Director’s Disqualification – The Criminal Law Regime

Separate identity of Company

It is a well-established legal principle that a company is a distinct and separate ‘person’ from its officers. With this in mind, it does not necessarily mean that directors are ‘guilty’ of a crime just because the company has attracted any such criminal liability. However, a company may be fixed with criminal liability through the acts or omissions of its directors and the way for criminal liability to be proved may be by identifying the criminal acts of one of its officers.

Consent, Connivance and Neglect

It should be made clear that the liability of a company for an offence does not prevent an individual employee from liability. For any person to be successfully prosecuted, the prosecution must first be able to prove that the company is in fact guilty of an offence.

The courts have given the following clarification of such terminology where individuals may potentially be held liable:

• Consent: A director is taken to have consented to the instruction of an offence by the company when they are well aware of what is going on and agree to it.
• Connivance: A director who connives in an offence will be aware of what is going on but gives implied agreement only; not actively encouraging what happens but letting it continue and saying nothing about it.
• Neglect: Neglect occurs where the person fails to perform a duty that they know or ought to have known about. Neglect does not necessarily require actual knowledge if the circumstances were such that they should have put the officer on inquiry.

There are many corporate offences which are strict liability offences. A strict liability offence requires no intention to commit the criminal act on the part of the offender and is committed irrespective of whether the person committing the offence is at fault.

Investigating corporate wrongdoing

Investigations into corporate wrongdoing can be conducted both internally by the company or on their behalf by appointed professionals as well as externally through interview under caution. In the event of the latter, the regulatory authorities should ask the company to nominate a person to partake in the formal interview process to answer questions on its behalf.

There should never be one interview only where the individual concerned is asked to answer questions both on his/her behalf and on behalf of the company – it would be impossible to identify which answers are legally admissible against each.

When can a director be disqualified?

A director of a limited company can be disqualified following a criminal conviction. However, the rules vary depending on whether a director is convicted of an indictable offence or following three default orders or convictions for summary offences within the preceding five years.

Further, it is not a requirement that the offence took place within the company; the offence may relate to the defendant's role within the company. The offence need not concern misconduct of the company's affairs or dishonesty. Moreover, the defendant does not have to have been a director at the time of the offence or at the sentencing hearing, nor does the defendant have to be a ‘shadow director’.

What is a Directors Disqualification Order (DDO)?

A directors disqualification order (DDO) disqualifies a person from operating with limited liability. It is used as a penalty in addition to the offence, the purpose of which is to protect the public from those who, for reasons of dishonesty, naivety or incompetence, abuse their role and status as director and may jeopardise creditors and others associated with the business of that director.

The effect of a DDO is that the relevant person subject to the Order must not:

• act as an insolvency practitioner;
• be a director of a company;
• be a liquidator or administrator of a company;
• be a receiver or manager of a company's property; and/or
• in any way, directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order.

The use of a DDO is invariably intended to ensure that only reasonably competent, responsible and honest people act as company directors.

Length of Disqualification

• The maximum period of disqualification following an order made in the Magistrates' Court is 5 years.
• The maximum period of disqualification following an order made in the Crown Court it is 15 years.
• There is no statutory minimum period of disqualification in the Crown Court.
• In the High Court however, the minimum period of disqualification is 2 years.

Whilst the courts have suggested that a DDO is not a punishment, the decision about the length of the period of disqualification does not differ from any other sentencing exercise. Therefore, the period of disqualification must reflect the gravity of the offence and equally act as a deterrent.

Breach of the Disqualification Order

Breach of a DDO, or an undertaking, is a criminal offence. During the term of the DDO the disqualified defendant may apply to the court for leave to act in specific circumstances. Breach of a DDO is, either-way an offence, and can be tried/heard before either the Magistrates’ or Crown Court:

• If the case is tried summarily, the maximum penalty on conviction is 12 months' imprisonment, a fine, or both.
• Following conviction on indictment, the maximum penalty is 2 years' imprisonment, or a fine, or both.

The Sentencing Council has published a guideline for the offence of ‘Breach of disqualification from acting as a director’, effective from 1 October 2018, which sets out the factors the Sentencing Court must consider before passing any sentence. The court will look at ‘culpability’ and ‘harm’ before going on to consider aggravating and mitigating features.

The risk of personal liability for breach of a DDO

When a person acts as a director of a company whilst disqualified, he becomes personally responsible for all the debts and liabilities of the company incurred during the time when he was involved in the management of the company.

Likewise, a person not being the disqualified director who is involved in the management of the company and who acts on instructions given by a person whom he knows to be subject to a disqualification order or undertaking, also assumes personal liability for the debts or liabilities of the company occurred at that time.

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