Following last weeks’ report from the Banking Standards Commission in which three former senior executives of HBOS were heavily criticised thoughts have turned to whether or not there is enough evidence for the executives to have disqualification proceedings brought against them. The report named the three executives responsible, and said that the bank, having run up £47bn losses in bad loans, would have gone bust even if the 2008 financial crisis had not happened.

How can a director be disqualified?

A disqualification order against a director can be applied for under the Company Directors Disqualification Act 1986 (“CDDA”). This prevents the individual in question from acting as a director of a company, acting as a receiver of a company’s property or in any way, whether directly or indirectly, being concerned or taking part in the promotion, formation or management of a company or acting as an insolvency practitioner.

A director is any person who acts as a director of a company, whatever their title (and includes shadow directors). Directors can be disqualified for up to 15 years. Under the CDDA the three broad categories under which a director can be disqualified are:

  1. General misconduct in connection with companies;
  2. Unfitness to act as a director of a company; and
  3. Other cases (this includes competition disqualification orders, where a court has made an order under Sections 213/214 of the Insolvency Act, undischarged bankrupts and those subject to a bankruptcy restrictions order).

Who can apply to the court for a disqualification order?

With regards to an application to the court for a disqualification order for general misconduct this may be made by any past or present member or creditor of the company in relation to which the person has committed or alleged to have committed an offence or default.

Where the company has failed, the Official Receiver or Insolvency Practitioner is required to send the Secretary of State a report on the conduct of all directors who were in office in the last 3 years of the company’s trading. The application for disqualification will need to be made within 2 years of the date of the winding-up order or any earlier voluntary liquidation, administrative receivership or administration (unless extended by the court).

In terms of competition disqualification orders the OFT or a specified industry regulator may seek a disqualification order from the court.

Breach of a disqualification order

If an individual breaches a disqualification order or an undertaking this is a criminal offence and carries a maximum two years imprisonment or an unlimited fine. The individual will also be personally liable for all the relevant debts of the company he is managing.

D&O Insurance

In the normal course of events, disqualification proceedings are intended to be covered by a D&O policy, unless, for example, the director concerned has been fraudulent.

When a company fails, liquidators and the government’s insolvency service are under pressure to attach the blame to company directors. Directors therefore need to be able to defend themselves whenever their conduct is called into question.

One of the issues that may arise for the former directors of HBOS if such an action is brought will be whether or not the disqualification proceedings can be linked to any notification made to the HBOS D&O policy (as it is unlikely that such proceedings will fall for cover in the policies covering their current capacities as directors of other companies as the wrongful acts were not committed in their capacity as directors of these companies).