Disqualification of Directors and Education Requirements, Supporting Responsible Entrepreneurship

Rebecca Parry, Nottingham Trent University and

Neeti Shikha, University of Bradford

31/10/2023

Overview

This work in progress paper considers how education might play a greater role towards enabling directors to perform their roles, as well as strengthening the director disqualification system.

We consider the problem of the increased complexity of the law, as well as enduring problems of phoenix companies and rogue traders.

We consider how education can be used to address these problems and how this educational system might develop.

Aim of the paper

• This paper considers how responsible entrepreneurship can be promoted alongside increased public protection through a combination of director disqualification and director education, building towards a rehabilitative approach in appropriate cases.
• It considers whether there should be a programme of education for directors alongside the disqualification system and how this might be structured and where it might be directed.

Entry to the profession of company director

• There are few barriers for adults who wish to become company directors, in contrast to other white collar professions
• Tighter entry requirements have been consistently resisted
• The focus is on ex post restriction through director disqualification, rather than greater ex ante restriction
• Yet this is a complex role

Common problems

1) There has been public concern that the law has developed post-Sequana in a way that makes it difficult for honest directors to understand and practicably apply.

2) There are also concerns that some prepacks can enable businesses to start afresh without addressing underlying weaknesses.

3) The corporate form can be manipulated by rogue traders, potentially enabling them to repeatedly walk away from debts and start again until such time as the disqualification system can stop them.

4) The director disqualification system does not necessarily lead to rehabilitation and it only applies to a small proportion of failed companies where there have been sufficiently serious failings. The aim of improving standards among directors may be difficult to achieve.

Increased regulatory burden

• Complexity of duties e.g. Companies Act 2006, s 172
• Directors of larger companies may be able to call upon advisers for guidance but directors of the MSMEs, which comprise the majority of UK businesses, may find the position more difficult.
• The position in insolvency is particularly complex.

Directors’ Duties in Insolvency

• BTI 2014 LLC v Sequana SA [2022] UKSC 25
• The company had paid a dividend of £135 million to its parent company (its sole shareholder).
• The company was solvent at the time of the payment but had uncertain long-term contingent liabilities, which gave rise to a real risk, although not a probability, that it might become insolvent at an uncertain but not imminent date in the future.
• It went into insolvent administration around 10 years later.
• Was the payment in breach of duty?

Directors’ Duties in Insolvency

• BTI 2014 LLC v Sequana SA [2022] UKSC 25
• Directors’ duty to act in good faith and in the interest of the company, CA 2006, s 172.
• Companies Act 2006, s 172(3) - the duty to promote the success of the company is subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
• Where the company is insolvent, bordering on insolvency or it is probable that the company will enter into an insolvent liquidation or administration, the interests of the company shift towards the interests of creditors, rather than enlightened shareholders.

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Directors’ Duties in Insolvency

• BTI 2014 LLC v Sequana SA [2022] UKSC 25
• At the time of the payment of the dividend, the company had not been actually or imminently insolvent; and that, accordingly, in the present case the modified duty s 172 was not engaged.

Existing educational opportunities

• There are various sources of information from government agencies e.g. Companies House, HMRC, the Insolvency Service.
• Business education in schools and universities, MBAs, IoD chartered director designation.
• Training is optional.

Transparency and Trust July 2013

• An approach of informing directors of their duties at the start was preferred to the proposed education add-on to disqualification which had been included in the discussion paper

Prepacks

• Concerns arise where successive business sales to the same parties result in repeated failures for the same reasons
• Graham review’s recommended viability report is good practice but voluntary
• Education with a mentoring element can more effectively address areas of weakness identified in a root cause analysis of the failed business.

Rogue traders

• Longstanding problem of abuse of the limited liability corporate form by rogue traders
• Education regarding moral conduct and ethics

Director disqualification

• Disqualification reflects the risk that past failings may be likely to be repeated in future.
• The position of company director, although not a regulated profession, in the way that medicine or law professions are, is still a fiduciary role and therefore one where there is potential for damage to be done to the interests of creditors and shareholders through future incompetence and/or dishonesty.

Purpose of disqualification

• Protection of the public: In Re Grayan Building Services Ltd [1995] 2 WLR 1, 15
• Encouragement of higher standards by providing an example to others: Re Swift 736 Ltd [1993] B.C.L.C. 896 , 899; Re Blackspur Group Plc (No.2), Secretary of State for Trade and Industry v Davies (No.2) [1998] BCC 11, 15.
• But directors are often unaware of a disqualification system or what behaviour attracts disqualification.

Purpose of disqualification

• The aim of improving standards could be strengthened through a programme of education to address the failings which have led to disqualification.

Scope of educational offering

• The sorts of errors that can lead to business failure are not necessarily going to lead to a disqualification, therefore the need for education is possibly wider and could be expanded to all directors of failed companies.

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Educational examples

• Debt counselling in the US and Canada to foster rehabilitative behaviour modification and reduce bankruptcy filing rates.
• Educational approaches are found to have helped in some instances, although there is criticism of mandatory counselling.

Possible aims of education

• Rehabilitation, encouragement of renascent entrepreneurship and the development of a culture of responsible entrepreneurship.
• These can be developed towards a “theory of change” by reference to existing educational theories and employed to articulate how and why a programme might lead to rehabilitative outcomes, including intermediate stages that might enable those outcomes to be reached and for the outcomes to be sustainable.

Targeted directors

• Training would not seem appropriate in all cases as some directors of failed companies will have good levels of existing knowledge.
• In some instances there may be difficulties regarding receptiveness and therefore it would be better for education to be optional.
• The programme might be best aimed at directors whose businesses have failed due to a lack of knowledge and where there is a genuine will to start again successfully

Content of education

• This could include reflection on past experiences, filling gaps in knowledge or skills, hopefully to enable past mistakes to be identified so that they may be avoided in future and better decisions be made.
• An entrepreneur may have doubts about their entrepreneurial skills and the educational process can either confirm or deny this but will preferably aid and “upskill” those who wish to start again.
• A root-cause analysis of the reasons for business failure could be produced along with an evaluation of what might be done differently.
• Certainly the aim would not be to stigmatise failure as this could inhibit future entrepreneurship

Incentives towards education

• The success of a programme of responsible entrepreneurial education can be viewed as depending on what the entrepreneur thinks that they will gain from the programme, how family and peers regard the training, as well as the entrepreneur’s confidence in their ability to implement the training.
• For some this approach may be a hard sell.
• A “carrot” could be e.g. the award of responsible entrepreneur certification.
• An educational requirement might be attached as a condition of leave being granted where an application has been made under CDDA 1986, s 17.
• Another possible incentive might be if the education is a mitigating factor in assessing the period of disqualification

Conclusion

• Some studies support the role of education in achieving behaviour modification.
• Linking a system too closely to rehabilitation of disqualified directors could miss others who might need it.
• It could distinguish between honest, responsible business people, who could potentially benefit from education, and those who would not, potentially to be offered to directors of failed companies who will be benefit from it.

Thank you