, there is the simple fact that the abnegation of responsibility by a director is a matter affecting the ability to conduct ordinary corporate governance. A director's failure to ensure that he was sufficiently concerned with relevant responsibilities is a grass roots failure".

Mrs Justice Proudman also accepted the submission, made on behalf of the Secretary of State, that: 

... in the case of a FSMA authorised company a director's duty to that company to exercise reasonable care skill and diligence extends to taking all reasonable steps to ensure that the company complies with its regulatory obligations" (para. [9]).

UK: compulsory education for disqualified directors?

A report in yesterday's Sunday Times newspaper indicated that the (opposition) Conservative Party is exploring the suggestion that disqualified directors should receive compulsory education on topics including their legal duties. The shadow business minister, John Penrose MP, is quoted:

I would favour an emphasis on rehabilitation and re-education, rather than boot-camp-style punishments ... This idea may have real potential for personal insolvencies as well as business insolvencies. Providing people with education on household budgeting, how to assess the loan market and other personal finance issues could have real value”

England & Wales: Case law: Directors' disqualification: acquiescence in corporate governance system

In Official Receiver v Watson & Anor [2008] EWHC 64 (Ch), a finance director was found unfit to be involved in the management of a company (the length of his disqualification period was left for a later hearing). The case against the director was based on his acquiescence in the system of corporate governance adopted by the other directors, which involved breaches of company law.

UK: the Companies (Disqualification Orders) Regulations 2009

The Companies (Disqualification Orders) Regulations 2009 were laid before Parliament last week and come into force on 1 October. The Regulations are available on OPSI: see here (html) and here (pdf). An explanatory memorandum has also been published and this explains the purpose of the Regulations as follows:

The purpose of this instrument is to require certain court officers to provide the Secretary of State with particulars of disqualification orders and grants of leave in relation to such orders or disqualification undertakings made or accepted under the Company Directors Disqualification Act 1986 (“the CDDA”), and of any action taken by a court in consequence of which any such orders or undertakings are varied or cease to be in force. The instrument prescribes the particulars and form in which the particulars are to be provided by the court officers to the Secretary of State. Section 18 of the CDDA requires the Secretary of State to maintain a public register from the particulars so furnished".

UK: MG Rover report published

In May 2005 the (then) Secretary of State for Trade and Industry appointed inspectors (Gervase MacGregor FCA and Guy Newey QC) under Section 432(2) of the Companies Act (1985) to investigate the affairs of Phoenix Venture Holdings Limited, MG Rover Group Limited and 33 other companies. Rover entered administration in April 2005. 

The inspectors' report was published today.  It is very long and split into volume one and volume two. On the basis of the report, Lord Mandelson - the Secretary of State for the Department of Business, Innovation and Skills - has announced that: "work has been commissioned to start legal proceedings to seek to declare relevant directors unfit to hold office and to disqualify them from management of any company in future". The report is also being considered by the Financial Reporting Council, given the issues it raising concerning, e.g., governance and financial reporting. 

Chapter 12 (in volume two) is titled "Aspects of corporate governance" (although corporate governance issues arise throughout the report, including the financial rewards received by the so-called Pheonix Four directors discussed in chapter 11 and found to be "unreasonably large"). The focus of chapter 12 is with the conduct of board meetings and the inspectors record that some directors were not always invited to such meetings. On page 661 the inspectors conclude:

It is obviously desirable to dispense with unnecessary bureaucracy. It is doubtless also the case ... that there are other companies which do not fully comply with legal requirements in relation to, say, the calling of board meetings. Even so, we consider that the members of the Phoenix Consortium paid insufficient regard to legal requirements. With respect, in particular, to board meetings, it seems to us that all directors should have been notified of all board meetings of their companies both because there was a legal requirement to do so and because that obviously represented proper corporate governance. It is of little significance in this context that transactions can sometimes be legally effective even where meetings were not properly called or minuted or directors were excluded from decision-making. Legal efficacy need not connote good corporate governance".

For background information, see here.