| Return to Contents The Disqualification Of Company Directors In Jersey Andrew Winchester The Bankruptcy (Désastre) (Jersey) Law 1990 (as amended) ("the Bankruptcy Law") introduced into Jersey law for the first time a statutory procedure for the disqualification of persons from acting as directors of companies. Article 43 of the Bankruptcy Law provides:- "(1) Where during the course of the "désastre" in respect of a company it appears to the Attorney General that it is expedient in the public interest that a director of that company should not be a director of or in any way, whether directly or indirectly be concerned or take part in the management of a company, the Attorney General may apply to the court for an order to be made to that effect against that director. (2) The court may make an order against a director where, on an application under this Article, the court is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company. (3) An order under paragraph (2) shall be for such period not exceeding fifteen years as the court thinks fit. (4) If a person acts in contravention of an order made under this Article he is guilty of an offence and liable to imprisonment for a term not exceeding two years or to a fine or both." As yet there have bst three applicatio the Royat pursuant to this Article; viz In re Delaney, Deltrust (C.I.) Limited and Sentinel Management Ltd [1], In re Hay [2] and In re Munson [3] . Interestingly Article 78 of the Companies (Jersey) Law 1991 ("the Companies Law") offers an alternative route to disqualification which has not yet been used. Article 78 provides:- "(1) Where it appears to the Committee or the Attorney General that it is expedient in the public interest that any person, should not, without the leave of the court, be a director of, or in any way whether directly or indirectly be concerned or take part in the management of a company, the Committee or the Attorney General, as the case may be, may apply to the court for an order to that effect to be made against that person. (2) The court may make an order against a person where, on an application under this Article, the court is satisfied that his conduct in relation to a company makes him unfit to be concerned in the management of a company. (3) An order under paragraph (2) shall be for such period not exceeding five years as the court thinks fit. (4) A person who acts in contravention of an order made under this Article is guilty of an offence." It might be thought that Article 78 afforded to the Attorney General and the Finance and Economics Committee (the Committee referred to in Article 78 of the Companies Law) wider powers than Article 43 of the Bankruptcy Law but that is not necessarily the case. It is true that an application under Article 43 can only be brought when certain matters come to the Attorney General's attention as the result of a declaration "en désastre" being made against a company and Article 78 is not limited in such a manner (and allows the Finance and Economics Committee to make the necessary application). However, "a company" receives a much wider definition in the Bankruptcy Law than in the Companies Law. Article 1 of the Bankruptcy Law defines a company as being:- "(a) a company registered under the "Loi (1861) sur les Sociétés à Responsabilité Limitée" and the Companies (Jersey) Law 1991; (b) a body corporate incorporated outside the Island; (c) a corporation constituted under Article 4 of the "Loi (1862) sur les teneures en fidéicommis et l'incorporation d'associations"; and (d) any association constituted by Act of the States." By contrast Article 1 of the Companies Law defines a company as:- "a company registered under this Law, or an existing company" (an existing company being a company registered under the "Loi (1861) sur les Sociétés à Responsabilité Limitée"). The definition in the Companies Law is thus much narrower than the definition in the Bankruptcy Law, and in particular excludes directors of companies incorporated outside the Island but administered here. What then is it necessary to establish if a director is to be disqualified from acting as such? The Court must be satisfied that a person's "conduct in relation to a company makes him unfit to be concerned in the management of a company". It is also necessary "that it is expedient in the public interest that any person, should not, (without the leave of the court) be a director of, or in any way whether directly or indirectly be concerned or take part in the management of a company". Neither the Bankruptcy Law nor the Companies Law gives any guidance as to what is necessary to make a person "unfit". However, it is clear that Article 78 of the Companies Law and Article 43 of the Bankruptcy Law are based upon the Company Directors Disqualification Act, 1986 of the United Kingdom ("the 1986 Act") which goes into the question of "unfitness" in a great deal more detail. Section 6(1) of the 1986 Act provides:- "(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied - (a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and (b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company." Unlike the Bankruptcy Law and the Companies Law, however, the 1986 Act offers guidance on what type of behaviour might be said to constitute "unfitness". Section 9(1) of the 1986 Act provides:- "Where it falls to a court to determine whether a person's conduct as a director or shadow director of any particular company or companies makes him unfit to be concerned in the management of a company, the court shall, as respects his conduct as a director of that company or, as the case may be, each of those companies, have regard in particular - (a) to the matters mentioned in Part 1 of Schedule 1 of this Act, and (b) where the company has become insolvent, to the matters mentioned in Part II of that Schedule; and references in that Schedule to the director and the company are to be read accordingly." The criteria set out in Schedule 1 may be summarised as follows:- Part 1 - Matters applicable to all cases:- (1) any misfeasance or breach of a fiduciary or other duty owed by the director to the company; (2) any misapplication of assets or conduct making him accountable to the company; (3) his part in any improper transfer of assets intended to defraud creditors; (4) his part in any failure by the company to keep proper records and registers and to file annual returns, etc; (5) his part in any failure to prepare annual accounts and directors' and auditors' reports; Part II - Matters applicable where company has become insolvent:- (6) his part in the causes of the company's insolvency; (7) his part in the company's failure to supply goods and services which have been paid for in whole or in part; (8) his part in any transaction which is "at an undervalue" or which is voidable as a `preference' (under the Insolvency Act, 1986, ss 238-240) or which is void (under the Insolvency Act 1986, s. 127) because it is made after the commencement of the winding up; (9) his part in any failure to summons a creditors' meeting in a creditors' voluntary winding up (Insolvency Act 1986 s.98); (10) his part in any failure to comply with various other procedural obligations imposed upon directors in an insolvency. It should perhaps be noted that Section 9 of the 1986 Act provides that the Court when determining "unfitness" should "have regard in particular" to the matters contained in Schedule 1. The Schedule is not exhaustive of the matters to which the disqualification application may relate. The Royal Court has not yet had occasion to consider these provisions of the 1986 Act in detail. It is however, submitted that in considering questions of "unfitness" in future the Court may well do so. There is also now a growing body of case law in the United Kingdom as to the meaning of "unfitness". In the case of Re Bath Glass Ltd [4] for example, Peibson J ruled that to reach a finding of unfitness the court should be satisfied that the director had been guilty of one or more serious failures, whether deliberately or through incompetence, to perform those duties which apply to those trading through companies with limited liability. In the case of Re Lo-Line Electric Moto & Ors [5] Browne - Wilkinson V.C. said:- "Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate." In Re Sevenoaks Stationers (Retail) Ltd [6], which was tt case brought under Section 6 of the 1986 Act which went as far as the Court of Appeal, Dillon LJ said, at page 176:- "It is beyond dispute that the purpose of sec.6 is to protect the public, and in particular potential creditors of companies, from losing money through companies becoming insolvent when the directors of those companies are people unfit to be concerned in the management of a company. The test laid down in sec.6 - apart from the requirement that the person concerned is or has been a director of a company which has become insolvent - is whether the person's conduct as a director of the company or companies in question "makes him unfit to be concerned in the management of a company". These are ordinary words of the English language and they should be simple to apply in most cases. It is important to hold to these words in each case". As more applications are brought in Jersey under Article 43 of the Bankruptcy Law and Article 78 of the Companies Law it will be interesting to see how far the Royal Court adopts the approach which had been adopted in the United Kingdom. Duration of the order Under Section 6 of the 1986 Act, the maximum period of disqualification is presently fifteen years. Initially the maximum period of disqualification in Jersey under Article 43 of the Bankruptcy Law was five years. However, it became apparent in the case of In re Delaney that in some cases such a period of disqualification would not be appropriate or perhaps sufficient. Article 40 of the Bankruptcy Law provides that a person can be discharged from a declaration of "en désastre" after four years from the date of the declaration of "en désastre" in respect of his property (although that period can be reduced or lengthened on the application of the Viscount of the Royal Court). Indee the case of Re Delaney [7]the period was extended. The Court held in that case that when deciding whether or not to extend the period of "désastre" proceedings the Court should weigh carefully the conflicting interests of the debtor and his creditors. In Delaney's case the Court ordered that the matter of Delaney's discharge should be deferred and referred back to the Court for reconsideration two years after his release from prison. Article 24 of the Bankruptcy Law provides that a person who is "en désastre" may not act as a director of a company. Therefore, in cases where a director of a company the property of which has been declared "en désastre" is himself declared "en désastre", by virtue of that declaration he is unable to act as a director of a company because of Article 24. As the law stood previously therefore the actual effect of any order which the Royal Court might make against a director pursuant to Article 43 could be negligible. If, for example, an application was made by the Attorney General to disqualify such a person shortly after such a person was declared "en désastre" even the maximum period of disqualification might not represent any real punishment to the ex-director or offer any additional protection to the public. He is, at least for four years, unable to act as a director because of the provisions of Article 24 of the Bankruptcy Law. By virtue of the Bankruptcy (Désastre) (Amendment No.2) (Jersey) Law 1996 the possible period of disqualification has now been increased to fifteen years. Jersey is therefore now in line with England in terms of the maximum period of disqualification which can be ordered, at least under the Bankruptcy Law. The Royal Court has not yet laid down any guidance as to what period of disqualification should be considered appropriate in particular types of cases. The first two cases which came before the Court involved individuals who had previously been convicted and sentenced for lengthy periods of imprisonment for fraud offences. In both cases the then maximum period of five years was ordered. The third case resulted in a three year period of disqualification. The Attorney General in that case asked for a three year period of disqualification and that period was not contested by the respondent. The courts in England have howe down guidelines in this area. The Court of Appeal in the leading case of re Sevenoaks Stationers (Retail) Limited [8] established three bands of seriousness of offence with corresponding periods of disqualification:- (a) in "not very serious cases" the appropriate period of disqualification was considered to be between two and five years; (b) for serious cases which do not merit the longest period of disqualification six to ten years; and (c) for particularly serious cases ten years or more. In the absence of any local case-law the Royal Court might well in the future follow the approach which has been taken in England in relation to the appropriate period of disqualification in any given instance. Conclusion In recent years the Attorney General has brought representations before the Royal Court seeking disqualification orders against directors of insolvent companies in appropriate cases. However, those applications have so far been limited to cases of persons who have previously been convicted of criminal offences. As this area of the law develops it will be interesting to observe in which circumstances, other than reasonably clear cut cases where criminal offences have been committed, the Attorney General (or the Finance and Economics Committee) determine that applications should be made in order to protect the public from "unfit" directors. Andrew Winchester is an advocate of the Royal Court practising with Jenners, P.O. Box 260, St. Helier, Jersey, JE4 8TS. |