UK: IT'S HARD CHEESE WHEN DISQUALIFICATION LOOMS. - Is the system of bringing dubious directors to book unfair?

Last Updated: 31 Aug 2010

Is the system of bringing dubious directors to book unfair?

The 1986 Company Directors' Disqualification Act was designed to prevent dishonest or incompetent directors inflicting further misery on shareholders and creditors. After a slow start, the Department of Trade and Industry, whose duty it is to bring dubious directors to book, has been enjoying a measure of success - last year saw an estimated 70% rise in such disqualifications. Now there's a feeling - and not only among directors threatened with disqualification - that the system is unfair.

Richard Bagley, company affairs executive at the Institute of Directors, wants to see disreputable directors punished. But he suggests that, in some cases, insolvency practitioners (who are responsible for making recommendations to the DTI) have either been loose with the facts and/or over-zealous. 'In one case I looked at, the insolvency practitioner simply did not read his papers thoroughly - he misinterpreted the facts. In another, the practitioner made a disqualification recommendation on the grounds of malice towards the director. A complaint had to be made to the accountants' professional institute, but it took months for anything to be done.'

Problems with disqualification procedures are a sore topic with John Gunn, who now runs a consultancy and venture capital firm called John Duncan and Co. Gunn also has several directorships, but claims to be dogged by DTI attempts to disqualify him for his part in the collapse of British and Commonwealth Holdings in 1990. The current procedure is both unfair and sloppy, he complains: the DTI does not even reply to his letters.

'It's just appalling. I don't have any rights in this country.' It's not only the possibility of being disqualified that disturbs him, but the long delay and the opprobrium that has attached to his name in the interim.

After six years the DTI has at last issued proceedings against him. But a further grouse is that the case will involve substantial costs whatever the outcome.

Alan Bloom, national practice leader in insolvency at Ernst & Young, admits that the road to disqualification can be a particularly long one but stoutly defends the role of the insolvency practitioner. Bloom and his colleagues, he points out, are expected to submit a report on every director of a failed company, whether real or 'shadow' (ie wielding power behind the scenes). And in practice the reporting deadline imposed by the DTI is much shorter than the official two years: 'They put us under pressure to hand over reports much more quickly than that'.

Bloom also disputes Bagley's accusation of over-eagerness. 'We have absolutely no incentive to make negative referrals to the DTI other than the general interest of weeding out bad directors.' The Department, for its part, is unmoved by criticism. Steve Gracey, spokesman for the Insolvency Service says that, 'We have no problems with the system itself - as far as we're concerned it works very well. After all, the number of disqualified directors has increased sharply.'

The official response is echoed by David Coates, managing director of CCN Business Information. Rather than blame the messenger, he says, the aim should be to stop the 'serial failures' of the corporate world at an earlier stage. A survey published recently by Coates's parent company, CCN Group, showed that some 4,000 directors had each been involved in more than 10 company failures. 'After two failures where creditors have lost money, you shouldn't be allowed to become a director again without a thorough, exhaustive investigation,' he argues.

In baseball terms it would be a case of 'two strikes and you're out'.

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