The Disqualification Order
A director of a company owes fiduciary duties to act responsibly and in their related company's best interests1. Serious breaches of such duties can result in a director's disqualification for periods that can extend over many years. In Templeton Insurance Ltd v Corlett2, His Honour Deemster Doyle noted the '...high standards required from company directors and in particular the need for each director to take responsibility to safeguard the company's interests and not necessarily to rely on what they are told by a fellow director.'
Breach of these duties can result in a director's disqualification and the Company Officers (Disqualification) Act 2009 (CODA) governs this on the Isle of Man. Sections 1 and 2 define disqualification orders:
(1) A disqualification order is an order that a person must not, without leave of the High Court, be an officer of a company for a period specified in the order.
(2) The following are officers of a company for the purposes of this Act-
(a) a director, secretary or registered agent;
(b) a liquidator;
(c) a receiver;
(d) a person holding an office under any relevant foreign law (Section 1(7) notes that this refers to the law of a place outside the Isle of Man where the Company concerned is for the time being established) analogous to any of the offices specified in paragraph (a), (b) or (c) in respect of a company; or
(e) a person who, in any way, whether directly or indirectly, is concerned or takes part in the promotion, formation or management of a company.
Such orders are not restricted to directors alone, although it is perhaps directors to whom they are most commonly associated. A disqualification order can be made on grounds other than criminal convictions, despite the fact the person may also be criminally liable.
Sections 3 to 10 CODA deal with the three primary reasons for disqualification. The most common is disqualification for unfitness, covered under sections 3 to 8. Section 9 deals with disqualification for participation in fraudulent trading and section 10 provides that a person whilst an undischarged bankrupt must not act as an officer for a company, except with the leave of the High Court.
With regards to court procedure on director disqualification, in FSC v Gallagher3, His Honour Deemster Doyle stated the following;
(1) The court should approach its task in two stages. First, consider each and every ground or charge and to determine whether all or any of such grounds or charges have been proved. If and only if the court is satisfied in respect of the grounds or charges in whole or in part can the court then proceed to consider whether the respondent ought to be disqualified and if so from which offices and/or activities and for how long. Where there are two or more respondents the position of each respondent must be considered separately. The court's power to make a disqualification order is discretionary.
(2) The question of whether a director is unfit is a question of fact. A decision of the court in one case to disqualify or excuse a director is not necessarily a guide to the outcome of another case. Each case depends on its own facts and circumstances.
Deemster Doyle also noted in the same case that, in his judgement in Financial Supervision Commission v Mellor and Gelling4, he had highlighted the danger of the court considering the question of disqualification with the benefit of hindsight. This point is important as the court must act on the basis of the situation before and information that was available to the defendant at the time of their alleged misconduct and not at the time of trial.
A Disqualification Undertaking
Section 2(1) CODA provides that a disqualification undertaking is an undertaking by a person that for a period specified in it, the person will not be an officer of a company without the leave of the High Court or the Financial Supervision Commission (FSC). Such an undertaking can be for a minimum of 2 years and a maximum of 15 years5.
To take effect, such an undertaking must be accepted by the FSC who will review whether it is the public interest to do so (rather than applying for a disqualification order) and, prior to specifying the prescribed form of any such undertaking, will consult with the Deemsters6. Disqualification undertakings can be applied either where it is deemed that the factors under sections 4(1) and 5(1) have been satisfied or where the officer themselves has offered such an undertaking7.
Whilst a disqualification action is effectively a civil procedure, contravention of such an order or undertaking can incur criminal liability.
Section 11 lists the criminal penalties whilst section 12 provides that a disqualified director will become personally liable for the debts of a company of which he has acted as director whilst disqualified.
Section 11(1) provides that an offence is committed when a disqualification order or undertaking is breached, or where an undisclosed bankrupt acts as a company officer without the leave of the court.
The penalties under section 11(2) are:
(a) on conviction on information, to custody for not more than 2 years or a fine, or both; and
(b) on summary conviction, to custody for not more than 6 months or a fine not exceeding £5,000, or both.
Proceedings for an offence under section 11 require the consent of the Attorney General (AG)8 and such proceedings must be brought within 12 months of evidence of a breach being brought to the AG's attention9. Proof of commencement of such period can be satisfied by the production of a certificate signed by the AG10.
Section 11(4) provides:
(4) If P is convicted of an offence under subsection (1) whilst subject to a disqualification order or undertaking, the court by which P is convicted may make a disqualification order to run concurrently or consecutively with the disqualification order or disqualification undertaking (as the case may be) which is breached.
Application to continue holding corporate office
A disqualified person, may apply to court for an order allowing them to continue holding corporate office and to continue acting as the sole shareholder of the company concerned. In such circumstances, the burden falls upon the applicant to prove that such an order by the court would not put the public at risk. As in the case of Blakely11, should such a scenario be considered by the court as unlikely to re-occur or should there be the ability to ensure measures are taken to 'safeguard' the public, permission can be granted where the applicant can adopt an alternative role to that of a director. Various relevant conditions will form a part of the order granting such leave.
The United Kingdom
With regards to the consequences of breaching a disqualification order, the statutory penalties applicable in the UK are akin to those under the 2009 Manx Act. The relevant sections, 13 and 15, are located in the Company Directors Disqualification Act 1986 (CDDA). Section 14 of the same act also provides for penalties in cases of contravention by bodies corporate. The penalties for breach under the CDDA 1986 are identical to section 11(2) of its Manx equivalent, the CODA 2009.
In contrast to the Manx legislation, the type of persons associated with a company who are liable under the Act is perhaps narrower under the CDDA, focussing on the role of the director.
Section 1(1) CDDA provides that disqualification prevents an individual from acting as a director or insolvency practitioner.
Below are a couple of UK cases for reference:
R v Seager; R v Blatch12
Secretary of State for Trade and Industry v Goldberg and another13
As well as referring to CODA 2009, or any subsequent legislation, please refer to the Isle of Man Financial Supervision Commission website for further information on the effects of director disqualification:
http://www.fsc.gov.im/ http://www.gov.im/lib/docs/fsc/effectsofadisqualificationorder.pdf (Effects of Disqualification)
Manx cases can be located at http://www.judgments.im
1 Common Law principle – UK example: Piercy v S Mills & Co  1 Ch 77, 88 LJ Ch 509
2 (Civ) 2013 MLR 23
3 (part 2) (ChD) 2009 MLR 52
4 (ChD) 2002 MLR 24
5 Company Officers (Disqualification) Act 2009, s2(3)
7 n5, s6(1)
8 n5, s11(3)
9 n5, s11(5)
10 n5, s11(6)
11 (ChD) 2009 MLR N
12  EWCA Crim 1303
13  EWHC 2843 (Ch)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.