Directors Disqualification - Prohibition on Involvement in Management

What is the scope of the prohibition on being involved in the management of a company?

It is well known that, under the Company Directors Disqualification Act 1986 (“CDDA”), a person can be disqualified from acting as a company director for a period of time. However, the scope of the prohibition imposed will typically be wider than simply prohibiting the disqualified person from acting as a company director. For instance, a directors disqualification order under section 1 of CDDA will state that the disqualified person:

'(a) shall not be a director of a company, act as a receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court, and

(b) shall not act as an insolvency practitioner

for a period of [x] years'

This article will consider one particular part of this wider prohibition, namely, what '...in any way, whether directly or indirectly, be concerned or take part in the...management of a company...' means - what guidance has the Court given, to help understand the scope of this prohibition?

Before turning to the main authorities, a few points can be noted initially:

(1) The most obvious scenario where the scope of the prohibition will come up, is where the disqualified person is being prosecuted for (allegedly) breaching the prohibition. Unless there is a half time submission, whether or not the prohibition has been breached, will be determined after full trial by the jury. It can be termed a 'jury question' in the sense that, a jury will be asked to determine whether a violation has occured. To assist the jury making this factual determination, the trial judge will want to give a summing up that assists the jury to understand quite what was prohibited. The words of the prohibition are broad. However, this is not the only scenario where the scope of the prohibition must be examined, so that a subsequent determination can be made of, whether or not the prohibition was violated. It can come up in civil cases without juries (i.e where the judge makes the findings of fact as well as determining the law). For instance, the issue can come up for determination in a winding up on public interests grounds petition, like it did in Re Market Wizard Systems (UK) Ltd [1998] 2 BCLC 282 ('Market Wizard'), wherein Carnwath J had to resolve whether there had been a violation or not.

(2) there is no 'succinct test' in this area of the law, nor convenient summary of the guidance set out in a single authority. Some of the authorities are collected together[1]in Market Wizard but, still, the reader must piece together various snippets of guidance from the authorities, with a view to creating a satisfactory tapestry/patchwork of what will and will not amount to violating the prohibition. Consequently, this area of the law is unsatisfactory and would benefit from renewed consideration and concise distillation by the Court of Appeal.

(3) many of the lesser authorities are not actually about the meaning of a directors disqualification order prohibition per se. They are referred to by analogy because they concern similar phrases to those in a directors disqualification order prohibition. However, the exact relevance of some of these assorted cases, becomes open to a some debate, as many of the authorities involve different Acts of Parliament:

(i) using somewhat different phraseology;

(ii) bringing with them different statutory contexts and legislative histories;

(iii) aimed at/seeking to address, different perceived mischiefs; and

(iv) involve (some) now revoked/superseded statutory provisions (so no new authorities can refine the decisions of earlier authorities).

The most recent such Act we will encounter is Insolvency Act 1986 - wherein:

(i) in section 212(1)(c), the range of people who may be a defendant in misfeasance proceedings (i.e. summary form of proceedings), includes any person who '...is or has been concerned, or has taken part, in the promotion, formation or management of the company'; and

(ii) in section 216(3)(b), directors/shadow directors of insolvent companies face a (different) prohibition. They must not: '...in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of [a phoenix type company]' for a prescribed period of time.

Turning to the two main authorities, R v Campbell [1984] BCLC 83 ('R v Campbell') and then Market Wizard.

R v Campbell

R v Campbell is an important authority, though the judgment is far from easy to use.

In R v Campbell, the accused/appellant was made subject to a disqualification order. The disqualification order was made under section 188 of the Companies Act 1948, a now obsolete provision, but with which section 1 of the CDDA shares similar terms. The most salient part of section 188(1) provided that in certain set circumstances: '...the court may make an order that that person shall 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...'. Presumably, the disqualification order was in these terms. 

Subsequently, the accused/appellant had acted as a 'management consultant' to advise on the financial management and restructuring of a company. At trial, he was convicted of breaching the prohibition imposed upon him by a disqualification order.

Before the Court of Appeal, the issue was: had his conduct amounted to a breach of the disqualification order prohibition?

The guidance in the judgment is rather scattered and piece-meal. But, from the reasoning, the following points can be extracted.

The Court of Appeal said the trial judge had been 'entirely correct' (p.85) to:

(1) direct the jury as to '...the difference between managing certain specific aspects of the company's activities, such as production, sales, trading and the like, and the central management of the affairs of the company, that is to say the matters normally undertaken by the directors or officers of the company.' (Carnwath J in the later case of Market Wizard Systems (UK) Ltd [1998] 2 BCLC 282 noted this at paragraph 57, was content to follow it, at paragraph 64).

(2) use '...the phrase 'central direction of the company's affairs' (p.85) and to drawn '...the distinction between that kind of management and the management of particular activities of the company's trading affairs...' (p.85)

Pausing there to digest this foundational dichotomy/distinction - there exists a dichotomy/distinction between:

(i) on the one hand, managing/management of specific/particular aspects of the company's activities/trading affairs (production, sales, trading and alike); and

(ii) on the other hand, central direction/management of the company's affairs - defined as matters normally undertaken by directors/officers of the company;

That is a valid dichotomy/distinction. Conversely, the Court of Appeal said the trial judge had been 'entirely correct' (p.85) to direct the jury to disregard the alleged distinction between 'central management' and 'day-to-day management', holding that any distinction was 'meaningless';

Further, the Court of Appeal:

(4) seemed to accept that “management” means the 'central direction of the company's affairs' (p.85);

(5) said 'The appellant in this case was described as a 'management consultant' or 'company doctor' phrases which have no legal significance.' (p.84);

(6) made no criticism of the trial judge's invitation to '...the jury not just to consider the isolated tasks which the defendant undertook, or in which he played some part, but to look at the overall picture and to say in the light of what they found he had done whether he had, as a matter of fact, taken part in the management of the company as he...' - I interpose, this 'he' here refers to the trial judge, '...had defined it.' (p.85)

(7) in response to an appeal ground that the trial judge should have directed the jury that '...advising on financial and management restructuring of the company could not, in law, amount to the offence' (p.85), said, on the contrary, such a direction would, if given, have been a misdirection (p.85). The Court of Appeal said '...advising on financial management and restructuring of a company may well amount to being concerned indirectly in the management of the company. It is the business of the directors to manage the business of the company (see Article 80 of Table A, Companies Act 1948, Sch 1) and in advising directors on financial and management structure, a person may well be being concerned directly or indirectly in the management of that company.' (p. 85) [bold added]

(8) said 'It was a question of fact for the jury whether what the appellant was shown to have done amounted to taking part in or being concerned in the management of the company.' (p. 86) - a comment made in an appeal against conviction in a criminal case, and so not, understandably, directed to non-jury scenarios (as stated earlier, the issue can arise for determination in ordinary civil proceedings, wherein it will be an ordinary civil judge who determines the findings of fact).

(9) recorded, that the trial judge, in his summing up to the jury, had said, at p.87:

'What is the picture here? Is this the picture of a consultant who, strictly speaking, was just there to advise and conduct certain specific negotiations; who for convenience wrote these letters without in any way taking part in the management of the company, or does it add up to a picture of activity which has gone beyond consultancy and are these letters only explicable on the basis that there is a management operation going on of the plainest and simplest kind, that is trying to get the sale of the assets to [a 3rd party] and at the same time as part of a vital piece of timing to make enough time with all the creditors who might put the company to death in the meantime, to make enough time with them to get the deal through first.

Whether that is an operation of management that is going on and whether the defendant is so fully and continuously involved in that so that you feel bound to say that he is taking part in it is a pure question of fact.

When I say it is a question of degree that does not mean you have not got to decide it. ... In this case you have to say whether this defendant's conduct is proved to be and thus clearly is on the side of taking part in the management. Not merely being consulted and giving advice when called upon, but actually standing beside [the managing director] and giving him such continuous advice which is so continuously put into effect that he can only be described as taking part.'

As to this, the Court of Appeal said, '...that direction, if anything, erred on the side of being too favourable' (p.87) to the accused/appellant and '...if anything the construction placed by the learned judge on s 188 was too favourable and too narrow.' (p.87), and more definitively: '...the narrow construction which the learned judge put upon the Act, was not a construction which s 188 can properly bear, and in that sense was in effect too favourable to the appellant.' (p.88);

(10) held that the trial judge had been wrong to said that '...in the context of s 188 the words 'be concerned in' means exactly the same as 'take part in' (p.88). The Court of Appeal said '...in so deciding the learned judge was placing too restrictive a view on the words of s 188....if one looks at s 188 the wording is so widely cast that it is the opinion of this court that it is intended to insulate persons, against whom an order of disqualification has been made, from taking part in the management of company affairs generally. It is cast in the widest of terms '... in any way, whether directly or indirectly, be concerned or take part in the management ...' It would be difficult to imagine a more comprehensive phraseology designed to make it impossible for persons to be part of the management and central direction of company affairs.' (p.88)

(11) rebut the contention that '...a person in a position of the [accused/appellant], a consultant, would not know what he could or could not do.'; the Court of Appeal said, at 88:

'...that criticism is amply met...by the fact that there is provision in s 188 or in any of the other sections which deal with disqualification of directors for such a person, in the case of doubt, to apply to the court for leave to do that which he seeks to do. If he applies to the court then any question of ambiguity would be resolved because the court would either say that he could or could not do that which he proposed to do.'

It should be noted however that the weight to be given to R v Campbell has been somewhat undermined by some obiter comments of Warner J in Re Clasper Group Services Ltd [1989] BCLC 143 ('Clasper'). At 678, having been referred during argument in Clasper, to R v Campbell as an aid to understanding section 212 of the Insolvency Act 1986, Warner J said 'I do not find that authority very helpful...' in part '... because the Court of Appeal was there concerned not so much with defining the phrase as with refuting criticisms which had been made of the summing-up of the judge in the Crown Court. It was enough for the Court of Appeal that that summing-up had not been unjustifiably unfavourable to the appellant.' An observation that diluted the R v Campbell guidance, without offering anything useful in its place.

Market Wizard - 1998

In Market Wizard, a Mr Reichelt was an undischarged bankrupt, with the result that, it was an offence (section 11 of the CDDA) for him to:

'act as director of, or directly or indirectly to take part in or be concerned in the promotion, formation or management of, a company, except with the leave of the court.'

A prohibition, the wording of which, is very similar to a section 1 of the CDDA directors disqualification order prohibition.

In Market Wizard, the Secretary of State's presented a public interest winding up petition against Market Wizard Systems (UK) Ltd (the 'Company') on the basis:

(i) the Company was selling computer systems that generated investment advice, when the Company did not have the requisite regulatory authorisation to give investment advice (whether directly, through a computer system, or at all);

(ii) Mr Reichelt was involved in the management of the Company when an undischarged bankrupt, contrary to section 11; and

(iii) the Company failed to maintain adequate books, records and accounting procedures.

The petition came before Carnwath J, and one of the issues he had to determine, was (ii), had in fact Mr Reichelt so been involved, contrary to Mr Reichelt's section 11 prohibition. The Secretary of State's case on (ii) was that '...Mr Reichelt took part in or was concerned in the management of the company and that the company either had knowledge of that, or, in the person of Mr Smith, 'turned a blind eye' to Mr Reichelt's background.' (paragraph 53)

In his judgment, Carnwath J said:

(1) under the subheading 'Concerned in the management', that he had been '...referred to a number of authorities in which the expression 'being concerned in the management' has been considered' before going on to helpfully analysed (at paragraphs 57 to 64 (298-301): (1) R v Campbell (s.188 of the Companies Act 1948); (2) Re Clasper Group Services Ltd [1989] BCLC 143 (a s.212 of the Insolvency Act 1986); (3) Re a Company [1980] Ch 138 (s.441 of the Companies Act 1948); (4) Comr for Corporate Affairs v Bracht (1989) 7 ACLC 40 (Ormiston J) (paragraphs 62-63 also quoted below); set out for readers in full in this footnote[2] At paragraph 64, he recorded: 'Before me both parties were content for me to adopt the guidance contained in these authorities, including the Australian case.' - which he then did.

(2) of the authorities, having gone through them: 'The extracts which I have cited demonstrate the difficulty of achieving a succinct test.'; summarising that it is 'Essentially it is a 'jury question'.;

(3) however, he found 'some assistance' (paragraph 61) from Re a Company [1980] Ch 138 (also known as Re Rascal Communications Ltd) - a case concerned with section 441 of the Companies Act 1948 (now obsolete), which gave certain powers to the High Court where it was shown that a person while an officer of a company had 'committed an offence in connection with the management of the company's affairs'. In particular, from the judgment of Shaw LJ, at 144, where Shaw LJ said:

'The expression ''manager'' should not be too narrowly construed. It is not to be equated with a managing or other director or a general manager. As I see it, any person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company is in the sphere of management. He need not be a member of the board of directors. He need not be subject to specific instructions from the board. If he fulfils a function which touches the central administration of the company, that is sufficient in my view to constitute him an ''officer'' or ''manager'' of the company for the purposes of section 441 of the Act.'

Note, although not mentioned by Carnwath J, this case (i.e. Re a Company [1980] Ch 138) was appealed to the House of Lords [1981] A.C. 374, where the appeal was allowed on the basis the Court of Appeal ought not to have heard an appeal from the 1st instance judge's decision - because the statute said his decision 'shall not be appealable'. The upshot is that the Re a Company [1980] Ch 138 - the Court of Appeal/Shaw LJ's judgment - has no binding validity as legal precedent, but should (only) be taken into account (see Butland v Powys CC [2009] EWHC 151 (Admin))

(3) the 'fullest discussion' (paragraph 62) is to be found in Commissioner for Corporate Affairs v Bracht [1989] VR 821; (1989) 7 A.C.L.C. 40 ('Bracht'), a decision of Ormiston J in the in the Supreme Court of Victoria, Australia (so not binding authority in England and Wales) - '...a case concerned a statutory provision in very similar terms to s 11.' (paragraph 62). Carnwath J explained that 'The respondent, Bracht, had been involved in negotiating credit facilities on behalf of the company and had held discussions with the company's bank manager as to the obtaining of bank guarantees. The magistrate had dismissed the charges apparently on the grounds that the director to whom Mr Bracht reported had 'effective or ultimate control' (paragraph 62), before quoting, at paragraphs 62-63, what Ormiston J stated in his judgment in Bracht (at 47-48):

'There must be an element of decision making, which affects the corporate enterprise as a whole, but those responsible need not form part of the board, nor even need they be executives directly communicating with the board. Nevertheless, in the ordinary course of affairs, it is only in a large company that persons outside this latter category, so far removed from the power of control exercised by the directors, may be engaged in the ''management'' of a company. In a small company like the present the actions of those directly answerable to the directors may amount to ''management'', for, even if those people are also engaged in routine activities of a kind not normally associated with management, it is sufficient if powers and functions are delegated to those persons which are likely in their performance to have a significant effect on the business and financial standing of the company. As it is a protective section, protective at least of the creditors and shareholders, then it must have been designed to prevent the participation in management of those who might put the solvency or the probity of the corporation's administration at risk. Persons not given any significant discretion or advisory role in decision making could not therefore be intended as an object of the prohibition. It may be difficult to draw the line in particular cases, but in my opinion the concept of ''management'' for present purposes, comprehends activities which involve policy and decision making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs.'

Carnwath J interposed 'He understood the expression 'take part in' to connote 'active participation' (at 48)', before continuing:

'Such participation would have to be real and direct, but not necessarily in a role in which ultimate control is exercised, although it would have to be more than the administrative carrying out of the orders of others responsible for a company's management.'

Carnwath J said, at paragraph 63. 'As to the expression 'being concerned in'' Ormiston J said (at 49):

'In the present section I would see the prohibition as covering a wide range of activities relating to the management of a corporation, each requiring an involvement of some kind in the decision-making processes of that corporation. That involvement must be more than passing, and certainly not of a kind where merely clerical or administrative acts are performed. It requires activities involving some responsibility, but not necessarily of an ultimate kind whereby control is exercised. Advice given to management, participation in its decision making processes, and execution of its decisions going beyond the mere carrying out of directions as an employee, would suffice.'

Carnwath J said he respectfully agreed '...with Ormiston J in emphasising that 'ultimate control' is not a necessary element, and further in the emphasis he gives to those functions which are relevant to 'the solvency or the probity of the corporation's administration' (paragraph 64).

(4) set out Mr Reichelt's involvement in the company, a description that provides an illustration of what actions are a violation of the prohibition (detailed in the footnote[3]).

Corran v Butters

R v Campbell was followed in Corran v Butters [2017] EWHC 2294 (Ch), a decision of Judge Stephen Davies (sitting as a High Court judge in the Manchester District Registry), although this was an unfair prejudice case [4].

Other Authorities - Modest Guidance/Assistance - Set 1

In addition to the above, there are other authorities, offering some modest guidance/assistance; these include:

(1) R v Austen (1985) 7 Cr App R 214

Mr Austen was disqualified under section 188(1) of the Companies Act 1948. He appealed, arguing that his misconduct/offences (the fraudulent raising of finance) did not come within the jurisdictional words of section 188(1): 'concerned in the management of a company', and so no disqualification order should have been imposed upon him. Consequently, the case related: (1) not to the scope of the meaning of a disqualification order (which is what this article focuses on); but to an earlier stage; but, (2) to whether the disqualification could be imposed in the first place, within the statutory provision. With that cavet, it is still illuminating to consider what Mann J said, at 216, about 'the management of the company', when dismissing Mr Austen's appeal:

'In our judgment the words of the section when they refer to "the management of the company" refer to the management of the company's affairs and there is no reason in language for differentiating between internal affairs and external affairs. Indeed as a matter of policy it may be thought appropriate that management should extend to both internal and external affairs. The section should cover activity in relation to the birth, life and death of a company.'

(2) Re Clasper Group Services Ltd [1989] BCLC 143; (1988) 4 BCC 673

The liquidator of a company brought, amongst other things, section 212 of the Insolvency Act 1986 proceedings, against an individual (an employee 'management trainee' and son of the controlling shareholder/director; the 'respondent') - such proceedings being a summary form of proceedings, seeking an order for repayment of a sum the respondent received from the company. However, such proceedings could only be brought against an individual if he/she fell within (at least) one of 3 categories set out in the 3 subsections. It was common ground that the respondent did not fall into the first 2 categories. The issue was, did he come with section 212(1)(c) as a person who '...has been concerned, or has taken part, in the...management of the company'. A similar expression to the phrase under consideration in this article. Warner J held, obiter, that '...however wide a meaning one should attribute to the phrase in sec. 212 , [his] functions and activities as an employee of the company were too lowly for him to come within it.' (678).

As to particular features and evidence on them, the judge said: 'I do not think that the evidence could justify a finding that he was concerned or took part in its management.' (678-679), after referring to:

(i) the respondent's written evidence that 'He appears never to have risen much above the status of an office boy and messenger, although he was provided with some management training' (at 149); and

(ii) the respondent's position vis-a-vis the company's bank. The respondent had been an authorised joint signatory on the company's bank account, but only because his father (who was an authorised sole signatory) wanted another signatory (the secretary) not to be a sole signatory. Further, the respondent had never discussed the company's affairs with the bank manager. For a period, company bank statements were addressed to the respondent, but this was explained as probably because it was his job to collect them from the bank.

The weight to be given to the Clasper as guidance, in relation to the scope of a directors disqualification order prohibition, must be tempered by the following: Warner J saw the two contexts (s.212 vs directors disqualification) are being different - and this must apply in both directions. He said of R v Campbell, at 678: 'I do not find that authority very helpful...' in part '...because it was not about the construction of sec. 212 but about the meaning of the phrase “take part in or be concerned in the management of a company” in another context...'

(3) Re Gibson Davies Ltd [1995] BCC 11

At first instance, a County Court Judge had refused a disqualified person's s.17 leave application, for permission to act as a director of a franchisor company (with about 31 franchisees (at 14)), stating (amongst other things) 'I do not see why the company should not prosper with the [disqualified person] employed as a chief salesman'. On the applicant/appellant's appeal against this refusal, Sir Mervyn Davies in the Chancery Division (Companies Court) commented, at 15:

'...having regard to the size of the company, I accept the sentiment ... that if, as the judge suggested, the appellant were to be a chief salesman, then the appellant would almost inevitably be concerned in the management of the company.'

Other Authorities - Modest Guidance/Assistance - Set 2

There are other authorities referred in the textbooks, as related to this topic. However, they are of only moderate assistance, as the Courts were therein considering somewhat different phrases in different statutes. As will be apparent, the words 'the management...of a company' were, in the authorities below, preceded by the phrase '...in connection with...' or a/some 'relevant factual connection with' - which is not necessarily the same as '...be concerned or take part in...'. This tends to diminish their insightfulness.

(1) R v Georgiou (1988) 87 Cr App R 207

In this case, the issue was whether the defendant carrying on an insurance business through a company without authorisation from the Secretary of State under the Insurance Companies Act 1982, was an offence connected with the management of the company. It was held that it was. O'Connor LJ said, at 210, of carrying on a business:

'In our judgment carrying on an insurance business through a limited company is a function of management and if that function is performed unlawfully in any way which makes a person guilty of an indictable offence it can properly be said that that is in connection with the management of the company.'

(2) R v Corbin (1984) 6 Cr App R (S) 17

In this case, the defendant operated a business dealing in yachts through three companies (see 87 Cr App R 207 at 209). He obtained money and yachts by various deceptions. That was held to be an offence in connection with the management of the three companies.

(3) R. v Creggy [2008] BCC 323;

A solicitor (unsuccessfully) appealed against a finding that he had committed an offence “in connection with the management” of a company. He permitted a company, which was involved in the fraudulent sale of worthless shares, to use his firm's client account as a private bank account, whereby the company avoided the usual scrutiny system operated by banks. This was later described as an offence of assisting the retention of criminal property through the client account (paragraph 12). The question '...whether this sheltering of criminal property by the defendant had a relevant factual connection with the management of [the company]' (paragraph 14) arose and as answered in the affirmative (paragraph 14). '...It is not...necessary that the offence be committed by the defendant himself using the company as a vehicle for fraud, though that of course is another situation in which a disqualification order is appropriate.' (paragraph 14)

(4) R v Goodman [1993] 2 All ER 789

Mr Goodman was chairman and shareholder in a company. Prior to some unexpectedly bad company results being published, and news of his resignation as chairman, he (though another) sold his shares in the company. Subsequently, he appealed against his disqualification under section 2(1) of the CDDA, contending the offence he committed (insider dealing) did not come within the jurisdictional words 'convicted of an indictable offence...in connection with the management...of a company'.

At 782, in relation to the 'in connection with the management...of a company' test, Staughton LJ (giving the judgment of the Court) said:

'There are three possible ways of looking at the test to be applied. The first might be to say that the indictable offence referred to in the 1986 Act must be an offence of breaking some rule of law as to what must be done in the management of a company or must not be done. Examples might be keeping accounts or filing returns and such matters. It is clear from the authorities that the section is not limited in that way, although even if there were such a limit it would be arguable that the offence of insider trading, because it requires some connection between the defendant and the company, is an offence of that nature. Another view might be that the indictable offence must be committed in the course of managing the company. That would cover cases such as R v Georgiou, R v Corbin and R v Austen. What the defendants in all those cases were doing was managing the company so that it carried out unlawful transactions.

The third view would be that the indictable offence must have some relevant factual connection with the management of the company. That, in our judgment, is the correct answer. It is perhaps wider than the test applied in the three cases we have mentioned, because in those cases there was no need for the court to go wider than in fact it did. But we can see no ground for supposing that Parliament wished to apply any stricter test. Accordingly, we consider that the conduct of Mr Goodman in this case did amount to an indictable offence in connection with the management of the company. Even on a stricter view that might well be the case, because as chairman it was unquestionably his duty not to use confidential information for his own private benefit. It was arguably conduct in the management of the company when he did that.'

There is also:

(5) Re Bell Pottinger Private Ltd (also known as: Secretary of State for Business, Energy and Industrial Strategy v Geoghegan) [2021] Bus. L.R. 776 ('Geoghegan')

In this Geoghegan, a case about the scope of activities that can be used to allege the person acted unfit under section 6(1)(b), Michael Green J said at paragraph 55:

'Directors are, by definition, concerned in the management of their company. Even non-executive directors can be said to be concerned in the management of their companies, albeit that their roles are limited and they will not be involved day-to-day.'

Further, readers might also want to consider:

(6) Re Altim Pty Ltd [1968] 2 NSWLR 762;

(7) Re Magna Alloys & Research Pty Ltd (1975) C.L.C. 40-227;

(8) Drew v Lord Advocate [1996] S.L.T. 1062.

Applications for Declaratory Relief and/or Section 17 Leave/Permission

The jurisdiction exists for an application to court for a declaration, as to whether a particular factual scenario does/would, or not, constitute a breach of the prohibition. There is an issue with the utility of this procedure. In Re Westminster Property Management Ltd (No 2) (also known as Official Receiver v Stern) [2002 BCC 937, Chadwick LJ observed, at paragraph 22:

‘The problem is that the court can only make a declaration as to an existing state of affairs on the basis of the material which is put before it. If, relying on that declaration, a party continues as a director of a company and is then prosecuted, the question for the criminal court will be whether on the material which is put before it-which is likely to include material which has come into existence since the matter was before the civil court and may include material which, although then available, was not before the civil court - the company concerned was a company within the winding-up jurisdiction at the time when the offence is said to have been committed. It is because the question in criminal proceedings is likely to be different from the question which would be before the civil court when asked to make such a declaration that the utility of any such declaration seems to me extremely doubtful.’

Though rare, in Re Thornton Construction Co Ltd (23 May 2000; unreported), Mr Registrar Jacques granted declaratory relief[5].

An alternative route (which could be run alongside an application for declaratory relief) would be, for an application for section 17 leave/permission to be made, and for the court to grant permission 'in so far as such permission is necessary'.

Conclusion

Applying the guidance from R v Campbell to present day directors disqualification order prohibitions, it can be said that '...the wording is so widely cast that ... it is intended to insulate persons, against whom an order of disqualification has been made, from taking part in the management of company affairs generally. It is cast in the widest of terms '... in any way, whether directly or indirectly, be concerned or take part in the management ...' It would be difficult to imagine a more comprehensive phraseology designed to make it impossible for persons to be part of the management and central direction of company affairs.' (p.88). 

Looking then at what roles/functions/actions will amount to prohibited involvement in management:

(1) R v Campbell identified a dichotomy/distinction between: (i) on the one hand, the potentially permissible, managing/management of specific/particular aspects of the company's trading affairs/activities (production, sales, trading and alike); and (ii) on the other hand, the impermissible, central direction/management of the company's affairs (generally) - defined as matters normally undertaken by directors/officers of the company. Ormiston J in Bracht, and applied by Carnwath J in Market Wizard, said 'There must be an element of decision making, which affects the corporate enterprise as a whole...'

(2) While speaking of small companies, Ormiston J in Bracht (applied by Carnwath J in Market Wizard), helped define that, an individual's activities will come within prohibited 'management' where the powers or functions exercised could have a significant effect (i.e adverse effect) on the business and financial standing of the company. He said '...the actions of those directly answerable to the directors may amount to 'management' for, even if those people are also engaged in routine activities of a kind not normally associated with management, it is sufficient if powers and functions are delegated to those persons which are likely in their performance to have a significant effect on the business and financial standing of the company. As it is a protective section, protective at least of the creditors and shareholders, then it must have been designed to prevent the participation in management of those who might put the solvency or the probity of the corporation's administration at risk.'; '[p]ersons not given any significant discretion or advisory role in decision making could not therefore be intended as an object of the prohibition.' and '...the concept of ''management'' for present purposes, comprehends activities which involve policy and decision making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs.'

(3) In a non-binding precedent touching on related circumstances, Shaw LJ in Re a Company [1980] Ch 138 said, at 144 '...any person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company is in the sphere of management.' This accords with Ormiston J in Bracht, where he said 'There must be an element of decision making, which affects the corporate enterprise as a whole...'

(4) The connecting phrases of 'be concerned or take part in' , Ormiston J in Bracht took 'take part in' to connote 'active participation' and 'being concerned in' (almost the same phrase) as covering '...involvement of some kind in the decision-making processes of that corporation. That involvement must be more than passing, and certainly not of a kind where merely clerical or administrative acts are performed. It requires activities involving some responsibility, but not necessarily of an ultimate kind whereby control is exercised. Advice given to management, participation in its decision making processes, and execution of its decisions going beyond the mere carrying out of directions as an employee, would suffice.'. Whereas, in R v Campbell, the jury were asked to consider whether the disqualified person had been so fully and continuously involved - that is, in the operation of management, such that it amounted to taking part in the management. Or was he merely being consulted and giving advice when called upon. Though on this, the appeal court in R v Campbell rather took the view that this was setting the line too much in favour of those disqualified.

The subsequent question, whether this prohibition (as properly understood), was breached, is a question of fact.

SIMON HILL © 2022

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

[1] As set out in Footnote 1, below

[2] In Re Market Wizard Systems (UK) Ltd [1998] 2 BCLC 282, Carnwath J set out his analysis of the cases he was referred to, between paragraphs 57 to 64 (at 298-301):

'57 ...In R v Campbell [1984] BCLC 83 the Court of Appeal upheld the appellant's conviction for breach of an order under s 188 of the Companies Act 1948, by which he was prohibited from taking part in or being concerned in the management of a company. His role was described as that of 'a management consultant'. As Beldam J said (at 84):

'The thrust of this appeal is that in the circumstances of this case an independent person such as a management consultant, who is not a director or officer of a company, cannot commit this offence since he does not control the decision-making process.'

The court (at 85) approved the distinction drawn by the judge in his summing up:

'between managing certain specific aspects of the company's activities, such as production, sales, trading and the like, and the central management of the affairs of the company, that is to say the matters normally undertaken by the directors or officers of the company.'

They also rejected (at 85) a submission that he should have directed the jury that 'advising on financial and managing restructuring of the company' could not constitute the offence.

'In the opinion of this court, if he had done so it would have been a misdirection for, as we shall show, advising on financial management and restructuring of a company may well amount to being concerned indirectly in the management of the company. It is the business of the directors to manage the business of the company ... and in advising directors on financial and management structure, a person may well be being concerned directly or indirectly in the management of that company.'

58. Later they referred (at 87) to an extract from the judge's summing up where he had made clear that the question was one of fact and degree for the jury, and had continued:

'When I say it is a question of degree that does not mean that you have not got to decide it ... In this case you have to say whether this defendant's conduct is proved to be and thus clearly is on the side of taking part in the management. Not merely being consulted and giving advice when called upon, but actually standing beside [the managing director] and giving him such continuous advice which is so continuously put into effect that he can only be described as taking part.'

59. Beldam J commented that that direction if anything erred on the side of being too favourable. This was because the judge had apparently regarded the words 'concerned in' and 'taking part in' as having the same meaning.

Beldam J said (at 88) that this was too restrictive a view. The wording of the section was

'so widely cast that it is the opinion of this court that it is intended to insulate persons, against whom an order of disqualification has been made, from taking part in the management of company affairs generally. It is cast in the widest terms ... in any way, whether directly or indirectly, being concerned or taking part in the management ... It would be difficult to imagine a more comprehensive phraseology designed to make it impossible for persons to be part of the management and central direction of company affairs.'

60. In Re Clasper Group Services Ltd [1989] BCLC 143 Warner J had to consider the application of a similar expression in s 212 of the Insolvency Act 1986. He held, on the facts of that case, that the functions of the employee concerned were 'too lowly' for him to come within the section. He was the son of the controlling shareholder, but according to the evidence (at 149):

'He appears never to have risen much above the status of an office boy and messenger, although he was provided with some management training.'

61. Some assistance may also be found in the words of Shaw LJ in Re a Company [1980] Ch 138 at 144.

This case was concerned with s 441 of the Companies Act 1948, which gave certain powers to the High Court where it was shown that a person while an officer of a company had 'committed an offence in connection with the management of the company's affairs'. He said:

'The expression ''manager'' should not be too narrowly construed. It is not to be equated with a managing or other director or a general manager. As I see it, any person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company is in the sphere of management. He need not be a member of the board of directors. He need not be subject to specific instructions from the board. If he fulfils a function which touches the central administration of the company, that is sufficient in my view to constitute him an ''officer'' or ''manager'' of the company for the purposes of section 441 of the Act.'

[3] In Re Market Wizard Systems (UK) Ltd [1998] 2 BCLC 282, Carnwath J set out, under the subheading 'Mr Reichelt's role', what Mr Reichelt's activities had been (which lead to a finding that he had violated his section 11 prohibition), from paragraph 65 to 73:

'65. Turning to the evidence in the present case, Mr Reichelt explained the background of his involvement in those businesses and his role in the company. He had been a solicitor in Queensland before he came to this country in 1992. Since 1994 he has been employed by Mr Wade, acting for various Asian and Australian concerns doing business in the United Kingdom. He had permission from the Department of Employment to be employed by Mr Wade as an 'international legal consultant'. Accordingly, such services as he provided to companies like Comstrad or Market Wizard were provided nominally in the name of Mr Wade or one of his companies. The precise nature of the arrangements between Mr Wade and Mr Reichelt were not entirely clear from the evidence. It seems that Mr Wade provided Mr Reichelt with a flat and living expenses, and additional payments which apparently varied according to what Mr Wade was able to pay.

66. Mr Wade and Mr Reichelt were introduced to Mr Smith in April 1997 by a business acquaintance. According to Mr Reichelt, Mr Smith was aware of his previous involvement with Comstrad, but not that he was bankrupt or of the disqualification which went with it. He understood that Mr Smith required simply 'someone to liaise if he or his wife had to be out of the UK at the same time and that this would not frequently occur'. He says that he agreed to act as general manager, provided that this did not involve anything other than strictly administrative tasks and the company was being fully managed by the Smiths. He says that his role with the company was 'strictly administrative'. He did not have a separate office or a secretary. He was not authorised to send letters without approval from Mr or Mrs Smith, and when they were away from the office he referred every piece of correspondence and every management decision to them.

67. Mr Wade gave evidence supporting Mr Reichelt's account. He says that Mr Reichelt was always an employee of his firm and that he was in daily contact with him. He did not mention Mr Reichelt's bankrupt status to Mr Smith, because it did not appear to him to be of any importance, Mr Reichelt not being an officer of the company. He received all his instructions from Mr or Mrs Smith.

68. Mr Smith's view of matters was rather different. When he met them, he had been told of their involvement with Comstrad and Interdata, and it was for that reason that he thought they would be useful. As he said, they had been 'involved with people that have got a very bad track record and they would know all the flaws in the business'. He regarded Mr Reichelt as 'a very smart man', with a good record as a lawyer and a businessman in Queensland. He regarded him as 'an excellent administrator that could do anything within reason'. He was 'a very learned man ... he has got very high qualifications, so I run a lot of things past Mr Reichelt all the time, because I believe he is much smarter than me'. He liaised with him regularly when he was away, and treated him as his 'right hand man'. It was Mr Smith who chose the title 'general manager'.

69. Even if one accepts Mr Reichelt's evidence that he referred all management decisions to Mr Smith, it is quite clear in my view that he was at least 'concerned in the management' in the sense explained in the authorities. As I have indicated, the fact that he did not have ultimate control is not critical. Mr Smith clearly relied on him in making his business decisions and in the general administration of the business. He had no reason to do otherwise since he was not aware of Mr Reichelt's disqualification. It is also clear that Mr Smith was away for substantial periods. In particular, he was away for more than two months over Christmas 1997. Even with modern means of communication, effective management of the business would have been impossible without someone such as Mr Reichelt in charge of the office.

70. Perhaps the clearest indication of Mr Reichelt's central role is in relation to the 'compliance meetings' which he attended with Mr Wade and Mr Cridland. Although he claimed that even then he was acting under direct instructions from the Smiths, there is no indication of that in the minutes which he himself prepared. Furthermore, Mr Smith had no detailed knowledge of the statutory and other requirements with which the company was seeking to comply. Thus for example in the minutes of the meeting on 3 November it is recorded that:

'[Mr Reichelt] agreed that as general manager of MWS, in charge of office administration, he would undertake to implement recommended procedural changes and report any known breaches of agreed procedures to the compliance officer who would then decide if it was a matter which required specific reference to Astwick and company.'

71. Thus, one can see that quite apart from his ordinary role as 'right hand man' to Mr Smith, he was taking direct responsibility in relation to an aspect of the business which was critical to 'the probity of the corporation's administration'.

The final words '[the disqualified person] was taking direct responsibility in relation to an aspect of the business which was critical to 'the probity of the corporation's administration'' hark back to Comr for Corporate Affairs v Bracht (1989) 7 ACLC 40, wherein at paragraph 47-48, Ormiston J said (speaking of small companies):

'...the actions of those directly answerable to the directors may amount to 'management' for, even if those people are also engaged in routine activities of a kind not normally associated with management, it is sufficient if powers and functions are delegated to those persons which are likely in their performance to have a significant effect on the business and financial standing of the company. As it is a protective section, protective at least of the creditors and shareholders, then it must have been designed to prevent the participation in management of those who might put the solvency or the probity of the corporation's administration at risk.'

The above was a violation of s11 prohibition, as Carnwath J said, at 82 'I have found that each of the complaints made by the Secretary of State is made out.'

[4] Note, the wording of section 1 of the CDDA is much wider than section 6(1)(b) because it prohibits a person from being “in any way, whether directly or indirectly … concerned or take part in … the management of a company” whereas section 6(1)(b) is more narrowly focused on being “concerned in the management of a company”.

[5] As referred to in Mithani - Directors Disqualification - Division Vi - Chapter 2 - Declaratory Relief, at paragraph 8E.