Chapter 6Companiesthe 1986 Act. It occurs when a company goes into liq-
uidation and the evidence shows that the directors have
negligently struggled on for too long with an insolvent
company in the hope that things would get better but
which has in the end gone into insolvent liquidation.
This is called wrongful trading and the maximum period
of disqualification is 15 years. The directors are also
jointly and severally liable for such of the company’s debts
as the court thinks fit. The court is not restricted to mak-
ing an order relating only to debts incurred during the
period of wrongful trading.
A director may also be disqualified if he or she is held
by the court to be ‘unfit’ to hold the office of director.
The company must be insolvent, generally as a result of
serious management failures, and often involving failure
to pay NIC and taxes. There is no personal liability for
the debts of the company but disqualification can be for
a period of up to 15 years and there is a minimum period
of two years. Sections 6, 7 and 8 of the 1986 Act apply.
A register of disqualification orders made by the court
is kept by the Registrar of Companies. The public can
inspect that register and see the names of those currently
disqualified from acting as directors. Obviously, the name
is removed at the end of the period of disqualification.
Disqualification – some case law
The High Court decided in Re Seagull Manufacturing
Co (No 2)(1994) that a disqualification order may be
made against a director regardless of his or her national-
ity and current residence and domicile. Furthermore,
the conduct leading to the disqualification need not have
occurred within the jurisdiction. In other words, you
can run an English company badly from abroad. The
director concerned was a British subject but at all mater-
ial times he was resident and domiciled in the Channel
Islands. Nevertheless, he could be disqualified under s 6
for unfitness. The relevant legislation contained no express
jurisdiction requirement or territorial distinction.
The High Court also decided in Re Pamstock Ltd
(1994) that a director who was also the secretary of the
company could be disqualified as much for failure to
perform his duties as secretary as those of a director. The
company had two directors and one was also the com-
pany secretary. It traded beyond the point at which it
should have ceased to do so and went into insolvent liq-
uidation. The judge said that, as the company secretary,
one of the directors had failed to ensure that accounts
and returns were filed on time and that an adequate sys-
tem of management was put in place. These were serious
defaults which must be taken into account when dealing
with the period of disqualification. This implies that it
was the director’s failure to carry out his duties as secret-
ary that were at the root of his disqualification for two
years. There is, of course, no power to disqualify a com-
pany secretary from acting as such.Powers of directors
The Act requires certain powers to be exercised by the
members, e.g. alteration of the articles. Apart from this
the distribution of powers between the board and the
members depends entirely on the articles.Duties of directors
Statutory frameworkOne of the major changes in the CA 2006 for directors is
the setting out, for the first time, of a statutory frame-
work for their legal duties. In previous editions of this
text we noted that the duties of directors were based
on common law principles from which, in case law, the
judiciary carved out a series of duties that became well-
established rules. We subsequently had to consider,
with the 2006 Act being so new and not yet interpreted
by the courts, whether to continue with a discussion of
the common law position and the statutory position. It
was decided to deal only with the new statutory duties.
The new statutory directors’ duties (ss 171–177) are
subject to further judicial interpretation. Although the
new duties are in some cases expressed in broader terms
than the common law rules, it is envisaged that the
judicial interpretation of the new provisions will draw
heavily from the existing case law. Arguably, it can be
said that the court’s approach has long departed from
the two-tier test laid down in City Equitable Fire, as
demonstrated in Lexi Holdings Plc (In Administration)
vLuqman(2007): the issue was not whether the dir-
ectors knew of their fellow directors’ misconduct, but,
had they performed their duties as directors, they would
have discovered it and either prevented it or brought
it to an end. Accordingly, the judge commented that ‘the
defence that complete inactivity was a sufficient dis-
charge of her fiduciary and common law duties fails the185