Disqualification of company directors : a comparative analysis of the law in the UK, Australia, South Africa, the US, and Germany 9781138636248, 113863624X

Table of contents :
1. Overview, Jean du Plessis and Jeanne Nel de Koker 2. United Kingdom, Andreas Ru hmkorf and Jean du Plessis 3. Australia, Tess Blackie and Jean du Plessis 4. South Africa, Neels Kilian, Jean du Plessis and Jeanne Nel de Koker 5. US, Hannah Marie Farhan and Jeanne Nel de Koker 6. Germany, Andreas Ru hmkorf

Citation preview

Disqualification of Company Directors

This book provides a clear overview of the legal rules relating to directors’ disqualification in Australia, Germany, South Africa, the UK and the US, highlighting the differences in the disqualification regimes of these jurisdictions. The book seeks to determine whether disqualification on application should be developed further as a corporate law and corporate governance tool to ensure that individuals who have a proven record of posing a particular risk to the business community, shareholders and creditors are indeed disqualified from being directors. The book is unique as it provides a single source where the disqualification regimes of all these jurisdictions are explored and compared. The book will be of interest to scholars of corporate law, regulators and policymakers. It will also be of particular interest to senior managers and directors to determine precisely what the laws regarding disqualification of company directors are, and what type of behaviour might expose them to potential disqualification. Jean Jacques du Plessis is a Professor of Corporate Law in the Deakin Law School at Deakin University, Australia, where he teaches in the areas of corporate governance, corporate law and business law. Jeanne Nel de Koker teaches corporations law and marketing law at an undergraduate level and corporate governance at a postgraduate level at Deakin University, Australia.

Disqualification of Company Directors A Comparative Analysis of the Law in the UK, Australia, South Africa, the US and Germany Edited by Jean Jacques du Plessis and Jeanne Nel de Koker

First published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 selection and editorial matter, Jean Jacques du Plessis and Jeanne Nel de Koker; individual chapters, the contributors. The right of Jean Jacques du Plessis and Jeanne Nel de Koker to be identified as the author of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Names: Du Plessis, J. J., editor. | Nel de Koker, Jeanne, editor. Title: Disqualification of company directors : a comparative analysis of the law in the UK, Australia, South Africa, the US, and Germany / edited by Jean Jacques du Plessis and Jeanne Nel de Koker. Description: Abingdon, Oxon [UK] ; New York : Routledge, 2017. | Series: Routledge research in corporate law | Includes bibliographical references and index. Identifiers: LCCN 2016056478 | ISBN 9781138636248 (hbk) | ISBN 9781315206097 (ebk) Subjects: LCSH: Directors of corporations—Legal status, laws, etc.— Great Britain. | Directors of corporations—Legal status, laws, etc.— Australia. | Directors of corporations—Legal status, laws, etc.—South Africa. | Directors of corporations—Legal status, laws, etc.—United States. | Directors of corporations—Legal status, laws, etc.—Germany. | Tort liability of corporations. Classification: LCC K1328. D59 2017 | DDC 346/.06642—dc23 LC record available at https://lccn.loc.gov/2016056478 ISBN: 9781138636248 (hbk) ISBN: 9781315206097 (ebk) Typeset in Galliard by Keystroke, Neville Lodge, Tettenhall, Wolverhampton

Contents

Table of cases Table of legislation List of tables About the editors and authors Preface 1

Analyses, perspectives and jurisdictional overview

vii xiii xxxi xxxiii xxxvii 1

JEAN JACQUES DU PLESSIS AND JEANNE NEL DE KOKER

2

The United Kingdom

32

ANDREAS RÜHMKORF AND JEAN JACQUES DU PLESSIS

3

Australia

69

TESS BLACKIE AND JEAN JACQUES DU PLESSIS

4

South Africa

112

NEELS KILIAN, JEAN JACQUES DU PLESSIS AND JEANNE NEL DE KOKER

5

The United States

155

HANNAH MARIE FARHAN AND JEANNE NEL DE KOKER

6

Germany

173

ANDREAS RÜHMKORF

Index

200

Table of cases

Australia ACCC v Colgate-Palmolive Pty Ltd (No 2) [2016] FCA 528 ......................... 83 Amann Aviation Pty Ltd v Continental Venture Capital Ltd (2000) 18 ACLC 277 .................................................................................... 74n30 ASC v Donovan (1998) 28 ACSR 583 ..............77n47, 83, 86n100, 87n101–2, 87n105–6 ASC v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 ............ 86n100, 87n102, 87n105 ASC v Roussi (1999) 32 ACSR 568 .......................... 86n100, 87n102, 87n105 ASIC v Adler (2002) 42 ACSR 80 ...............76n43, 77n47, 79n56, 82–3, 86–7 ASIC v Adler (No 5) (2002) 42 ASCR 80 ................................. 5, 7n24, 17n32 ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305.......................................................................................... 76n39 ASIC v Beekink (2007) 61 ACSR 305 ..................................................... 77n46 ASIC v Hutchings (2001) 38 ACSR 387 ................................. 86n100, 87n104 ASIC v Parkes (2001) 38 ACSR 355 ..................... 85, 85n88, 87n102, 87n104 ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561...................................85n89–90, 86n100, 87n101–2,87n104 ASIC v Rich (2003) 44 ACSR 682 ................................................. 88, 90n119 ASIC v Vizard (2005) 54 ACSR 394 ...................................................... 77n46 AWA Ltd v Daniels (t/a Deloitte Haskins & Sells) (1992) 7 ASCR 759 ............ 5 Blunt v Corporate Affairs Commission (NSW) (1988) 13 ACLC 648..... 90n129 Boorer v ASIC [2010} AATA 390 .......................................................... 91n132 Commissioner for Corporate Affairs v Bracht [1989] VR 821 .......................................................................75–6, 76n39, 93n147 Commissioner for Corporate Affairs v Ekamper (1988) 12 ACLR 519 ............ 83 Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789 ......................................................................... 91n136, 93n147 Dempsey v Corporate Affairs Commission (1989) 7 ACLC 370............... 94n163 Dwyer v National Companies and Securities Commission (No 2) (1989)7 ACLC 743 ............................................................... 71n10, 76n42 Feher v ASC (1997) 15 ACLC 1774 ............................................................. 91

viii Table of cases Forge v ASIC (2004) 52 ACSR 1 ........................................................ 100n183 Healey v ASIC (2000) 18 ACLC 225 .................................................89n115–7 Ho v Akai Pty Ltd (in liq) (2006)24 ACLC 1526.................................... 76n40 Jorgensen v ASIC (1999) 30 ACSR 418 ................................................ 90n122 Kardas v ASC (1998) 53 ALD 303 ......................................... 89n117, 90n126 Laycock v Forbes and ASC (1997) 150 ALR 186 .............................. 89n117, 90 Murray v ASC (1993) 12 ACLC 11 ...................................................... 94n164 NSW v Commonwealth (1990) 169 CLR 482 .......................................... 74n27 O’Brien v Commissioner for Corporate Affairs (1989) 7 ACLC 259 .................................................................................... 90n129 Platcher v Joseph; ASIC v Platcher (2003) 44 ACSR 277 .............................85–6 Proudman v Dayman (1941) 67 CLR 536 ............................................ 94n157 R v Hughes (2000) 74 ALJR 802 ............................................................ 74n30 Re Altim Pty Ltd [1968] 2 NSWLR 762 ..................................... 77n47, 81n66 Re Brown; Ex parte Amann (1999) 73 ALJR 839 ................................... 74n30 Re Gold Coast Holdings Pty Ltd; ASIC v Papatto (2000) 35 ACSR 107.......................................................................... 86n100, 87n105 Re Hamilton-Irvine (1990) 8 ACLC 1067 ........................................... 94n164 Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 .............................................. 76n43, 79n56, 87n101, 93n147 as Re Phillips and Inspector-General in Bankruptcy (2012) 131 ALD 564 ......................................................................................... 94n156 Re Sheslow v ASC [1994] 12 ACLC 740 ............................................... 89n116 Re Strikers Management Pty Ltd; ASC v Dimitri (Unreported, Federal Court of Australia, Burchett J, 7 May 1997)........... 86n100, 87n105 Re Tasmanian Spastics Association; ASC v Nolan (1996) 23 ACSR 743 ........................................... 86n100, 87n101, 87n106 Re Wakim; Ex parte McNally (1999) 198 CLR 511 ................................ 74n30 Rich v ASIC (2004) 220 CLR 129 ............................5, 7n23, 17n33, 77n44–5

Canada Shou Yin Mar v Royal Bank (1940) 3 DLR 331 .................................... 93n147

Germany BayObLG GmbHR 1993, 224 ............................................................. 184n90 BGH 15.12.1982, BGHZ 85, 293, 295f, NJW 1983, 991 .................. 185n105 BGH NJW 1991, 2566......................................................................... 184n89 BGH, Beschluss vom 07.05.2007 – II ZB 7/06 (OLG Jena) ...................195–6 BGH NZG 2010 829 ........................................................................... 185n97 Higher Regional Court Düsseldorf (NZG 2009, 678,679) ................179n43–4 Higher Regional Court München (NZG 2010, 157, 158) .................... 179n43 ................................................................................................................195–6 OLG Celle (ZIP 2013, 1914, 1915) ..................................................... 182n70

Table of cases ix OLG Hamm 20.12.2010, NJW-RR 2011, 772, 773 ............................. 184n88 OLG München ZIP 2009, 1321 ........................................................... 184n95 OLG Naumburg, Beschluss vom 10.11.1999 (7 Wx 7/99), FGPrax2000, 121 .....................................................194–5, 194n177, n180

New Zealand R v Newth (1974) 2 NZLR 760 ............................................................ 93n147 Re Minimix Industries Ltd (1982) 1 ACLC 511........................ 81n67, 94n162

South Africa Bainbridge v Smith (1889) 41 (Provincial Division) 462 ........................ 127n99 Botha v Swanepoel [2002] 1 All SA 85 (Provincial Division) ........122–3, 123n59 Bryant & Flanagan (Pty) Ltd v Muller 1978 (2) SA 807 (Appellate Division) 812 .................................................................. 119n32 Ex parte Barron 1977 (3) SA 1099 (Provincial Division) ....... 123n61, 142n156 Ex parte Bester 1937 (Provincial Division) 45 ........................................ 119n30 Ex parte Dworsky 1970 (2) SA 429 (Provincial Division).............................................17n 29, 119–20, 141n152 Ex parte Hemphill 1967 (3) SA 101 (Provincial Division) 103............... 124n66 Ex parte Jacobson 1944 (Provincial Division) 112 .................................. 124n66 Ex parte Premier Paper Ltd 1981 (2) SA 612 (Local Division) 615...... 127n102 Ex parte K 1971 (4) SA 289 (Provincial Division) ................................. 118n24 Ex parte R 1996 (1) SA 84 (Supreme Court) ........................................ 123n61 Ex parte Schreuder 1964 (3) SA 84 (Provincial Division) ......... 121n42, 123n61 Ex parte Velkes 1963 (3) SA 576 (Provincial Division) ................. 118, 122, 131 Flegg v McCarthy 1942 (Provincial Division) 109 ................................ 127n101 Gihwala v Grancy Property Ltd [2016] ZASCA 35 (Supreme Court of Appeal) .............................................142, 150–1, 152–3 Gohlke v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (Appellate Division) ........................................................... 127n102 Grevler v Landsdown 1991 (3) SA 175 (Provincial Division) .................. 119n33 Kukama Koketso v Lobelo Lamber and The Companies and Intellectual Property Commission Case Number 38587 / 2011 (12 April 2012) (GSJ) ........................................................148–9, 151 Louw v MJ & H Trust 1974 (4) SA 268 (Provincial Division) ................ 118n15 Meyer v The Master 1935 (South West Africa) 3 ............................. 118n15, 119 Nedcor Investment Bank v Pretoria Belgrave Hotel (Pty) Ltd 2003 (5) SA 189 (Supreme Court of Appeal) 192 ...................... 119n32 Nel v Divine (1890) 8 (Supreme Court of Appeal) 16 ........................... 118n15 Nusca v Da Ponte 1994 (3) SA 251 (Local Division) 261 ...................... 122n57 Philotex (Pty) Ltd v Synman; Braitex (Pty) Ltd v Synman (334/93) [1997] ZASCA 92.................................... 129n110 Pleat v Van Staden 1921 (Provincial Division) 91 .................................. 118n15

x Table of cases Prokureurs v Van Aarde 1999 (4) SA 1333 (Provincial Division) 1335 ................................................................................................ 119n31 S v Coetzee 1997 (3) SA 527 (Constitutional Court) ........................... 129n111 S v Nixon 1971 (4) SA 495 (Provincial Division) 497............................ 124n66 Sesing v Minister of Police 1978 (4) SA 742 (Local Division) .................. 118n15 Techni-Pak Sales (Pty) Ltd v Hall 1968 (3) SA 231 (Local Division) 236 ........................................................................ 124n58 Von Steen v Von Steen 1984 (2) SA 198 (Provincial Division) ............... 128n106 Woods v Davies 1934 (Provincial Division) 250 ...................................... 118n15

United Kingdom Official Receiver v Wedge Rapps & Hunt (A Firm) [2003] UKHL 49 ................................................ 45, 46n68, 46n69, 47n76 R v Corbin [1984] Crim LR 302 .................................................................. 67 R v Brockley [1994[ 1 BCLC 606............................................................ 49n88 R v Young [1990] BCC 549 ........................................................... 65, 65n194 R v Ward [2002] BCC 953 .................................................................... 38n37 Re Arctic Engineering Ltd [1986] BCLC 253 ....................................... 58n150 Re Barings plc [1998] BCC 583 ............................................................. 34n10 Re Barings plc (No 3) [2000] 1 WLR 634 ............................................. 60n166 Re Barings plc (No 4), Secretary of State for Trade and Industry v Baker [1999] 1 BCLC 262 ................ 60n163, 60n164 Re Barings plc (No 5), Secretary of State for Trade and Industry v Baker (No 5) [1999] 1 BCLC 433 ............ 55n131, 66 Re Blackspur Group plc, Secretary of State for Trade and Industry v Davies [1998] 1 BCLC 676 ........................ 17n28, 34 Re Campbell (1984) BCLC 83 .............................................................. 93n147 Re Cargo Agency Ltd [1992] BCLC 686 ............................................... 60n165 Re Civica Investments Ltd [1983] BCLC 456 ....................................... 91n136 Re Dawson Print Group Ltd [1987] BCLC 601 ...........................54n118, 65–6 Re Gibson Davies Ltd [1995] BCC 11 ................................................... 60n165 Re INS Realisations Ltd [2006] EWHC 135 (Ch) ................................ 60n162 Re Living Images [1996] 1 BCLC 348.................................................. 54n123 Re Lo-Line Electric Motors Ltd [1988] Ch 477 ........................ 53n109, 54n118 Re Mea Corporation Ltd, Secretary of State for Trade and Industry v Assis [2007] 1 BCLC 618 ............................... 55n128 Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 ............................................ 34, 55n129, 55n130, 55n132, 59n160 Re Stanford Services Ltd [1987] BCLC 607 .......................................... 54n118 Secretary of State for Trade and Industry v Baker [2000] BCC 273 ........ 66n200 Secretary of State for Trade and Industry v Creegan [2001] EWCA Civ 1742 .................................................................. 54n122 Secretary of State for Trade and Industry v Goldberg [2004] 1 BCLC 597 ........................................................................ 55n127

Table of cases xi Secretary of State for Trade and Industry v Gray [1995} 1 BCLC 276 .... 55n126 Secretary of State for Trade and Industry v McTighe (No 2) [1996] 2 BCLC 477 ............................................................. 55n126

United States SEC v Aimsi Techs, Inc., 650 F Supp 2d 296 (SDNY) ............................ 168n84 SEC v Bankosky, No 12 Civ 1012 (HB) ........................... 168n83, 168n86, 169 SEC v Bankosky, 716 F 3d 45 (2d Cir 2013) .............................162n44, 168n83, 168n86, 169n91–3, 170 SEC v Conaway, 697 F Supp 2d 733 (ED Mich 2010) ................................ 170 SEC v Drexel Burnham Lambert, Inc., 837 F Supp 587 (SDNY 1993)... 166n75 SECv Global Telecom Services, LLC, 325 F Supp 2d 94 (D Conn 2004) . 169n88 SEC v Gunn, No 08 Civ 1013 .............................................................. 168n83 SEC v Johnson, 2006 WL2053379......................................................... 168n87 SEC v Johnson, 595 F Supp 2d 40 (DDC 2009) .................................... 168n84 SEC v Levine, 517 F Supp 2d 121 (DDC 2007) .................................................168n87, 169, 169n88–90, 170 SEC v Manor Nursing Centers, Inc., 458 F 2d 1082 (2 Cir 1972) .................................................................... 1266n75, 168n85 SEC v Maxxon, Inc., No 02 Civ 975 (HJ) ............................................. 168n84 SEC v Miller, 744 F Supp 2d 1325 (ND Ga 2010)...................................... 170 SEC v Pallais, No 08 Civ 8384 (SDNY July 9 2010)............................. 168n83 SEC v Patel, 61 F 3d 137 (2d Cir 1995) .........................................162, 166–7, .............................................................167n76–9, 167n81–2, 168n87, 169 SEC v Patterson, No 03 Civ 0302 (CVE) (PJC) .................................... 169n88 SEC v Posner, 16 F 3d 520 (2 Cir 1994) ....................................... 160n32, 166 SEC v Resnick, 604 F Supp 2d 773 (DMd 2009) .................................. 168n83 SEC v Robinson, No 00 Civ 7452.......................................................... 168n83 SEC v Save The World Air, Inc., No 01 Civ 11586 (GBD) (FM) ............ 169n88 SEC v Seldon, 632 F Supp 2d 91 (D Mass 2009) ................................... 168n87 SEC v Savoy Indus, 587 F 2d 1149 (DC Cir 1978)................................ 168n84

Table of legislation

Australia Australian Securities and Investments Commission Act 2001(Cth) s 12GLD ............................................................................................ 20n48 Bankruptcy Act 1966 (Cth) pt X.................................................................................................... 78n50 Companies Act 1896 (Vic) ......................................................................... 70n2 Companies Act 1961 (NSW) .................................................................... 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80 Companies Act 1961 (Qld) ...................................................................... 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80 Companies Act 1961 (Vic) ....................................................................... 73n22 s 117 ........................................................................................................ 79 s 117(2) ................................................................................................... 92 s 122 ........................................................................................................ 80 Companies Act 1961 (WA) ...................................................................... 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80 Companies Act 1962 (SA) ........................................................................ 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80 Companies Act 1962 (Tas) ....................................................................... 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80 Companies Act 1981 (Cth) s 222 ........................................................................................................ 80 Companies Ordinance 1962 (ACT) .......................................................... 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80

xiv Table of legislation Companies Ordinance 1963 (NT) ............................................................ 73n22 s 117 ........................................................................................................ 79 s 122 ........................................................................................................ 80 Competition and Consumer Act 2010 (Cth) s 86E ........................................................................................... 20n48, 83 sch 2 s 248 ......................................................................................... 20n48 Constitution ............................................................................................ 74n28 s 51 .................................................................................................... 72n17 s 51(xx).................................................................................................... 73 s 51(xxxvii) ...............................................................................................74 Corporate Law Economic Reform Program Act 1999 sch 3 ................................................................................................ 90n127 Corporations (Aboriginal and Torres Strait Islander) Act 2006 ................... 85n84 s 386–1 ............................................................................................................. 82 s 526–1 .............................................................................................. 84n80 Corporations Act 1989 ................................................................................... 73, 74 s 91A(2)................................................................................................... 93 s 206B ............................................................................................... 74n33 s 206D ............................................................................................... 74n33 s 206E ............................................................................................... 74n33 s 206F ................................................................................................ 74n33 s 229 ...................................................................................... 74n33, 80, 92 s 229(3) ................................................................................. 80, 81, 85n85 s 230 ............................................................ 74n33, 81, 82, 85, 85n85, 101 s 230(6) ................................................................................................... 82 s 599 ................................................................................ 74n33, 84n83, 92 s 600 .............................................. 74n33, 89, 89n115, 90, 90n127, 91, 92 s 600(5) ................................................................................................... 90 Corporations Act 2001 (Cth) ............................................................... 3, 22, 74 pt 2D.6 ........................................................ 18n37, 19n45, 77, 86, 92, 102 pt 2F.1 ........................................................................................... 101n188 pt 2F.1A......................................................................................... 101n188 pt 5.1 ....................................................................................................... 84 s 9 .............................................................................................................. 4 s 136 .................................................................................................. 114n5 s 180(1) ................................................................................................... 85 s 181 ........................................................................................................ 85 s 198A ....................................................................................................... 5 s 201B(1) ........................................................................................... 19n45 s 203 ................................................................................................ 159n30 s 203D ............................................................................................... 21n59 s 206A ................................70, 75, 76n40, 92–4; 92n146, 93n149, 94, 100 s 206A-206EA ......................................................................................... 95 ss 206A-206G .......................................................................................... 28

Table of legislation xv s 206A(1)............................................................................76, 76n39, 92–3 s 206A(1)(a) ...................................................................................... 75, 93 s 206A(1)(b) ...................................................................................... 75, 93 s 206A(1)(c) .......................................................................... 75, 75n37, 76 s 206A(1A) ........................................................................................ 93, 94 s 206B ..........................20n48, 20n52, 77, 78, 80–1, 94, 102n199, 163n53 s 206B(1) ................................................................................................. 80 s 206B(1)(a) ............................................................................................ 78 s 206B(1)(b) ............................................................................................ 78 s 206B(1)(c) ............................................................................................ 78 s 206B(2) ................................................................................................. 78 s 206B(3) ......................................................................................... 3n6, 78 s 206B(4) ..................................................................................... 78, 78n52 s 206B(6) ..................................................................................... 78, 78n51 s 206B(7) ........................................................................................... 78n51 s 206BA ........................................................................... 25n91, 80, 80n63 s 206C ............................................21n61, 26n96, 81, 82–4, 85, 86, 92, 94 ss 206C-206D.......................................................................................... 82 ss 206C-206E .................................... 77, 81, 86, 86n95, 101n187, 164n57 s 206C(1) .............................................................................................. 3n7 s 206C(1)(b) ...................................................................................... 86n94 s 206C(2)(a) ...................................................................................... 86n96 s 206C(2)(b) ...................................................................................... 86n97 s 206D ........................................................... 26n96, 81, 82, 86, 89, 92, 94 s 206D(1) .................................................................................. 3n7, 22n63 s 206D(1)(b)(ii) ................................................................................. 86n94 s 206D(2) ................................................................................................ 84 s 206D(3)(a) ...................................................................................... 86n96 s 206D(3)(b) ..................................................................................... 86n97 s 206E ..................................................21n62, 26n96, 81, 82, 85–6, 92, 94 s 206E(1) ............................................................................................... 3n7 s 206E(1)(b) ...................................................................................... 86n94 s 206E(2)(a) ...................................................................................... 86n96 s 206E(2)(b) ...................................................................................... 86n97 s 206EAA........................................... 3n7, 22n64, 26n96, 81n69, 102n199 s 206EA ................................................................................. 26n96, 81n69 s 206EB ................................................................................. 62n96, 81n69 s 206F .........................................3n7, 24, 26n96, 77, 81n71, 89–91, 92, 94 s 206F(1)(b) ................................................................................ 24n85, 90 s 206F(1)(b)(i)................................................................................. 90n120 s 206F(1)(b)(ii) ................................................................................ 90n121 s 206F(1)(c) ....................................................................................... 86n94 s 206F(1A)(b)(i) ........................................................................ 89, 89n118 s 206F(2)(a) ..................................................................................... 91n130

xvi Table of legislation s 206F(2)(b)(i)................................................................................. 91n133 s 206F(2)(b)(ii) ................................................................................ 91n134 s 206F(2)(b)(iii) ............................................................................... 92n133 s 206F(5) ......................................................... 25n90, 90n127, 94, 94n161 s 206G ......................................................................... 80, 94, 94n158, 100 s 206G(1) .......................................................................................... 25n89 s 206G(2) ........................................................................................ 94n159 s 206G(3) ........................................................................................ 94n161 s 206G(4) ........................................................................................ 94n160 s 230(1) ......................................................................................... 101n189 s 230(6)(a)-(d) ............................................................................... 101n190 s 459B ..................................................................................................... 84 s 533(1) ............................................................................................. 84, 89 s 533(1)(b) .............................................................................................. 89 s 798K ..........................................................................................91n137–8 s 901F ................................................................................ 91n137, 91n139 s 903E ............................................................................... 91n137, 91n140 s 1274 ........................................................................................ 95, 95n166 s 1274A ..................................................................................... 94, 95n165 s 1274AA ........................................................................................... 26n96 s 1317B(1)(b) .................................................................................. 90n128 s 1317E ....................................................................................... 77, 82, 85 s 1317E(1) ............................................................................................... 82 s 1324 ............................................................................................ 101n188 sch 3 ................................................................................................ 92n146 sch 3 item 9 ..................................................................................... 93n149 Corporations Regulations 2001 (Cth) reg 2D.6.01 ....................................................................... 78n51, 102n199 reg 7.2A.01(3) ................................................................................. 91n141 reg 7.2A.01(5)(a) ............................................................................. 91n142 reg 7.2A.01(5)(b) ............................................................................ 92n144 reg 7.2A.01(5)(c) ............................................................................. 91n143 reg 7.2A.01(5)(d) ............................................................................ 92n145 reg 7.5A.101(3) ............................................................................... 91n141 reg 7.5A.101(6)(a) ........................................................................... 91n142 reg 7.5A.101(6)(b) .......................................................................... 92n144 reg 7.5A.101(6)(c) ........................................................................... 91n143 reg 7.5a.101(6)(d) ........................................................................... 92n145 Crimes Act 1914 (Cth) s 44AA ............................................................................................. 93n149 Criminal Code (Cth) div 13 .............................................................................................. 93n151 s 6.1 ................................................................................................. 93n148 Mining Companies Act 1871 (Vic) ............................................................. 70n2 Trade Practices Act 1974 (Cth)................................................................ 83n78

Table of legislation xvii European Union Council Regulation (EC) No 2157/2001 of 8 October 2001 ............................................................................. 196n190 Treaty on the Functioning of the European Union art 101 ..................................................................................................... 56 art 102 ..................................................................................................... 56 Germany Act to Modernise the Law on Private Limited Companies and Combat Abuses (MoMiG) .......................................................177–8, 177n31 Aktiengesetz (AktG) ...........6, 174, 175n17, 177, 181, 183–5, 187, 193–4, 197 s 37(2)1 ........................................................................................... 184n92 s 76 ................................................................................ 20n51, 174n6, 180 s 76(1) ............................................................................................. 175n11 s 76(2) ............................................................................................. 174n10 s 76(3) ................................... 174n3, 177n35, 181n64, 185n101, 191n152 s 76(3) No 3(a) ................................................................................ 182n69 s 76(3) No 3(e) ................................................................................ 183n80 s 76(3)2 No 1 ........................................................................... 3n6 180n54 s 76(3)2 No 2 .................................................................................. 180n55 s 76(3)I............................................................................................ 178n39 s 76(3)2 ........................................................................... 180n53, 196n184 s 76(3)2 No 2 ........................................................................................ 183 s 76(3)3 ........................................................................................... 181n65 s 76(3)3 No 3(c) ................................................................ 182n71, 182n74 s 84 .................................................................................................... 174n9 s 82(1) ............................................................................................. 174n10 s 94 .................................................................................................. 184n93 s 95 ...................................................................................... 174n6, 175n12 s 96 .................................................................................................. 175n13 s 100 ........................................................................................ 178n38, 185 s 100(1) ......................................................................... 185n100, 186n106 s 100(2)1 No 1-No 4 ..................................................................... 186n107 s 100(3) ......................................................................................... 187n114 s 100(4) ......................................................................................... 187n116 s 100(5) ......................................................................................... 185n102 s 103(3) ......................................................................................... 188n126 s 105 ................................................................................ 178n38, 189n130 s 105(1) ........................................................................................... 184n87 s 250(1) No 4 ................................................................................ 188n123 s 251(1) ......................................................................................... 188n125 ss 399–400 ....................................................................................... 182n74 s 399(1) No 6 .................................................................................. 185n99

xviii Table of legislation Banking Act (KWG) ....................................................... 6n20, 25, 26n94, 189 s 1(1) ..........................................................................................189n135–6 s 1(2) ............................................................................................. 190n139 s 6 ...............................................................................................189n137–8 ss 35–36 ................................................................................. 3n8, 190n139 s 35(2) No 3 .................................................................................. 190n144 s 35(2) No 4 .................................................................. 190n144, 190n147 s 35(2) No 6 .................................................................. 190n144, 190n148 s 36(1) ............................................................................................. 190n47 s 49 ................................................................................................ 191n149 Banking Supervision Law .............................................................................17 n27 Basic Law art 5 ............................................................................................... 188n121 art 12 ............................................................................................. 193, 198 art 55(2) .......................................................................................... 183n85 art 66 ............................................................................... 183n85, 188n122 Civil Code (BGB) s 134 .................................................................................. 179n46, 184n88 s 134(1) ......................................................................................... 189n133 s 1903 ............................................................................................ 180, 186 Commercial Code (HGB) s 13e ................................................................................................ 178n37 s 15 .................................................................................................. 184n91 s 331 ................................................................................................ 182n74 Corporate Governance Code ......................................................................187–8 r 5.4.2 .........................................................................................187n118–9 r 5.4.5 ............................................................................................ 187n120 Criminal Code (StGB) s 56 [2] ............................................................................................ 183n80 s 70 .................................................................................... 177n26, 180n56 s 70(1) ....................................... 6n18, 24n79, 181n59, 191n153, 192n155 s 70(1)2 ........................................................................... 181n60, 192n164 s 263 ................................................................................................ 183n81 s 263a .............................................................................................. 183n81 s 264 ................................................................................................ 183n81 s 264a .............................................................................................. 183n81 s 265b .............................................................................................. 183n81 s 266 ................................................................................................ 183n81 s 266a .............................................................................................. 183n81 s 283 ................................................................................................ 182n73 ss 283–283(d) .................................................................. 176n25, 177, 182 s 283a ............................................................................................ 182n177 s 283c .............................................................................................. 182n73 s 283d .............................................................................................. 182n73

Table of legislation xix Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG) ...............6, 174, 175n17, 177, 181, 183–5, 193–4, 197 s 6 .............................................................................................. 20n51, 180 s 6(1) ................................................................................................. 174n5 s 6(2) ....................................... 174n3, 177n35, 178n39, 180n53, 191n152 s 6(2) No 1 .............................................................................. 3n6, 180n54 s 6(2) No 2 ...................................................................................... 180n55 s 6(2) No 3 .............................................................................. 181n64, 183 s 6(2) No 3(a) .................................................................................. 182n69 s 6(2) No 3(b) ................................................................................. 182n71 s 6(2) No 3(c) .................................................................................. 182n74 s 6(2) No 3(e) .................................................................................. 183n80 s 6(2)3 ........................................................................................... 196n184 S 6(3) ......................................................................................................... 179 s 8(3) ............................................................................... 184n92, 198n199 s 39(1) ........................................................................................... 198n199 s 39(3) ........................................................................................... 198n199 s 62(3) ............................................................................................. 181n65 s 82 .................................................................................................. 182n74 s 83(1) No 5 .................................................................... 27n100, 199n199 Insolvency Act ........................................................................................ 20n54, 182 Public Accountant Act (Wirtschaftsprüferordnung) s 43(3) .....................................................................................................183n86 Trade Regulations (GewO) s 35 .................................................................... 177n26, 180n56, 193n167 s 35(1) ..................................................... 6n19, 24n79, 191n154, 103n171 s 35(1)2 ......................................................................................... 193n165 s 35(7a) ......................................................................................... 193n166 Transformation Act (Umwandlungsgesetz) s 313 ................................................................................................ 182n74 Transparency and Disclosure Law (Transparenz- und Publizitätsgesetz) s 17 ................................................................................................ 182n174 South Africa Board Notice 91 of 2000 .............................................................................. 126 s 3.20 ............................................................................................... 126n82 s 3.20.1.1 ......................................................................................... 126n83 s 3.20.1.2 ......................................................................................... 126n84 s 3.20.1.3. ........................................................................................ 126n85 s 3.20.1.4.1 ...................................................................................... 126n86 s 3.20.1.4.2 ...................................................................................... 126n87 s 3.20.1.4.3 ...................................................................................... 126n88 s 3.20.1.4.4 ...................................................................................... 126n89 s 3.20.1.4.5 ...................................................................................... 126n90

xx Table of legislation s 3.20.1.4.6 ...................................................................................... 126n91 s 3.60 ............................................................................................... 126n93 s 3.60.1.2 ......................................................................................... 127n94 s 3.60.1.3 ......................................................................................... 127n95 s 3.60.1.5 ......................................................................................... 127n96 s 3.60.1.6 ......................................................................................... 127n97 s 3.60.1.7 ......................................................................................... 127n98 s 3.120 ............................................................................................. 127n92 Board Notice (No 158) 2014 s 2(a)(ii) ................................................................................................. 136 s 3(1)(a) ..............................................................................136, 136n133–4 s 3(1)(b)(i)(aa) ............................................................................... 136n135 s 3(1)(b)(i)(cc) ............................................................................136n136–7 s 3(1)(b)(i)(cc)(ii) .......................................................................... 136n138 Board Notice (No 113) 2015 s 4(1) ..................................................................................................... 137 Children’s Act 38 2005 s 17 .................................................................................................. 118n14 Close Corporations Act 1984 22n65, 141 s 47 .................................................................................22n65, 134–6, 144 Companies Act 1926 .................................................................................113–6 s 12(1) ............................................................................................... 114n4 s 68 ........................................................................................ 113, 114, 115 s 68bis ................................................................................ 114, 114n3, 115 s 68(1)(a) ............................................................................................... 118 s 68(1)(b) .............................................................................................. 120 s 168 .................................................................................................. 21n59 s 180 ...................................................................................................... 115 s 180ter .................................................................................................. 115 sch 1 table A .................................................................................. 114, 116 sch 1 table A art 80 ................................................................................ 113 sch 1 table A art 83 ................................................................................ 5n9 sch 1 table A art 95 .................................................... 114, 115n7, 116, 117 Companies Act 1973 .......................................................... 113, 116–30, 131, 141 s 3(2) ............................................................................................... 119n30 s 213 ...................................................................................... 114, 127n100 s 213(1)-(c) ........................................................................................... 128 s 218 ....... 114, 116–17, 120–1, 123, 127, 128, 129–30, 133n128, 136, 153 s 218(a)-(d) ..................................................................................... 116n11 s 218(d)(iii)............................................................................................ 140 s 218(1)(a) ............................................................................................. 131 s 218(1)(b) ............................................................................................ 118 s 218(1)(d) .................................................................................... 119, 140 s 218(1)(d)(i) ......................................................................................... 128

Table of legislation xxi s 218(1)(d)(iii) ............................................................................... 124, 129 s 218(1)(d)(iv) ....................................................................................... 124 s 218(1)(A) ...................................................................................... 122n54 s 218(1A)....................................................................................... 124, 125 s 218(1A)(i)(aa)-(cc) ........................................................................ 124n65 s 218(1A) (a)(i)(bb) ............................................................................... 123 s 218(1A)(a)(i)(cc) ................................................................................. 124 s 218(1A)(a)(ii) ................................................................................ 124n64 s 218(1A)(a)(iii) ..................................................................................... 124 s 218(2) ............................................................................. 117n12, 121n48 s 219 .................................................................................116, 128, 129–30 s 219(1)(a) ............................................................................. 129, 129n108 s 219(1)(d) ............................................................................................ 129 s 219(2)(a)(i) ................................................................................. 129n109 s 424 .............................................................................................. 129, 151 s 424(1) ................................................................................................. 129 s 441(a)-(d) ..................................................................................... 123n63 s 441(1)(p) .................................................................................... 128n105 sch 1 table A .......................................................................... 115, 116, 117 sch 1 table A art 56 ........................................................................ 127n101 sch 1 table A art 65 ................................................................................ 117 sch 1 table A art 65(d) ..................................................................... 117n13 sch 1 table B .......................................................................... 115, 116, 117 sch 1 table B art 66 ................................................................................ 117 sch 1 table B art 66(d)...................................................................... 117n13 Companies Act 2008 ......................................... 6, 18, 25, 25n88, 30, 113, 116, 125, 130–53, 142n157, 153–4 s 1 .......................................................................................................... 131 s 11 .......................................................................................................... 38 s 8(b) ................................................................................................. 18n37 s 20(6) ........................................................................................... 151n193 s 22 ........................................................................................ 130n114, 149 s 69 .................................................. 22, 130, 130n115, 144, 149, 154n215 s 69(1) ................................................................................................... 141 s 69(5) ....................................................................... 22n65, 134, 134n129 s 69(7) ................................................................18n35, 18n37, 130–1, 133 s 69(7)(a) ............................................................................... 130n116, 131 s 69(7)(b) ...................................................................................... 130n117 s 69(7)(c) ........................................................................................... 18n36 s 69(8) ....................................................................... 18n35, 133, 133n128 s 69(8)(iv) .............................................................................................. 140 s 69(8)(a) ........................................................................... 22n65, 134n129 s 69(8)(b) ............................................................................ 20n49, 25, 141 s 69(8)(b)(i) ........................................................................................... 3n6

xxii Table of legislation s 69(8)(b)(iv) ................................................................................. 141, 142 s 69(10) ................................................................................................. 141 s 69(10)(b) .................................................................................... 141n151 s 69(11) ................................................. 18n37, 25n91, 141, 142, 144n163 s 69(11A)....................................................................................... 143n158 s 69(11B) ............................................................................... 142, 143n159 s 69(12) ......................................................................................... 144n163 s 69(13) ............................................................................. 27n98, 142, 148 s 71 .................................................................................................... 21n59 s 76(2)(a) ............................................................................... 145, 149, 152 s 76(2)(a)-(b) ......................................................................................... 149 s 76(2)(b) .............................................................................................. 149 s 76(3) ................................................................................................... 149 s 77(3) ........................................................................................... 149, 151 s 77(3)(a)-(c) ......................................................................................... 145 s 129 ...................................................................................................... 146 s 155 ...................................................................................................... 146 s 162 .....................22, 22n65, 24n83, 143, 144–8, 154, 154n214, 154n215 s 162(2) ................................................................................................. 144 s 162(3) ................................................................................................. 144 s 162(5) ......................................................................................151, 152–3 s 162(5)(a) ..................................................................... 144n163, 147n171 s 162(5)(a)-(b) ............................................................................147n166–7 s 162(5)(b) .................................................................................... 147n171 s 162(5)(c) ............................................................................................. 149 s 162(5)(c)(iii) ....................................................................................... 149 s 162(5)(c)(iv)(aa).................................................................................. 130 s 162(6) ......................................................................................... 147n171 s 162(6)(ii) .................................................................................147n168–9 s 162(6)(a) ..................................................................................147n166–7 s 162(7) ................................................................................................. 144 s 162(7)(a) ............................................................................................. 145 s 162(7)(a)(ii) ........................................................................................ 151 s 162(7)(b) ............................................................................................ 145 s 162(8)(b)(ii) ................................................................................ 145n164 s 162(9)(a) ..................................................................................... 145n165 s 162(9)(b) .................................................................................... 147n170 s 162(1) ................................................................................................. 146 s 162(10) ....................................................................................... 154n214 s 162(11) ....................................................................................147n166–7 s 162(11)(a) ................................................................................... 147n172 s 162(11)(b)(ii) .............................................................................. 147n173 s 162(12) ............................................................................................147–8 s 163(1) ................................................................................................. 145

Table of legislation xxiii s 163(4) ................................................................................................. 144 s 171(7) ......................................................................................... 144n161 s 185 .............................................................................................. 144n160 s 214(1)(b) ............................................................................................ 140 s 214(3) ......................................................................................... 144n161 s 218(2) ......................................................................................... 151n193 s 262(5)(a)-(b) ............................................................................... 144n162 Companies Amendment Act 1939 ................................................................. 114n3 Companies Amendment Act 1946 ................................................................. 114n3 Companies Amendment Act 1952 ................................................................. 114n3 Companies Amendment Act 2011 ................................................................. 116n8 Companies Regulations 2011 ......................................................................... 116n8 Competition Act 2001 ........................................................................................ 141 Constitution of the Republic of South Africa 1996............................ 122, 129n111 Criminal Procedure Act 1977 s 18 ................................................................................................ 130n113 s 283 .............................................................................................. 133n128 s 332(5) ......................................................................................... 129n111 Electricity Act 1958 s 5(3) ............................................................................................. 132n121 s 5(4) ..........................................................................................132n122–3 s 6(1) ..................................................................................................... 131 Electricity Act 1987 s 5 .................................................................................................. 132n120 s 5(1)(b) ................................................................................................ 132 s 5(1)(c) ................................................................................................. 132 s 5(3)-(4) ............................................................................................... 132 Eskom Amendment Act 1991 s 6 .................................................................................................. 132n120 Financial Advisory and Intermediary Services Act 2004 .................................. 139 Financial Intelligence Centre Act 2001 ........................................................ 138 Financial Services Board Act 1900 .................................................................... 124 s 19 .................................................................................................. 124n67 Financial Services Board Directive 101 r 1.2(b) ............................................................................................ 125n70 r 1.3(a) ............................................................................................ 125n71 r 1.3(c) .........................................................................................125n72–3 r 21 .................................................................................................. 125n74 r 21(b) ..........................................................................................125n75–7 Friendly Society Act 1956 132 s 10(2) ........................................................................................132n125–6 s 11(1) ........................................................................................... 132n127 Insolvency Act 1936 ..................................................................................... 141 s 127(A)(1) ...................................................................................... 119n33 s 144 .............................................................................................. 133n128

xxiv Table of legislation Johannesburg Stock Exchange Derivative Rules r 3.20 ................................................................................................139–40 Johannesburg Stock Exchange Equity Rules r 3.30.1 .......................................................................................... 138n143 r 3.30.1.2 ....................................................................................... 138n144 r 3.40.6 .................................................................................................. 139 r 4.10 ............................................................................................. 138n142 r 4.10.1 ...............................................................................................137–8 r 4.10.1.1–4.10.1.3 ........................................................................ 138n141 r 4.10.1.2 ....................................................................................... 139n146 r 4.10.1.3 ............................................................................................... 139 r 4.10.2. . . 138–9 r 4.10.2.1 ....................................................................................... 139n145 r 4.20.1.1 ............................................................................................... 139 r 4.50 ..................................................................................................... 139 Johannesburg Stock Exchange Interest Rate and Currency Rules r 3.30 ..................................................................................................... 140 Labour Relations Act 1995 ........................................................................122, 126 s 3(1) ............................................................................................... 122n52 s 3(3) ............................................................................................... 122n53 s 4 .................................................................................................... 122n54 sch8 s 2(2) ....................................................................................... 122n51 Long-Term Insurance Act 1998 ...................................................................124n68 National Energy Regulator Act 2004 ................................................... 132n120 Pharmacy Act 1928 ............................................................................................ 119 Prevention and Combating of Corrupt Activities Act 2004 ............. 116, 121, 141 ch 2 ....................................................................................................... 141 s 3 .................................................................................................... 121n45 s 4 .................................................................................................... 121n46 ss 10–11 ........................................................................................... 121n47 ss 13–18 ........................................................................................... 121n47 s 20 .................................................................................................. 121n47 Promotion of Administrative Justice Act 2000 ............................................125n69 Protection of Personal Information Act 2013 ............................................122, 140 s 4 .................................................................................................... 122n56 s 11 .................................................................................................. 122n56 Securities Services Act 2004 .......................................................................... 141 Short-Term Insurance Act 1998 ............................................................. 124n68 South African Banks Act 1990 s 60 ........................................................................................................ 3n8 Stock Exchange Control Act 1 1985 .............................................................. 126 s 12(6) ................................................................................................... 126

Table of legislation xxv United Kingdom Companies Act 1862 ............................................................ 33n2, 40, 70n2, 72 s 15 .................................................................................................... 40n49 sch 1 table A, reg 57 .................................................................... 40n49, 41 Companies Act 1908 .......................................................................................... 113 sch 1 table A .......................................................................................... 114 sch 1 table A art 77 .................................................................... 114, 115n7 Companies Act 1928 .............................................................. 33, 39, 40, 41, 44 s 18(1)-(2) ......................................................................................... 40n51 s 75(4) ............................................................................................... 44n63 s 80(2) ......................................................................................... 42, 42n54 s 84 .................................................................................................... 39n45 sch 2 reg 72 ....................................................................................... 40n52 sch 2 reg 77 ............................................................................................. 42 Companies Act 1929 ...................................................................................... 40 s 217 ........................................................................................................ 42 s 275 ............................................................................................ 42, 44n63 table A reg 72 .................................................................................... 42, 43 Companies Act 1947 ...................................................................................... 45 s 33 .................................................................................................... 45n67 s 33(1) ............................................................................................... 45n67 Companies Act 1948 .............................................................. 33n2, 40, 79, 113 s 6 ...................................................................................................... 40n53 s 8(1) ................................................................................................. 40n53 s 182 ........................................................................................................ 42 s 188 .............................................................. 43, 44, 45, 45n67, 57, 58, 67 s 188(1) ................................................................................................... 43 s 188(2) ............................................................................................. 44n57 s 188(3) ................................................................................. 44n59, 44n60 s 188(4) ................................................................................. 44n58, 44n61 s 188(5) ................................................................................. 43n55, 44n62 s 188(6) ....................................................................................... 43, 43n56 table A ................................................................................................. 33n2 table a reg 88 ........................................................................................... 43 Companies Act 1956 sch 1 table B .............................................................................................. 3 sch 1 table B reg 47.................................................................................. 41 Companies Act 1976 ...................................................................................... 45 s 9 ............................................................................................................ 45 Companies Act 1981 ...................................................................................... 46 s 93 .................................................................................................... 46n70 Companies Act 1985 ...................................................................................... 46 ss 295–9 ................................................................................. 45n65, 46n71 ss 295–302 ............................................................................................... 45

xxvi Table of legislation s 300 .................................................................................................. 45n65 ss 301–2 ............................................................................................. 45n65 s 302 .................................................................................................. 45n64 Companies Act 2006 .......................................................... 19, 19n38, 54, 58, 113 s 155 .................................................................................................. 19n41 s 157 ...................................................................................... 19n39, 48n86 s 157(1) ............................................................................................. 49n93 s 993 ........................................................................................................ 58 s 1214 ................................................................................................ 48n86 Companies (Consolidated) Act 1908............................................................... 40 s 10(1)-(2) ......................................................................................... 40n50 s 73 .......................................................................................................... 42 sch 1 table A reg 70 ................................................................................ 42 sch 1 table A reg 77 ..................................................................40n50, 41–2 Companies (Disqualification Orders) Regulations 2009......................... 61n175 Company Director Disqualification Act 1986 ....23, 25, 28, 33, 39, 43, 45, 45n65, 46–7, 58, 67 Preamble .................................................................................................. 45 s 1 ............................................................................................................ 59 s 1(1) ................................................................................................. 38n35 s 1A ..................................................... 39, 39n43, 39n44, 53n110, 53n112 s 1A(1)..................................................................................................... 47 s 2 .............................................................................................. 39, 67n201 s 2A ................................................................................................. 61n174 ss 2–5 ....................................................................................................... 57 s 2(1) ............................................................................................... 58n144 s 2(2) ............................................................................................... 58n147 s 2(3) ............................................................................................... 58n145 s 3(1) ............................................................................................... 58n148 s 3(2) ............................................................................................... 58n149 s 3(4) ............................................................................................... 58n151 s 4(1) ............................................................................................... 59n152 s 4(2) ............................................................................................... 59n153 s 4(3) ............................................................................................... 59n154 s 5 .................................................................................................... 59n155 s 5(5) ............................................................................................... 59n157 s 6 .......................... 23, 23n70, 23n73, 39, 47, 50, 56, 59, 59n158, 65n195 ss 6–9 ....................................................................................................... 51 s 6(1) ..................................................................................... 23, 51n97, 53 s 6(2) ................................................................................................... 51n9 s 6(2)(c) ........................................................................................... 51n100 s 6(3C) .............................................................................................. 51n98 s 6(4) ................................................................................. 52n102, 59n159 s 7(1) ....................................................................... 47n77, 51n96, 52n105

Table of legislation xxvii s 7(2) ............................................................................................... 52n101 s 7(2A)............................................................................................. 53n111 s 7(3) ............................................................................................... 52n104 s 7(4) ............................................................................................... 52n103 s 8 .............................................................................................50, 51, 52–3 s 8(1) ................................................................................... 23, 53, 53n107 s 8(2A)............................................................................................. 53n111 s 8(4) ............................................................................................... 53n108 s 8A ................................................................................... 53n113, 60n161 s 8A(1)............................................................................................... 26n92 s 9(1) ............................................................................................... 53n115 s 9A ................................................................................................. 56n135 s 9A(4)............................................................................................. 56n136 s 9A(5)-(6)....................................................................................... 56n137 s 9B(3) ............................................................................................. 57n138 s 9C ................................................................................................. 57n139 s 9C(4) ............................................................................................ 57n140 s 9E ..................................................................................... 50n94, 56n135 s 10(1) ............................................................................................. 57n141 s 10(2) ............................................................................................. 57n142 s 11 .......................................................... 20n50, 41, 47, 48n85, 49n87, 64 s 11(1)(aa) ......................................................................................... 39n46 s 11(1)(b) .............................................................................. 39n46, 49n90 s 12 ........................................................................................ 48n86, 49n92 s 12A ................................................................................................. 20n53 s 13 ................................................................................... 60n 167, 60n168 ss 13–15 ............................................................................................. 38n38 s 15 .................................................................................................. 61n172 s 16 .......................................................................................................... 59 s 16(1) ............................................................................................. 52n106 s 16(2) ............................................................................................. 59n156 s 16(4) ............................................................................................. 57n143 s 17 ........................................................................................ 26n92, 38n40 s 18 .................................................................................................... 27n99 s 18(2) ............................................................................................. 61n173 s 18(3) ............................................................................................. 61n176 s 18(4) ............................................................................................. 61n177 s 22(5) ............................................................................................... 38n41 s 26 .................................................................................................. 28n108 sch 1 ........................................................................................................ 53 sch 1 pt 1 ......................................................................................... 54n116 sch 1 pt 2 ................................................................................. 53, 54 n 117 sch 2 pt 1 ........................................................................................... 23n76 sch 2 pt 2 ........................................................................................... 23n76

xxviii Table of legislation Competition Act 1998 ch 1 ......................................................................................................... 56 ch 2 ......................................................................................................... 56 County Courts Act 1984 ................................................................................ 49 Enterprise Act 2002 ....................................................................................... 47 Insolvency Act 1976 ....................................................................................... 46 s 28 .......................................................................................................... 45 Insolvency Act 1986 ....................................................... 45n65, 46, 53, 53n110 pts 1–7 ..................................................................................................... 58 s 213 ........................................................................................................ 57 s 214 .................................................................................................... 5, 57 s 216 .................................................................................................. 48n85 s 216(1) ........................................................................................... 61n170 s 216(2)-(3) ..................................................................................... 61n171 s 216(4) ........................................................................................... 61n169 s 281A ............................................................................................... 49n91 sch 4A ................................................................................................ 49n91 Insolvency Act 2000 ....................................................................................... 47 Joint Stock Companies Act 1856 ..................................................................... 40 sch 1 table A ............................................................................................ 44 sch 1 table B ................................................................................ 33, 40, 78 sch 1 table B reg 46................................................................................ 5n9 sch 1 table B reg 47.................................................... 40, 41, 72, 72n14, 79 Limited Liability Act 1855 .................................................................... 2, 71n7 Preamble .................................................................................................... 2 Small Business, Enterprise and Employment Act 2005.......................35, 48, 63–7 s 104 ................................................................................................ 63n186 s 105 ................................................................................................ 63n187 s 106 ................................................................................................ 63n188 s 107 ................................................................................................ 64n192 s 108 ................................................................................................ 64n189 s 110 .................................................................................. 64n190, 64n191 United States of America 15 USC s 17(a)(1) ......................................................................................... 164n56 s 19 (2015) .......................................................................... 156n8, 163n50 s 19(a)(1) (2015) ............................................................................. 163n52 s 77h-1 .......................................................................................165n69–70 s 77q(a)(I) ....................................................................................... 164n56 s 77t (2010) ..................................................................................... 164n56 s 77t(a) (2010)................................................................................. 164n58 s 77t(b) (2010) ................................................................................ 164n59 s 77t(e) ................................................................................ 156n8, 163n50

Table of legislation xxix s 78j ................................................................................... 164n60, 164n64 s 78j(a)(i) ......................................................................................... 164n61 s 78j(b) ............................................................................................ 164n62 s 78j(c)(1) ........................................................................................ 164n63 s 78j(c)(2) ........................................................................................ 165n66 s 78u .................................................................................. 164n65, 165n69 s 78u(d) ............................................................................... 156n8, 163n50 s 78u(d) (2010) ................................................................. 160n33, 161n35 s 78u(d)(2) ...................................................................................... 161n39 s 78u(2)(d) ........................................................................................ 156n6 s 78u-3 .......................................................................................165n69–70 s 7264 .............................................................................................. 165n67 s 7264(c) ......................................................................................... 165n68 Alaska Statutes Annotated s 10 .................................................................................................. 163n54 Clayton Antitrust Act 1914 s 8 .................................................... 156n8, 163, 163n50, 163n51, 163n52 Delaware Code Act of Dec 31, 1963 ch 218 s 1 ....................................... 159n21 Delaware Code Annotated Title 8 s 141(k) .............................................................................. 171n101 Delaware General Corporation Law ......157, 159, 159n23–6, 159n29, 166, 171 s 141(b) ............................................................................... 19n42, 166n72 s 109(b) ........................................................................................... 166n73 Dodd-Frank Act 2010 ............................................................................. 156n4 Illinois Business Corporation Act 1933 .......................................................... 158 Model Business Corporation Act ...............156n3, 157, 157n11, 158–9, 157n17, 159n23–6, 159n28, 159n29, 171 s 8.02 ................................................................................................. 19n42 Montana Code Annotated s 35–1-112 ....................................................................................... 158n17 Ohio Revised Code Annotated s 1701.57 ......................................................................................... 163n54 s 1701.58 ......................................................................................... 163n55 Pennsylvania Consolidated Statutes Annotated s 1726(b) ........................................................................... 163n54, 163n55 Public Company Accounting Reform and Investor Protection Act 2002.....162n42 Sarbanes-Oxley Act 2002 ....................17, 25n87, 156n4, 161–2, 165, 166, 169 s 305 ...................................................................... 156n8, 162n41, 163n50 s 305(a)(1) ....................................................................................... 161n39 s 406 .............................................................................................165n67–8 s 1105 .....................................................................25, 162n41, 165n69–70 Securities Act 1933 .............................18, 156n4, 156n8, 160, 163–4, 1645n57 s 17(a)(1) ......................................................................................... 164n56 s 20(e) ..................................................156n8, 163n50, 164n56, 164n58–9

xxx Table of legislation Securities Enforcement Remedies and Penny Stock Reform Act 1990 ......160–1, 160n34, 161n35, 161n37–8, 162, 162n45, 166 Securities Exchange Act 1934 .... 18, 156n4, 156n7, 156n8, 160, 160n33, 164–5 s 10(b) ............................................................................................. 166n71 s 12 .......................................................................................... 166, 166n71 s 15(d) ............................................................................................. 166n71 s 21(d) ..................................................24n82, 163n50, 164n60–5, 165n66 s 21C ....................................................................................................... 25 s 21C(f) ........................................................................................... 166n71 Securities Law Enforcement Remedies Act 1990 ..........................................161n37 Sherman Antitrust Act 1890 .......................................................................163n51 Stronger Enforcement of Civil Penalties Act 2015.................................... 165n69

List of tables

1.1 2.1 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9

3.10 3.11 3.12 3.13 3.14 3.15 3.16

Jurisdictions at a glance Number of director disqualifications in financial years 2000–2001 to 2012–2013 Disqualifications by court order and disqualifications by ASIC Sections 206A and 206B: Primary provision and automatic disqualification Section 206C: Court power of disqualification – contravention of civil penalty provision Section 206C: Summary of years of disqualification and number of defendants disqualified (cases from 2009 until June 2016) Section 206D: Court power of disqualification – insolvency and non-payment of debts Section 206D: Summary of years of disqualification and number of defendants disqualified (cases from 2009 until June 2016) Section 206E: Court power of disqualification – repeated contraventions of Act Section 206E: Summary of years of disqualification and number of defendants disqualified (cases from 2009 until June 2016) Sections 206EAA–206EA: Court power of disqualification – disqualification under a law of a foreign jurisdiction and under the Competition and Consumer Act 2010, etc. Section 206F: Summary of disqualifications by ASIC Enforcements Office Section 206F: Summary of disqualifications by ASIC Small Business Compliance and Deterrence (SBC&D) Cases by year – 2009 to 2016: Sections 206A and 206B Cases by year – 2009 to 2016: Section 206C Cases by year – 2009 to 2016: Section 206D Cases by period of disqualification: Section 206E Cases by year – 2009 to 2016: Sections 206EAA-206EA

8 62 95 96 96 96 97 97 97 98

98 98 99 103 104 107 107 111

About the editors and authors

Editors/authors Jean Jacques du Plessis graduated from the Faculty of Law of University of the Free State with a BProc, LLB, LLM and LLD. He is currently a Professor of Corporate Law in the Deakin Law School at Deakin University, Australia, where he teaches in the areas of corporate governance, corporate law and business law. He initiated and is the first author of Principles of Contemporary Corporate Governance (Cambridge University Press, 2005) and German Corporate Governance in International and European Context (Springer Verlag, 2007). He is also the co-author (with Gregory Lyon) of The Law of Insider Trading in Australia (Federation Press, 2005) as well as seven other books published in Australia, Germany and South Africa. Jean publishes actively in the areas of corporate law and corporate governance, with more than 100 articles published in Australia, New Zealand, South Africa, Hong Kong and the United Kingdom. The majority of his publications focus on international comparative corporate law and comparative corporate governance. Jean has been an Alexander von Humboldt Scholar since 1995. In 2013, he received the Anneliese Maier Research Award from the Alexander von Humboldt Foundations for a five-year period (2013–2018). As part of the Anneliese Maier Research Award, Jean organised four international forums addressing issues in contemporary international corporate law and corporate governance (http://2013.icgl.org.au; http://2014.icgl.org.au; http://2016. icgl.org.au/; and http://2016-beijing.icgl.org.au/). The papers delivered at these forums were published in special issues of the European Business Law Review (Issue 1, 2015) and the Deakin Law Review (Issue 1, 2015) and the papers of the 2016 Forums will be published in two separate books by Springer Verlag (Heidelberg) in 2017. Jean assisted the South African Government with its Corporate Law Reform Program (2002–2010). This resulted in the new South African Companies Act 71 of 2008, which became law in April 2012. He was also the Head of the Deakin Law School (2000–2002), President of the Australian Corporate Law Teachers Association (2008–2009) and a Graduate of the Australian Institute of Company Directors (AICD) since October 2011. He was co-editor of the

xxxiv About the editors and authors Deakin Law Review in 2012 and currently serves on the editorial board of the European Journal of Economics and Management. Since 2016 Jean was the section editor for corporate governance, corporate responsibility and law in the Company and Securities Law Journal. Jeanne Nel de Koker graduated from the Faculty of Law of University of the Orange Free State (Bloemfontein) with a BIuris, an LLB and an LLM in Constitutional Law. Jeanne was admitted as an Advocate of the High Court of South Africa in Bloemfontein and practised as a member of the Orange Free State Bar. Jeanne has taught corporate law and business law as well as family law, deceased estates and African customary law at Vista University, the University of the Orange Free State, the Rand Afrikaans University and the University of Johannesburg. She was a senior lecturer in the Department of Business Law and Taxation at Monash University, Australia, deployed to their new South African campus to develop and present their commercial law courses. Jeanne currently teaches corporations law and marketing law at an undergraduate level and corporate governance at a postgraduate level at Deakin University, Australia. She has delivered more than 25 academic papers at various national and international conferences and published 13 articles in national and international peer-reviewed journals. Jeanne compiled and edited a number of reports for the South African Commission on Gender Equality; participated in and contributed to the drafting of the report which was presented as the official South African report at the Trends and Typologies Meeting of the Financial Action Task Force during 2002; and undertook the empirical research analysis for a multi-country study for the Alliance for Financial Inclusion, Bangkok (2012). Jeanne contributed to several parts of the book Principles of Contemporary Corporate Governance (3rd edn, Cambridge University Press, 2015) and authored chapters in Anti Money Laundering Guide (Thomson Reuters, 2015) and The Changing Family (Hart Publishing, 1998).

Other authors Tess Blackie completed her Bachelor of Arts (International Studies) and LLB (Honours) at Deakin University, Australia. She also holds a Graduate Diploma of Legal Practice from the College of Law. She is currently a Solicitor at YourLawyer Pty Ltd, Melbourne, Australia. Tess was a Research Assistant at the Deakin Law School, assisting senior academics with several publications. In 2014, Tess pre-edited and provided overviews of several papers that were published in a special edition (Issue 1, 2015) of the European Business Law Review. During 2012 and 2013 she served as student editor for the Deakin Law Review, the official law journal of the Deakin Law School. Hannah Marie Farhan holds a JD from the Boston College Law School. Originally an historian, she taught as a primary school teacher before transitioning to

About the editors and authors xxxv law. During her tenure at Boston College Law School, Hannah was a research assistant for multiple professors, including Professor H Kent Greenfield from May 2014 to May 2015 and Professor M S Bilder from May 2015. Hannah worked on corporate governance and federal whistle blower protection policies while completing an in-house legal internship at the public telecommunications security company Sonus Networks from June 2014 to August 2015. She has also worked in the public sector, as a legal intern for the Criminal Section of the Civil Rights Division at the US Department of Justice, and served as student attorney for the Juvenile Rights Advocacy Project and as a delegate for Boston College’s Jessup International Moot Court Team. Hannah has done human rights work in Port-au-Prince, where she co-authored a report to the United Nations Human Rights Committee on prison conditions and pre-trial detention. From 2014 to 2015 Hannah has received honours from the Clough Center for Constitutional Democracy, first as an Academic Law Fellow and then as a Public Interest Scholar. She has accepted a position as a judicial clerk for a civil law trial judge in Philadelphia, PA. Cornelius (Neels) Kilian completed his BProc Degree at the University of Johannesburg. He then obtained his MA Degree from the University of Regensburg (Germany), an LLM Degree from the University of Pretoria and his LLD from the University of the Free State (Bloemfontein). In 2013 Neels was appointed as Research Fellow of the Department of Mercantile Law, University of the Free State. He has published 17 articles and three books, including A Glossary of Financial Planning Law (LexisNexis South Africa, 2009) and has presented eight papers at international conferences. In early 2007 Neels received an Oxford University Press award for one of the best papers at the Corporate Law Teachers Association’s Annual Conference held in Melbourne, Australia. During 2006 he received funding from the South African National Research Foundation (NRF) to investigate the new proposed section 91 of the Companies Bill. Neels acted as an interim researcher at the European Academy (EURAC) Bolzano, Italy, in 2005. Andreas Rühmkorf is a Lecturer in Commercial Law, University of Sheffield (UK). He completed his Law Degree at the Westfälische Wilhelms-Universität in Münster, Germany, and obtained his PhD Degree in Law from the University of Sheffield in 2013. Andreas sat for his Second State Exam in law at North Rhine Westphalia, Germany, and was admitted to practise as a German lawyer (Rechtsanwalt) in 2007. He is a partner of the law firm Rechtsanwälte Merkle & Rühmkorf PartG mbB in Berlin where his areas of practice include legal aspects of corporate social responsibility, English company and commercial law and compliance. Andreas teaches both at undergraduate (LLB) and postgraduate (LLM) level in, inter alia, the areas of corporate law, comparative corporate governance, e-commerce law and internet privacy at the University of Sheffield. He has

xxxvi About the editors and authors also been a visiting lecturer at the Westfälische Wilhelms-Universität, Münster, since 2012. Andreas is the author of Corporate Social Responsibility, Private Law and Global Supply Chains (Edward Elgar Publishing, 2015). His current research focuses primarily on corporate social responsibility, corporate law and corporate governance and internet law. Andreas’s research on global sourcing through foreign subsidiaries and suppliers as a challenge for corporate social responsibility will be included as a chapter in Research Handbook on Transnational Corporations edited by Alice de Jonge and Roman Tomasic (Edward Elgar Publishing, forthcoming 2017). As sole author or co-author, he has published seven articles. Since 2013 Andreas has been a contributing editor of the loose-leaf commentary Shawcross and Beaumont on Air Law edited by David McClean et al. (LexisNexis), an international commentary on aviation law which is updated twice a year.

Preface

My interest in the topic of disqualification of company directors originated when I realised that the subject has received only scant attention in Australia, Germany, South Africa, the UK and the US, the jurisdictions reviewed in this book. I then realised that a comparative research project on the law regarding the disqualification of company directors would fit in neatly under the Anneliese Maier Research Award (2013–2018) I received from the Alexander von Humboldt Foundation. Scholarships were made available to all the other authors to undertake research on the topic in their own jurisdictions, with me and Jeanne Nel de Koker overseeing the project to ensure a consistent approach and editing each chapter jointly. Apart from acknowledging the financial support of the Alexander von Humboldt Foundation, through the Anneliese Maier Research Award, I would also like to thank the Foundation for the support, financial and otherwise, I have received from them since 1995. In addition, I would also acknowledge the financial support of the Deakin Law School’s Centre for Comparative Corporate Governance (CCC-G). This book provides the first comparative analysis of the law regarding the disqualification of company directors in these jurisdictions. The editors selected the jurisdictions for the following specific reasons: 1. 2.

3.

The law regarding the disqualification of company directors in Australia and the UK seems to be developed much further than in the US and in Germany. South Africa provides an interesting comparative perspective because the statutory provisions on disqualification of company directors have been consolidated and refined in the South African Companies Act 71 of 2008, even giving trade unions the right to apply for the disqualification of company directors. German company law, based on a two-tier board system (management board and supervisory board), is remarkably underdeveloped as far as disqualification of members of both management boards and supervisory boards is concerned.

The overall aim of the law regarding the disqualification of company directors is universal. It serves as a corporate law and corporate governance tool to

xxxviii Preface ensure that individuals who have a proven record of posing a particular risk to the business community, shareholders and creditors are indeed disqualified from being directors. This book provides a focused, concise and clear overview of the specific legal rules relating to directors’ disqualification in the selected jurisdictions. The differences in the disqualification regimes of these jurisdictions are highlighted. This book is also unique in that it provides a single source where the disqualification regimes of all these jurisdictions are available and compared with each other. This book will be of particular interest to legal academics interested in comparative research, members of institutes of company directors, company secretaries, compliance officers and corporate governance in all these jurisdictions. In addition, it will be invaluable to people holding directorships in more than one of these jurisdictions or those who need to advise directors on the risks of being disqualified in the jurisdictions covered in this book. Disqualification of company directors can potentially affect hundreds of thousands of directors, other company officers and senior managers. Therefore, knowledge of the law in this area is essential. We trust that this book will provide such information and assist readers when faced with the challenges associated with globalised and internationalised corporate law and corporate governance models. The book will also be of interest to senior managers and directors to determine what the law regarding disqualification of company directors is and what type of behaviour might expose them to potential disqualification. In addition, regulators and policy makers in all the jurisdictions will find the book useful to determine whether law reform is required to develop a proper and efficient disqualification regime or to refine the law regarding disqualification based on best practice in other jurisdictions. This book contains six chapters. In Chapter 1, we introduce the topic of directors’ disqualification, clarify terminology and provide a broad comparative overview of the different directors’ disqualification regimes in Australia, Germany, South Africa, the UK and the US. Chapters 2 to 6 are dedicated to the specific jurisdictions. In each chapter, the authors set out and analyse the grounds upon which a person can be disqualified from acting as a director. The authors also discuss the interpretation and application of directors’ disqualification provisions by the courts in each of the jurisdictions covered. I would like to thank all the authors and Jeanne Nel de Koker, who was my co-editor, for their patience with me expecting more and more, thus resulting in the book being finished more than a year later than anticipated. Jean Jacques du Plessis (Professor of Corporate Law, Deakin Law School) Recipient of the Anneliese Maier Research Award Alexander von Humboldt Foundation

1

Analyses, perspectives and jurisdictional overview Jean Jacques du Plessis* and Jeanne Nel de Koker**

Contents 1.1

Introduction

1

1.2

Different directors’ disqualification regimes at a glance

7

1.3

The purpose of directors’ disqualification regimes

7

1.4

Ineligibility, eligibility and positive requirements to be appointed as director

18

1.5

The disqualification provisions 1.5.1 Automatic disqualification 1.5.2 Disqualification on application

19 20 21

1.6

Leave by the court for a disqualified person to be exempted from being disqualified

25

1.7

The role of the regulator 1.7.1 Enforcement 1.7.2 Monitoring 1.7.3 Comparing the regulatory involvement

26 26 26 27

1.8

The benefits and drawbacks of active regulators

27

1.9

Conclusion

28

1.1 Introduction Many jurisdictions in the world use similar strategies to manage the risks intrinsically linked to the ingenious creature of statute, the company with limited

* BProc, LLB, LLM, LLD (UFS). Professor of Corporate Law, Deakin Law School, Deakin University (Australia). ** BIuris, LLB, LLM (UFS), Deakin Law School, Deakin University (Australia).

2

Jean Jacques du Plessis/Jeanne Nel de Koker

liability.1 N M Butler, President of Columbia University, claimed that ‘[t]he limited liability corporation is the greatest single discovery of modern times . . . [e]ven steam and electricity are less important than the limited liability company’. 2 Len Sealy, who held the SJ Berwin Chair in Corporate Law at Cambridge University’s Gonville and Caius College for many years, reflected on this claim: We may think this is a rather extravagant claim, but its general thrust is clear, and telling: the importance of the corporate form and of limited liability over the past century and a half has been immeasurable; the greater part of the commercial expansion, the scientific development and the many other achievements which have changed the shape of society during and since the industrial revolution have come about through the medium of the limited company.3 Since at least 1855 in the United Kingdom (UK), when incorporation automatically gave shareholders the considerable protection of ‘limited liability’ on registration,4 the issue of how they should be governed has been a challenge. These challenges have not diminished and that is why the subject area of ‘corporate governance’ is still of such importance worldwide. The Limited Liability Act 1855 (UK) made it compulsory for all companies incorporated as ‘limited liability’ companies to add the word ‘Limited’ as the last word of the name of the company. That was the red flag for creditors to know the shareholders of these companies were not liable in an ‘unlimited’ context. In addition, to ensure that there was some reassurance for creditors, directors who approved the payment of a dividend when the company was known to be insolvent, or made a dividend payment which they knew would render the company insolvent, were held to ‘be jointly and severally liable for all the Debts of the Company then existing, and for all that shall be thereafter contracted, as long as they shall respectively continue in the Office’.5 In other words, the underlying principle of ‘unlimited liability’ for shareholders changed to ‘limited liability’ for

1 John Gooley, David Russell, Matthew Dicker and Michael Zammit, Corporations and Associations Law: Principles and Issues (LexisNexis Butterworths, 5th edn, 2011) 309. See Gonzalo Villalta Puig, ‘A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine’ (2000) 7 Murdoch University Electronic Journal of Law 32, where the author describes the separate legal entity doctrine as a doubled-edged sword and calls attention to the fact that Australian jurisdictions introduced provisions addressing this issue into their corporate law. See also Greg Golding, ‘Tightening the Screws on Directors: Care, Delegation and Reliance’ (2012) 35 University of New South Wales Law Journal 266, where he refers to the ‘profound significance’ of maintaining the balance between the need to encourage directors to advance the business of the company through entrepreneurial decision-making and the need to ensure that the interests of shareholders are adequately protected. 2 N M Butler, President of Columbia University, quoted by A L Diamond in T Orhnial (ed.), Limited Liability and the Corporation (Croom Helm, 1982) 2. 3 L S Sealy, Company Law and Commercial Reality (Sweet & Maxwell, 1984) 1. 4 Limited Liability Act 1855 (18 & 19 Vict c 133) Preamble. 5 Ibid. (2), (9).

Analyses, perspectives and jurisdictional overview

3

directors when they paid dividends to shareholders if the company was already insolvent or became insolvent because of the payment of the dividend. As far as shareholders were concerned, their liability was now ‘limited’ to what they paid for their shares or undertook to pay for their shares if they did not hold fully paid-up shares – calls could be made for the unpaid part of the shares to which a shareholder subscribed. Another safeguard was added to Table B of the First Schedule to the Joint Companies Act 1856 (UK), namely ‘Disqualification of directors’ in regulation 47, stipulating several grounds on which the office of director would be vacated, including ‘bankruptcy’, which was later on moved from the First Schedule as a ground of disqualification into the Companies Acts themselves. This was a pattern in the UK, Australia and South Africa. It is necessary to explain the way in which we use the words ‘disqualification of company directors’ throughout the book. The term ‘disqualification’ does not lend itself to a narrow or even exact definition. We use it in a broad sense to denote the legislated prohibition of individuals to manage corporations. We identify and discuss three forms of disqualification: automatic disqualification, disqualification on application and disqualification by a regulator. In several jurisdictions, the law stipulates certain grounds that automatically disqualify a person from becoming a director, or disqualify them from continuing to hold the office of director. We refer to this process that does not require any active involvement of the court or the relevant corporate regulator as automatic disqualification. For example, in most jurisdictions an unrehabilitated bankrupt is automatically disqualified from taking up a directorship, and existing directors, if declared bankrupt, automatically cease to be directors.6 In other instances, an application to a court is required to disqualify a person. We call this disqualification on application. For instance, in Australia, the Corporations Act 2001 (Cth) (2001 Act) sets out a number of instances where a person can be disqualified from managing a corporation on application of the primary regulator, the Australian Securities and Investment Commission (ASIC).7 In contrast, German company law does not provide for its primary corporate regulator to apply to court for persons to be disqualified to act as members of supervisory boards or management boards. However, the Federal Financial Supervisory Authority, the financial regulatory authority for Germany, has the power to demand the removal of directors of financial institutions as an alternative to revoking authorisation.8

6 See, for instance, Companies Act 2008 s 69(8)(b)(i) in South Africa; 2001 Act s 206B(3) in Australia; and Aktiengesetz (AktG) s 76(3)2 No 1 and Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG) s 6(2) No 1 in Germany. 7 2001 Act ss 206C(1), 206D(1), 206E(1), 206EAA. In fact, the importance of the role of the regulator in the Australian directors’ disqualification regime is highlighted by the fact that the 2001 Act provides for instances when the regulator may disqualify individuals from managing corporations without a court order (s 206F). 8 KWG (The German Banking Act, Kreditwesengesetz) ss 35–36. Similarly, s 60 of the South African Banks Act 1990 determines that the Registrar of Banks may object to the appointment

4

Jean Jacques du Plessis/Jeanne Nel de Koker

Finally, we identify and discuss disqualification by a regulator, where the regulator uses powers it obtains under the relevant legislation to disqualify an individual from managing a corporation. Under these powers, a regulator can disqualify persons from managing corporations without applying to a court for a disqualification order. The maximum period of these disqualifications is shorter than the periods of disqualification that courts can order. Although it differs slightly from jurisdiction to jurisdiction, it is generally understood that a person who has been disqualified automatically, by a court order or by a regulator is ‘disqualified from managing corporations’. In Australia, it is an offence for a disqualified person to manage a corporation. However, ‘managing corporations’ is then given a specific meaning: namely, it is an offence if such disqualified persons ‘make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation’; or ‘exercise the capacity to affect significantly the corporation’s financial standing’. This also applies to ‘shadow directors’. This means that a person can still be involved in companies as long as it is not at the higher level of decision-making. Although not specified explicitly, it could be assumed that a person disqualified from ‘managing corporations’ would automatically be disqualified from being an ‘officer’ of a company. In Australia, the UK, South Africa and the United States (US), director disqualification regimes extend beyond the conduct of actual directors to include officers of companies as well as shadow and de facto directors. As an example, in section 9 of the Australian 2001 Act, ‘officer’ is defined to include a director or secretary of the corporation; a receiver, or receiver and manager, of the property of the corporation; an administrator of the corporation; an administrator of a deed of company arrangement executed by the corporation; a liquidator of the corporation; or a trustee or other person administering a compromise or arrangement made between the corporation and someone else. The same section deems a person to be an ‘officer’ when involved in a higher level of decision-making or if the person is a ‘shadow director’. The German law focuses on directors of German private companies and members of the management boards, as well as supervisory boards of German public companies. We focus primarily on the disqualification of company directors in this book. Historically, the focus has been on disqualifications of directors because the legislative provisions and provisions of disqualification in the Tables of former Companies Acts were aimed at ensuring that unfit people do not become directors or that they vacate the office of director if certain disqualification grounds applied to them. It should also be remembered that in Australia and the UK it was considered a primary task of the board of directors to manage the business of the

or continued employment of a chief executive officer, director or executive officer of a bank if the Registrar reasonably believes that the chief executive officer, director or executive officer concerned is not or is no longer a fit and proper person to hold that appointment, or if it is not in the public interest that such chief executive officer, director or executive officer holds or continues to hold such appointment.

Analyses, perspectives and jurisdictional overview

5

corporation.9 Later, it was realised that, in large public companies, the directors of the company (up to half of whom were non-executive directors) could not manage the day-to-day business of the company. The board’s role changed to one of directing, supervising and governing management.10 The statutory recognition of this is currently contained in section 198A of the Australian 2001 Act, providing that ‘[t]he business of a company is to be managed by or under the direction of the directors’. In proprietary companies, it will usually still be the directors who manage the business of the company, but not in large listed companies.11 Especially in the US, the more common term used is ‘suspension’ or ‘debarment’. Disqualification, suspension or debarment is distinguished in this book from ‘removal’ of a company director from office. ‘Removal’ refers to the removal of directors by shareholders, by way of powers they have either in terms of legislation or in their internal governance provisions – for instance, a company’s constitution or articles of association. Disqualification generally precludes a director from participating in managing any corporation, whereas removal is specific to a particular company. The focus of this book is on ‘disqualification’ as a method to prohibit a person from managing corporations, either automatically if any of the automatic disqualifications grounds apply to a person or if the person was disqualified by court order or by a regulator. Internationally, disqualification of directors is seen as part of corporate governance because it aims at ensuring that people who are considered to be unfit are disqualified from serving in positions of influence as far as the governance and managing of corporations are concerned.12 In Australia, disqualification of directors serves three main purposes: (1) protecting shareholders against abuse by people unfit to serve in positions of influence over company matters; (2) punishing people in breach of civil penalty provisions of the 2001 Act; and (3) deterring improper behaviour.13 Deterrence plays a central role when considering whether and for what period a disqualification order should be made.14 To varying degrees in different jurisdictions, disqualification regimes also fulfil a gatekeeper function in that they ensure that people of competence and integrity,

9 Regulation (“reg”) 46 of Table B in the First Schedule to the Joint Stock Companies Act 1856 (UK); reg 83 of Table A in the First Schedule to the South African Companies Act 1926. 10 Jean Jacques du Plessis, Anil Hargovan, Mirko Bagaric and Jason Harris, Principles of Contemporary Corporate Governance (Cambridge University Press, 3rd edn, 2015) 96–7. 11 Ibid., referring to Rogers CJ’s comments in AWA Ltd v Daniels (t/a Deloitte Haskins & Sells) (1992) 7 ACSR 759, 865–8. 12 See Gooley, above n 1, 592–5; Meyrick Williams, ‘Directors’ Disqualification’ (2005) 2 International Journal of Disclosure and Governance 281, 281–2. 13 Rich v ASIC (2004) 220 CLR 129; Phillip Lipton, Abe Herzberg and Michelle Welsh, Understanding Company Law (Thomson Reuters, 18th edn, 2016) 330. The majority of court decisions emphasise that the purpose of disqualification orders is protective rather than punitive. See Golding, above n 1, 272. 14 ASIC v Adler (No 5) (2002) 42 ACSR 80 [56], [87].

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who would not be likely to abuse the corporate form with limited liability, take up directorships,15 but that others, considered not to be fit to serve as directors, are automatically disqualified from taking up the position of director. In the absence of a public oversight body or institution responsible for director disqualification, the provisions of the German Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG), which regulates private limited companies, and Aktiengesetz (AktG), which regulates public limited companies, do not contain any provisions that allow the regulator to exercise discretion in the disqualification of directors.16 This prompts the question whether, as part of a drive for the internationalisation of the German corporate law and corporate governance model, a modern statutory disqualification regime should not be considered for Germany.17 Outside company law, there are only three instances under German law that could be described as disqualification on application and/ or by a regulator: occupational bans imposed by criminal courts,18 trade bans by administrative bodies19 and disqualification in banking supervision law.20 This book attempts, by using a comparative approach, to answer the question of whether disqualification regimes where the primary corporate regulator plays a greater role in applying for the disqualification of directors serve as an effective gatekeeper to limit abuse of the position and fraudulent behaviour. Does the increased participation and power of the corporate regulator in a disqualification regime affect directors’ behaviour as well as corporate behaviour in general? With this aim in mind, the book provides an overview of the directors’ disqualification regimes under UK, Australian, South African, US and German law. These jurisdictions were selected because they represent different continents as well as different legal traditions (i.e. common law, civil law, mixed legal systems). In addition, South Africa provides an interesting case study as it is the jurisdiction

15 Kevin O’Doherty, ‘The Changing Corporate Governance Scene in Ireland for Offshore Financial Services’ (2009) 2(2) Journal of Securities Law, Regulation and Compliance 157; Puig, above n 1. 16 The legislation does not allow any discretion as to the question of whether or not disqualification applies to an individual. If the conditions are met, then the person concerned is unable to be a company director. 17 The issue of directors’ disqualification in the broader context of harmonisation of company law in the EU has been addressed in a number of reports and publications before. See e.g. Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe, Brussels, 4 November 2002; Carsten Gerner-Beuerle, Philipp Paech and Edmund Philipp Schuster, Study on Directors’ Duties and Liability (European Commission, London, 2013). This book provides a comparative perspective focusing in particular on possible changes in German company law. See Tom Reker, ‘Unqualified Directors in Insolvency: A Comparative Study on the Desirability of Civil Law Directors’ Disqualification in the Netherlands’ (2014) 23 International Insolvency Review 144 for an informative comparative discussion in relation to directors’ disqualification provisions in the Netherlands. 18 German Criminal Code (StGB) s 70(1). 19 Trade Regulations (GewO) s 35(1). 20 The German Banking Act (Kreditwesengesetz, abbreviated as KWG) gives the Federal Financial Supervisory Authority the power to demand the removal of directors and to disqualify directors.

Analyses, perspectives and jurisdictional overview

7

that reformed its disqualification provisions comprehensively, in the Companies Act 2008 (2008 Act), and because the reforms resulted in significantly different statutory provisions applying to disqualifications. Bearing in mind that ‘there will always be fundamental aspects distinguishing corporate law systems from each other’,21 and that different is not necessarily bad, this chapter introduces the different regimes, provides a broad overview of similarities and differences, and considers specific aspects of the different regimes that may enhance the German directors’ disqualification regime.22

1.2 Different directors’ disqualification regimes at a glance To provide readers with a bird’s-eye view of the directors’ disqualification regimes in the different jurisdictions, this chapter summarises information such as the name of the applicable legislation, the primary corporate regulator, the permitted applicants in disqualification procedures, and whether the legislation applies to private and/or public companies alike, in table format (Table 1.1).

1.3 The purpose of directors’ disqualification regimes When one considers the purpose of directors’ disqualification across the different jurisdictions covered in this book, some broad common themes arise. All the jurisdictions aim to protect the public, maintain high corporate standards and prevent unlawful and fraudulent behaviour.23 Although these aims are sometimes mentioned as separate objectives of a disqualification regime, they are, in fact, intertwined and dovetail to serve a broader overarching purpose: public interest in the good management of corporations. The fact that individuals may be prohibited from managing corporations is generally viewed as a preventative measure which ultimately enhances higher standards of honesty and diligence in corporate management. There is, however, no practical way of proving that this is true, although logic would dictate that it will be the case. The notion of protecting the public against rogue directors is a golden thread running through all the jurisdictions covered in the book. The public protection aim with disqualifications is dominant in all jurisdictions covered and is often mentioned in court decisions and by commentators. In Australia, protecting the public interest is seen as including the interests of consumers, creditors and investors.24 Similarly, directors’ disqualifications in Germany primarily serve to

21 Jean J du Plessis, ‘Reflections on Some Recent Corporate Governance Reforms in Germany: A Transformation of the German Aktienrecht?’ (2003) 8 Deakin Law Review 381. 22 The chapters that follow provide an overview and commentary of a particular disqualification regime in various jurisdictions without any specific comments as to the positive or negative aspects of these systems in juxtaposition with other jurisdictions. 23 Rich v ASIC (2004) 220 CLR 129. 24 In ASIC v Adler (No 5) (2002) 42 ACSR 80 [56] Santow J stated: ‘Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards.’

Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) for financial institutions only. Germany does not have such an institution for private and public companies.

Primary corporate regulator

Australian Securities and Investment Commission (ASIC)

s Company Directors Federal law: Disqualification s Securities Act 1986 Enforcement Remedies and Penny Stock Reform Act of 1990 s Securities Act 1933 s Securities Exchange Act 1934 s Sarbanes–Oxley Act of 2002 s #OMPANIES(OUSE Federal: s )NSOLVENCY3ERVICE s 3ECURITIES Exchange Commission (SEC)

s 0RIVATEGesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG) s 0UBLICAktiengesetz (AktG)

Primary legislation s Corporations Act 2001 s Australian Securities and Investments Commission Act 2001

US

UK

Germany

Australia

Table 1.1 Jurisdictions at a glance

Companies and Intellectual Property Commission (CIPC)

s Companies Act 2008

RSA

ASIC

Yes s !3)# s Competition and Consumer Act 2010

Who can apply to have a director disqualified?

Can directors’ be disqualified under other legislation?

No

3ECRETARYOF3TATE SEC #OMPANIES(OUSE #OURTS !COMPANY insolvency practitioner s #OMPETITIONAND Markets Authority (CMA)

s s s s

Yes Yes s "ANKING3UPERVISION,AW s Companies Act s German Criminal Code 2006 sections s Trade law 1182–1187 s &OREIGN disqualification orders s Insolvency Act 2000 s Enterprise Act 2002

No provision in German Company Law per se. German Banking Act – banking supervisor.

s 3HAREHOLDERS s $IRECTORS s #OMPANYSECRETARY or prescribed officer of a company s 2EGISTEREDTRADE union that represents employees of a company or another employee representative s #)0# s 4AKEOVER Regulation Panel s !NYORGANOFSTATE responsible for the administration of any legislation Yes The nature of the RSA legal system is such that numerous acts and/or public regulations may apply, e.g. rules of the JSE, Banks Act 1990 or directives of the FSB (The Financial Services Board, to be transformed into the Financial Sector Conduct Authority) i.e. Directive 101 (continued)

Yes

Do separate Acts regulate private and public companies?

No

No

Germany

Are directors’ No disqualification provisions contained in a separate Act?

Australia

Table 1.1 Jurisdictions at a glance (continued)

No

US

The Companies Act 2006 and the Small Business, Enterprise and Employment Act 2015 set some minimum requirements. No s 4HENATUREOF the US legal system is such that numerous acts, on a state and federal level may apply. s 3%#LEGISLATION only applies to public listed companies.

Company Directors Disqualification Act 1986

UK

Yes The nature of the RSA legal system is such that numerous acts may apply to private and/or public companies i.e. Financial Advisory and Intermediary Services Act 2004, s 13 requires fit and proper requirements for directors of financial services providers.

Primarily in the Companies Act 2008 but other acts may regulate additional disqualification criteria, e.g. Short Term Insurance Act 1998, s 70.

RSA

Specific leave by the court or regulator to manage corporation even though disqualified? Does the disqualification regime include positive or eligibility requirements?

Yes Yes Companies Act 2006 Natural persons s -INIMUMAGEOF 16 Supervisory boards s -INIMUMOFONE s -AXIMUMMEMBERSHIPOF natural person as ten boards at a time. director s !PERSONMAYNOTBEA s &ROM/CTOBER member of the 2016: Corporate supervisory board if they directors abolished were a member of the with limited management board of the exceptions same listed company during the past two years. s -EMBERSOFTHE supervisory board must have sufficient knowledge and skills to comprehend and to assess all usual business processes without assistance.

Yes Natural person of full legal capacity

Yes

Yes s /NLYNATURAL persons s -INIMUMAGE for directors is 18 s !TLEASTONE director of private companies must ordinarily reside in Australia

Yes

No

Yes

Yes

Yes

(continued)

1. The dominant view is that 1. Many companies are allowed to companies will establish additional still have articles eligibility requirements of association for directors through the based on the articles. First Schedule 2. However, these additional Tables under requirements are only former allowed to the extent legislation that they do not based on UK disproportionally restrict legislation. the discretion of the 2. These articles supervision board of a most likely joint stock corporation contain with regard to selecting grounds for directors. disqualification or when a director must vacate the office of director.

Germany

US Both federal and state corporate law permit companies to prescribe qualifications for their directors in the United States.

UK The articles can impose any qualification on the appointment of a director.25

Memorandum of Incorporation of a company may impose additional requirements.

RSA

25 Peter Loose, Michael Griffiths and David Impey, The Company Director: Powers, Duties and Liabilities (Jordan Publishing, 2011) 149.

Does the relevant legislation provide for additional requirements in companies’ articles of association, memorandum of incorporation or constitution?

Australia

Table 1.1 Jurisdictions at a glance (continued)

Do the provisions only apply to directors and officers?

3. It is not required that Australian companies adopt a constitution, but if one is adopted, the company has wide powers to include disqualification grounds. Application extends beyond the conduct of actual directors to include officers of companies as well as shadow and de facto directors.

Directors of private companies and members of the management boards, as well as supervisory boards of public companies.

3. Anyone who is a member of a supervisory board cannot be a member of the management board at the same time.

Application extends beyond the conduct of actual directors to include officers of companies as well as shadow and de facto directors.

Application extends beyond the conduct of actual directors to include officers of companies as well as shadow and de facto directors.

(continued)

Application extends beyond the conduct of actual directors to include officers of companies as well as shadow and de facto directors.

Germany

Duration of disqualification orders

1. Disqualifications in The duration company law: five years. depends on the 2. Occupational bans in reason for the criminal law: 1–5 years or disqualification. Note that the permanent in exceptional For instance, South African cases. disqualification legislation refers to based on a 3. Occupational bans in delinquency or trade law. conviction can be probation orders. five years from conviction date or release date if the individual is imprisoned. Disqualification on application based on a contravention of a civil penalty provision is for such period of time as the court determines. However, disqualification orders based on insolvency and non-payment of debts are capped at 20 years.

Australia

Table 1.1 Jurisdictions at a glance (continued) RSA 1. A delinquency order may be for the lifetime of the delinquent director or for seven years or longer, as determined by the court. 2. A probation order may run for up to five years. 3. Automatic disqualification is subject to a prescription period, e.g. ten years for an unrehabilitated insolvent. 4. Other public regulations may disqualify a director for life, e.g. termination of office due to a JSE disciplinary hearing.

US No fixed period determined in legislation. Disqualification can be permanently or for such period of time as the court determines.

UK Any disqualification will be for a minimum of two years, and a maximum of 15 years.

Consequence of managing a corporation whilst disqualified

ASIC has the power to disqualify directors and officers for a maximum of five years without applying for a court order of disqualification. Offence punishable with a fine up to $8,500.00 or one year’s imprisonment or both.

N/A

Offence punishable with a fine and/or imprisonment for up to two years and possible disqualification for a further period.

(continued)

Violating disqualification provisions in itself is not an offence. However, CIPC or Takeover Regulation Panel may issue a compliance notice – 214(3) – to a disqualified director (s 69(2) includes s 162 disqualification/ probation orders) who contravenes the Companies Act, s 214. Ignoring the compliance notice is an offence.

Australia

Germany

Table 1.1 Jurisdictions at a glance (continued) UK

US

The penalty is a fine or 12 months’ imprisonment, not both (s 171(7)(a)). The Companies Act states that a company must not knowingly appoint a disqualified director; thus the compliance notice could also be issued to the company for non-compliance (s 69(3)) and the company could be fined (s 171(7)(a)).

RSA

Analyses, perspectives and jurisdictional overview

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protect creditors and the capital market. Apart from protecting creditors,26 the provisions also aim to prevent exposing the public to financial risk.27 Directors’ disqualification provisions in the UK also focus primarily on the protection of the public.28 In South Africa, the courts cited ‘public interest in the clean government and administration of companies’, including ‘public interest in the administration of companies’, as the reason for the disqualification provisions.29 Public interest also features prominently as a purpose for the US disqualification provisions. It is clear that the provisions under which directors and officers could be barred were drafted to deter corporate misconduct and to send a signal to public investors that the markets were safe from the actions of proven violators.30 In particular, ‘proactively protect[ing] investors and the market’ is cited as the most important purpose of the federal disqualification regime in the US.31 Although the disqualification provisions in most of the jurisdictions were not drafted with a specific punitive objective in mind,32 they do, in fact, act as a punishment. For many public company directors, a banning order will effectively result in their removal from public life.33 In the US in particular, the

26 Hertig and Kanda contend that corporate creditors are the only non-shareholder stakeholders protected by ‘all company law’ because corporate creditors face a unique risk of debtor opportunism owing to limited liability. For an informative comparative discussion on creditor protection in corporate law, see Gerard Hertig and Hideki Kanda, ‘Creditor Protection’ in R Kraakman, Paul Davies, Henry Hansmann, Gerard Hertig, Klaus J Hopt, Hideki Kanda and Edward B Rock (eds), The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, 2004) 71–99. 27 The German Banking Supervision Law, the only German legislation that provides for disqualification on application, aims to protect and maintain the functionality of the credit industry in order to protect creditors of credit institutions from losing their deposit. It should be noted, however, that the imposition of an occupational ban is regarded as a form of punishment. 28 See Lord Woolf MR in Re Blackspur Group plc, Secretary of State for Trade and Industry v Davies [1998] 1 BCLC 676. In the UK, disqualification provisions set public protection as the overarching, ultimate goal, and prohibitory remedial action, deterrence and encouragement of higher standards of honesty and diligence in corporate management as the tools that will bring about public protection. The court that decides about the application for leave must balance the protection of the public and the need that the individual can act as a director of a particular company. 29 See Ex parte Dworsky 1970 (2) SA 429 (Provincial Division) discussed further in Chapter 4. 30 Jon Carlson, ‘Securities Fraud, Officer and Director Bars and the “Unfitness” Inquiry after Sarbanes–Oxley’ (2009) Fordham Journal of Corporate & Financial Law 679, 686. 31 Luis Aguilar, ‘Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws’, Speech delivered at the Securities Enforcement Forum, Washington, DC (18 October 2012), available at www.sec.gov/News/Speech/Detail/Speech/1365171491510 (accessed 10 November 2016). The SEC has used the officer and director bar, in particular, to prevent perpetrators of fraud from serving as fiduciaries to the public. See also Carlson, above n 30, 681. 32 ASIC v Adler (No 5) (2002) 42 ACSR 80 at 56 (Santow J); Golding, above n 1, 272. 33 See Golding, above n 1, 274. In Rich v ASIC (2004) 220 CLR 129, Spigelman CJ and Ipp JA concluded that such proceedings were not penal in nature, but ‘purely protective’, whereas

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Sarbanes–Oxley Act 2002 added a number of provisions to the Securities Act 1933 and the Securities Exchange Act 1934 in an attempt to stiffen penalties for dishonest corporate officers and directors. The directors’ disqualification provisions in the Act were certainly drafted with sanction in mind.34

1.4 Ineligibility, eligibility and positive requirements to be appointed as director We discuss the minimum requirements or eligibility criteria for directors in each of the five jurisdictions. It is also pointed out that, in all jurisdictions, companies have the discretion to set additional internal requirements. Although the eligibility requirements form part of the provisions that regulate disqualification, such requirements do not constitute disqualification in the true sense of the word. Whereas disqualification is negative by nature, eligibility is positive. Disqualification requires an event or change in status that makes an eligible person ineligible to be a director or officer. Eligibility, on the other hand, requires an event or change in status that makes a previously ineligible person eligible to be a director or officer. The additional requirements are similarly limited and subject to the provisions of the relevant broader corporate law. The rules differ, however, when it comes to the question whether the court or the regulator can override the eligibility requirements. In South Africa, disqualification and ineligibility, though regulated in one section of the 2008 Act,35 are clearly distinguished. Juristic persons and unemancipated minors, or persons under a similar legal disability, are ineligible and prohibited completely from being a director. The Act also provides for additional eligibility requirements in a company’s Memorandum of Incorporation.36 The court cannot grant ineligible persons leave to manage a corporation. However, a person who has been disqualified may still be permitted to be a director if the court sanctions such appointment.37

34

35 36 37

McColl JA dissented, concluding that the distinction between ‘punitive’ and ‘protective’ purposes was a false dichotomy and that a proceeding seeking to disable a person from acting as a director was a proceeding for a penalty, even if some protective purpose was served. Philip F S Berg, ‘Unfit to Serve: Permanently Barring People from Serving as Officers and Directors of Publicly Traded Companies after the Sarbanes–Oxley Act’ (2003) 56 Vanderbilt Law Review 1871. 2008 Act s 69(7) deals with eligibility and s 69(8) with disqualification. 2008 Act s 69(7)(c). See Mzo Tshaka, ‘Ineligibility and Disqualification of Directors’, mondaq.com (21 November 2013), available at www.mondaq.com/southafrica/x/276334/Directors+Officers/ Ineligibility+And+Disqualification+Of+Directors (accessed 10 November 2016). The 2008 Act s 69(11) determines that a court may exempt a person from the application of any provision of s 8(b). There is no similar provision in relation to s 69(7). However, in Australia, people disqualified from managing a corporation under Pt 2D.6 may be appointed as a director if ASIC permits it. See Gooley, above n 1, 587. The German system also sets eligibility requirements.

Analyses, perspectives and jurisdictional overview

19

The Companies Act 2006 (UK) (CA 2006) introduced two eligibility requirements to act as a company director in the UK.38 The first is age, in that a person must be at least 16 years of age to be appointed.39 However, in contrast to the South African provisions, the CA 2006 authorises the government to issue regulations under the Act for the purpose of specifying circumstances in which a person under the age of 16 could still validly be appointed as a director.40 The second requirement is that companies must have at least one natural person as a director. Consequently, in some circumstances, only natural persons are eligible to be appointed.41 Similar to the South African legislation, the UK provisions also allow companies to set additional requirements or restrictions in their articles of association. Federal as well as state corporate law permits companies to prescribe qualifications for their directors in the US. Delaware corporate law, for example, stipulates that directors must be natural persons as a minimum requirement.42 Under German company law, only natural persons with full legal capacity may be appointed as company directors.43 Australian company law determines that corporate bodies cannot be directors44 and the minimum age for directors is 18.45

1.5 The disqualification provisions However much the directors’ disqualification regimes in this book share common objectives, the structures and methods of the regimes vary quite significantly. The regimes are similar in that all the jurisdictions allow for directors to be disqualified on the basis of automatic disqualification and on application46 from a regulatory

38 The CDDA 1986 in itself imposes no qualification. See Loose, Griffiths and Impey, above n 25, 129. 39 CA 2006 s 157. 40 See Loose, Griffiths and Impey, above n 25, 129. 41 CA 2006 s 155. 42 Model Business Corporation Act s 8.02. Example of state law: Del General Corp Law s 141(b). On Delaware, see Mark Gerstein, Steven Stokdyk and Anthony Bruno, Latham & Watkins LLP, ‘Establishing and Enforcing Qualifications for Directors in Delaware Corporations’, Boardmember.com (undated), available at www.lw.com/thoughtLeadership/4024EstablishingandEnforcingQualificationsforDirectorsofDelawareCorporations (accessed 10 November 2016). 43 German company law determines that directors cannot be required to hold shares in a company to be eligible for directorship. Prior to 2011 and 2007 respectively, company law in South Africa and the UK allowed share qualifications as a positive requirement. 44 See Lipton, Herzberg and Welsh, above n 13, 317. 45 2001 Act s 201B(1). However, the Act permits ASIC to allow persons disqualified in terms of Pt 2D.6 to be directors. 46 Some events automatically disqualify a person from acting as a director or officer, whereas others require the intervention of the courts or a corporate regulator to eventuate a disqualification. See Julie Cassidy, Corporations Law (Federation Press, 4th edn, 2013) 182.

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body47 to a greater or lesser extent. A deeper investigation, however, reveals a number of differences. 1.5.1 Automatic disqualification All five jurisdictions provide for automatic disqualification. However, automatic disqualification ranges from being almost non-existent in the US to being, for all intents and purposes, the only form of disqualification measure in German company law. The concept of automatic disqualification is well developed in Australia, the UK, South Africa and Germany. Furthermore, the grounds for automatic disqualification are broadly similar. Convictions, insolvency or bankruptcy are common grounds for automatic disqualification in Australia,48 South Africa,49 the UK50 and Germany.51 Related foreign court orders only feature in Australia52 and the UK.53 Although the German disqualification regime provides for similar grounds for automatic disqualification, the provisions are more detailed and the substantive content of the provisions extend significantly beyond that of the other jurisdictions.54 In stark contrast, disqualification of directors as an external process – in particular, automatic disqualification – is very limited in US corporate law.

47 See Table 1.1 above. In Australia and the US, only the primary corporate regulator can apply to the court to disqualify a director. In the UK and South Africa, the law provides for applications from other bodies and individuals. 48 2001 Act s 206B. Automatic disqualification can also be the result of orders made under s 86E or s 248 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and s 12GLD of the Australian Securities and Investments Commission Act 2001 (Cth). In the Australian context, the grounds on which a person is automatically disqualified reflect that such a person is presumed to be unfit to be a company director. 49 2008 Act s 69(8)(b). 50 Company Director Disqualification Act 1986 (CDDA) 1986 s 11. The UK legislation also provides for director disqualification related to phoenix companies. See Helen Anderson, ‘Directors’ Liability for Fraudulent Phoenix Activity – A Comparison of the Australian and UK Approaches of Director Disqualification’ (2014) Journal of Corporate Law Studies 139 for an in-depth discussion of ‘phoenixism’ in the UK and Australia. 51 AktG s 76; GmbHG s 6. 52 2001 Act s 206B. 53 CDDA 1986 s 12A. 54 The German provisions list several specific insolvency and criminal offences. Notes accompanying the German Insolvency Act indicate that the focus on insolvency offences follows from the view that committing these offences is an indication of the incapability to be a company director. For instance, delaying filing for insolvency proceedings is a ground for automatic disqualification. This offence, contained in the German Insolvency Act, is the most common insolvency offence. It should be noted that, unlike the Australian provisions that expose directors and officers on the basis of negligent behaviour, the German provision requires a wilful or intentional act. Committing the listed offences in negligence does not constitute a ground for disqualification. See Golding, above n 1, 274. South African legislation requires gross negligence. See the discussion below.

Analyses, perspectives and jurisdictional overview

21

Corporate law in the US and the UK builds on the same premise that the powers of shareholders are limited to what corporate statutes specify and, to the extent permitted by these statutes, to the provisions in a company’s constitutional documents. However, the corporate codes in the US and the UK significantly differ in their treatment of shareholder intervention.55 The notion that directors will make decisions that meet shareholder interests as long as shareholders are the ones with the power to replace directors drives the US federal law regarding removal of company directors.56 Therefore, individuals are prevented from managing corporations through the primarily internal mechanism of removal rather than a predominantly external process of disqualification.57 However, as far as the removal of directors is concerned, the US law differs considerably from the Australian, South African and UK approach. In the US, the principle that directors can only be removed ‘for cause’ is very deeply embedded in the US law and several States adopted legislation that only gives a court the right to remove a director.58 In contrast, in Australia, South Africa and the UK, shareholders have the nonvariable statutory right, though only in respect of public companies, to remove directors by ordinary resolution. This right overrides any provisions to the contrary in a company’s internal governing provisions, any contractual provision between the director and the company, and any contractual arrangement between the director and shareholders.59 1.5.2 Disqualification on application 1.5.2.1 Disqualification by the court Several provisions of the Australian 2001 Act allow a court or ASIC to disqualify a person from managing corporations.60 The Act allows a court to disqualify a person from managing corporations for any period of time if a declaration is made under section 1317E for those provisions that constitute civil penalty provisions61 and for repeated breaches of the 2001 Act.62 A court can also disqualify a person

55 Lucian Behchuk, ‘The Case for Increasing Shareholder Power’ (2005) 118 Harvard Law Review 833, 843. 56 However, see ibid. 851–62 where he argues that this theory fails in practice and that the allocation of power between management and shareholders should be reviewed. 57 In private companies, internal director removal procedures serve as the only form of protection against director abuse. 58 See Jean J du Plessis and James McConvill, ‘Removal of Company Directors in a Climate of Corporate Collapses’ (2003) 31 Australian Business Law Review 249, 261–3. 59 Australia: s 203D of the 2001 Act; South Africa: s 71 of the 2008 Act; UK: s 168 of the CA 2006. See further Jean J du Plessis, ‘Some Peculiarities Regarding the Removal of Company Directors’ (1999) Australian Business Law Review 6. 60 Cassidy, above n 46, 196. 61 2001 Act s 206C; Cassidy, above n 46, 199. 62 2001 Act s 206E; Cassidy, above n 46, 205.

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from managing a company for up to 20 years, if the person was involved in two or more companies that went into insolvency and could not pay their debts.63 Finally, the 2001 Act also gives the court the power to disqualify a person from managing corporations if the person is disqualified under the law of a foreign jurisdiction.64 All of the aforementioned instances allow only for the corporate regulator, ASIC, to be the applicant. There seems no logical reason for the court’s discretion to disqualify a person to be only for a maximum of 20 years if the person was involved in two or more companies that went into insolvency and could not pay their debts. One would expect the court to have complete discretion to determine the period of disqualification on the merits of a particular case, irrespective of which particular contravention is considered worthy of disqualifying a person from managing corporations. Section 69 (automatic disqualification) of the South African 2008 Act does not provide for a specific disqualification order on application as such. However, a section 162 order effectively serves as a disqualification order as it precludes individuals from taking up directorships.65 This section enables a broad range of persons and institutions66 to apply for a court order to declare a director delinquent67 or put a person under probation.68 The grounds for such applications are wide-ranging, including directors grossly abusing their position, taking personal advantage of information, intentionally or by gross negligence inflicting harm on the company, acting in a manner that amounted to gross negligence, wilful misconduct or breach of trust, unauthorised acts, reckless trading or fraud.69

63 2001 Act s 206D(1), (3); Cassidy, above n 46, 205. 64 2001 Act s 206EAA. 65 2008 Act s 69(5) read with s 162. The prohibition is repeated in s 69(8)(a). Since the adoption of the 2008 Act, no new close corporations were allowed to be incorporated under the Close Corporations Act 1984. However, there are a large number of close corporations still registered and active in South Africa, and the law of close corporations is therefore still applicable to all these close corporations. It also means that the disqualification grounds for members of close corporations are still relevant, and if a person is disqualified under s 47 of the Close Corporations Act 1984, such person is then also automatically disqualified, under s 69(5) of the 2008 Act, to be a director of a company. See Chapter 4 for a discussion of the Close Corporations Act 1984 and the transitionary provisions. 66 The section confers locus standi on a broad range of persons – a company, a shareholder, a director, a company secretary or prescribed officer of a company, a registered trade union that represents employees of a company or another employee representative, the CIPC and the Takeover Regulation Panel – to apply to court for an order declaring a director delinquent or placing him under probation. 67 A ‘delinquent director’ is prohibited from being a director. A delinquency declaration remains in place for the lifetime of the person who has been declared delinquent. 68 A probation order is similar to a suspended sentence, made with certain conditions, and may be in place for up to five years. 69 The grounds include scenarios where a director who has repeatedly been personally subjected to a compliance notice or similar enforcement mechanism for substantially similar conduct in terms of any legislation may be declared delinquent. The effect of an order of delinquency is very serious. Although couched in different terms, a delinquency or probation order is, in

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In the UK, the Company Director Disqualification Act 1986 (UK) (CDDA 1986) contains an elaborate structure of disqualification on application. Apart from the regulator, other parties can also apply for persons to be disqualified from managing corporations.70 Unlike South Africa and Australia, the UK legislation distinguishes between mandatory and discretionary disqualification.71 The CDDA 1986 provides for disqualification undertakings. The Secretary of State may accept a disqualification undertaking offered by a person the Secretary considers to be unfit in accordance with section 6(1) or section 8(1) if it appears to the Secretary that it is expedient in the public interest to do so instead of applying for a disqualification order.72 It is interesting to note that, whereas other jurisdictions list specific convictions, conduct and status matters as indicative of an individual’s ‘unfitness’ to manage corporations, the CDDA 1986 treats ‘unfitness’ as an independent ground for disqualification.73 If the court determines that the director in question is unfit to be concerned in the management of the company, the imposition of a disqualification order on that director is mandatory and the court will have no discretion to refuse the making of such an order.74 This is of particular interest since the most common way directors are disqualified currently is under section 6 of the CDDA 1986, when a director’s conduct ‘makes [them] unfit to be concerned in the management of a company’.75 What constitutes unfitness is extremely wide-ranging, and there is no specific definition or definitive answer in the UK legislation.76 In addition, there is developing case law that identifies a number of situations that are relevant to a determination of unfitness.77

70

71 72 73 74 75

76

77

fact, a disqualification order. The order may under certain circumstances be unconditional and continue for the lifetime of a delinquent director or it may be conditional and continue for a minimum of seven years or longer, as determined by the court. The Insolvency Service brings the majority of applications. In certain circumstances, Companies House, the courts, company insolvency practitioners or the CMA may apply. Only a competent authority can apply: CDDA 1986 s 6. In some instances, the court has discretion as to whether to disqualify an individual, and with other grounds the court does not have a discretionary power. The undertaking has the same effect as a court order. The maximum period that may be specified in the disqualification undertaking is fifteen years and the minimum period is two years. CDDA 1986 s 6. Christopher Mallon and Shai Waisman, The Law and Practice of Restructuring in the UK and US (Oxford University Press, 2011) 130. Conduct and action that would in themselves be a ground for disqualification in other jurisdictions only point to unfitness in the UK legislation. The disqualification follows on the finding of ‘unfitness’. There are provisions in Parts 1 and 2 of Schedule 2 to the CDDA 1986 for determining unfitness of directors. These include any breach of fiduciary or other duty and the failure to keep accounting records. See Williams, above n 12, 281–2. John Farrar and D Tennant, ‘The Unfitness of Directors, Insolvency and the Consequences – Some Comparisons’ (2005) 11 Canterbury Law Review 239. The uncertainty around the concept of ‘unfitness’ also poses a problem in the US. Carlson, above n 30, 693–4; Jayne W Barnard, ‘Rule 10b-5 and the “Unfitness” Question’ (2005) 47 Arizona Law Review 9, 20.

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German company law per se does not provide for disqualification of directors on application to the court. Outside German company law, however, two situations can be considered as constituting ‘disqualification on application’:78 occupational bans imposed by criminal courts79 and trade bans by administrative bodies.80 Disqualification on application81 in the US is achieved in an indirect manner. It is similar to the Australian and UK process in that the regulator, the Securities Exchange Commission (SEC), applies to the court to make an order that relates to directorship. However, in the UK and Australia, the application is for an actual disqualification order, on the basis of certain conduct and convictions. The regulator must bring evidence to the effect that the individual was convicted or acted in a particular manner. If the court is convinced by the SEC, a disqualification order is mandatory. In South Africa, as well as in the US, an interested party or the regulator can apply to the court to find either that an individual has committed certain acts82 or that a person is delinquent.83 In the US, such an application can only be brought by the regulator. The conviction or the order of delinquency then automatically bars the individual from participating in corporate management. It may, therefore, appear as if the disqualification is automatic. However, the ultimate disqualification cannot happen in the absence of the application from the SEC in the US or a relevant party in South Africa. 1.5.2.2 Disqualification by the regulator with no court involvement The majority of the disqualification regimes in this book allow the primary corporate regulator to independently disqualify individuals from managing corporations without the need to apply for a court order of disqualification. Section 206F of the Australian 2001 Act allows ASIC, without a court order, to prohibit a person from managing a company for up to five years.84 In order to exercise this power, ASIC must give the person a ‘show cause’ notice requiring the person to demonstrate why they should not be disqualified and to provide an opportunity to be heard on questions.85 The UK Department for Business, Innovation and Skills has the power to disqualify directors from holding corporate office (in any company, be it a small

78 These provisions allow the competent institution to exercise discretion. That in itself can possibly distinguish the provisions as ‘on application’ disqualification of directors. 79 StGB s 70(1). 80 GewO s 35(1). 81 This discussion focuses on federal legislation. Disqualification on application is extremely limited in state law. Note that 16 states, including Delaware, have no provision for judicial proceedings whatsoever. 82 Securities Exchange Act of 1934 s 21(d), 15 USC s 78u(d) (2010). 83 The 2008 Act s 162 provides for a delinquency or probation order. 84 Cassidy, above n 46, 209. 85 2001 Act s 206F(1)(b).

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private limited one or a large News Corporation-size plc) where it is satisfied that there is sufficient evidence of ‘unfitness’ under the CDDA 1986.86 Section 1105 of the US Sarbanes–Oxley Act 2002 authorises the SEC to prohibit persons from serving as officers or directors in any cease-and-desist proceeding under section 21C of the Securities Exchange Act 1934.87 In the absence of a primary corporate regulator in Germany, German company law does not provide for disqualification by a corporate regulator. However, the German Banking Act does allow the Federal Financial Supervisory Authority to disqualify directors of banks. South Africa does have a corporate regulator – the CIPC (Companies and Intellectual Property Commission);88 however, the disqualification provisions in the 2008 Act do not allow the Commission to disqualify individuals.

1.6 Leave by the court for a disqualified person to be exempted from being disqualified Directors and officers may be exempted from disqualification provisions and orders to a greater or lesser extent in the disqualification regimes discussed. The Australian dispensation allows for exemption by the court as well as the regulator, ASIC. The court may grant a disqualified person leave to manage corporations or a particular class of corporations, or a particular corporation. However, the court’s power to grant such leave does not include persons who were disqualified by ASIC.89 ASIC may give a person whom it has disqualified written permission to manage a particular corporation or corporations.90 The South African 2008 Act determines that a court may exempt a person from the application of any provision of section 69(8)(b).91 The UK CDDA 1986 allows

86 R Lovell, ‘Director Disqualification: Get the Details Right’, accounting web.co.uk (10 May 2012), available at www.accountingweb.co.uk/article/director-disqualification-what-youneed-know/527281 (accessed 10 November 2016). The question of what constitutes ‘unfitness’ arises again in the application of this section. 87 The Sarbanes–Oxley Act 2002 applies to all companies that are required to file periodic reports with the SEC and contains a number of significant changes relating to the responsibilities of directors and officers and the reporting and corporate governance obligations of SEC-reporting companies. The disqualification relates to a very specific type of company. 88 The CIPC administers all or parts of 15 pieces of legislation relating to corporate and intellectual property regulation. Its mandate encompasses companies, close corporations, co-operatives, trademarks, patents, designs, aspects of copyright legislation and enforcement of rules and regulations in most of these areas of law. The CIPC’s primary institutional mandate is derived from the 2008 Act, which established the CIPC as a juristic person. 89 2001 Act s 206G(1). 90 2001 Act s 206F(5). 91 2008 Act s 69(11). It is interesting to note that s 69(10) allows the Commission to apply to a court for an extension of the disqualification. The court may extend the disqualification for no more than five years at a time, if the court is satisfied that an extension is necessary to protect the public, having regard to the conduct of the disqualified person up to the time of

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a court to exempt a disqualified person as well as reduce or order the cessation of an undertaking.92 In the US, barred individuals may apply for the Commission’s consent to participate in regulated activities again.93

1.7 The role of the regulator 1.7.1 Enforcement The extent to which the regulator impacts on the enforcement of directors’ disqualification regimes in Australia, the UK, South Africa and the US94 varies. The regulator plays a far greater and active role in enforcement in well-developed disqualification regimes such as those of Australia and the UK. The limited application95 of the directors’ disqualification regime in the US, though quite developed, means that the SEC in the US only plays a limited role in the context of broader corporate conduct.

1.7.2 Monitoring The Australian 2001 Act determines that ASIC must keep a register of people disqualified from involvement in the management of a corporation.96 The information is also available in the banned and disqualified register. 97 Similarly,

92

93 94

95

96 97

the application. The Australian 2001 Act s 206BA allows for the extension of the disqualification period for up to 15 years. A person who is subject to an order or undertaking may apply to the court for permission to act as a director or to take part in the promotion, formation or management of a named company: CDDA 1986 s 17. The court cannot give permission to a disqualified person to act as an insolvency practitioner. In addition, s 8A(1) of the CDDA 1986 grants a court the power to reduce the period of the undertaking or to provide for it to cease to be in force. Nicole A Baker and Richard M Phillips, The Securities Enforcement Manual: Tactics and Strategies (American Bar Association, 2007) 228. The corporate law systems of these jurisdictions provide for a primary corporate regulator. German company law does not. Outside German company law, banking supervision law in the German Banking Act allows the Federal Financial Supervisory Authority to demand the removal of directors and disqualify directors. However, the German Banking Act specifically applies to credit and financial services institutions. The US disqualification regime focuses on securities law violations, barring individuals from acting as officers or directors of, in particular, publicly traded or registered securities. The US and German regimes are therefore comparable in the limited application of legislative provisions that allow for disqualification on application. 2001 Act s 1274AA. The register contains the names of people disqualified under ss 206C, 206D, 206E, 206EAA, 206EA, 206EB or 206F. The register also provides information on people disqualified from auditing self-managed superannuation funds and practising in the Australian financial services or credit industry.

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registers of disqualified individuals are available in South Africa98 and the UK,99 but it could not be determined whether there are similar registers in the US. Germany does not have an institution that monitors disqualifications and maintains a register of disqualified directors of private companies or disqualified members of supervisory and management boards. Therefore, it falls on the companies to self-regulate, and requires directors and members of the boards to certify that they are not disqualified before they are appointed.100

1.7.3 Comparing the regulatory involvement The primary corporate regulators in Australia and the UK are very actively and prominently involved in the respective disqualification regimes compared with South Africa and Germany.101 The regimes contain well-developed provisions on disqualification on application by the regulator as well as provisions that allow the regulator to disqualify directors without any court involvement.

1.8 The benefits and drawbacks of active regulators In the context of directors’ disqualification orders, provisions that rely on the regulator to apply for disqualification, inter alia, depend on the regulator having the required resources to make an application to the court. The disqualification can only be ordered once the matter reaches the court. These hurdles and delays necessarily limit the effectiveness of the regime.102 Active involvement of the

98 The 2008 Act s 69(13) requires the CIPC to establish and maintain a public register of persons disqualified from serving as a director or who are subject to an order of probation as a director in terms of a court order. It should be noted, however, that the CIPC is not required to maintain a register of directors who have been declared delinquent by a court order. See Rehana Cassim, ‘Delinquent Directors under the Companies Act 71 of 2008’ (2013) 26 De Rebus 14. 99 CDDA 1986 s 18. Orders and undertakings are registered at Companies House, which is required to maintain a register of all disqualified directors in England and Wales. The Insolvency Service operates an online facility that provides the public with details of recent disqualification results, including details of the unfit conduct that led to the disqualification. The facility lists directors disqualified in the last three months. It is also possible to request details of the unfit conduct for older cases. 100 False declarations are a criminal offence pursuant to GmbHG s 83(1) No 5 to ensure that these statements are made correctly. The lack of institutional monitoring means that it would be problematic to expand the grounds for disqualification beyond criminal offences, as this would necessitate the introduction of adequate oversight/monitoring procedures. 101 The limited application of US disqualification provisions inevitably equates to a less active regulator in the broader corporate law environment. 102 See Anderson, above n 50, 166.

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regulator has serious cost implications.103 Financial constraints could make the efficacy of the regime a budget issue.104 Having said that, effective regulation of corporation law and the capital markets is widely accepted as essential to ensure good corporate governance.105 Furthermore, effective regulators form part of the complete picture of an effective corporate governance system.106 The negative impact of financial constraints on a disqualification regime can be addressed if the focus of regulatory involvement shifts to monitoring companies and prevention, rather than prosecution.107 As stated before, the purpose of most disqualification regimes centres on protection. Prevention facilitates protection of the public in a proactive manner.

1.9 Conclusion Although all the jurisdictions covered broadly share the same aims regarding disqualification – namely, to protect the public, maintain high corporate standards and prevent unlawful and fraudulent behaviour – the ways in which these aims are achieved differ. One would expect, because of historic reasons, that the disqualification regimes in Australia and the UK would closely resemble each other, but that is not the case at all. A few major differences should be noted in particular. In Australia, disqualification is covered in only 11 sections (sections 206A to 206G of the 2001 Act), whereas disqualification in the UK is covered by a separate Act, namely the CDDA 1986, with 36108 sections and four Schedules. Whereas the Australian disqualification-on-application model is based on breaches of civil penalty provisions, involvement in several insolvent companies and repeated breaches of the 2001 Act, the UK disqualification-on-application model is to a large extent based on the concept of ‘unfitness’.109 Under Australian law, a person can be disqualified for life, whereas the maximum period in the UK is 15 years and there are rarely orders for the maximum period of disqualification in the UK.

103 For instance, ASIC is a big institution with 1,785 employees and a $4 million annual budget. 104 In the UK, the reduction in staffing and budgets at the Insolvency Service and the other departments of the Secretary of State for Business, Innovation and Skills were cited as a reason for the decline in the number of disqualifications in 2011 and 2012. See Francis Wilks & Jones, ‘Directors Disqualifications Recent Statistics’, available at www.franciswilksandjones. co.uk/site/business/director_disqualification_london/statistics_dd (accessed 10 November 2016). 105 Du Plessis et al., above n 10, 118. 106 Ibid. 119. 107 Ibid. 236. 108 The last section in the CDDA 1986 is s 26, but ten new sections have been added since 1986 because of amendments. The calculations were made on 3 June 2016. 109 See Chapter 2; UK Government, Company Director Disqualification, available at www.gov. uk/company-director-disqualification (accessed 10 November 2016).

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An interesting practical difference between these two regimes is that in the UK the majority of disqualifications are now done via disqualification undertakings and not by court orders or by the Disqualification Unit of the Insolvency Service. In Australia, based on statistics from 2009, the vast majority of disqualifications are done by ASIC via its independent disqualification powers under section 206F of the 2001 Act. Very few disqualifications are effected via enforceable undertakings, which are comparable to disqualification undertakings in the UK. In Australia, disqualification is a common occurrence, as will be seen from the number of persons disqualified since 2009. Although the numbers of persons disqualified before 2009 could not be obtained, there is no reason to believe that the numbers would have been significantly higher or significantly lower before 2009. Disqualification, primarily based on ‘unfitness’ and through ‘disqualification undertakings’, is also used often in the UK. Only a few orders of delinquency or putting persons under probation have been made in South Africa. The South African disqualification regime stands out for its complexity as well as for the large number of parties that may apply for a person to be declared a delinquent or for a person to be put under probation. The fact that trade unions also have standing in South Africa for persons to be disqualified is unique in the world. Since the disqualification regimes in Germany and the US are far less developed (or, rather, used less often110) than in Australia and the UK, the question is whether they should strive for more active disqualification regimes. In principle, any corporate law model should, in the public interest and to ensure confidence in the financial markets, do everything possible to ensure that people not fit for managing corporations should indeed be disqualified from managing corporations. The introduction of a more active regime of disqualification in the UK was the result of recommendations made by the Review Committee on Insolvency Law and Practice (Cork Committee) in 1982.111 The problem was identified in the late 1970s and is illustrated by a question asked in the House of Commons on 19 November 1972: Is the Hon gentleman aware that many of us receive constant complaints from our constituents who are the creditors of fly-by-night directors who have taken a firm into insolvency and started it up again almost immediately using the same telephone number, the same office but a different company name?112

110 Renee Jones, ‘Unfit for Duty: The Officer and Director Bar as a Remedy for Fraud’ (2014) 82(2) University of Cincinnati Law Review 439, 441. 111 Cork Committee, Review Committee on Insolvency Law and Practice, Cmnd 8558 (1982) 390–413, [1734]–[1837]. 112 Hansard, House of Commons, 5th Series, Volume 974, Column 9.

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In 1987, McQueen referred to ‘[r]ogue directors who have drawn such prominent media attention to themselves in the past by leap frogging from one insolvent company to another, defrauding customers and creditors alike in the process’.113 For the UK, establishing an active regime of disqualification of ‘unfit’ persons and persons involved in wrongful and insolvent trading was a measure to deal with the problem.114 Keeping the business community clean from rogue and fly-bynight directors also underlies the Australian disqualification regime, where protecting the public, shareholders and creditors are often quoted as an objective that disqualification aims to achieve. The question for the US and Germany is whether they should seek to achieve the same objectives, not only by including disqualification, debarring or suspension provisions in their corporations law, but also by ensuring that the primary corporate regulator actively enforces the disqualification of persons. The actual impact of the active involvement of a corporate regulator on director disqualification regimes is difficult to determine, but that the aspirational aims cannot be faulted is beyond dispute. The difficult questions are, inter alia: Does the involvement of a corporate regulator serve as an effective gatekeeper to limit abuse of the position and fraudulent behaviour? Does the increased participation and power of the corporate regulator in a disqualification regime affect directors’ behaviour as well as corporate behaviour in general? How does one determine the answers to these questions? In fact, any attempt to answer them raises a range of related questions: Is it possible to look at statistics to establish whether the presence of an active regulator and the possibility of disqualification on application impacts on the number of director disqualifications? Whereas an active regulator certainly leads to an increase in the number of disqualifications, how would such an increase in disqualifications reflect the positive impact on corporate behaviour?115 Would there be alternative methods to judge the extent to which the different disqualification regimes impact on corporate behaviour?116 Should commentaries and academic discussions inform the decision? In South Africa, the provisions of the Companies Act 2008 significantly increased the expected level of directors’ duties to companies in South Africa and the standard of conduct required.117 Comments related to the

113 J McQueen ‘Major Reforms in Insolvency Laws Take Effect’ (1987) 5 Company Law Digest 65. 114 See also DTI – The Department for Enterprise, Cmnd 278 (1988) 12 para 2.32; P Farmery, ‘The Insolvency Act’s Message to Directors’ (1986) 4 Company Law Digest 56, 58. 115 Does an increase in disqualifications actually reflect the contrary – that active regulatory involvement does not prevent transgressions and does not have a positive impact on directors’ conduct? 116 Could statistics on actions against directors for breach of duties be an indication? 117 In South Africa, as is the case in other jurisdictions, disqualification has severe adverse consequences for a director’s present and future ability to act as a director for any company: Eric Levenstein, ‘The Delinquent Director: The Death Knell for Negligent Directors?’ Legal Brief (November, 2010).

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US disqualification provisions indicate that the impact of disqualification legislation on broader corporate conduct lies in the deterrent effect of the provisions.118 This book does not provide clear answers to these questions. However, it attempts to provide a better understanding of the underlying aims of disqualification and it emphasises the vast differences in approach in the jurisdictions discussed. The increased internationalisation and globalisation of corporate law necessitate that we continue to explore how the disqualification regimes in various corporate law models can be harmonised.

118 Aguilar, above n 31.

2

The United Kingdom Andreas Rühmkorf* and Jean Jacques du Plessis**

Contents 2.1 Introduction

33

2.2 A critical analysis of the purpose and intentions of the UK law of disqualification of company directors

35

2.3 Forms of disqualification

38

2.4 History 2.4.1 Automatic disqualification 2.4.2 Disqualification in Tables A and B of Schedules to former UK Companies Acts 2.4.3 Disqualification by court order or by the Disqualification Unit of the Insolvency Service

39 39

2.5 Grounds for automatic disqualification 2.5.1 Undischarged bankrupts 2.5.2 Failure to pay under a county court administration order 2.5.3 Phoenix companies 2.5.4 Auditor 2.5.5 Age

48 48 49 49 49 49

2.6 Standing to bring application and grounds for disqualification on application 2.6.1 Parties having standing to apply for a court order to get persons disqualified 2.6.2 Disqualification of unfit directors 2.6.3 Disqualification for competition infringements

40 45

50 50 51 56

* LLM, PhD (University of Sheffield). Lecturer in Commercial Law, University of Sheffield (UK), Assessor Juris (Federal State of North Rhine Westphalia, Germany), Rechtsanwalt (Germany). ** BProc, LLB, LLM, LLD (UFS). Professor of Corporate Law, Deakin Law School, Deakin University (Australia).

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2.6.4 Fraudulent and wrongful trading 2.6.5 Disqualification for general misconduct in connection with companies

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2.7

Periods of disqualification

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2.8

Consequences of acting while disqualified

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2.9

Register of disqualified persons

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2.10 Legislative reform through the SBEEA 2015 2.10.1 Cases 2.10.2 Automatic disqualification 2.10.3 Disqualification on application

63 64 64 65

2.11 Summary and conclusion

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2.1 Introduction Under United Kingdom (UK) law, the disqualification of directors is regulated by a specific Act of Parliament, the Company Directors Disqualification Act 1986 (UK) (CDDA 1986). This Act stipulates the situations in which a court may or must disqualify a person from being a company director. The rules apply to directors of private limited companies (ltd) and public limited companies (plc) alike. English law does not regulate these two corporate forms in separate Acts. Instead, both forms are addressed in the Companies Act 2006 (UK) (CA 2006). Prior to the enactment of the CDDA 1986, the rules concerning the disqualification of directors on application to a court and a court having the power to make a disqualification order could be found in respective Companies Acts since the Companies Act 1928 (UK) (1928 Act).1 As will be seen the below, the phrase ‘disqualification of directors’ can be traced back to 1856, used in Table B to the Joint Stock Companies Act 1856 (UK) (1856 Act).2 The board structure of an English company is, in theory, a matter that the company can decide for itself. The one-tier board model is a ‘virtually unanimous feature of UK public company governance’.3 The CA 2006 only prescribes that companies need to have directors.4 However, listed companies are subject to the

1 L Sealy, Disqualification and Personal Liability of Directors (CCH.New Law, 5th edn, 2000) 1. 2 Table B served as the model set of articles of association for companies with a share capital. From the Companies Act 1862 (UK) (1862 Act) until the Companies Act 1948 (UK) (1948 Act), this model set of articles of association was contained in Table A, which was part of the First Schedule to later Companies Acts. 3 M Moore, ‘United Kingdom’ in A Fleckner and K Hopt (eds), Comparative Corporate Governance: A Functional and International Analysis (Cambridge University Press, 2013) 916. 4 CA 2006 s 154. This section stipulates that a private company must have at least one director and a public company must have at least two directors.

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recommendations of the Corporate Governance Code. The Code requires that at least half the directors of the board of a UK listed company should be independent non-executive directors.5 The Code is based on the ‘comply or explain’ approach which means companies that do not comply with the recommendations of the Code have to provide an explanation.6 The purpose of the CDDA 1986 was described by Lord Woolf MR in Re Blackspur Group plc, Secretary of State for Trade and Industry v Davies in the following way: The purpose of the 1986 Act is the protection of the public, by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by encouragement of higher standards of honesty and diligence in corporate management, from those who are unfit to be concerned in the management of the company.7 Following from this statement, the primary purpose of the CDDA 1986 is the protection of the public, including shareholders and creditors, against the future conduct of persons whose past conduct gives reason to disqualify them from being a company director.8 The CDDA 1986 is also intended to raise the standards of directors.9 This is particularly important, given that they benefit from limited liability.10 A further statement about the purpose of disqualification of unfit directors was made by Dillon LJ in Re Sevenoaks Stationers (Retail) Ltd: It is beyond dispute that the purpose of the CDDA 1986, s 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.11 This chapter will be structured in the following way. It will first introduce the different forms of disqualification, then give a brief overview of the historical development of the law pertaining to the disqualification of directors under English law. It will then outline the grounds for automatic disqualification, followed by the grounds for disqualification on application. The chapter will then

5 UK Corporate Governance Code Provision B.1.2. 6 For an overview of the Code, see D French, S Mayson and C French, Mayson, French & Ryan on Company Law (Oxford University Press, 30th edn, 2013–2014) [9.9.3]. 7 [1998] 1 BCLC 676, at 680. 8 See B Hannigan, Company Law (Oxford University Press, 3rd edn, 2012) [25-69]. 9 Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276, 288. 10 See Re Barings plc [1998] BCC 583, 590. 11 [1991] Ch 164, 176.

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continue with a brief look at sanctions, giving an overview of the impact of the Small Business, Enterprise and Employment Act 2015 (UK) (SBEEA 2015) on the disqualification of directors under English law. This is followed by the analysis of some illustrative cases concerning both automatic disqualification and disqualification on application.

2.2 A critical analysis of the purpose and intentions of the UK law of disqualification of company directors Although the regime of directors’ disqualification under English law appears, at first sight, very thorough, it is important to consider that it is the flip side of making limited liability readily available.12 Directors can gain the benefits of limited liability (protection against personal liability) comparatively quickly under English law, but they face a strict regime of disqualification if they do not meet the standards expected of them. Reviews of the CDDA 1986 in the academic literature is mixed. Davies argues13 that the disqualification of incompetent directors has perhaps become a more important tool for the enforcement of directors’ standards of competence than actions for breach of the duty of care which need funding by private litigants. He concludes that the provisions of the CDDA 1986 ‘now have a substantial impact’.14 This positive view is, however, not shared generally. For instance, an official report on the operation of the CDDA 1986, carried out by the National Audit Office, found that 64 per cent of all directors it surveyed considered the disqualification regime to be unsuccessful in deterring unfit conduct.15 This report also shows that about two-thirds of the directors said that they were unaware of the rules. This finding is further supported by a report conducted by Andrew Hicks for the Association of Chartered Certified Accountants in which about two-thirds of insolvency practitioners opined that the disqualification laws did not influence the behaviour of directors.16 It is therefore argued that the low levels of awareness raise the question as to whether the rules on disqualification of directors have any deterrent effect.17 Moreover, in practice, only those directors whose companies enter into formal insolvency proceedings are affected by the disqualification regime as

12 D Milman, ‘Disqualification of Directors: An Evaluation of Current Law, Policy and Practice in the UK’ (2013) 331 Company Law Newsletter 1. 13 P Davies, Gower and Davies’ Principles of Modern Company Law (Sweet & Maxwell, 8th edn, 2008) [10-8]. 14 Ibid. [10-15]. 15 National Audit Office, Insolvency Service Executive Agency, Company Director Disqualification – A Follow-Up Report (House of Commons Papers, Session 1998–1999) 424. 16 A Hicks, Disqualification of Directors: No Hiding Place for the Unfit? (Association for Chartered Certified Accountants Research Report No 59, 1998). 17 R Williams, ‘Disqualifying Directors: A Remedy Worse than the Disease’ (2007) 7 Journal of Corporate Law Studies 213, 234.

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companies that are dissolved and struck off the register fall outside the system.18 With regard to applications that are being made for the most widely used disqualification ground of ‘unfitness’, it has been asserted that the discretion allowed to insolvency practitioners and official receivers in the reporting process would be a further weakness of the present system.19 Williams notes that the duty of these bodies to report the conduct of a director to the Secretary of State in those instances where they believed that a director was meeting the conditions for unfitness in accordance with the CDDA 1986 would ‘require an encyclopedic knowledge of disqualification precedents’.20 Consequently, this situation would lead to confusion and inconsistent reporting. In his report about the CDDA 1986 for the Association of Chartered Certified Accountants, Hicks points out that part of the problem in the UK might be the ease of setting up a private limited company.21 The widespread use of this company form would mean that some of the directors of private limited companies are not prepared to sufficiently fulfil their duties to creditors. He also notes that the goal of protecting the public through the disqualification legislation would be difficult to achieve, given that the majority of the disqualification orders are made against directors of small private companies who can continue working as sole traders.22 They are free to start again, albeit with a different form of business organisation, such as a sole trader. The deterrent effect of the disqualification legislation for these directors is therefore, in his view, limited. As part of a list of recommendations about reforming the law, Hicks proposed in 2001 the introduction of a Director Disqualification Tribunal, and he also emphasised the need for better education.23 Hicks’ tribunal proposal was not implemented. Through the SBEEA 2015 (see discussion below) the government introduced legislative changes to the disqualification of directors which, in the government’s view, will, inter alia, improve the compensation for creditors who have suffered from directorial misconduct,24

18 Ibid. 19 Ibid. 235; S Wheeler, ‘Directors’ Disqualification: Insolvency Practitioners and the DecisionMaking Process’ [1995] Legal Studies 283. 20 Williams, above n 17, 235. 21 Hicks, inter alia, notes that the absence of a minimum capital fund would make it too easy to gain limited liability and in that context he refers to continental European systems. However, his remarks were made before the competition between different European systems led to reforms on the European continent in the wake of which member states deregulated their private limited company form and significantly reduced minimum capital requirements: Hicks, above n 16. 22 A Hicks, ‘Director Disqualification: Can it Deliver?’ [2001] Journal of Business Law 433, 442. 23 Ibid. 446, 448. 24 Department for Business, Innovation and Skills, Small Business, Enterprise and Employment Act: Directors’ Disqualification and Creditor Compensation Fact Sheet, available at www.gov. uk/government/uploads/system/uploads/attachment_data/file/417337/bis-15-264SBEE-Act-directors-disqualifications-fact-sheet.pdf (accessed 14 November 2016).

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and therefore increase confidence in the director disqualification regime.25 However, it is unclear if the legislative changes will achieve the government’s aims. The reforms have received critical reviews in the academic literature. For example, Loughrey argues that the 2015 reforms do not meet the aim of the legislator – that is, to restore market trust in the financial services market and in business generally.26 She concludes that the disqualification regime is ‘a poor means of addressing the loss of trust in the banking and financial services market’.27 Her assessment is based on several criticisms, including the low level of awareness among directors (a survey in 2012 found that only 43 per cent of directors were aware of this sanction)28 and the fact that many disqualified directors are from small private limited companies.29 The effects of the legislation on present directors are therefore likely to be limited. The Act fails to address the more fundamental question of whether or not the present regime of disqualifying owner–managers is capable of adequately protecting the public against abuses of limited liability.30 Moreover, she states that the 2015 reforms would also deflect attention from the more fundamental issue of how best to address the conduct of directors of companies with dispersed share ownership.31 Finally, the further practical use of the system in the UK with its reliance on the Insolvency Service also depends on the financial means of this public body. Milman notes that the use of disqualifications against the abuse of limited liability is under pressure due to cuts in public expenditures.32 It therefore remains to be seen how the system in the UK will develop further in the future. However, although the commentary on the system of directors’ disqualification under English law is mostly critical, it is worth noting that comparative perspectives are more positive. For example, a German commentator calls the UK’s system ‘the prime example’ of a disqualification system in company law.33

25 Ibid. 26 J Loughrey, ‘Smoke and Mirrors? Disqualification, Accountabiltiy and Market Trust’ (2015) 9 Law and Financial Markets Review 50. 27 Ibid. 28 SPA Future Thinking, The Insolvency Service Stakeholder Confidence Survey 2012 (8 January 2013), available at www.gov.uk/government/uploads/system/uploads/attachment_data/ file/288412/confidencesurvey.pdf (accessed 14 November 2016). This survey is different from the one referred to above in which 64 per cent of all directors surveyed considered the disqualification regime to be unsuccessful in deterring unfit conduct. The latter survey is from the year 1998–1999 whereas this is a survey from 2012. 29 See the argument made by Hicks, above n 22, 442. 30 Loughrey, above n 26, 58. 31 Ibid. 32 Milman, above n 12, 5. 33 H Fleischer, ‘Bestellungshindernisse und Tätigkeitsverbote von Geschäftsleitern im Aktien-, Bank- und Kapitalmarktrecht’ (2004) WertpapierMitteilungen 157, 160.

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2.3 Forms of disqualification The disqualification of directors is not an issue of criminal law, but a civil proceeding.34 It does not just prohibit the individual concerned from being a director of a company, but places other restrictions on that person’s activities. A disqualification against a person is an order that for a specified period the person 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 they have the leave of the court.35 The order also disqualifies the person from acting as an insolvency practitioner. The effect of a disqualification order is that the person concerned is banned from acting as a company director, but is still allowed to work as a sole trader or in partnership.36 As the disqualification order is not limited to directors of a particular type of company such as private limited companies, it applies to directors of small private companies as well as large multinational enterprises. 37 Criminal penalties and personal liability ensure that disqualified persons comply with the orders of disqualification or disqualification undertakings.38 The disqualification is not indefinite, but for a limited period of time. The maximum period is 15 years, but this duration will only rarely be imposed.39 Moreover, courts can grant leave to the person disqualified to act in a particular situation.40 Several provisions also refer to shadow directors.41 Three different forms of directors’ disqualification can be distinguished: automatic disqualification, disqualification by court order and disqualification undertakings. First, in the case of an automatic disqualification, an individual is automatically disqualified from being a company director if the conditions of the pertinent statutory provision are met. The director is automatically disqualified from acting as the director of a company without the need for anyone to apply for a disqualification order and without the need for a court to make a disqualification order (an example of automatic disqualifications is undischarged bankrupts under section 11 of the CDDA 1986). Second, a disqualification order is an order made by a court against a person stipulating that the individual concerned is banned from being a company director

34 35 36 37 38 39 40 41

Hannigan, above n 8 [25-69]. CDDA 1986 s 1(1). French, Mayson and French, above n 6 [20.13.1.1]. R v Ward [2002] BCC 953. CDDA 1986 ss 13–15. Davies, above n 13 [10-3]. CDDA 1986 s 17. CDDA 1986 s 22(5): ‘Shadow director’, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity). See also Sealy, above n 1, 5–8.

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for a specified period.42 In some situations, the court can make a disqualification order in its own right – that is, without the need for anyone to apply for such an order. An example of this is a disqualification upon conviction of an indictable offence, under section 2 of the CDDA 1986. In other instances, the court can make a disqualification order on application by a person who has standing to apply. This can, for example, be found in section 6 of the CDDA 1986 (Duty of court to disqualify unfit directors of insolvent companies). Third, disqualification undertakings have a similar effect to court orders as the director is barred from acting as a director, but they are undertakings (or proposals) by the person who is to be disqualified for a specific period. These disqualification undertakings can then be accepted by the Secretary of State and do not require the involvement of the courts.43 They are only possible in the case of the disqualification of an unfit director of an insolvent company and the disqualification of an unfit director after the investigation of a company (section 1A of the CDDA 1986). There are also grounds that require an application to the court by a competent authority. Grounds for disqualification on application can either be mandatory if the conditions of the respective ground are met (e.g. unfitness under section 6 of the CDDA 1998) or discretionary – that is, the court has the power to decide whether or not to disqualify the person.44

2.4 History 2.4.1 Automatic disqualification Undischarged bankrupts were already automatically disqualified since the 1928 Act.45 The CDDA 1986 introduced two further grounds for automatic disqualification under the heading ‘Undischarged bankrupts’. Under these grounds, a person is automatically disqualified if a moratorium period under a debt relief order applies to them or if a bankruptcy restriction order is in force in respect of that person.46

42 Hannigan, above n 8 [25-71]. 43 CDDA 1986 s 1A. 44 CDDA 1986 s 1A: ‘In each section of this Act which gives to a court power, or, as the case may be, imposes on it the duty to make a disqualification which there is specified the maximum (and, in the case of section 6, the minimum) period of disqualification which may or (as the case may be) must be imposed by means of the order.’ 45 1928 Act s 84; Davies, above n 13 [10-13]. 46 CDDA 1986 s 11(1)(aa), (b).

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2.4.2 Disqualification in Tables A and B of Schedules to former UK Companies Acts 2.4.2.1 Origins of disqualification and vacation grounds Since the 1856 Act, the approach in the UK was that companies limited by shares were not required to adopt articles of association that prescribed internal management arrangements (also called regulations for management) for the company.47 It was, however, provided that companies could adopt all or some of the ‘regulations’ contained in Table B to the 1856 Act. Thus, Table B provided a model set of articles of association for companies limited by shares. Under the heading ‘Disqualification of directors’, regulation 47 of Table B provided as follows: 47 The Office of Director shall be vacated, – (1) If he holds any other office or place of profit under the company; (2) If he becomes bankrupt or insolvent; (3) If he is concerned in or participates in the profits of any contract with the company; (4) If he participates in the profits of any work done for the company.48 The same approach was adopted in the 1862 Act,49 the Companies (Consolidation) Act 1908 (UK) (1908 Act),50 1928 Act,51 Companies Act 1929 (UK) (1929 Act)52 and the Companies Act 1948 (UK) (1948 Act),53 namely that companies limited by shares were not required by law to have articles of association, but that they

47 For a historical background of the 1856 Act, see S Watson, ‘The Significance of the Source of the Powers of Boards of Directors in UK Company Law’ [2011] Journal of Business Law [as used in n 22 p 36] 597. The first prescribed formats, made in the 1856 Act, were called ‘Table B’, because they were preceded by a form of Memorandum of Association called ‘Form A’: see Companies House, Model Articles of Association for Limited Companies, available at www.gov.uk/guidance/model-articles-of-association-for-limited-companies (accessed 14 November 2016). 48 The provision ended with a specific qualification to these grounds of vacation or disqualification: ‘But the above rules shall be subject to the following exceptions: that no director shall vacate his office by reason of his being a shareholder in any incorporated company which has entered into contracts with or done any work for the company of which he is director; nevertheless he shall not vote in respect of such contract or work; and if he does so vote his vote shall not be counted, and he shall incur a penalty not exceeding twenty pounds.’ See J Maltas, ‘The Historical Development of Legal Principles and Procedures Evident in Modern Australian Corporate Legislation’ (2008) 1 Journal of Applied Law and Policy 111, 127. 49 1862 Act s 15, reg 57 (First Schedule, Table A). 50 1908 Act s 10(1)–(2), reg 77 (First Schedule). 51 1928 Act s 18(1)–(2), reg 77 (Second Schedule). 52 1929 Act s 8(2), reg 72 (First Schedule, Table A). 53 1948 Act ss 6, 8(1).

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could adopt all or some of the regulations for management of the company in the Tables to these Acts as contained in the Schedules. It is reasonable to assume that most companies would have adopted most of the provisions in the Tables of the various Companies Acts if they adopted articles of association. This makes it likely that, since 1856, most UK companies limited by shares that adopted articles of association would have adopted a provision exactly the same as, or at least similar to, regulation 47 of Table B to the 1856 Act or later expanded versions of that regulation (see discussion below). In other words, even if there were no disqualification provisions in the main Act until 1928, the provisions regarding disqualification in the Tables provided some insight into the later statutory developments regarding disqualification. In addition, it seems as if the ground ‘bankruptcy and insolvency’ in the Tables played a role in the later adoption of the disqualification ground ‘undischarged bankrupts’ that currently serves as an automatic disqualification ground under section 11 of the CDDA 1986. 2.4.2.2 Purpose of regulation 47 in Table B to the 1856 Act and later refinements Regulation 47 was clearly premised on the basis that if a director were to ‘vacate’ their office based on any one of the grounds listed, they would then be disqualified from being a director in that particular company. Vacating the office based on ‘bankruptcy and insolvency’ stands out as it is the only ground which was not directly linked to a conflict of interest with ‘the [particular] company’. In other words, a director was only disqualified from being a director of that company. Even if another company’s articles of association contained similar provisions, it was only when a person became ‘bankrupt’ or ‘insolvent’ that the person would, by inference, be disqualified from being a director of that other company. As the automatic disqualification of undischarged bankrupts was only introduced into the main legislation by the 1928 Act, bankrupt or insolvent persons could be company directors as long as the company’s articles did not contain a provision that banned them from being a director of that company prior to the enactment of the 1928 Act. Regulation 57 of Table A of the 1862 Act only contained the following three grounds on which a director vacated the office of director: (1) If he holds any other office or place of profit under the company; (2) If he becomes bankrupt or insolvent; (3) If he is concerned in or participates in the profits of any contract with the company. In other words, ground four (‘If he participates in the profits of any work done for the company’) was omitted. Regulation 77 of Table A of the 1908 Act added two new grounds on which a director, in a company that adopted the regulation in its articles, was to vacate the office of director, namely if the director:

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s s

CEASEDTOBEADIRECTORBYWAYOFSECTIONOFTHE1908 Act; and WASFOUNDLUNATICORBECOMESOFUNSOUNDMIND

Section 73 of the 1908 Act provided for ‘share qualifications’, namely the minimum number of shares to be acquired by directors if so provided for in the articles of association. There was no statutory requirement for directors to hold shares in a company, but section 73 applied when there were such requirements stipulated in the articles of association. For instance, regulation 70 of Table A to the 1908 Act provided that ‘a director shall be the holding of at least one share in the company, and it shall be his duty to comply with the provisions of section seventy-three of the Companies (Consolidation) Act 1908’. The 1928 Act followed this approach from the 1908 Act. It again provided for ‘share qualifications’ in case these were required by the articles of association of the company. Section 80(2) stipulated that the office of director shall be vacated if the director does not acquire the number of shares required by the articles within two months after their appointment or a shorter period prescribed by the articles. A director who had to vacate their office was then incapable of being reappointed as director of that company until they obtained the necessary number of shares.54 Moreover, a director who did not meet a ‘share qualification’ prescribed in the company’s articles within the two-month period specified in section 80(2) or a shorter period, if required by the articles, was subject to a penality of not more than five pounds every day between the expiry of this period and the last day that they acted as director of that company. Irrespective of this penalty, the acts done by such a director who did not meet the ‘share qualification’ were valid. Section 182 of the 1948 Act replicated the provision regarding the ‘share qualification’ in the 1928 Act. The requirements were identical, as well as the liability of no more than five pounds per day. Regulation 77 of Table A of the 1928 Act was later refined and expanded as regulation 72 of Table A of the 1929 Act. Two new grounds were added, namely if the director: s s

BECAMEPROHIBITEDFROMBEINGADIRECTORBYREASONOFANORDERMADEUNDER sections 217 and 275 of the 1929 Act; and RESIGNEDHISOFlCEBYNOTICEINWRITINGTOTHECOMPANY

Section 217 gave courts the power, on the application of the official receiver, to disqualify an individual from being a company director on the winding up of a company by a court order where the official receiver has made a report that, in his opinion, the director has committed fraud in relation to the company. Section 275 dealt with the disqualification of directors who have committed fraudulent trading.

54 1928 Act s 80(2).

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Regulation 88 of Table A of the 1948 Act was a refinement and expansion of regulation 72 of Table A of the 1929 Act. Again two new grounds were added, namely if the director: s s

BECAMEPROHIBITEDFROMBEINGADIRECTORBYREASONOFANORDERMADEUNDER section 188; and RESIGNEDTHEIROFlCEBYNOTICEINWRITINGTOTHECOMPANY

Section 188 of the 1948 Act is of some interest as that was the prevailing section before the CDDA 1986 was adopted. Thus, it deserves a short analysis to illustrate its relative simplicity. Under the margin note ‘Power to restrain fraudulent persons from managing companies’, this section dealt with the disqualification of persons after a court order had been made. Section 188(1) provided: Where – (a) a person is convicted on indictment of any offence in connection with the promotion, formation or management of a company; or (b) in the course of winding up a company it appears that a person – (i) has been guilty of any offence for which he is liable (whether he has been convicted or not) under section three hundred and thirty-two [the then fraudulent trading provision] of this Act; or (ii) has otherwise been guilty, while an officer55 of the company, of any fraud in relation to the company or of any breach of his duty to the company; 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 for such period not exceeding five years as may be specified in the order. What stands out is that persons who were convicted of these offences were not automatically disqualified; instead, it required a court order to disqualify them. Persons disqualified under these orders were not allowed to ‘be concerned or take part in the management of a company’. Section 188(6) made it a criminal offence if any person acted in contravention of an order made under section 188(1).56

55 Under s 188(5), the expression ‘officer’ included ‘any person in accordance with whose directions or instructions the directors of the company have been accustomed to act’. In other words, a shadow director could also be charged with this offence and could then also be disqualified. 56 A person who contravened this section could, ‘in respect of each offence, be liable on conviction on indictment to imprisonment for a term not exceeding two years, or on summary conviction to imprisonment for a term not exceeding six months or to a fine not exceeding five hundred pounds or to both’ (s 188(6) of the 1948 Act).

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It should also be noted that even for these serious offences a person could only be ‘disqualified’ for a maximum period of five years. The parties who had standing to bring an application to a court57 for such a disqualification order were: the official receiver, or the liquidator of the company, or any person who was or had been a member or creditor of the company.58 Very basic procedures were required for the application and the hearing of the application: s

s s

4HEPERSONWITHSTANDINGWHOINTENDEDTOAPPLYFORTHEMAKINGOFANORDER under section 188 had to give not less than ten days’ notice of their intention to the person against whom the order was sought.59 /NTHEHEARINGOFTHEAPPLICATION THELAST MENTIONEDPERSONMAYAPPEARAND give evidence or call witnesses.60 /NTHEHEARINGOFANYAPPLICATIONFORANORDERUNDERSECTIONBYTHE official receiver or the liquidator, the official bringing the application had to appear and call the attention of the court to any matters which seemed to the official to be relevant, and could give evidence or call witnesses.61

Even if the person was not convicted of the offences listed, the ‘disqualification order’ could still be sought and made by the court.62 In summary, under all the Companies Acts up to the 1948 Act, there was no clear distinction between grounds of disqualification and grounds when the office of director would be vacated. Under section 188 of the 1948 Act, some grounds of disqualification (by court order on application by certain parties) were given, but they pertained only to specific criminal offences. Table A of the First Schedule, still under the 1856 Act’s heading of ‘Disqualification of directors’ provided for some grounds on which a director would vacate the office of director, but there was a clear reference to the fact that a director would vacate the office of director if they were ‘prohibited’ – in other words ‘disqualified’ – to act as director under section 188. The automatic disqualification ground of being an ‘undischarged bankrupt’ only became part of the UK legislation upon the introduction of the 1928 Act. This Act also introduced the discretionary power of the court to make an order disqualifying a person from being concerned in the management of a company if it appeared that, in the course of a winding up, any business of the company had been carried out with the intention to defraud.63 It implied an

57 1948 Act s 188(2) defined ‘court’ as the court before which the person was convicted, as well as any court having jurisdiction to wind up the company. 58 1948 Act s 188(4). 59 1948 Act s 188(3). 60 Ibid. 61 1948 Act s 188(4). 62 1948 Act s 188(5). 63 1928 Act s 75(4) which was then consolidated as s 275 of the 1929 Act.

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application to a court for a disqualification order and, for purposes of this book, this is referred to as ‘disqualification on application’. It will be seen that the parties who have standing to apply for a court order to disqualify a person from being a director vary considerably across the jurisdictions discussed in this book. Section 188 of the 1948 Act was the primary section in this regard until the CDDA 1986 was passed. Prior to the enactment of the CDDA 1986, the Companies Act 1985 (the 1985 Act) contained provisions dealing with the disqualification of directors in sections 295 to 302. This included the automatic disqualification of ‘undischarged bankrupts’.64 However, these sections in the 1985 Act were repealed when the CDDA 1986 was introduced.65 Therefore, prior to the enactment of the CDDA 1986, provisions concerning the disqualification of directors were found in the Companies Act. As will be seen in the next section, the approach to the disqualification of directors in the UK changed drastically from 1986: not only as far as disqualification by court order was concerned, but also providing powers to the Insolvency Service to disqualify persons without applying for a court order. 2.4.3 Disqualification by court order or by the Disqualification Unit of the Insolvency Service The Preamble to the CDDA 1986 states: An Act to consolidate certain enactments relating to the disqualification of persons from being directors of companies, and from being otherwise concerned with a company’s affairs. A summary of the development of the law pertaining to the disqualification of directors under English law can be found in the opinion from Lord Millett in Official Receiver v Wadge Rapps & Hunt (A Firm).66 The Companies Act 1947 (UK) (1947 Act) extended the grounds on which persons could be disqualified by court order on application by the Secretary of State.67 A further extension was made by section 9 of the Companies Act 1976 (UK) and section 28 of the Insolvency Act 1976 (UK). The Companies Act 1976 made it possible to disqualify anyone who had been persistently in breach

64 1985 Act s 302. 65 See the information about changes to the 1985 Act at www.legislation.gov.uk/ukpga/1985/6 (accessed 14 November 2016). Sections 295 to 299 and 301 to 302 of the 1985 Act were repealed by the CDDA 1986. Section 300 of the 1985 Act, which concerns the disqualification by reference to association with insolvent companies, was repealed by the Insolvency Act 1986. 66 [2003] UKHL 49 [32]–[42]. 67 1947 Act s 33 which was then consolidated as s 188 of the 1948 Act. Section 33(1) stipulated that a person who is convicted on indictment of any offence in connection with the promotion, formation or management of a company could be subject to a disqualification order.

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of statutory requirements for returns, accounts and other documents.68 The right to application was given to the Secretary of State. This was necessary because until that time it was a condition of disqualification orders that the company was insolvent or in the course of winding up. Under the Insolvency Act 1976 a person could be disqualified if they were a director of more than one company that had gone into liquidation while insolvent and if their conduct as a director of any of those companies made them unfit to be concerned in the management of a company.69 In the Companies Act 1981 (UK) the maximum period of disqualification orders was extended to 15 years. Again, this Act further extended the powers of the court to make disqualification orders.70 The power to make an application to a court for a disqualification could now be made by the Secretary of State, the official receiver, the liquidator, or by any past or present member or creditor of any company in relation to which the person against whom an order was sought had committed or was alleged to have committed an offence or default. These provisions were then consolidated in the 1985 Act.71 The CDDA 1986 consolidated the provisions concerning the disqualification of directors in a separate Act. This Act also applies to Scotland. The CDDA 1986 is now the primary source of rules pertaining to the disqualification of directors under English law. The background to the introduction of the CDDA 1986 can be found in a review of English insolvency law: the Report of the Review Committee on Insolvency Law and Practice (the ‘Cork Report’).72 The Review Committee started its work in 1977 and the report was published in 1982.73 Its main proposal was the introduction of a new Insolvency Act. The legislative process led to the introduction of the Insolvency Act 1985 (UK). However, following a significant discussion process, large parts of this new Act were left unimplemented before a consolidation took place in 1986. In that year, the Insolvency Act 1986 (UK) and the CDDA 1986 were enacted. Inter alia, the Cork Report recommended the introduction of the wrongful trading provision to hold directors accountable for their conduct. The report went further by suggesting that additional provisions should be enacted which ensure that ‘those whose conduct has shown them to be unfit to manage the affairs of a company with limited liability shall, for a specified period, be prohibited from doing so’.74 The recommendations pertaining to the disqualification of directors were intended to be a reform and extension of existing provisions. A particular focus was on disqualifying ‘unfit’ directors.75 As part of its work on insolvency law, the Cork

68 69 70 71 72 73

See Official Receiver v Wadge Rapps & Hunt (A Firm) [2003] UKHL 49 [33]. Ibid. [34]. 1981 Act s 93. 1985 Act ss 295–9. For an overview of the process, see Sealy, above n 1, 1–9. Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, London, HMSO, 1982). 74 Ibid. [1808]. 75 For a discussion of the reform, see Davies, above n 13 [10-1].

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Committee recommended that the disqualification of directors of insolvent companies on grounds of ‘unfitness’ should be expanded.76 In fact, the Act introduced the concept of a mandatory disqualification as courts are under a duty to disqualify an unfit director if the conditions of the relevant section are met. The application for this order must be made by the Secretary of State or by the official receiver if the Secretary of State so directs in relation to a person who is or has been a director of a company which is being or has been wound up by a court in England and Wales.77 The CDDA 1986 was amended by the Insolvency Act 2000 (UK) and the Enterprise Act 2002 (UK). The most important change that resulted from the Insolvency Act 2000 was the introduction of disqualification undertakings in cases of unfitness as an alternative to court orders. The power to disqualify under these circumstances was vested with the Disqualification Unit of the Insolvency Service. Prior to the Insolvency Act 2000, directors were either automatically disqualified such as in the case of undischarged bankrupts (section 11 of the CDDA 1986) or they were disqualified by court order, following an application by a competent body to the court. The consequence of this proceeding meant that the courts were involved in many disqualification applications and thus subject to a heavy workload. The introduction of the disqualification undertaking by the Insolvency Act 2000 simplified this procedure as it allowed disqualification undertakings that were agreed between a director and the Disqualification Unit of the Insolvency Service without the involvement of a court.78 Disqualification undertakings were intended to reduce the cost for the director involved, while increasing the pace of disqualification orders.79 They were particularly meant to facilitate clear cases of unfitness where the Disqualification Unit of the Insolvency Service and the director could agree on how to apply the pertinent provisions without the need for a court to adjudicate.80 There is no obligation for directors to offer a disqualification undertaking. Contentious cases are still decided by courts.81 Undertakings are only possible in case of unfitness on insolvency (section 6 of the CDDA 1986) or after an investigation of a company (section 1A(1)). In practice, the majority of disqualifications are now done by undertakings and not by court orders.82 Further reforms to the the CDDA 1986 have since been proposed. In 2013, the Department for Business, Innovation and Skills published a discussion paper that contained a range of proposals intended to enhance the transparency of

76 77 78 79 80 81 82

See Official Receiver v Wadge Rapps & Hunt (A Firm) [2003] UKHL 49 [38]. CDDA 1986 s 7(1). Davies, above n 13 [10-2]. Hannigan, above n 8 [25-72]. Davies, above n 13 [10-2]. Ibid. See the data in French, Mayson and French, above n 6 [20.13.2.9].

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UK company ownership and to increase trust in UK business practice. 83 The consultation process was called ‘Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business’. The discussion paper included proposals that affect the rules pertaining to the disqualification of directors. The consultation process led to the enactment of the SBEEA 2015.84 As these reforms are very recent, they will be analysed in a separate section in this chapter following the overview of the statutory provisions and the case law.

2.5 Grounds for automatic disqualification There is no clear distinction between grounds for disqualification and what could be considered to be a legal requirement for the appointment as director. For instance, if it is provided that a person must be at least 16 years old to be appointed as a director, it implies that the person is disqualified to act as director until the person reaches the age of 16. However, as will be seen below, under UK law it is possible to appoint a person as director before the person reaches the age of 16, but the appointment only takes effect when they reach the age of 16. The section will deal with all the grounds mentioned in the CDDA 1986 that could be considered automatic disqualification grounds. The CDDA 1986 provides for automatic disqualification without an explicit prohibition to act as a company director. The individuals concerned are automatically disqualified from being a company director. The grounds for an automatic disqualification are: if the person concerned is an undischarged bankrupt;85 and failing to pay under a country court administration order.86 2.5.1 Undischarged bankrupts Anyone who is an undischarged bankrupt commits an offence if they act as director of a company or directly or indirectly take part in or are concerned in the promotion, formation or management of a company, without the leave of

83 Department for Business, Innovation and Skills, Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business (15 July 2013, updated 24 April 2014), available at www.gov.uk/government/consultations/companyownership-transparency-and-trust-discussion-paper (accessed 14 November 2016). 84 The changes to this Act regarding the disqualification of directors will be discussed later in this chapter. 85 CDDA 1986 s 11. 86 CDDA 1986 s 12. See also Insolvency Act 1986 s 216. There is also an automatic restriction for statutory auditors (CA 2006 s 1214) and there is also the requirement of a minimum age (CA 2006 s 157). Anyone under the age of 16 must not be appointed as a director of a company. However, this does not affect the validity of an appointment that does not take effect until the person appointed attains the age of 16.

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the court.87 The offence that is committed by contravening this automatic disqualification is one of strict liability.88 However, nearly all bankrupts are automatically discharged after a maximum period of 12 months.89 This ground for disqualification also applies to a person against whom a bankruptcy restriction order or a debt relief restriction order is in force.90 Anyone who is adjudged bankrupt can also be made subject to a bankruptcy restriction order or undertaking for a period of two to 15 years.91 Similar to the case of disqualification orders, it is an offence for anyone who is subject to a bankruptcy restriction order if they act as a director of a company or take part, directly or indirectly, in the promotion, formation or management of the company without leave of the court that adjudged the person as bankrupt. 2.5.2 Failure to pay under a county court administration order A person who fails to make any payment which they are required to make by virtue of an administration order under the County Courts Act 1984 (UK) is not allowed to act as a director or liquidator or directly or indirectly take part or be concerned in the promotion, formation or the management of a company.92 2.5.3 Phoenix companies This will be discussed in greater detail below in 2.8 Consequences of acting while disqualified. 2.5.4 Auditor The independence requirements for statutory auditors stipulate that a person cannot be both a director and an auditor. A person is not allowed to act as statutory auditor of a company if they are a director of the company. 2.5.5 Age Anyone under the age of 16 must not be appointed as a director of a company.93 However, this disqualification does not affect the validity of an appointment that does not take effect until the person appointed attains the age of 16.

87 88 89 90 91 92 93

CDDA 1986 s 11. R v Brockley [1994] 1 BCLC 606. French, Mayson and French, above n 6 [15.5.4.2]. CDDA 1986 s 11(1)(b). Insolvency Act 1986 s 281A sch 4A. CDDA 1986 s 12. CA 2006 s 157(1).

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2.6 Standing to bring application and grounds for disqualification on application 2.6.1 Parties having standing to apply for a court order to get persons disqualified The CDDA 1986 gives various parties standing to apply for a disqualification order to be made by a court against a person. First, in the case of the most frequently used ground for disqualification in practice – the duty of the court to disqualify unfit directors of insolvent companies (section 6 of the CDDA 1986) – only the Secretary of State or the official receiver can apply for a disqualification. The Secretary of State also has standing to apply for a disqualification order following an investigation of a company (section 8 of the CDDA 1986). Second, in the case of a disqualification for competition infringements, the CDDA 1986 gives standing to the Competition and Markets Authority (CMA) or a ‘specified regulator’. The Act defines which parties are a ‘specified regulator’: the Office of Communication; the Gas and Electricity Markets Authority; the Water Services Regulation Authority; the Rail Regulator; and the Civil Aviation Authority.94 In the case of disqualification for fraudulent trading or wrongful trading, the rules concerning standing are rather broad as the statutory provisions refer to ‘the application of any person’. In this situation, a court can also disqualify the individual on its own motion. However, the reference to ‘any person’ is unique and makes this disqualification ground potentially very far-reaching. Finally, the application for disqualification orders for general misconduct in connection with companies (under sections 2 to 5 of the CDDA 1986) can be made by the Secretary of State or the official receiver, or by the liquidator, or any past or present member or creditor of any company in relation to which the person concerned has committed or is alleged to have committed an offence or other default. This brief overview of the different parties that have standing to apply for a disqualification order of a court shows that the Secretary of State dominates applications in practice due to the frequent use of the disqualification based on unfitness. However, it is also apparent that, apart from this dominance by the Secretary of State, there is a far-reaching list of parties that have standing in different circumstances. The grounds for disqualification on application can be divided into those which require that a court must disqualify a person (mandatory disqualification) and those where a court may disqualify an individual (i.e. it has discretion to decide whether or not to disqualify the person concerned).

94 CDDA 1986 s 9E.

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2.6.2 Disqualification of unfit directors In practice, the most widely used grounds for disqualification are found in sections 6 to 9 of the CDDA 1986. There are two situations of unfitness. The first situation concerns the disqualification of unfit directors of insolvent companies (sections 6 and 7).95 Only the Secretary of State (or the official receiver in most cases) can apply for disqualification on the grounds of unfitness, and can do so if they think that ‘it is expedient in the public interest’.96 Alternatively, the Secretary of State may accept a disqualification undertaking. In the second situation (section 8), the Secretary of State may apply to the court or accept an undertaking, irrespective of the question of whether or not the company is insolvent. In practical terms, the Insolvency Service decides after it has considered the results of an official investigation of the company. Under these circumstances, the court may make a disqualification order against the individual concerned. This means that, unlike the case of unfit directors of insolvent companies (section 6), the ban pursuant to section 8 is discretionary. 2.6.2.1 Disqualification on ground of unfitness under section 6 of the CDDA 1986 A disqualification order on application pursuant to section 6 must be made against a person who is, or has been, a director of a company that has at any time become insolvent (whether while they were a director or subsequently) and whose conduct as a director of that company (either taken alone or taken together with their conduct as a director of any other company or companies) makes them unfit to be concerned in the management of a company.97 This provision also applies to shadow directors of a company that has become insolvent.98 ‘Becoming insolvent’ under this section means one of the following situations: the company goes into liquidation at a time when its assets are insufficient for the payment of its debts and the payment of other liabilities and the expenses of the winding up; or the company enters administration; or an administrative receiver of the company is appointed.99 References to the conduct of a person as a director of any company or companies include, where that company or any of those companies has become insolvent, that person’s conduct in relation to any matter connected with or arising out of the insolvency of that company.100 Except with the leave of the court, an application for a disqualification order may only be made within two years after

95 96 97 98 99 100

Hannigan, above n 8 [25-77]. CDDA 1986 s 7(1). CDDA 1986 s 6(1) . CDDA 1986 s 6(3C). CDDA 1986 s 6(2). CDDA 1986 s 6(2)(c).

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the company of which the person was a director became insolvent.101 On the application for a disqualification order by the Secretary of State or the official receiver, the court must make a disqualification order for a minimum of two years and a maximum of 15 years if it is satisfied that the conduct of the person concerned makes them unfit to act as the director of a company.102 The Secretary of State or the official receiver can require the liquidator, administrator or administrative receiver of a company, or the former liquidator, administrator or administrative receiver of a company to provide such information about any person’s conduct as a director of the company and to produce and permit inspection of such books, papers and other documents relevant to that person’s conduct as such a director as the Secretary of State or the official receiver may reasonably require for the purpose of determining whether to apply for a disqualification order.103 If it appears to the ‘officer holder responsible under this section’ (i.e. the official receiver, the liquidator, the administrator or the administrative receiver) that the conduct of a person who has been a director, de facto director or shadow director of a company that has become insolvent while that person has been a director (either taken alone or taken together with their conduct as a director of any other company or companies) makes them unfit to be concerned in the management of a company, the office holder must report the matter to the Secretary of State.104 In practice, the person must then report to the Disqualification Unit as part of the Insolvency Service. The Secretary of State then considers the report, and if it appears to be in the public interest that a disqualification order is made, an application may be made by the Secretary of State or the court.105 Prior to this, the Disqualification Unit gives notice of not less than ten days to the director of the intention to make a disqualification order against them.106

2.6.2.2 Disqualification on ground of unfitness under section 8 of the CDDA 1986 As indicated above, a different way to disqualify a director on grounds of unfitness is provided by section 8 of the CDDA 1986. According to this provision, an application for a disqualification order against a person who is, or has been, a director or shadow director of a company may be made by the Secretary of State where the Secretary thinks it is expedient to apply following an inspection of the

101 102 103 104 105 106

CDDA 1986 s 7(2). CDDA 1986 s 6(4). CDDA 1986 s 7(4). CDDA 1986 s 7(3). CDDA 1986 s 7(1). CDDA 1986 s 16(1).

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company under the provisions of the CA 2006.107 The maximum period of the disqualification order under this provision is 15 years.108 Disqualification orders against a person can also be made against de facto directors. It was held that it was Parliament’s intention to have regard to the conduct of a person acting as director, whether validly appointed or not.109 2.6.2.3 Disqualification of unfit directors by a disqualification undertaking As an alternative to a disqualification order by a court, there is also the option to offer a disqualification undertaking.110 The Secretary of State may accept a disqualification undertaking offered by a person the Secretary considers to be unfit in accordance with section 6(1) or section 8(1) of the CDDA 1986 if it appears that it is expedient in the public interest that the Secretary should do so instead of applying for a disqualification order.111 The undertaking has the same effect as a court order. The maximum period that may be specified in the disqualification undertaking is 15 years and the minimum period is two years.112 On the application of the person who is subject to a disqualification undertaking, the court may reduce the period for which the undertaking is to be in force or provide for it to cease to be in force.113 The purpose of the undertaking is to increase the speed of disqualifications and to reduce the cost in clear cases.114 2.6.2.4 Determining the ‘unfitness’ of a director Where a court has to determine whether a person is ‘unfit’ to be concerned in the management of a company, it must focus on the person’s conduct as a director of that company. The court must consider the matters listed in Schedule 1 to the CDDA 1986 and, in the case of a company that has become insolvent, must also consider the matters mentioned in Part 2 of that Schedule.115 The matters that are applicable in all cases include, inter alia, any misfeasance or breach of any fiduciary or any other duty by the director in relation to the company, as well as any misapplication or retention by the director of any money or other property of the company. The court must also consider the extent of the director’s responsibility for the company entering into any transaction liable to be set aside under provisions

107 108 109 110 111 112 113 114 115

CDDA 1986 s 8(1). CDDA 1986 s 8(4). Re Lo-Line Electric Motors Ltd [1988] Ch 477. CDDA 1986 s 1(A). This section was introduced by the Insolvency Act 1986 into the CDDA 1986. CDDA 1986 ss 7(2A), 8(2A). CDDA 1986 s 1A. CDDA 1986 s 8A. Hannigan, above n 8 [25-72]. CDDA 1986 s 9(1).

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against debt avoidance in the Insolvency Act 1986 such as undervalue transactions. Another aspect to be taken into consideration by the courts is the director’s responsibility for any failure by the company to comply with certain provisions of the CA 2006, such as the duty to keep accounting records and the duty to register charges.116 Other matters that need to be considered in the case of a company that has become insolvent are the extent of the director’s responsibility for the causes of the company becoming insolvent and the extent of the director’s responsibility for any failure by the company to supply any goods or services that have been paid for.117 Thus, there are various issues that courts must consider when deciding on the merits of an application for disqualification on the ground of unfitness. There is now a large volume of case law related to this issue which has been analysed in the academic literature. In their review of the pertinent case law, Boyle and Birds note that what basically must be shown to justify disqualification is: conduct that is dishonest, is in breach of commercial morality or is grossly incompetent, such as to convince the court that it would be a danger to the public to allow the person in question to continue to be involved in the management of the company.118 Davies divides the case law pertaining to ‘unfitness’ into two categories: those cases that concern probity and those that concern competence.119 Commercial misjudgment or mere incompetence by itself is not enough to be deemed ‘unfit’ as a company director.120 Gross incompetence, on the other hand, is a sufficient ground for unfitness. This is, for example, evidenced by failure to file accounts and returns in compliance with the provisions of the Companies Act.121 According to Secretary of State for Trade and Industry v Creegan (a case of the Court of Appeal), the general test for acting incompetently is whether the director caused the company to trade while insolvent and had no reasonable prospect of meeting creditors’ claims. Knowing that the company has been insolvent as a director is not enough.122 This kind of behaviour is sometimes referred to in the case law as ‘taking unwarranted risk with creditors’ money’.123 It has been argued that this

116 CDDA 1986 sch 1 pt 1, ‘Matters applicable in all cases’. 117 CDDA 1986 sch 1 pt 2, ‘Matters applicable where company has become insolvent’. 118 See e.g. Re Dawson Print Group Ltd [1987] BCLC 601; Re Stanford Services Ltd [1987] BCLC 607; Re Lo-Line Electric Motors Ltd [1988] Ch 477. 119 Davies, above n 13 [10-6]. 120 J Birds and A J Boyle (eds), Boyle & Birds’ Company Law (Jordans Publishing, 6th edn, 2007) [15.18.4]. 121 Davies, above n 13 [10-8]. 122 Secretary of State for Trade and Industry v Creegan [2001] EWCA Civ 1742. 123 French, Mayson and French, above n 6 [20.13.6.8] with reference to cases such as Re Living Images [1996] 1 BCLC 348.

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approach of the courts would link the disqualification on grounds of unfitness to the conditions of wrongful trading in section 214 of the Insolvency Act 1986.124 Hannigan notes that the reported cases of disqualifications for unfitness would often be based on a situation where the director is linked to several companies that became insolvent over a short period of time.125 She points out that the cases where a director was considered to be unfit included situations where the director allowed the company to continue trading to the detriment of creditors, where the director obtained personal benefits through the continuation of trading, or where the director transferred the company’s assets for inadequate consideration.126 In many cases, the director was dishonest, although that is not a condition of unfitness.127 There are several cases of unfitness in the context of groups of companies where the director of one company trades to the detriment of the creditors of an individual company to the benefit of other companies in the group by paying out cash to other companies while disregarding the interests of the creditors of individual companies.128 A further typical case of unfitness is where directors only pay those creditors who press for payment to the detriment of others, which leads to unequal treatment of creditors as the ones who are more patient are discriminated against. Such a policy in itself leads to unfitness.129 This kind of behaviour is often also found where directors decide not to pay sums due to HM Revenue and Customs such as national insurance or VAT receipts. The decisive factor in this respect is both the significance of the non-payment and the decision to only pay pressing creditors.130 Although the conduct of the director that constitutes a breach of their duties can also be an indication of unfitness, there is no direct link between the two – that is, a breach of directors’ duties is neither necessary nor sufficient to constitute unfitness.131 The question of whether or not a person is unfit to be a director is a matter of fact.132 The court that hears an application to disqualify a director must consider what the defendant did, whether their actions were due to lack of probity or incompetence or both, and whether the case against the defendant is serious enough to warrant disqualification.133

124 D Kershaw, Company Law in Context: Text and Materials (Oxford University Press, 2009) 742. 125 Hannigan, above n 8 [25-81]. 126 Ibid. See e.g. Secretary of State for Trade and Industry v McTighe (No 2) [1996] 2 BCLC 477; Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276. 127 See Secretary of State for Trade and Industry v Goldberg [2004] 1 BCLC 597, 611. 128 See Re Mea Corporation Ltd, Secretary of State for Trade and Industry v Aviss [2007] 1 BCLC 618, 635, 643. 129 Re Sevenoaks Stationers (Retail) Ltd [1991] CH 164, 176. 130 Ibid. 131 Hannigan, above n 8 [25-83] with reference to Re Barings plc (No 5), Secretary of State for Trade and Industry v Baker (No 5) [1999] 1 BCLC 433, 486. 132 Re Sevenoaks Stationers (Retail) Ltd [1991] CH 164, 176. 133 French, Mayson and French, above n 6 [20.13.6.2].

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The number of disqualification orders for unfitness under section 6 of the CDDA 1986 began to exceed a thousand per year by the late 1990s.134 2.6.3 Disqualification for competition infringements Upon the application of the CMA or a specified regulator, a court must make a disqualification order against a person if a company that they are a director of commits a breach of competition law and if the court considers that their conduct as a director makes them unfit to be concerned in the management of a company.135 A relevant breach of competition law by a company for the purpose of this provision is if the company engages in conduct which infringes any of the following: the Chapter 1 prohibition within the meaning of the Competition Act 1998 (i.e. the prohibition on agreements preventing, restricting or distorting competition); the Chapter 2 prohibition under that Act (i.e. the prohibition on abuse of a dominant position); Article 101 of the Treaty on the Functioning of the European Union (i.e. prohibition on agreements preventing, restricting or distorting competition); Article 102 of that Treaty (i.e. prohibition on abuse of a dominant position).136 When deciding if a person is unfit to be concerned in the management of a company, the court must have regard to a number of issues. First, it must consider if the conduct of the person contributed to the breach of competition law, or, if it did not contribute to it, whether the person had reasonable grounds to suspect that the conduct of the undertaking constituted the breach and the person took no steps to prevent it, or if they did not know but ought to have known that the conduct of the company constituted the breach. Second, the court may have regard to the conduct of the person as a director of a company in connection with any other breach of competition law. Third, it must not have regard to the matters mentioned in Schedule 1 – that is, the matters for determining unfitness of directors.137 The maximum period of disqualification for this ground is 15 years. The CMA or a specified regulator may accept a disqualification undertaking by a person that for the period specified in the undertaking the person will not be a director; will not act as receiver of a company’s property; will not in any way, whether directly or indirectly, be concerned or take part in the promotion,

134 See A Dignam, Hicks & Goo’s Cases and Materials on Company Law (Oxford University Press, 7th edn, 2011) [11.8]. 135 CDDA 1986 s 9A. Section 9E enumerates the entities that are specified regulators for the purpose of this ground for disqualification: the Office of Communication, the Gas and Electricity Markets Authority, the Water Services Regulation Authority, the Rail Regulator, and the Civil Aviation Authority. The CMA took over from the Office of Fair Trading on 1 April 2014 when the latter ceased to exist. 136 CDDA 1986 s 9A(4). 137 CDDA 1986 s 9A(5)–(6).

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formation or management of a company; and will not act as an insolvency practitioner.138 The maximum period for a disqualification undertaking is 15 years. If the CMA or a specified regulator has reasonable grounds for suspecting that a breach of competition law has occurred, it can carry out an investigation for the purpose of deciding whether or not to make an application for a disqualification order.139 Before making the application, the competent body must give notice to the person likely to be affected by the application and give that person an opportunity to make representations.140 2.6.4 Fraudulent and wrongful trading On the application of any person or on its own motion, a court may also make a disqualification order against a person if it makes a declaration under section 213 or 214 of the Insolvency Act 1986 that this person is liable to make a contribution to a company’s assets, based on fraudulent trading or wrongful trading.141 This disqualification order can be made irrespective of the question of whether or not an application for such an order is made by any person. The maximum period of a disqualification order under this section is 15 years.142 2.6.5 Disqualification for general misconduct in connection with companies There are further grounds for disqualification orders made by courts which can either follow an application to the court or which can be made by the court acting on its own without an application. These grounds can be found in sections 2 to 5 of the CDDA 1986. The grounds are based on the approach in section 188 of the 1948 Act. An application for a disqualification order may be made by the Secretary of State or the official receiver, or by the liquidator, or any past or present member or creditor of any company in relation to which the person concerned has committed or is alleged to have committed an offence or other default.143 A person who intends to apply for the making of a disqualification order by the court which has jurisdiction to wind up a company must give not less than ten days’ notice to the person against whom the order is sought. On the hearing of the application, the person who is subject to the application for a disqualification order may appear and give evidence or call witnesses. The grounds found in these sections do not automatically lead to a disqualification, but the decision is at the

138 139 140 141 142 143

CDDA 1986 s 9B(3). CDDA 1986 s 9C. CDDA 1986 s 9C(4). CDDA 1986 s 10(1). CDDA 1986 s 10(2). CDDA 1986 s 16(4).

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discretion of the court as the CDDA 1986 permits but does not require it to disqualify the individual concerned. First, courts may disqualify a person who is convicted of an indictable offence that is connected with the promotion, formation, management of a company; the liquidation of or striking off of a company; the receivership of a company’s property; or the person being an administrative receiver of a company.144 Under this ground, the maximum period of disqualification is five years where the order is made by a court of summary jurisdiction (this is similar to section 188 of the 1948 Act) and 15 years in any other case (this is different to the 1948 Act).145 The scope of this ground is very wide.146 In particular, it is not necessary that the offence is committed in the course of the internal management of the company. The court that has the power to disqualify a person under this provision can be any court that has jurisdiction to wind up the company in relation to which the offence was committed or the court by or before which the person is convicted of the offence, or, in the case of a summary conviction in England and Wales, any other magistrates’ court acting in the same local justice area.147 Second, courts may disqualify a person who has persistently been in default in relation to provisions of the company legislation (i.e. the CA 2006 and Parts 1 to 7 of the Insolvency Act 1986) requiring any return, account or other document to be filed with, delivered or sent, or notice of any matter to be given, to the Registrar of Companies.148 There is a presumption that the person in question has persistently been in default if it can be proven that they have been adjudged guilty of three or more defaults in relation to the provisions mentioned above in the five years prior to the date of the application.149 The maximum period of disqualification is five years. If the presumption does not apply, then there is no need to show culpable disregard, but some degree of continuance or repetition must be demonstrated.150 The court that has the power to disqualify a person under this provision is any court that has jurisdiction to wind up any of the companies in relation to which the offence or other default has been or is alleged to have been committed.151 Third, a court may make a disqualification order against a person if, in the course of the winding up of a company, it appears that they have been guilty of an offence for which they are liable (whether they have been convicted or not) under section 993 of the CA 2006 (fraudulent trading) or have otherwise been guilty (while being an officer or liquidator of the company, receiver of the

144 145 146 147 148 149 150 151

CDDA 1986 s 2(1). CDDA 1986 s 2(3). Birds and Boyle, above n 120 [15.18.3]. CDDA 1986 s 2(2). CDDA 1986 s 3(1). CDDA 1986 s 3(2). Re Arctic Engineering Ltd [1986] BCLC 253. CDDA 1986 s 3(4).

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company’s property or administrative receiver of the company) of any fraud in relation to the company or of any breach of their duty as such officer, liquidator, receiver or administrative receiver.152 The court that has the power to disqualify a person under this section is any court that has the jurisdiction to wind up any of the companies in relation to which the offence or other default has been or is alleged to have been committed.153 The maximum period of disqualification under this section is 15 years.154 Finally, a disqualification order may be made against a person who has been convicted three times in the past five years of a summary offence in contravention of, or failure to comply with, any provision of the companies legislation requiring a return, account or other document to be filed with, delivered or sent, or notice of any matter be given, to the Registrar of Companies.155 The disqualification order may be made by the court in which the person is convicted. Sealy notes that it appears from section 16 that the court that has jurisdiction to wind up the company may also exercise the jurisdiction under this ground for disqualification if a separate application is made under that section.156 The disqualification period may be up to five years.157

2.7 Periods of disqualification The statutory grounds for disqualification in section 1 of the CDDA 1986 specify the maximum duration for which a person is banned from being a director.158 The period varies depending on the ground for disqualification. There is a maximum penalty of five years for persistent default and for an order made by court of summary jurisdiction, and of 15 years for any other case. Where the court disqualifies someone from being a director on the grounds of unfitness in the case of insolvency, the order has a minimum period of two years.159 The Court of Appeal established different ‘brackets’ for disqualification orders made under section 6 of the CDDA 1986: two to five years where the case is minor, six to ten years for cases of medium severity, and ten or more years for serious cases.160

152 153 154 155 156

157 158 159 160

CDDA 1986 s 4(1). CDDA 1986 s 4(2). CDDA 1986 s 4(3). CDDA 1986 s 5. Sealy, above n 1, 38. CDDA 1986 s 16(2) stipulates that an application for the making of a disqualification order against a person may be made by the Secretary of State or the official receiver, or by the liquidator or any past or present member or creditor of any company in relation to which that person has committed or is alleged to have committed an offence or other default. CDDA 1986 s 5(5). Section 6 specifies the minimum duration of the order. CDDA 1986 s 6(4). Re Sevenoaks Stationers (Retail) Ltd [1991] BCLC 325, 328.

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If a director makes a disqualification undertaking, then there is usually a lesser period negotiated than in those instances where a court makes a disqualification order. Appeals against the disqualification order are possible by both the director concerned and the Secretary of State. Anyone who is subject to a disqualification undertaking can apply to the court to reduce the period for which the undertaking is in force (variation of disqualification undertaking).161 A variation of an undertaking should only be made where there are circumstances which could not have been foreseen or were not intended to be covered by the undertaking and which have changed since the undertaking was accepted.162 A disqualified person may also apply to the court for leave to act. The court that decides about the application for leave must balance the protection of the public against the need for the individual to act as a director of a particular company.163 The balance between the countervailing interests depends, inter alia, on the reasons that caused the disqualification order or undertaking in the first place and the danger of a reoccurrence of those defects.164 The need for the individual to act as a director must be based on a legitimate business requirement for the applicant to act in that particular capacity or on grounds as to why the applicant has some legitimate interest in so doing. This means that leave will only be granted by a court in those cases where the company needs the director’s work and not in those where a director simply needs to work.165 It should not be granted without serious consideration.166

2.8 Consequences of acting while disqualified There are sanctions in place to prevent anyone who is disqualified by court order or an undertaking from ignoring the ban. A person who acts while disqualified (either via automatic disqualification or under a disqualification order) or who is subject to a disqualification undertaking is subject to criminal penalties.167 Anyone who acts as a director despite a disqualification is also liable to criminal indictment and imprisonment for not more than two years or a fine, or both. In this scenario, on summary conviction, such individuals are liable to imprisonment of up to six months or a fine not exceeding the statutory maximum, or both.168 Moreover, a person who acts in contravention of the restriction on being a company director of a company that is known by a prohibited name is liable to imprisonment or a

161 CDDA 1986 s 8A. 162 Re INS Realisations Ltd [2006] EWHC 135 (Ch). 163 Re Barings (No 4), Secretary of State for Trade and Industry v Baker [1999] 1 BCLC 262, 265. 164 Ibid. 269. 165 French, Mayson and French, above n 6 [20.13.8] with reference to Re Cargo Agency Ltd [1992] BCLC 686 and Re Gibson Davies Ltd [1995] BCC 11. 166 Re Barings plc (No 3) [2000] 1 WLR 634, 641. 167 CDDA 1986 s 13. 168 CDDA 1986 s 13. The statutory maximum is £5,000.

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fine, or both.169 The scenario underlying this situation is a company (the liquidating company) that has gone into insolvent liquidation and where the person was a director or shadow director of the company at any time in the period of 12 months prior to the day before it went into liquidation.170 In such a situation, the company name must not be re-used, as it is a ‘prohibited name’. The person who was a director or shadow director of that company is disqualified for a period of five years from the day of liquidation from being a director of any other company known by the prohibited name.171 Moreover, there is also civil liability for directors acting when disqualified. If a disqualified person acts in contravention of a disqualification order or disqualification undertaking and is involved in the management of the company, then that person is liable jointly and severally with the company and any other person who is also jointly and severally liable for all the relevant debts of a company.172

2.9 Register of disqualified persons The Secretary of State maintains a register of disqualification orders and of those cases where leave has been granted,173 and must include in the register information about disqualification undertakings.174 Within 14 days of a disqualification being made by a court, it must send information about the order to the Secretary of State for entry into the register.175 Variations of orders or undertakings and grants of leave to act despite an order or undertaking must also be reported. The Secretary of State must delete those entries where the pertinent order or undertaking is no longer in force.176 The register is open to inspection upon payment of a fee.177 The UK’s system is very transparent with its online search function on the website of Companies House which allows anyone to search for disqualified directors online.178 It is also possible to report persons online who have breached

169 Insolvency Act 1986 s 216(4). 170 Insolvency Act 1986 s 216(1). 171 Insolvency Act 1986 s 216(2)–(3). The person is also disqualified from being concerned or taking part in the promotion, formation or management of any such company or in any way, whether directly or indirectly, being concerned or taking part in the carrying on of a business carried on under a prohibited name, except with leave of the court. 172 CDDA 1986 s 15. 173 CDDA 1986 s 18(2). 174 CDDA 1986 s 2(A). 175 Companies (Disqualification Orders) Regulations 2009 (UK). 176 CDDA 1986 s 18(3). 177 CDDA 1986 s 18(4). 178 See ‘Search for Disqualified Company Directors’, available at www.gov.uk/search-theregister-of-disqualified-company-directors (accessed 14 November 2016). The government also provides a clear and accessible outline of the rules about the disqualification of directors

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their disqualification order or undertaking.179 Statistics show that the introduction of the disqualification undertaking through the Insolvency Act 2000 significantly reduced the number of cases that are adjudicated by the courts. Now the majority of disqualifications (about 80 per cent) are made by way of disqualification undertakings.180 It is difficult to obtain official statistics that distinguish between director disqualifications by undertakings and those by court orders. In response to a Freedom of Information request by a member of the public, the Insolvency Service provided the figures of disqualifications in respect of financial years (1 April to 31 March) shown in Table 2.1.181 182 It is clear from the numbers in Table 2.1 that the disqualification regime in the UK has had a great impact on a relatively large number of individuals. If one

Table 2.1 Number of director disqualifications in financial years 2000–2001 to 2012–2013 Financial year

Number of directors disqualified182

2000–2001 2001–2002 2002–2003 2003–2004 2004–2005 2005–2006 2006–2007 2007–2008 2008–2009 2009–2010 2010–2011 2011–2012 2012–2013

1,548 1,761 1,594 1,367 1,240 1,095 1,149 1,066 1,204 1,321 1,373 1,100 969

179 180 181 182

on its website: www.gov.uk/company-director-disqualification (accessed 14 November 2016). See ‘Report a Disqualified Director’, available at www.gov.uk/report-a-disqualified-director (accessed 14 November 2016). See French, Mayson and French, above n 6 [20.13.2.9]. What Do They Know, Director Disqualification Statistics, available at www.whatdotheyknow. com/request/director_disqualification_statis_2?unfold=1 (accessed 14 November 2016). In its response to the Freedom of Information request, the Insolvency Service clarified that all the figures in Table 2.1 are in respect of s 6 disqualifications (disqualification of unfit directors of insolvent companies) apart from the year 2004–2005 which also contains disqualification orders obtained under s 2 (disqualification on conviction of indictable offence). A separate figure is not available for s 6 disqualifications obtained in 2004–2005. The Insolvency Service pointed out that the great majority of disqualifications are obtained under s 6 of the CDDA 1986 and all such disqualifications are dealt with by the Insolvency Service.

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assumes that people are disqualified on average for a period of three years, there would have been 3,442 (1,373 plus 1,100 plus 969) people affected by disqualification orders between 2010 and 2013.

2.10 Legislative reform through the SBEEA 2015 The law on the disqualification of directors is subject to reform following the enactment of the SBEEA 2015.183 The Act introduced a number of reforms for company law such as the prohibition of corporate directors. The reforms also affect the rules on directors’ disqualification. Inter alia, the Act introduces new grounds for disqualifying a director and broadens the range of matters that must be considered by a court when disqualifying a director.184 This section will give a brief overview of the changes to the rules on the disqualification of directors. The Department for Business, Innovation and Skills explained the aims of the legislation as: strengthening the current director disqualification legislation in order to increase the confidence of consumers that action is taken against wrongdoers; simplifying the way in which insolvency practitioners can report directors’ misconduct; and compensating creditors for directors’ misconduct.185 The Act introduces two new grounds for disqualifying directors in the UK. The first ground concerns convictions for relevant foreign offences. This is an offence in connection with the promotion, formation, management, liquidation of or striking off of a company (or any similar procedure), the receivership of a company’s property (or any similar procedure), or a person being an administrative receiver of a company (or holding a similar position), and which corresponds to an indictable offence under the law of England and Wales or Scotland. In this case, the Secretary of State may apply to the court for an order of disqualification where it appears that it is expedient in the public interest that a disqualification order should be made against a person. The Secretary of State may also accept undertakings by the individuals concerned.186 A further ground for disqualification is introduced against persons who have instructed unfit directors.187 This new rule is intended to cover those persons whose directions or instructions have resulted in the conduct that resulted in a director being disqualified. Moreover, when disqualifying a director a court must now also consider the nature and the extent of harm that the director’s misconduct has had and their track record in running failed companies.188

183 The Act received Royal Assent on 26 March 2015. 184 See ‘Small Business, Enterprise and Employment Act 2015 Introduces Changes to Company Law’ (2015) 36 Company Lawyer 205. The pertinent rules about disqualification of directors are in ss 104–11 of the Act. 185 Department for Business, Innovation and Skills, above n 24. 186 SBEEA 2015 s 104. 187 SBEEA 2015 s 105. 188 SBEEA 2015 s 106.

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The Act also extends the application period to disqualify unfit directors of insolvent companies from two to three years.189 Following the reform, liquidators and administrators are allowed to bring legal cases against directors in the case of wrongful or unlawful trading, including the ability to apply for creditor compensation orders against directors who have been disqualified.190 Under the new regime, a court may make a compensation order against a person on the application of the Secretary of State if the following conditions are met: first, the person must be subject to a disqualification order or disqualification undertaking under this Act; and, second, the conduct for which the person is subject to the order or undertaking has caused loss to one or more creditors of an insolvent company of which the person has at any time been a director. The Secretary of State may accept a compensation undertaking.191 A compensation order or undertaking requires the disqualified person to pay a specified amount to the Secretary of State for the benefit of a creditor or creditors specified in the order or a class or classes of creditor so specified as a contribution to the assets of a company. The determination of the amount payable depends on the amount of the loss caused, the nature of the conduct and whether the person has made any other financial contribution in recompense for the conduct. Finally, the Act also requires insolvency practitioners to report to the Secretary of State on the conduct of every director of a company that has become insolvent. The report must describe any conduct that may assist the Secretary of State in deciding whether it is in the public interest to apply for the making of a disqualification order.192 2.10.1 Cases As a general illustration of the application of the disqualification regime in the UK, a few cases will be analysed. 2.10.2 Automatic disqualification As noted, the grounds that automatically result in the disqualification of a director are limited. Consequently, there is less case law available in relation to these grounds. An example of a ground for automatic disqualification can be found in section 11 of the CDDA 1986 which makes it an offence for a person to act as director or be concerned with the management of a company while being an undischarged bankrupt. As the law is clear on this point, the contentious issues arise in relation to breaches of this disqualification. However, those covered by

189 190 191 192

SBEEA 2015 s 108. SBEEA 2015 s 110. SBEEA 2015 s 110. SBEEA 2015 s 107.

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this ban can apply to the court for leave to act as a director irrespective of the automatic disqualification. In the case R v Young, the Court of Appeal had to decide the appeal of a person who had been convicted of managing a company while being an undischarged bankrupt under the provisions of the 1948 Act.193 The Crown Court had conditionally discharged the appellant for three years, ordered him to pay a fine and additionally disqualified him as a director for two years under the disqualification on conviction of indictable offence. The Court of Appeal held that in principle ‘there was nothing wrong with the sentence of two years’ disqualification’ for the managing of the company as an undischarged bankrupt because this is ‘a serious offence’ and the prohibition on undischarged bankrupts to take part in company management is ‘a serious prohibition’.194 Therefore, in the Court’s view, undischarged bankrupts who get involved in the management of a company must expect to be disqualified when this is brought before a court. However, the particular facts of this case meant that the issue was not as simple as first thought. The case here was brought to the Court only three and a half years after the appellant had been discharged from his bankruptcy. He acted as a company director while being an undischarged bankrupt, but had successfully worked as a director since then during the following three and a half years. The Court considered this to be an exceptional case due to the ‘intolerable delay before the matter came to court’ and held that, given these circumstances, it was not appropriate to impose a disqualification order. 2.10.3 Disqualification on application 2.10.3.1 Mandatory disqualification by court order With regard to mandatory disqualifications, the most widely used ground for disqualifications in practice is the unfitness of a director of an insolvent company.195 The interpretation of this section will be illustrated by two cases. First, in Re Dawson Print Group Ltd, the High Court had to decide the question of unfitness of a person.196 In this case, the official receiver had applied for an order disqualifying a director from acting as a company director or being concerned in the management of a company on the basis that he was a director of two companies that had been compulsorily wound up due to large amounts of tax debts owed to HM Revenue and Customs. The official receiver submitted that the company had paid very little of the sum that it owed. The Court dismissed the application for a disqualification order. It held that the evidence did not show that the director was unfit. A disqualification order on the ground of unfitness would either require conduct in

193 194 195 196

R v Young [1990] BCC 549. Ibid. 553. CDDA 1986 s 6. [1987] BCLC 601.

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breach of standards of commercial morality or some gross incompetence. The Court held that the non-payment of debts to HM Revenue and Customs itself did not meet these conditions as it would not ‘be regarded in the commercial world generally as such a breach of commercial morality that it required in itself a conclusion that the directors concerned were unfit to be involved in the management of companies’.197 The failure to pay was neither grossly negligent nor in breach of standards of commercial morality. The decision demonstrates a cautious interpretation of the conditions of unfitness by the Court. The reason for this approach is probably that a finding of unfitness automatically leads to a disqualification. A court must make a disqualification order when it concludes that a person is ‘unfit’. The interpretation here shows that gross incompetence or a breach of commercial morality requires more than simply the failure to pay debts. In this case, the owing of taxes to HM Revenue and Customs per se was not regarded as worse than the failure to pay ordinary creditors. Secretary of State for Trade and Industry v Baker (also known as Re Barings plc)198 provides another example of the approach the courts adopt to mandatory disqualification based on the ground of ‘unfitness’. In this case, the Secretary of State had applied for a disqualification order to be made against three directors of the Barings Group which had collapsed following the unauthorised trade activities of Nick Leeson. The Secretary of State held that the directors had seriously failed in complying with their duty to supervise adequately the activities of this trader who caused the collapse of the bank through its losses. This failure would demonstrate a high level of incompetence which would make them unfit to act as company directors. The High Court held that the three directors were unfit as their conduct had fallen below the standards of competence to be expected of directors. The Court held that each director had a duty to inform himself about the affairs of the company. Although they could delegate functions, they were responsible for adequate systems and a certain level of supervision to check the performance of any particular function.199 Consequently, the three directors were disqualified. The Court of Appeal rejected the appeal against this decision.200 It confirmed the decision of the High Court that the directors had committed a serious abdication of their responsibility to supervise the trader since they did not have a system in place for monitoring the trader’s performance. 2.10.3.2 Illustration of the courts’ approach when disqualification is non-mandatory With regard to discretionary (non-mandatory) grounds for disqualification on application, a court may make a disqualification order against a person that meets

197 198 199 200

Ibid. [1999] 1 BCLC 433 (Ch). Ibid. [2001] BCC 273.

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the conditions of the respective ground for disqualification. For example, a court may disqualify a person who was convicted of an indictable offence in connection with the promotion, formation or management of a company.201 In the case R v Corbin, the Court of Appeal had to decide the case of a director who was disqualified for offences committed in connection with the management of a company.202 Here the director had been disqualified by a court because he had entered into fraudulent dealings with several finance companies and other companies while he conducted the business of three companies. The Court sentenced the director to three and a half years’ imprisonment, issued a criminal bankruptcy order, and disqualified him from being a company director for five years under section 188 of the 1948 Act. The director argued, inter alia, that the power to make a disqualification order was limited to offences that are committed in the course of the internal management of the company’s affairs. The Court of Appeal allowed the appeal, but dismissed it on the basis that any offence in connection with the management of the company was sufficient to disqualify a director under this ground. This decision shows that the courts take a broad view of the meaning ‘in connection with the promotion, formation, [or] management’ of a company.

2.11 Summary and conclusion The preceding analysis has shown that the UK operates a developed system of directors’ disqualification. The rules are found in a separate Act, the CDDA 1986, and are therefore, at least in theory, easily accessible. Prior to the enactment of the CDDA 1986, rules regarding the disqualification of directors could be found in the different Companies Acts and already in the model articles (then called Table A/B) of the Acts in the nineteenth century. The disqualification of directors therefore has a long history in English law. The system in the UK is traditionally based on the disqualification by application to a court. However, in recent times the number of persons disqualified by disqualification undertakings started to exceed the number of persons disqualified by court order. There are only a few grounds that lead to automatic disqualification, such as undischarged bankruptcy. The grounds for disqualification on application can be divided into those that are mandatory and those that give the courts discretion to decide whether or not to disqualify the individual concerned. Among the discretionary grounds is the disqualification for persistent breaches of companies legislation requiring the return, account or other document to be filed, delivered or sent, or notice of any matter to be given to the Registrar of Companies. The most widely used ground for disqualifying directors, however, is ‘unfitness’, which, if the conditions are met, leads to a mandatory disqualification. Unfit directors of insolvent companies are

201 CDDA 1986 s 2. 202 [1984] Crim LR 302.

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disqualified under section 6 of the CDDA 1986. A further ground for unfitness exists where, following the result of an investigation of a company, it appears to the Secretary of State that it is in the public interest that a disqualification order be made against a person whose conduct makes them unfit to be concerned in the management of a company. The possibility to apply for leave under an order or undertaking provides an opportunity to make the ban more flexible. Although in practice the Secretary of State holds a central position owing to the Secretary’s standing to apply for disqualifications based on unfitness, the analysis above has shown the different circumstances in which various parties have standing to make an application for a court order, including ‘any person’ in case of fraudulent or wrongful trading. This far-reaching approach demonstrates that the law of the disqualification of directors is central to English company law. It is often said that English law makes limited liability through the corporate form comparatively easily available. That being true, it is important to bear in mind that directors are also exposed to a well-developed and defined set of rules about disqualification, such as in those cases where they are considered unfit to be a company director. However, the system is complicated, regarding not only who has standing to apply for a disqualification order, but also the specific grounds on which an application can be brought to court. The distinction between discretionary disqualification and mandatory disqualification makes the system even more complex. In addition, there are circumstances, based on the 1948 Act, where a court could mero muto order that a person is disqualified. The possibility of disqualification undertakings provides some solution to the complexity of the UK disqualification regime, which might explain why significantly more people are disqualified via undertakings than disqualification orders.

3

Australia Tess Blackie* and Jean Jacques du Plessis**

Contents 3.1

Introduction

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3.2

History of corporate legislation in the Australian jurisdiction 3.2.1 Colonial inheritance 3.2.2 Australian companies law: co-operative methods 3.2.3 Referral of power by the states: a truly national corporate law

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3.3

Meaning of ‘disqualification’ and consequences for contravening disqualification provisions

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Grounds for disqualification of directors and purpose of an order for disqualification 3.4.1 Automatic disqualification 3.4.2 Disqualification by the courts 3.4.3 Disqualification by ASIC

76 78 81 89

3.5

Enforcement of disqualification orders and defences 3.5.1 Section 206A – criminal offence 3.5.2 Leave to manage a corporation: sections 206G and 206F(5)

92 92 94

3.6

Register of Disqualified Persons

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3.7

Role of the Regulator 3.7.1 Strengths of the regulatory model 3.7.2 Limitations of the regulatory model

95 100 101

3.8

Conclusion

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3.4

* BA (International Studies), LLB (Honours) (Deakin University, Australia). Solicitor, YourLawyer Pty Ltd (Melbourne, Australia). ** BProc, LLB, LLM, LLD (UFS). Professor of Corporate Law, Deakin Law School, Deakin University (Australia).

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3.1 Introduction For a number of years Australian legislators struggled to develop a cohesive body of law capable of dealing with the expanding role and power of corporations.1 Much of Australia’s earliest corporations and company legislation was based upon rules and principles developed in the United Kingdom (UK)2 and was thus aimed at the maintenance of colonial interests rather than the development of a legislative framework designed to meet the particular needs of Australia.3 From the first introduction of corporate legislation in the colonies, it was approximately 100 years before any cohesion was achieved in the area of company law,4 and it was not until 2001 that a truly national company law was passed in Australia.5 Even in its most disjointed incarnations, however, Australian law recognised the need to ensure that persons who were acting as directors of corporations were trustworthy.6 In this chapter we briefly examine the peculiarities associated with the historic development of corporations legislation in Australia. We then explain what it means to be ‘disqualified’ and what potential consequences there might be for disqualified persons if they are involved in the management of corporations while ‘disqualified’. The chapter then looks at the current grounds upon which a person in Australia can be disqualified from acting as a director, and the interpretation and application of these provisions by the courts. We consider the provisions that serve as the enforcement mechanism for the disqualification provisions, and possible defences against an alleged contravention of section 206A(1) of the Corporations Act 2001 (Cth) (2001 Act), which contains criminal offences. The chapter then examines the unique role of the regulator, the Australian Securities and Investment Commission (ASIC) in the Australian system; the purposes of corporate law in Australia; and the effectiveness of disqualification provisions in achieving these purposes both in isolation and as part of the broader scheme of corporate governance in Australia.

1 Rob McQueen, ‘Limited Liability Company Legislation – The Australian Experience’ (1991) 1 Australian Journal of Corporate Law 22. 2 Despite a number of innovations by the colonies – it was the State of Victoria, for example, which first introduced ‘no liability’ schemes for mining companies through the Mining Companies Act 1871 (Vic) – all Companies Acts for the Australian colony were, until Federation in 1901, based on the Companies Act 1862 (UK), including the Companies Act 1896 (Vic). See McQueen, above n 1, 33; R P Austin, H A J Ford and I M Ramsay, Ford, Austin and Ramsay’s Principles of Law and Corporate Governance (LexisNexis, 2015) 48. 3 McQueen, above n 1, 24. 4 Ibid. 43; Elizabeth Boros and John Duns, Corporate Law (Oxford University Press, 3rd edn, 2013) 14. 5 Boros and Duns, above n 4, 20. 6 CCH, The Duties and Responsibilities of Company Directors in Australia (CCH Australia Ltd, 4th edn, 1982) 301–2.

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3.2 History of corporate legislation in the Australian jurisdiction 3.2.1 Colonial inheritance In 1855, the Parliament of the UK promulgated a law that introduced the concept of limited liability into corporate law in that jurisdiction.7 The legislation prompted disquiet among parliamentarians, with one legislator stating that ‘[t]he principal of limited liability had produced injurious effects to commercial credit both in America and in France by inducing reckless speculation and systemic frauds upon credits’.8 It was thought by many parliamentarians that unlimited liability gave shareholders reason to monitor the company’s solvency, while limited liability eliminated the risk for investors and might open the ‘floodgates to unscrupulous promoters’.9 Ensuring that those who make use of the structure of limited liability are worthy of the trust of the community and the ‘gift of limited liability’10 remains a fundamental principle of modern provisions dealing with director disqualifications. This can be seen to flow from the earliest misgivings about the potential for unprincipled persons using the corporate structure to engage in reckless speculation with little or no regard for the legitimate concerns of creditors and other interested persons.11 Australia was no stranger to these same initial misgivings among ‘respectable’ business persons about the diffusion of the corporate structure. One Australian businessman stated: The moral effect of all joint stock associations for mercantile objects which are properly within the compass of individual exertion is bad; they introduce in the place of patient labour and moderate expectations, ambitious hopes and the practice of gambling in shares.12 Another opinion, of a successful manufacturer, was that he was: not yet persuaded that [incorporation] will be the correct thing to do . . . you know how companies are run not so much to do a legitimate business &

7 Limited Liability Act 1855 (UK). 8 John Maltas, ‘The Historical Development of Legal Principles and Procedures Evident in Modern Australian Corporate Legislation’ (2008) 1 Journal of Applied Law and Policy 111, 126 quoting United Kingdom, Parliamentary Debates, House of Commons, 26 July 1855, col 1393 (Archibald Hastie). 9 Maltas, above n 8, 127. 10 Julie Cassidy, ‘Disqualification of Directors under the Corporations Law’ (1995) 13 Companies and Securities Law Journal 221, 238 citing Dwyer v National Companies and Securities Commission (No 2) (1989) 7 ACLC 743, 745, 748. 11 Maltas, above n 8, 126. 12 McQueen, above n 1, 29, quoting Circular to Bankers, 17 August 1844.

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Tess Blackie/Jean Jacques du Plessis as to do plenty of it & during the time this is going on the chances are there would be no profits to anyone.13

Given these misgivings, it is unsurprising that the next enactment of the UK parliament with respect to company law included provisions for the vacation of the office of director in certain prescribed circumsances.14 These provisions were not included in the main Act, but in Regulation 47 of Table B of the First Schedule to the Joint Stock Companies Act 1856 (UK). The Companies Act 1862 (UK) consolidated the English corporate law then in effect. This law was adopted in an ‘essentially unaltered’15 form by the colonial legislatures of Australia in the mid-1860s.16 Company law was historically state legislation17 developed from the legislation of the colonies, most of which was based squarely on UK legislation,18 often with little or no consideration of the appropriateness of the adopted rules to the Australian experience.19 Particular and divergent colonial experiences led to the development of, and introduced discrepancies in, the laws across the Australian jurisdictions, particularly in Victoria, which had ‘some notable innovations’.20 The effect of this approach to corporate lawmaking is that the law of Australia relating to liabilities of directors

13 Letter from T B Guest to his son, 29 March 1888, in Guest Collection, University of Melbourne Archives Guest Letter Books 1886–1891, Letter No 179, quoted in McQueen, above n 1, 30. 14 Joint Stock Companies Act 1856 (UK) Table B reg 47, available at www.gov.uk/government/ uploads/system/uploads/attachment_data/file/386364/comm14July1856JointStock CoAct_P1.pdf (accessed 15 November 2016). 15 McQueen, above n 1, 24. 16 Ibid. 17 Although a full discussion of the constitutional complexities of the Australian jurisdiction is well beyond the scope of this chapter, some explanation of the difficulties faced by the parliaments of the jurisdictions in enacting a uniform national law for companies is necessary to understand the extensive periods of time during which no national law was forthcoming. By way of brief introduction, it is enough to understand that originally the several states of Australia were independent colonies of the British Empire, each with a colonial government answerable to the English courts, and subject to legislation of the British Parliament. In 1901 the colonies federated, becoming states of the newly established Commonwealth of Australia. As part of this process of federation, a constitution was drafted that established the processes by which parliamentarians of the new Commonwealth would be selected, the procedures for forming governments, and the Australian High Court. The Constitution also set out in s 51 a specific number of ‘powers’ that the new federal parliament could use to pass legislation. Importantly, any law passed that did not stem from one of these ‘powers’ was constitutionally invalid and could be challenged in and invalidated by the High Court. Those interested in the constitutional law and history of Australia might wish to refer to Jennifer Clarke, James Stellios and John Trone, Hanks Australian Constitutional Law: Materials and Commentary (LexisNexis, 9th edn, 2012). 18 Boros and Duns, above n 4, 13–14. 19 McQueen, above n 1, 24, 34. 20 Ibid. 33, quoting H A J Ford, Principles of Company Law (Butterworths, 4th edn, 1986) 13–14.

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and other officers remained largely congruent with that of the UK during this period.21 3.2.2 Australian companies law: co-operative methods In the 1960s, there was a conscious effort by the various Australian states to enact laws regulating the governance of corporations and company officers in an attempt to address the expense and cumbersomeness to which companies wishing to conduct business in more than one jurisdiction were exposed.22 Such uniform legislation would also, it was hoped, deal with situations in which the unscrupulous elements of the commercial community were ‘perpetrating frauds by playing one system off against another’.23 The Uniform Companies Acts (adopted by the States and Terrotories between 1961 and 1963) were passed in, as far as was possible, identical terms.24 However, once the Acts were passed in each jurisdiction there was no way of ensuring that if one Act was amended, the others would follow suit, and the variations that the laws intended to remove soon began to creep back in.25 Perhaps the most unattractive aspect of the state-based approach to corporate legislation was that any company wishing to raise capital in more than one state was still required to incorporate in each, and to comply with costly and complicated prospectus requirements that, in large part, lacked any real consistency or cohesion.26 Several federal governments attempted to develop national company legislation, before the Hawke Government finally passed the Corporations Act 1989 (Cth) (1989 Act). This legislation was intended to introduce a single, comprehensive national scheme, providing for the incorporation of companies and governance of corporate issues. The scheme was, however, based on a reading of section 51(xx) of the Constitution, ultimately invalidated by the High Court. The Court found that the Commonwealth was only given power with respect to companies already formed within Australia, and was not empowered to legislate with regard to incorporation, thereby severely curtailing hopes for a simple solution to

21 McQueen, above n 1, 41–3. Indeed, developments in the area were focused less on issues of corporate governance and more on the issue of governance of corporations. 22 Boros and Duns, above n 4, 14; David Morrison and Colin Anderson, Company Law (Oxford University Press, 2010) 19. Thus, in each state and territory the following laws, known collectively as the Uniform Companies Acts, were passed: Companies Act 1961 (Vic); Companies Act 1961 (WA); Companies Act 1961 (NSW); Companies Act 1961 (Qld); Companies Act 1962 (Tas); Companies Act 1962 (SA); Companies Ordinance 1962 (ACT); Companies Ordinance 1963 (NT). 23 McQueen, above n 1, 41. 24 Boros and Duns, above n 4, 14. 25 Ibid. 26 Ibid.

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the multiplicities that had plagued Australian corporate legislation and regulation.27 A scheme to establish a Companies Code was then entered into, under which the Commonwealth would pass an amendment to the 1989 Act such that it would only apply to the Australian Capital Territory.28 The states would each then pass legislation adopting that Act as its own company law, while also legislating for jurisdiction over its enacting laws to be reposed in the federal courts and federal regulator.29 Ultimately, constitutional challenges also unravelled the Code scheme.30 The 1989 Act together with later amendments became known as the Corporations Law.31 3.2.3 Referral of power by the states: a truly national corporate law With the failure of the cross-vesting scheme under the Corporations Law, the states finally capitulated to growing pressure and agreed to refer their powers with relation to corporate law to the Commonwealth Parliament under section 51(xxxvii) of the Constitution.32 The result was a cohesive corporate law, the 2001 Act, which incorporated many of the provisions of the previous Corporations Law, including the provisions relating to disqualification of directors.33 These provisions were rebranded and placed within a more comprehensive regulatory scheme but, as a number of decisions of first instance and appellate courts determined, the core

27 NSW v Commonwealth (1990) 169 CLR 482. 28 Boros and Duns, above n 4, 18. This legislation would not suffer the same constitutional issues, as the Constitution gave complete power to the Commonwealth to legislate with regards to territories. 29 Ibid. 18–19. 30 Re Wakim; Ex parte McNally (1999) 198 CLR 511 is the most commonly cited decision on the constitutional validity of the Code. The High Court determined in this case that the purported conferral of jurisdiction on the Federal Court by state legislation was invalid. Other cases that contributed to the eventual unravelling and abandonment of the Code scheme include Re Brown; Ex parte Amann (1999) 73 ALJR 839; Amann Aviation Pty Ltd v Continental Venture Capital Ltd (2000) 18 ACLC 277; R v Hughes (2000) 74 ALJR 802, in which the Court questioned whether the referral by the states of regulatory power under their Code legislation to Commonwealth regulatory officers could be validly made. See further Boros and Duns, above n 4, 18–19 on the weaknesses of the Code system. 31 See Austlii, Commonwealth Repealed Acts: Corporations Law (18 January 2016), available at www.austlii.edu.au/au/legis/cth/ repealed_act/cl184 (accessed 15 November 2016). For clarity, ‘1989 Act’ is used throughout this section to refer to the original act of 1989 incorporating all amendments. 32 Prior to the latest failure, the states had been reluctant to take this step because of fears that the power, once surrendered, could never be reclaimed; also, it would mean yielding the not insignificant revenue streams that were provided by state incorporation schemes: Boros and Duns, above n 4, 16. 33 Thus many of the leading cases on directors’ disqualifications refer to ss 229 (the equivalent of s 206B); 230 (the equivalent of s 206E); 599 (the equivalent of s 206D); and 600 (the equivalent of s 206F).

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provisions for the disqualification of directors remained largely consistent with those of the Code and previous state and territory legislation.34

3.3 Meaning of ‘disqualification’ and consequences for contravening disqualification provisions Section 206A of the 2001 Act makes it an offence if persons, while disqualified, ‘manage corporations’. But when will the offence be commited? The automatic disqualification grounds as well as disqualification by court order or by ASIC will be thoroughly discussed further below. But what is meant by ‘managing corporations’? Although section 206A deals with the offence for acting while disqualified, the section in fact provides the key to what is meant by ‘managing corporations’. First, section 206A(1) (a) provides that a person will be considered to ‘manage a corporation’ if they ‘make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation’. It has been held that ‘managing a corporation’ does not require that the disqualified person be part of a board, or directly communicating with the board,35 but they must be involved in more than the day-to-day carrying out of routine functions.36 Under section 206A(1)(c) it is sufficient for a person to give instructions knowing or intending that the directors will act in accordance with those wishes.37 Under current jurisprudence a person who engages in conduct amounting to management, in the sense of being something more than participation in the day-to-day activities of the company, while subject to a disqualification order, commits an offence. Second, section 206A(1)(1)(b) provides that a person will be considered to ‘manage a corporation’ if the person ‘exercise(s) the capacity to affect significantly the corporation’s financial standing’. In Commissioner for Corporate Affairs v Bracht38 Ormiston J noted that negotiating terms with a bank or provider of credit, or for the rent of a corporation’s principal premises were matters of financial importance which, as long as they involved more that the simple communication

34 See below 3.4 Grounds for disqualification for directors and purpose of an order for disqualification. It has been noted that although the current scheme is a vast improvement on the previous patchwork and poorly regulated schemes of the 1960s and later, it is not a permanent solution, as the referral power has a ‘sunset clause’ that requires states to re-refer their power over corporations every few years: see Boros and Duns, above n 4, 20; Editorial, ‘ASIC’s 20th Anniversary: Some Reflections on the Operation of the Corporations Act, the Role of the Australian Securities and Investment Commission, and Related Issues’ (2011) 29 Company and Securities Law Journal 247, 247. 35 Corporate Affairs Commission v Bracht [1989] 7 ACLC 40.. 36 Ibid. 37 2001 Act s 206A(1)(c). 38 [1989] 7 ACLC 40.

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of instructions on a single occasion, could well lead to determination that a person was involved in the management of a corporation.39 Third, section 206A(1)(c) provides that a person will also be considered to ‘manage a corporation’ if they ‘communicate instructions or wishes . . . to the directors of the corporation’ while having knowledge that the directors are accustomed to acting in accordance with the person’s instructions or wishes. Futhermore, such a person will also be considered to be part of ‘managing a corporation’ if they intend the directors to act in accordance with their instructions or wishes. The aim of this section is to ensure that so-called ‘shadow directors’40 are covered. In other words, if a person is disqualified and they come under the definition of ‘shadow director’, they will also commit an offence under section 206A(1) of the 2001 Act. There is an exception, namely if a person ‘communicate[s] instructions or wishes’ as ‘advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation’. It implies that a disqualified person may still give advice as, for example, banker, solicitor, accountant or auditor in a professional capacity or regarding their business relationship with the directors or the corporation without commiting an offence under section 206A(1).

3.4 Grounds for disqualification of directors and purpose of an order for disqualification It was noted above that as early as 1855 in the UK there was a fear that limited liability would induce a reckless disregard for the interest of shareholders and creditors in those tasked with the management and direction of corporations.41 The first provisions for the disqualification of directors were therefore directed to ensuring that people with a demonstrable inability to manage financial responsibility were not given access to the benefits of conducting business through limited liability corporations.42 There is good authority for the proposition that for many years Australian courts did not see the disqualification of directors as punishment, but as a means of protecting the public.43 However, a slightly

39 Ibid. Although Bracht pre-dates the current legislative provisions by a number of years, Palmer J in ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305 (4 April 2005) noted that the conduct ‘included within the prohibitions contained in the present s 206A(1) and in its predecessor in the Corporations Law is drawn largely from the Judgement of Ormiston J in Corporate Affairs Commission v Bracht [1989] VR 821’. 40 See 2001 Act s 9, ‘director’, pt (b); Ho v Akai Pty Ltd (in liq) (2006) 24 ACLC 1526 (13 November 2006). 41 Maltas, above n 8, 126–7. 42 Cassidy, above n 10, 222, 238, citing Dwyer v National Companies and Securities Commission (No 2) (1989) 7 ACLC 743, 745, 748; CCH, above n 6, 301–2. 43 ASIC v Adler (2002) 42 ASCR 80; Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 Senate Standing Committee on Legal and Constitutional Affairs, Parliament of Australia,

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different view has emerged in recent times. In Rich v ASIC44 the High Court of Australia pointed out that a ‘protective’ measure like disqualification does not necessarily mean that there cannot be a ‘punative’ element involved in such a disqualification, stating: Just as a law may bear several characters, a proceeding may seek relief which, if granted, would protect the public but would also penalise the person against whom it is granted.45 In later cases the view was expressed that disqualification could indeed serve as both general and personal deterrence and that it could be seen as a form of punishment as well.46 However, protecting the public (and companies) remains the primary aim of disqualification orders against directors, implying that the cases where this aim was foremost will still guide the courts to determine whether or not to make a disqualification order and to determine the period of disqualification.47 In Australia there are three broad ways in which a person may be disqualified from managing a corporation, all of which are captured within Part 2D.6 of the 2001 Act. Under Part 2D.6, a person is automatically disqualified under section 206B; can be disqualified by the court for any of the reasons set out in sections 206C to 206E; and can be disqualified by the regulator under section 206F. This chapter provides an overview of these sections and the operation of each. Although all the disqualification provisions deal with specific situations, collectively they serve to protect the public from persons who have committed serious offences or offences pertaining to the promotion or management of corporations; persons who have breached some of the most fundamental provisions pertaining to the duties and responsibilities of directors (listed as civil penalty provisions in section 1317E of the 2001 Act); persons involved in several corporations that failed because of insolvency or not being able to pay creditors under, for instance, a deed of company arrangement (normally following when a company was placed under voluntary administration); persons involved in repeated contraventions of non-civil penalty provisions; and persons who, in the opinion of ASIC and

44 45 46 47

Company Directors’ Duties (1989) 194 [13.25]; Morrison and Anderson, above n 22, 115; Isuru Devendra, ‘Statutory Directors Duties, the Civil Penalty Regime and Shareholder Ratification: What Role Does the Public Interest Play?’ (2014) 32 Companies and Securities Law Journal, 399, 403; The Australian Institute of Company Directors, Company Directors Manual (Prentice Hall, 1990) 66. (2004) 220 CLR 129. Ibid. [35]. ASIC v Beekink (2007) 61 ACSR 305; ASIC v Vizard (2005) 54 ACSR 394. See discussion in Austin, Ford and Ramsay, above n 2, 104. Re Altim Pty Ltd [1968] 2 NSWLR 762, 764; ASIC v Adler (2002) 42 ACSR 80 [56]; ASC v Donovan (1998) 28 ACSR 583; Boros and Duns, above n 4, 104; Morrison and Anderson, above n 22, 115; Devendra, above n 43.

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based on a liquidator’s report, seem to be involved in the managing of corporations where several of these corporations were wound up over a seven-year period. 3.4.1 Automatic disqualification Section 206B of the 2001 Act provides that a person will be automatically disqualified from managing a corporation upon conviction for any of three types of offence: first, under section 206B(1)(a), a conviction on indictment48 for an offence concerning the making or participation in the making of a decision affecting the whole or a substantial part of a corporation’s business or concerning an act having the capacity to significantly affect a corporation’s financial standing; second, under section 206B(1)(b), a conviction for an offence in contravention of the 2001 Act punishable by a period of imprisonment in excess of 12 months, or an offence which involves dishonesty punishable by a period of imprisonment of at least three months; third, under section 206B(1)(c), a conviction for an offence against the law of a foreign country punishable by a period of imprisonment in excess of 12 months. Section 206B(2) provides that the period of the automatic disqualification under subsection (1) begins on the day of conviction and lasts for a period of five years, unless the person is sentenced to a term of imprisonment, in which case the period of disqualification ends five years after the day of the person’s release from prison. Section 206B(3) and (4) provide that a person who is an undischarged bankrupt49 or who has executed a personal insolvency agreement,50 the terms of which have not been complied with, is also automatically disqualified from managing corporations, as are persons who are disqualified under a court order of a foreign jurisdiction51 from being a director, or concerned in the management of a foreign company. With regard to subsections (3), (4) and (6) the disqualification continues as long as the relevant condition exists.52 3.4.1.1 History of automatic disqualification provisions As noted above, the first hint of disqualification grounds can be traced back to Table B to the Joint Stock Companies Act 1856 (UK) under the heading

48 An ‘indictable’ offence is one which the law requires to be tried before a judge and jury, as opposed to ‘summary’ offences which are tried before a judge alone. Usually, ‘summary’ offences are offences that are deemed to be less serious, such as minor traffic violations or minor criminal offences. 49 Under the laws of Australia, its external territories or any foreign country. 50 Under the Bankruptcy Act 1966 (Cth) pt X, or a similar law of an external territory or foreign country. 51 S 206B(7) defines a ‘foreign jursidiction’ as one designated so under the relevant regulations. Currently, under the Corporations Regulations 2001 (Cth) r 2D.6.01, only New Zealand is designated as a foreign jurisdiction for the purposes of s 206B(6). 52 So, for example, a person disqualified under subs (4) cannot manage a corporation until such time as they have complied with the terms of the insolvency agreement.

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‘Disqualification of directors’. Regulation 47 (and later comparable regulations in Table B to UK Companies Acts up to the Companies Act 1948) has already been quoted in Chapter 2. However, for easy reference it is laid out again: 47 The Office of Director shall be vacated, – (1) If he holds any other office or place of profit under the company; (2) If he becomes bankrupt or insolvent; (3) If he is concerned in or participates in the profits of any contract with the company; (4) If he participates in the profits of any work done for the company.53 However, it should be noted that Table B was only a model set of articles of association for the internal regulation or management arrangments for companies limited by shares, meaning that the provisions were not contained in the Act itself. What is noteworthy is that the disqualification of persons from the management of limited liability corporations for reasons of bankruptcy or insolvency was the only disqualification ground later incorporated in legislation that is still part of the Australian legislation. The other grounds of vacation or disqualification contained in Regulation 47 of Table B to the 1856 Act were taken up in Tables to later company and corporations legislation, but they never became part of the main Act. In other words, the developments in this regard in the UK and in Australia were identical, but the details of later provisions under the Tables to Australian Acts differ from the details of comparable UK provisions.54 In principle and as far as the specific provisions were concerned, there were only minor differences between the versions of this provision (Disqualification of directors) that appear in later Tables to the UK and Australian Companies and Corporations Acts. The principle underpinning the automatic disqualification provisions is that the grounds on which a person is automatically disqualified are such that it can be presumed that they are persons who are unfit to be directors of corporations.55 This will usually be because they are felt to be susceptible to using the corporate structure to the ‘financial detriment of investors, shareholders, creditors and persons dealing with the company’.56 Thus section 117 of all the Uniform

53 The provision ended with a specific qualification to these grounds of vacation or disqualification: ‘But the above rules shall be subject to the following exceptions: that no director shall vacate his office by reason of his being a shareholder in any incorporated company which has entered into contracts with or done any work for the company of which he is director; nevertheless he shall not vote in respect of such contract or work; and if he does so vote his vote shall not be counted, and he shall incur a penalty not exceeding twenty pounds.’ See further Maltas, above n 8, 127. 54 See Chapter 2 for details of the UK provisions. 55 Cassidy, above n 10, 222. 56 Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203, quoted in ASIC v Adler (2002) 42 ACSR 80 [60].

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Companies Acts passed between 1961 and 196357 provided that persons who were undischarged bankrupts and directly or indirectly took part in the management of any corporation without leave of the court committed an offence.58 Section 122 of these Acts provided that persons convicted of offences in relation to the formation or promotion of a company, fraud59 and specified sections of the Uniform Companies Acts would also commit an offence if they managed a corporation.60 Section 222 of the later Companies Act 198161 expanded these rules to ensure that the office of any director who was convicted of a relevant offence or became insolvent was automatically vacated,62 while the same was provided for under section 229 of the 1989 Act. 3.4.1.2 Interpretation of section 206B of the 2001 Act As the overaching disqualification provision, section 206B of the 2001 Act (and its predecessors) have become firmly entrenched in corporate law jurisprudence. The automatic operation of the provision means that much of the reasoning and scholarly writings focus on the issues of proof of the offence listed in section 206B(1) and aspects that the courts considered when a person applies (under section 206G) for leave to be released from any form of disqualification, or when ASIC applies (under section 206BA) for an extension of a disqualification period.63 These aspects are discussed in greater detail below. The most significant difference between section 229 of the 1989 Act and section 206B of the 2001 Act lies in the offences that lead to automatic disqualification. Under section 229(3) of the 1989 Act, the relevant offences were indictable offences connected with the formation, promotion or management of a corporation, offences which involved serious fraud, and offences in contravention of certain provisions of the Corporations Law or its predecessors.64 Under the current legislation the relevant convictions are for offences that involve making or participating in making decisions that affect the whole or a substantial part of the business of the corporation, an act or acts having capacity

57 Above n 22. 58 Philip R Adams, The Law and Practice Relating to Company Directors in Australia (Butterworths, 1965) 162; S R Brown, Company Directors: A Concise Treatise on the Duties, Powers, Rights and Liabilities of Company Directors in Australia (Law Book Company Ltd, 2nd edn, 1965) 195. 59 As long as the offence was punishable by more than three months’ imprisonment: Adams, above n 58, 165. 60 Ibid.; Brown, above n 58, 199. 61 See CCH, above n 6, v. 62 Ibid. 12–13. 63 S 206BA allows ASIC to apply to the courts, within the first year of the period of disqualification, to extend the period of automatic disqualification by up to 15 years. 64 Cassidy, above n 10, 226.

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to significantly affect the corporation’s financial standing, a contravention of the Corporations Law punishable by more than 12 months’ jail, dishonesty where the offence is punishable by imprisonment for at least three months, and offences against equivalent foreign laws.65 Removing the need to distinguish ‘serious’ fraud from other offences involving dishonesty under section 229(3) of the 1989 Act is a major improvement. It is important where a disqualification is automatically imposed that the offences allowing for this are clear. Removing the minefield of ‘seriousness’ makes it a much simpler task for affected persons and the regulator to identify when section 206B will apply. It has been noted that the legislation makes no distinction between honest and dishonest bankrupts, in line with the prevailing view that section 206B and the other disqualification provisions are primarily a means of protecting the public.66 This protective purpose was highlighted with regard to the automatic disqualification for relevant offences in Re Minimix Industries Ltd67 where Cook J noted that ‘those who have dealings with the company . . . are entitled to find that they are dealing with persons of integrity’.68 3.4.2 Disqualification by the courts Sections 206C, 206D and 206E each give the court the power to disqualify a person based on specific grounds.69 It will be noticed that the grounds reflect conduct that the legislature would consider to make a person unworthy of the privilege of doing business through limited liability corporations.70 It is only the primary Australian corporate regulator, ASIC, that has standing to bring an application under sections 206C to 206E of the 2001 Act to have a person disqualified by court order.71 This differs from the approach under section 230 of the 1989 Act (comparable to the current section 206E), where the power

65 66 67 68 69

2001 Act s 206B. Cassidy, above n 10, 225; Re Altim Pty Ltd [1968] 2 NSWR 762, 765. (1982) 1 ACLC 511, 512; Cassidy, above n 10, 225. Re Minimix Industries Ltd (1982) 1 ACLC 511, 512; Cassidy, above n 10, 225. This chapter does not deal with ss 206EAA, 206EA, 206EB, as the grounds of disqualification under those provisions are quite narrow and specifically Australian such as to make a comparison with other jurisdictions rather meaningless. It is perhaps worth briefly mentioning the potential application of s 206EAA that gives the courts, on application by ASIC, a power to disqualify from being a director in Australia a person who is already subject to a substantially similar order in a foreign jurisdiction. The potential development of this ground as a way of ensuring more consistent international corporate governance is an interesting consideration; however, as the only jurisdiction currently defined under regulations as a foreign jurisdiction for the purposes of this provision is New Zealand, there is little comment yet to be made, and none that would advance the overall purpose of this book. 70 Cassidy, above n 10, 222. 71 As will be seen below, under s 206F, ASIC has the power to disqualify persons for up to five years without application to the court.

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to bring the application for disqualification was conferred on certain ‘prescribed persons’ and they were prescribed in section 230(6) as an official manager, liquidator, shareholder/member, creditor or person authorised by ASIC to bring an application. It should be noted that no minimum number of years of disqualification is mentioned in sections 206C to 206D. However, the maximum number of years of disqualification under section 206D is 20 years (the maximum period under this section was originally ten years), while it is entirely within the discretion of the court to determine the period of disqualification under sections 206C and 206E. It is somewhat awkward that the court’s discretion seems to be limited to a maximum of 20 years for section 206D. One would have expected the legislature to assume that the court will consider the period of disqualification carefully for each and every case and there seems to be no particular reason why 20 years should be the maximum period of disqualification under section 206D, while no maximum period is determined for the other sections. As will be seen below, the courts have used many different factors to determine the appropriate period of disqualification and always seem to be particularly careful to rely on comparable circumstances in previous cases to determine the period of disqualification. Each case has, however, to be judged on its own merits. The type of conduct that has been determined to render a person unsuitable to act as a director and the court’s interpretation of these provisions are now considered in turn. 3.4.2.1 Section 206C Section 206C provides for the disqualification of persons from managing corporations upon the making of a declaration under section 1317E of the 2001 Act or section 386-1 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) that a person has contravened a relevant civil penalty provision under those sections.72 The court, in these circumstances, may make a disqualification order upon application by ASIC where it is satisfied that the order is justified. Under section 206C, ASIC must show that a declaration of contravention under section 1317E is warranted,73 and that a disqualification order is justified. Under section 1317E a declaration of contravention can be made for the contravention of a single relevant provision. Unlike under the previous section 230, there is no requirement that the person whom ASIC seeks to disqualify has repeatedly breached a relevant provision. In practice, however, ASIC will usually bring proceedings under this section where the breaches have been persistent, wilful and multifarious. An example is

72 2001 Act s 1317E(1). 73 As to the operation of s 1317E, see Austin, Ford and Ramsay, above n 2, 99–102.

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one of the largest corporate collapses in Australia, namely the HIH Insurance Ltd collapse, following which ASIC sought to enforce significant penalties against the directors of HIH for repeated serious breaches of the corporations legislation. As well as significant pecuniary penalties, Santow J was satisfied in that instance that disqualification periods of up to 20 years were appropriate for directors who had actively manipulated and misused the corporate structure for their own gain.74 In Commissioner for Corporate Affairs v Ekamper75 it was noted that the onus was on the applicant to show that there were grounds for making an order to disqualify, and that it was then a matter of the court exercising its discretion to determine an appropriate period of disqualification. In ASC v Donovan76 Cooper J held that it was relevant in determining the period of disqualification to have regard to the officer’s prior corporate conduct, to the officer’s present activities, to the likelihood that the conduct would be repeated, including whether or not the offender showed contrition or accepted responsibility for his or her conduct, and the extent to which the officer benefitted personally from the conduct.77 Section 206C has also influenced the drafting of similar disqualification provisions in other legislative instruments designed to protect Australia’s markets and economy, one such provision being section 86E of the Competition and Consumer Act 2010 (Cth) (CCA).78 The reasonings of the courts in Ekamper and Donovan, among others, were referred to in the recent and widely reported decision of ACCC v Colgate-Palmolive Pty Ltd (No 2)79 in which a disqualification of seven years was imposed by the Court under section 86E of the CCA against the sales director of Colgate-Palmolive Pty Ltd, Mr Paul Ansell. Mr Ansell was found to have been knowingly involved in contraventions by the company of provisions of the CCA which prohibit conduct in restraint of trade. Given the

74 ASIC v Adler (2002) 42 ACSR 80 [110]; J J du Plessis, ‘Reverberations after the HIH and Other Recent Australian Collapses: the Role of ASIC’ (2003) 15 Australian Journal of Corporate Law 225. 75 (1988) 12 ACLR 519, 525–6. 76 (1998) 28 ACSR 583. 77 Ibid. 583. 78 ACCC v Colgate-Palmolive Pty Ltd (No 2) [2016] FCA 528 [137]. Formerly the Trade Practices Act 1974 (Cth), the Act was renamed in 2010, although the numbering of provisions was not affected by the change; Australian Competition Law, Trade Practices Act 1974 (3 September 2014), available at http://australiancompetitionlaw.org/legislation/1974tpa. html (accessed 15 November 2016). 79 [2016] FCA 528. In this case the ACCC alleged that Colgate-Palmolive Pty Ltd and two competitors, PZ Cussons Australia Pty Ltd and Unilever Australia Ltd, had entered an arrangement to restrict the sale of standard-concentrate laundry detergents in favour of ultraconcentrate laundry detergents, which had bigger profit margins for the manufacturers. Due to the influence of these three companies, the judgment of Jagot J stated (at [5]) that their combined market share was at the relevant time 80 per cent, and the fact that the agreements related to sales to the three biggest supermarket chains in Australia generated high levels of public interest when news of the case broke in early 2016.

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similarity in purpose of sections such as sections 86E and 206C, it is not uncommon for the reasonings of decisions made under similar provisions to be given significant weight by the courts. 3.4.2.2 Section 206D The court may also make an order disqualifying a person from managing corporations if, within the last seven years, that person was the officer of two or more corporations which failed in circumstances where the failure was wholly or partly attributable to the way in which the corporations were managed. The court may make such an order upon application by ASIC in circumstances where a disqualification order is justified. Subsection (2) provides that a corporation will be found to have failed in a number of circumstances, including where the court orders the corporation to be wound up under section 459B of the 2001 Act80 because it is satisfied the corporation is insolvent, where the corporation enters voluntary liquidation, executes a deed of company arrangement or ceases to carry on business and creditors are not fully paid or are unlikely to be fully paid; where a levy of execution against the corporation is not satisfied; where a receiver, receiver and manager, or provisional liquidator is appointed; where the corporation enters into a compromise or arrangement with its creditors under Part 5.1 of the 2001 Act; and where the corporation is wound up and a report is lodged by the liquidator under section 533(1). Literature on directors’ disqualifications makes much of the need to prevent phoenix activity, the rebirth of one company from the failure of another. This type of activity leaves creditors without any real recourse for recovery of debts and directors with a fresh new company to mismanage.81 It is this kind of misconduct that section 206D aims to prevent.82 It achieves this by allowing a disqualification order, on application by ASIC, where the defendant has been an officer of a failed corporation at least twice in seven years. ASIC must show that mismanagement played a role in the failure, and that any of a number of specified outcomes follows the failure of the corporations, including an inability to pay creditors more than 50 cents in the dollar.83

80 Or under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) s 526-1. 81 In addition to numerous articles, the issue was the subject of a 1994/1995 Law Reform Committee of Victoria investigation; see Law Reform Committee, Parliament of Victoria, Curbing the Phoenix Company (1995, Second Report). 82 Although it should be noted that it is not illegal for a corporation to fail, the nature of the capitalist market makes occasional failure inevitable: Helen Anderson ‘The Proposed Deterrence of Phoenix Activity: An Opportunity Lost?’ (2012) 34 Sydney Law Review 411, 419. 83 This was a change recommended to be made under s 599, the precursor to s 206D: Law Reform Committee, Parliament of Victoria, Curbing the Phoenix Company (1994, First Report) 19.

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3.4.2.3 Section 206E Section 206E provides that the court may make a disqualification order on application by ASIC where a person has at least twice contravened the 2001 Act84 while they were an officer of a body corporate or has been the officer of a body corporate when that body corporate has contravened the Act and failed to take reasonable steps to prevent the contravention, or was an officer of a body corporate and acted in a way which would have contravened sections 180(1) or 181 if the body corporate had been a corporation. In each case the court must be satisfied that the disqualification order is justified. Section 206E is in broadly similar terms to its precursor provision, section 230 of the 1989 Act,85 and between sections 206C and 206E there is some overlap, as many of the breaches contemplated by section 206E are of the kind that would constitute grounds for a declaration under section 1317E. Disqualification orders made under section 206E often impose the longest periods of disqualification. It is suggested that this is partially because traditionally section 230 was the provision under which the most serious corporate misfeasance would be brought, given the absence of an equivalent to section 206C in the preceding corporate law.86 ASIC v Parkes87 serves as an example. An order was made disqualifying the defendant in that case from managing corporations for a period of 25 years. The Court considered the seriousness of the contraventions, the substantial losses suffered by the companies and investors involved, that the defendant was involved in the management and financial consultancy of the companies, the fact that the defendant showed no contrition but had carried out similar courses of conduct in respect of three distinct groups of companies, and the high probability that he would engage in such conduct again.88 An even longer period of disqualification of 30 years was ordered for a defendant who, shortly after being released from prison, incorporated a company for the purposes of defrauding members of the public. 89 Through the scheme, millions of dollars were raised and lost.90 A disqualification for 25 years was also ordered against the defendant in Platcher v Joseph91 who managed a corporation in a way that caused extensive losses to a number of people.92 While acknowledging that there was no evidence the defendant had set out to defraud, in setting the period of disqualification, Stone J stated that he had shown ‘indifference to the interests

84 85 86 87 88 89 90 91 92

Or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth). See s 230 of the 1989 Act; Cassidy, above n 10, 234. See e.g. Cassidy, above n 10, 222. (2001) 38 ACSR 355. ASIC v Parkes (2001) 38 ACSR 355 [181]. ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 [105]. Ibid. Platcher v Joseph; ASIC v Platcher (2003) 44 ACSR 277. Ibid. [68].

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of those whom he embroiled in his schemes’93 and had given no indication of regret or awareness of the effects of his conduct, which His Honour felt was perhaps even more important. 3.4.2.4 The disqualification must be justified Apart from the individual and unique elements of each power of disqualification in sections 206C to 206E of the 2001 Act, there is a common requirement across the disqualification provisions that the court must be satisfied that the disqualification is justified.94 A large portion of judicial reasoning relating to disqualification orders is taken up with considerations of whether a disqualification is justified. This decision is often conflated with the determination of the appropriate length of any order made, although the two questions are separate and distinct under the legislative provisions.95 Sections 206C, 206D and 206E all allow that the court, when considering whether or not to disqualify a person, may have regard to the conduct of that person in relation to the management, business or property of any corporation96 and to any other matter considered appropriate.97 One of the leading judgments on this point is that of Santow J in ASIC v Adler98 which attempted to distil the guiding principles arising from the case law on the disqualification provisions of Part 2D.6, and their predecessor sections under the 1989 Act.99 His Honour noted that protection of the public, including individuals such as consumers, creditors, shareholders and investors, from misuses of the the corporate structure by safeguarding the public’s interest in corporate transparency and accountability was the basis of the design of disqualification orders.100 Those orders are designed to protect against present and future misuse, meaning that while an order is not punative, personal and general deterrence are

93 Ibid. 94 2001 Act ss 206C(1)(b), 206D(1)(b)(ii), 206E(1)(b), 206F(1)(c). 95 2001 Act ss 206C–206E all provide that where a court is satisfied that the relevant provision is enlivened and a disqualification is justified, then the court may make a disqualification order for a period it considers appropriate. It is therefore inherent in the wording of the provisions that a court may elect not to impose a disqualification order, even if it finds such an order to be justified. 96 2001 Act ss 206C(2)(a), 206D(3)(a), 206E(2)(a). 97 2001 Act ss 206C(2)(b), 206D(3)(b), 206E(2)(b). 98 (2002) 42 ACSR 80. 99 Ibid. [55]. 100 Ibid. [56] referring to: ASIC v Hutchings (2001) 38 ACSR 387, 395; ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; ASC v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339, 349–50; ASC v Donovan (1998) 28 ACSR 583, 602; ASC v Roussi (1999) 32 ACSR 568, 570–1; Re Strikers Management Pty Ltd; ASC v Dimitri (Unreported, Federal Court of Australia, Burchett J, 7 May 1997); Re Tasmanian Spastics Association; ASC v Nolan (1996) 23 ACSR 743, 751; Re Gold Coast Holdings Pty Ltd; ASIC v Papatto (2000) 35 ACSR 107, 112.

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important considerations for the court.101 The offender’s recognition of the seriousness of their conduct, remorse, honesty or lack thereof and possibility of reformation were all relevant factors to be taken into account when determining the length of any banning order.102 His Honour then identified the factors which characterised each of three broad periods of disqualification, those periods being 25 years or more, seven to 12 years and three years or less.103 Factors which warranted the longest periods of disqualification, 25 years or more, included that the defendant had acted with dishonesty, an intent to defraud and a disregard for the law or corporate regulations, and that the defendant had previous convictions for similar conduct, was likely to reoffend and showed no contrition or remorse. Also relevant was the potential to do significant financial damage or if the conduct caused large financial losses.104 Characteristics of those cases in which a disqualification order of seven to 12 years was considered appropriate included: that the conduct caused substantial losses; that the conduct was designed to enrich at the expense of others, but with a less significant degree of dishonesty; continued and knowing contraventions of the law; and a lack of contrition or remorse. This was weighed against any possibility or likelihood of reform.105 Where defendants had made genuine and identifiable attempts to reform and repair the damage caused by repaying amounts misappropriated, expressing (genuine) remorse or contrition, indicating that they had no intention of holding a position of influence in a company for the foreseeable future, following professional advice, or co-operating with and attempting to expediate the legal proceedings, the shortest periods of up to three years’ disqualification were warranted.106

101 ASIC v Adler (2002) 42 ACSR 80 [56] referring to: ASC v Donovan (1998) 28 ACSR 583, 602–3, 607; Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203, ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; ASC v Nolan (1996) 23 ACSR 743, 751. 102 ASIC v Adler (2002) 42 ACSR 80 [56] citing ASC v Donovan (1998) 28 ACSR 583, 605–7; ASIC v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; ASIC v Parkes (2001) 38 ACSR 355, 386; ASC v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339, 351; ASC v Roussi (1999) 32 ACSR 568, 570–1. 103 ASIC v Adler (2002) 42 ACSR 80 [56]; see also du Plessis, above n 74, 234. 104 ASIC v Hutchings (2001) 38 ACSR 387; ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; ASIC v Parkes (2001) 38 ACSR 355. 105 ASIC v Adler (2002) 42 ACSR 80 [56] citing ASC v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339; ASC v Donovan (1998) 28 ACSR 583; ASC v Roussi (1999) 32 ACSR 568; Re Strikers Management Pty Ltd; ASC v Dimitri (Unreported, Federal Court of Australia, Burchett J, 7 May 1997); Re Gold Coast Holdings Pty Ltd; ASIC v Papatto (2000) 35 ACSR 107. 106 ASIC v Adler (2002) 42 ACSR 80 [56] citing ASC v Donovan (1998) 28 ACSR 583; Re Tasmanian Spastics Association; ASC v Nolan (1996) 23 ACSR 743.

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Although Santow J’s judgment as quoted above is generally perceived to give good guidance on the factors to be taken into account, there are decisions, such as that of Bryson J in ASIC v Rich, that suggest the value of such enunciations of principle is limited as: each decision is closely related to its own facts, the facts in such cases tend to be highly complex and the circumstances of each person under consideration are special to that person . . . There is in my view not much to be gained from considering or attempting to classify periods of disqualification which have been imposed in other cases.107 Bryson J then makes the point that it is difficult, if not impossible, to distinguish between motives of deterrence and punishment in imposing periods of disqualification, stating: I must respectfully say that I find a distinction between motives of deterrence and a punitive motive as difficult, in practical terms impossible to sustain. The punitive impact of such an order must be recognised; Courts apply punitive measures with care, avoid excessive measures and have regard to the circumstances of individuals. No-one should be sacrificed to the public interest.108 His Honour furthermore explicitly noted that the period of disqualification to be imposed is entirely within the court’s discretion.109 While seemingly obvious, this matter was a live issue in ASIC v Rich as the Court was, in large part, being asked to give effect to declarations and orders agreed between Keeling and ASIC which would, effectively, have disposed of the proceedings between them.110 Bryson J eventually determined that a period of ten years was appropriate,111 but he meticulously detailed his reasoning as the Court’s power to fix the period of disqualification cannot be delegated,112 making it important that the Court give genuine consideration to all relevant factors. One factor to which His Honour gave serious weight was that a disqualification of ten years was supported by ASIC which, as being both the guardian of the public interest and well placed to assess the situation and practicalities of legal proceedings, was in a position to thoroughly assess the matter.113

107 108 109 110 111 112 113

ASIC v Rich (2003) 44 ACSR 682 [30]. Ibid. [26]. Ibid. [21]. Ibid. [1]. Ibid. [32]. Ibid. [27]. Ibid. [31].

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3.4.3 Disqualification by ASIC 3.4.3.1 Section 206F Section 206F gives the regulator the power to disqualify a person directly from managing a corporation for a period of up to five years without the need to apply to the court for a disqualification order. ASIC’s power of disqualification is based upon a person having been the officer of at least two corporations which have been wound up while they were an officer or within 12 months after they ceased to be an officer. The liquidator must have lodged a report about the inability of the corporation to pay its debts under section 533(1) of the 2001 Act.114 Before a disqualification order can be made, ASIC is required, under subsection (1)(b), to provide notice that the affected person is required to demonstrate why they should not be disqualified and give the affected person a chance to be heard on the question. Like section 206D, this provision is aimed at reducing phoenix activity and enforcing good standards of corporate governance by ensuring that directors act in a way that ensures that the corporations they manage are viable businesses. A number of cases on section 206F (and section 600, its predecessor in the 1989 Act) have questioned the breadth of the power given to ASIC under those provisions. Early decisions of the state courts115 concluded that it would be inappropriate for ASIC to issue a notice of disqualification without evidence of some dishonesty or gross incompetence.116 However, in interpreting section 600 of the 1989 Act, the Federal Court determined that a finding of dishonesty or gross incompetence – that is, a finding of some fault on the part of the person to be disqualified – was not a prerequisite for ASIC to issue a notice of disqualification.117 The question has been somewhat settled by the enactment of section 206F, which introduced a requirement that the regulator must be satisfied that the disqualification was justified, and provided under subsection (1A)(b)(i) that the conduct of the affected person is a relevant consideration in determining whether the order is justified.118 However, the power to disqualify remains

114 This section provides that the liquidator must make a report to ASIC if it appears that a past or present officer, member, employee or contributory may have been guilty of an offence in relation to the company; that a person who took part in the formation, promotion, administration, management or winding up of the company may have misapplied, retained or become accountable for money or property of that corporation, or been guilty of negligence, default or breach of duty or trust in relation to the company, or the company may not be able to pay its unsecured creditors more than 50 cents in the dollar. 115 Under the predecessor to s 600, s 562A of the Code; Healey v ASIC (2000) 18 ACLC 225. 116 Healey v ASIC (2000) 18 ACLC 225 quoting Re Sheslow v ASC (1994) 12 ACLC 740. 117 Healey v ASIC (2000) 18 ACLC 225 quoting Kardas v ASC (1998) 29 ACSR 304; Laycock v Forbes and ASC (1997) 150 ALR 186. 118 2001 Act s 206F(1A)(b)(i)

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discretionary, and there is no requirement that a specific default on the part of the person be shown before an order for disqualification can be validly made.119 3.4.3.2 Procedural requirements and review of decisions As an administrative decision maker, ASIC is bound by rules of fairness and due process that are legislatively provided for in section 206F(1)(b). This subsection requires that a person whom ASIC proposes to disqualify be notified120 and given an opportunity to be heard.121 In the decision of Jorgensen v ASIC122 it was held that the right to be ‘heard’ did not oblige the regulator to conduct an oral hearing. The legislation would be complied with if the person had opportunity to place all material, evidence and arguments before ASIC, sufficient for both sides of the case to have been heard.123 In Laycock v Forbes124 it was determined that rules of natural justice required ASIC to provide all the material that was available to it to a person against whom they intended to serve a notice of disqualification. In addition, the power granted under section 206F is subject to an implied reasonable time limit.125 What is reasonable will vary between cases, according to the specific circumstances of each, such as any difficulties in obtaining information from companies.126 One of the biggest changes between the original section 600 of the 1989 Act and section 206F of the 2001 Act is that section 206F does not allow a person disqualified by ASIC to appeal that decision to the courts. Previously, section 600(5) provided that a person so disqualified could apply to the courts for leave to manage a corporation or corporations, but that power was expressly removed.127 An application for review of a decision of ASIC to disqualify a person may be made to the Administrative Appeals Tribunal.128 A hearing before the Tribunal is a de novo hearing, and a person may apply to the courts for a stay of the order pending the outcome of the review, provided that there are prospects of success.129

119 Austin, Ford and Ramsay, above n 2, 98. This approach is consistent with the protective purpose of the corporations legislation that aims to protect the public from inept directors as well as the wicked or malfeasant; see e.g. ASIC v Rich (2003) 44 ASCR 682. 120 2001 Act s 206F(1)(b)(i). 121 2001 Act s 206F(1)(b)(ii). 122 (1999) 30 ACSR 481. 123 Ibid.; Austin, Ford and Ramsay, above n 2, 98. 124 Laycock v Forbes and ASC (1997) 150 ALR 186. 125 Austin, Ford and Ramsay, above n 2, 98. 126 Kardas v ASC (1998) 53 ALD 303. 127 It was replaced with s 206F(5), allowing ASIC to give leave to persons to manage corporations where they have been disqualified by the regulator. S 600 was repealed by the Corporate Law Economic Reform Program Act 1999 (Cth) sch 3. 128 2001 Act s 1317B(1)(b). 129 Blunt v Corporate Affairs Commission (NSW) (1988) 13 ACLR 648; O’Brien v Commissioner for Corporate Affairs (Vic) (1989) 7 ACLC 259.

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3.4.3.3 The disqualification must be justified Section 206F provides more detailed guidance to ASIC in the exercise of its power to disqualify than the guidance provided to the courts. The regulator is required to have regard to whether the corporations mentioned in section 206F(1) were related to one another.130 In Feher v ASIC131 a decision by the then Commission to issue a notice under section 600 was held to be inappropriate, as the two companies were in substance a single entity.132 In addition, regard may be had to those matters that can be considered by the courts in determining whether an order is justified,133 and whether the order is in the public interest.134 The maximum period of disqualification was often automatically imposed under section 600.135 A number of appeals from such decisions eventually settled that the maximum period should be reserved for those instances where there was a serious default on the part of the disqualified person.136 3.4.3.4 Enforceable undertakings As part of its arsenal of regulatory tools, the ASIC may accept, as an alternative to civil proceedings, an enforceable undertaking where a person is alleged to have contravened a relevant section.137 Relevant conduct includes failure to comply with market integrity rules,138 derivative transaction rules139 and derivative trade repository rules.140 An enforceable undertaking may provide that a person will do or refrain from doing any specific thing or things, or that a person will pay a specified amount to the Commonwealth or other person.141 If ASIC is satisfied that the enforceable undertaking has not been complied with, application may be made to the court for an order directing the person to comply with the undertaking,142 to pay compensation to a person suffering loss or damage,143 to

130 131 132 133 134 135 136

137

138 139 140 141 142 143

2001 Act s 206F(2)(a). (1997) 15 ACLC 1774. Ibid., cited in Boorer v ASIC [2010] AATA 390 (26 May 2010). 2001 Act s 206F(2)(b)(i), (iii). 2001 Act s 206F(2)(b)(ii). Cassidy, above n 10, 238. Cullen v CAC (NSW) (1988) 14 ACLR 789, 796–7, applying Re Civica Invstments Ltd [1983] BCLC 456. See generally Cassidy, above n 10, 238; Austin, Ford and Ramsay, above n 2, 99. 2001 Act ss 798K, 901F, 903E; ASIC (23 March 2016), available at http://asic.gov.au/ regulatory-resources/markets/markets-disciplinary-panel/enforceable-undertakingsmarkets-disciplinary-panel (accessed 15 November 2016). 2001 Act s 798K. Ibid. s 901F. Ibid. s 903E. Corporations Regulations 2001 (Cth) rr 7.2A.01(3), 7.5A.101(3). Ibid. rr 7.2A.01(5)(a), 7.5A.101(6)(a). Ibid. rr 7.2A.01(5)(c), 7.5A.101(6)(c).

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pay an amount to the Commonwealth144 or any other such order as the court sees fit.145

3.5 Enforcement of disqualification orders and defences Under the earlier incarnations of the disqualification provisions, each ground of disqualification provided its own enforcement mechanism. Sections 229, 599 and 600 of the 1989 Act all provided that a person who was an insolvent or subject to a banning order shall not manage a corporation, while section 117(2) of the Companies Act 1961 (Vic) provided that: Every person who being an undischarged bankrupt acts as director of, or directly or indirectly takes part in or is concerned in the management of, any corporation except with the leave of the Court shall be guilty of an offence against this Act. The situation under Part 2D.6 of the 2001 Act is quite different. Sections 206C, 206D, 206E and 206F each provide for disqualification orders to be made, but do not set out the consequences for a person who becomes subject to such an order. These sections must be read in conjunction with section 206A. We have already commented on section 206A above to explain when a person will be considered to contravene section 206A(1) by ‘managing corporations’ while disqualified. In this part we focus on the criminal offence as such. 3.5.1 Section 206A – criminal offence As discussed above, section 206A provides the key to what is meant by the phrase ‘managing corporations’. It also creates the offence which serves as the enforcement mechanism for the disqualification orders in the 2001 Act,146 as an offence against section 206A is committed by those who manage corporations while subject to a disqualification order under any of the sections previously discussed. 3.5.1.1 Burdens of proof As explained above, disqualification orders are still seen to be protective rather than serving as deterrence for the person disqualified or for others and are also not punitive, but both ‘deterrence’ and ‘serving as a form of punishment’ could be seen as subsidiary or secondary aims or perhaps consequences of disqualification

144 Ibid. rr 7.2A.01(5)(b), 7.5A.101(6)(b). Any such amount ordered to be paid cannot exceed the amount of any financial benefit obtained directly or indirectly which is reasonably attributable to the breach. 145 Ibid. rr 7.2A.01(5)(d), 7.5A.101(6)(d). 146 Together with 2001 Act sch 3, which provides the penalties for a conviction of the offence under s 206A.

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orders. However, section 206A creates a criminal offence if a person participates in the management of a corporation. It is a punitive provision used to enforce the protective regime established in the disqualification sections. As pointed out above, to determine whether the offence in terms of section 206A(1) is committed, a court will now have to consider whether the defendant participated in ‘managing the corporation’ as defined in section 206A(1)(a) and (b). These subsections differ considerably from the previous vague and general definition of ‘concerned in or [taking] part in the management of the corporation’ contained in section 91A(2) of the former 1989 Law. In this respect, the cases decided under the former provisions should be treated cautiously.147 Section 206A(1A) provides that for an offence based on section 206A(1), strict liability applies to the circumstance that the person is disqualified from managing corporations. Therefore, ignorance as to their status as a disqualified person will not preclude a person being found to have breached the provision.148 A person who is found to have contravened section 206A is liable to a fine of up to $9,000, imprisonment for a year, or both.149 As a criminal offence under Commonwealth legislation, enforcement of the criminal sanctions requires the co-operation of the Director of Public Prosecutions (DPP).150 It is for the prosecution to prove the contravention to the criminal standard – that is, beyond a reasonable doubt.151 3.5.1.2 Prosecutions under section 206A One of the strongest aspects of the regulatory system of corporate governance is transparency of proceedings. This ensures that successful action against wrongdoers protects the public not only by removing such persons from positions wherein they have the ability to hurt large numbers of people, but also by discouraging others from following the path of mismanagement.152 ASIC has a well-developed and functional media presence, yet in its published enforcement outcomes153 only a handful of successful criminal prosecutions are mentioned. One view of this

147 See M Bagaric and J du Plessis, ‘Expanding Criminal Sanctions for Corporate Crimes – Deprivation of Right to Work and Cancellation of Education Qualifications’ (2003) 21 Company and Securities Law Journal 7, 24 fn 92, referring to some cases decided under the former provision: Commissioner for Corporate Affairs v Bracht [1989] VR 821; Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789; R v Newth (1974) 2 NZLR 760; Shou Yin Mar v Royal Bank (1940) 3 DLR 331 at 333; Re Campbell (1984) BCLC 83; Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 at 207. 148 See Criminal Code (Cth) s 6.1 for strict liability. 149 2001 Act sch 3 item 49 sets the penalty for contravention of s 206A at 50 penalty units. At the time of writing, a penalty unit equals $180; Crimes Act 1914 (Cth) s 4AA. 150 du Plessis, above n 74, 235; Morrison and Anderson, above n 22, 22–3. 151 Criminal Code (Cth) div 13. 152 See Part 3.7 below, ‘Role of the Regulator’. 153 ASIC, ASIC Enforcement Outcomes (6 August 2015), available at http://asic.gov.au/aboutasic/asic-investigations-and-enforcement/asic-enforcement-outcomes (accessed 15 November 2016).

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might be to say that surely the system is failing, if so few people are being prosecuted.154 However, when one considers the model of regulation enforcement in Australia, it makes sense that serious criminal convictions are reserved for very serious conduct that deserves to be criminalised, either on its own merits or to deter others from engaging in similar conduct in future.155 3.5.2 Leave to manage a corporation: sections 206G and 206F(5) These provisions provide a defence to a charge under section 206A.156 Section 206A(1A) applies strict liability to the physical element of a person’s disqualification. As this offence is of strict, not absolute, liability, a defendant who can show that they reasonably believed that they were not disqualified from managing corporations will also have a valid defence.157 Under sections 206F(5) and 206G, ASIC and the court respectively have power to grant leave to manage corporations to persons who have been disqualified from managing corporations. Only ASIC has the power to grant leave to a person disqualified under section 206F, and only the court may grant leave to a person disqualified under sections 206B, 206C, 206D and 206E.158 A person who is granted leave by the court is required to lodge a notice of their intention to apply with ASIC 21 days before the application is made,159 and in the event that an order granting leave to manage is made, a copy of that order must be lodged within 14 days.160Any leave granted may be subject to any conditions that the court or ASIC sees fit to impose,161 such as a condition that a director permitted to manage corporations have no capacity to sign cheques,162 an independent director with suitable qualifications be appointed to the board,163 or provision be made for appropriate supervision.164

3.6 Register of Disqualified Persons In keeping with the regulatory ideals discussed below, section 1274A provides that ASIC must keep a register of persons who have been disqualified from

154 We will assume that no one reading this chapter believes that there are only a handful of convictions because there are only a handful of contraventions. 155 Devendra, above n 43, 402; du Plessis, above n 74. Undoubtedly, the practical difficulties of co-ordinating ASIC and the DPP’s resources and focus also play their part. 156 Re Philips and Inspector-General in Bankruptcy (2012) 131 ALD 564. 157 Proudman v Dayman (1941) 67 CLR 536. 158 2001 Act s 206G. 159 2001 Act s 206G(2). 160 2001 Act s 206G(4). 161 2001 Act ss 206F(5), 206G(3). 162 Re Minimix Industries Ltd (1982) 1 ACLC 511. 163 Dempsey v Corporate Affairs Commission (1989) 7 ACLC 370. 164 Re Hamilton-Irvine (1990) 8 ACLC 1067; Murray v ASC (1993) 12 ACLC 11.

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Table 3.1 Disqualifications by court order and disqualifications by ASIC

2009–2010 2010–2011 2011–2012 2012–2013 2013–2014 2014–2015

Disqualifications by court order (sections 206C to 206E)

Disqualifications by ASIC (section 206F)

20 0 4 7 0 7

70 72 74 61 60 32

managing corporations.165 Section 1274 provides general rules as to the content, accessibility and maintance of registers kept by ASIC.166 Currently, the Register of Disqualified Persons can only be accessed online, with details of the commencement and end dates of any order, type of disqualification, name and address of the affected person accessible for free.167 The Register cannot be ‘browsed’ or ‘perused’, but must be searched using the full name of the affected person.168 According to records obtained from ASIC, a total of 420 people have been removed from directing companies since the 2009/2010 financial year. Thirteen of those were removed under an enforceable undertaking, with the remainder being removed by order of the courts or of ASIC. As can be seen in Table 3.1, above 169 disqualifications by the regulator far outnumbered disqualifications by the courts. An electronic search for court cases where sections 206A to 206EA (the most important disqualifications sections) were used, revealed the following (Tables 3.2–3.12).

3.7 Role of the Regulator In 1991, McQueen, discussing the history of corporate enforcement, lamented the lack of thought given to the administration of the English limited liability legislation that was adopted in the Australia colonies.170 The lack of an effective

165 2001 Act s 1274A. 166 2001 Act s 1274. 167 ASIC, Banned and Disqualified, available at https://connectonline.asic.gov.au/HLP/ SearchRegisters/sch-using-this-service/sch-whatyoucansearch/banned-and-disqualified/ index.htm (accessed 15 November 2016). 168 ASIC, Search ASIC Registers, available at https://connectonline.asic.gov.au/RegistrySearch (accessed 15 November 2016). 169 We would like to thank ASIC for providing us, in August 2016, with the figures contained in the first three tables. 170 McQueen, above n 1, 25.

Table 3.2 Sections 206A and 206B: Primary provision and automatic disqualification Year of case

Number of cases

2009 2010 2011 2012 2013 2014 2015 2016 (until June)

3 2 2 1 2 7 9 2

Note: A list of the cases is provided in Table 3.12.

Table 3.3 Section 206C: Court power of disqualification – contravention of civil penalty provision Year of case

Number of cases

2009 2010 2011 2012 2013 2014 2015 2016 (until June)

3 1 0 1 1 3 3 3

Note: A list of the cases and individual periods of disqualification for all defendants is provided in Table 3.13.

Table 3.4 Section 206C: Summary of years of disqualification and number of defendants disqualified (cases from 2009 until June 2016) Number of years disqualified

Defendants disqualified

1–5 6–10 11–15 >15

28 13 3

12

Table 3.5 Section 206D: Court power of disqualification – insolvency and nonpayment of debts Year of case

Number of cases

2009 2010 2011 2012 2013 2014 2015 2016 (until June)

1 0 0 0 0 0 0

1

Note: A list of the cases and individual periods of disqualification for all defendants is provided in Table 3.14.

Table 3.6 Section 206D: Summary of years of disqualification and number of defendants disqualified (cases from 2009 until June 2016) Years

Defendants disqualified

1–5 6–10 11–15 >15

3 0 0 0

Table 3.7 Section 206E: Court power of disqualification – repeated contraventions of Act Year of case

Number of cases

2010 2011 2012 2013 2014 2015 2016 (until June)

4 3 5 4 1 3

3

Note: A list of the cases and individual periods of disqualification for all defendants is provided in Table 3.15.

Table 3.8 Section 206E: Summary of years of disqualification and number of defendants disqualified (cases from 2009 until June 2016) Years

Defendants disqualified

1–5 6–10 11–15 >15

18 16 1 16

Table 3.9 Sections 206EAA–206EA: Court power of disqualification – disqualification under a law of a foreign jurisdiction and under the Competition and Consumer Act 2010, etc. Year of case

Number of cases

2009 2010 2011 2012 2013 2014 2015 2016 (until June)

1 0 1 0 0 0 1 1

Note: A list of the cases and individual periods of disqualification for all defendants is provided in Table 3.16.

Table 3.10 Section 206F: Summary of disqualifications by ASIC Enforcements Office 2015/ 2016 1 year 18 months 2 years 2.5 years 3 years 3 years, 2 months 4 years 5 years Total

2014/ 2015

2013/ 2014

2012/ 2013

2011/ 2012

2010/ 2011

1 1 1 1 1 2 4

1 1 1 1 5

0

1 1 4

0

2 1 3

Total 1 1 1 1 2 1 4 5

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Table 3.11 Section 206F: Summary of disqualifications by ASIC Small Business Compliance and Deterrence (SBC&D) 2015/ 2016 0.5 years 1 year 1.5 years 2 years 2.5 years 3 years 3.5 years 4 years 4.5 years 5 years Total

1 1 5 2 12 2 4 5 32

2014/ 2015 1 7 3 2 4 4 3 3 27

2013/ 2014

2012/ 2013

11 7 20 2 8

7 9 12 2 6 2 12

8 1 3 60

7 57

2011/ 2012

2010/ 2011

Total

1 7 5 27 3 17 8

1 5 8 13 2 19 1 13

6 74

7 69

4 37 33 79 15 66 5 48 1 31

enforcement mechanism was responsible for amendments and revisions that were a ‘backward looking, short term expedient’,171 watched over by administrative apparatuses that saw their role as a facilitative one, and ‘did not regard enforcement of the penal provisions of the Act or the provision of routine advice in regard to the Act as part of their responsibility’.172 He went on to state that ‘[t]he establishment of the ASC, with a relatively adequate budget, may yet to be one of the single most significant developments in the history of corporate regulation in Australia’.173 In 2015–2016 ASIC174 operated with a budget of $371 million dollars,175 and boasted a staff of 1,627 across Australia.176 The central role of the regulator is one of the most distinctive features of Australia’s system of corporate governance, with

171 Ibid. 36. 172 Ibid. 40–1. 173 Ibid. 44. See also Jean Jacques du Pless and Niklas Cordes, ‘Claiming Damages from Members of Management Boards in Germany: Time for a Radical Rethink and Possible Lessons from Down Under?’ (2015) 36 Company Lawyer 11. 174 The ASC (Australian Securities Commission) became ASIC in 1998, after being given responsibility for the protection of consumers in the areas of superannuation, insurance and deposit taking: ASIC, How We Operate: History (19 May 2015), available at http://asic. gov.au/about-asic/what-we-do/how-we-operate (accessed 15 November 2016). 175 ASIC, How We Operate: Finance (19 May 2015), available at http://asic.gov.au/aboutasic/what-we-do/how-we-operate (accessed 15 November 2016). In addition to the operational budget, ASIC’s legal services expenditure was $67,348,756; ASIC, ASIC’s Legal Expenditure 2013–2014 (2 February 2015), available at http://asic.gov.au/aboutasic/what-we-do/how-we-operate/asics-legal-expenditure/asics-legal-expenditure-20132014 (accessed 15 November 2016). 176 ASIC, How We Operate: Our People (19 May 2015), available at http://asic.gov.au/aboutasic/what-we-do/how-we-operate (accessed 15 November 2016).

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several commentators focusing on the role and powers of ASIC.177 As noted above, in relation to the disqualification of directors, ASIC is responsible for bringing an application to disqualify a director to the courts, may decide to disqualify a director, may apply to the courts to extend a period of automatic disqualification, and may challenge an application for leave to manage a corporation under section 206G. ASIC may also commence criminal proceedings under section 206A in conjunction with the Commonwealth DPP178 and intervene in private litigation.179 3.7.1 Strengths of the regulatory model A regulator’s main goal should be to ensure compliance with the law.180 The most severe means by which compliance is ensured is the imposition of criminal penalties for wrongdoing. However, ASIC’s broader roles in educating persons to prevent future contravention, monitoring corporations and financial services, and imposing lesser civil penalties where appropriate also all help to ensure that resort will rarely need to be had to the most extreme tools in the regulator’s arsenal.181 The strength of the regulatory model with regard to the imposition and enforcement of banning orders in particular is that power to bring such actions is given only to the regulator. This ensures that these penalties will be applied only in circumstances where the public interest warrants the taking of the most extreme enforcement action.182 The imposition of the most serious penalties available serves the public interest twofold. First, it ensures that: officers of a company who contravene corporations legislation . . . are barred from having that opportunity again, not only in relation to the company of which they were an officer at the time of the transactions, but also in relation to other companies. In this sense civil penalty proceedings involve public rights.183 Second, in taking such action against large, high-profile corporations whose directors have fallen far short of the standards set for them, ASIC can generate

177 See e.g. Joanna Bird, ‘ASIC’s Role as Intervener: When Should the Regulator Intervene in Private Litigation?’ (2010) 28 Company and Securities Law Journal 460; du Plessis and Cordes, above n 173, 11; du Plessis, above n 74; Vicky Comino, ‘The Challenge of Corporate Law Enforcement in Australia’ (2009) 23(3) Australian Journal of Corporate Law 233; Ian Ramsay, ‘Increased Corporate Governance Powers of Shareholders and Regulators and the Role of the Corporate Regulator in Enforcing Duties Owed by the Corporate Directors and Managers’ (2015) 26(1) European Business Law Review 49. 178 Morrison and Anderson, above n 22, 22–3. 179 Bird, above n 177. 180 Devendra, above n 43, 402, citing G Gilligan, H Bird and I Ramsay, ‘Civil Penalties and the Enforcement of Directors’ Duties’ (1999) 22 University of New South Wales Law Journal 417, 426. 181 Devendra, above n 43, 402; du Plessis, above n 74. 182 Ibid.; Comino, above n 177. 183 Forge v ASIC (2004) 52 ACSR 1.

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publicity not only for its own role184 but also to demonstrate the severity of the consequences for officers and directors who misuse their position. By doing this, the regulator can hope to have a positive influence on others who might be considering actions that carry a risk of contravention of corporations law.185 This will, ideally, increase the opportunity for the regulator to have a positive impact on corporations and officers before they get to a state of spectacular collapse and allow ASIC to ‘take struggling companies by the hand’.186 3.7.2 Limitations of the regulatory model Individuals – even those who may have a very legitimate interest in ensuring directors and officers are appropriate persons – have no standing under the disqualification provisions of the 2001 Act. An application for disqualification can only be made by ASIC.187 This stands in contrast to the bulk of the provisions dealing with directors’ duties and obligations, which in the most part allow for direct action where individual rights are impacted, or derivative action.188 Under section 230 of the 1989 Act, the former disqualification provision, the power to make an application was conferred not only on ASIC but also on prescribed persons,189 including official managers, liquidators, members (shareholders) and creditors, as well as other persons authorised by ASIC.190 There are certainly benefits to permitting action to be taken only by the regulator, as noted above. Although these are certainly desirable outcomes, the limitation on this approach is that ‘smaller’ or ‘less serious’ contraventions might be overlooked by a regulatory body. Being publicly funded, such bodies may put greater emphasis on cases that, because of the seriousness or highly visible nature of the contraventions involved, are more likely to garner public attention.191 This is not, of course, to suggest that ASIC pursues these cases purely for the publicity they engender. However, in selecting the matters to pursue, ASIC has regard to the general deterrent effect the action is likely to have. This effect is understandably much higher in those cases where significant pecuniary penalties and long periods of disqualification are considered appropriate.192 As one writer

184 185 186 187 188

189 190 191 192

Ramsay, above n 177, 72. Comino, above n 177. du Plessis, above n 74, 237. See 2001 Act ss 206C–206E; See e.g. 2001 Act pts 2F.1, 2F.1A, s 1324; Nance Frawley, ‘The Cost of Bringing a Statutory Derivative Action in Australia – Is it Time to Reconsider the Terms of Section 242 of the Corporations Act 2001?’ (Paper presented at 2007 CLTA Conference, Deakin University Melbourne, 4–6 February 2007). 2001 Act s 230(1). 2001 Act s 230(6)(a)–(d). Ramsay, above n 177, 72. For example, in the wake of the HIH saga and other large corporate collapses, ASIC’s role in preventing such collapses and protecting the public from further misfeasance by those

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points out, it is much easier for ASIC ‘to walk softly when it is known that they carry big sticks’.193 The consequence of these considerations is that if the regulator decides not to bring an application, those whose interests are most directly affected by a miscreant director’s conduct have no alternative method to seek such penalties. There is now some debate about the role that private party litigation and the actions of shareholders in ratifying decisions of directors will play in the future of corporate governance in Australia. With an ever-increasing focus on the broader public interest, and decreasing benefits flowing to small private party litigants from enforcement action, one might wonder whether there is still a place for such action, and if so, what form that might take.194

3.8 Conclusions Although corporate regulation and legislation has struggled through many obstacles in Australia,195 a core tenet and policy of parliament was to ensure that the public interest in the good management of corporations was protected.196 The provisions of Part 2D.6 currently operate to ensure that fraudsters, bankrupts, the unscrupulous and the dishonest are barred from the realm of corporate management. The legislation is overseen and enforced by one of the most empowered corporate regulatory bodies in the world,197 whose exclusive enforcement powers under Part 2D.6 aim to ensure consistency and transparency in the operation of the disqualification provisions, and compliance with the law.198 What remains to be seen, as local markets become increasingly smaller parts of the large global web of commerce, is whether the current provisions will be sufficient to protect the Australian public from the dishonesty of foreign directors and companies.199

193 194

195 196 197 198 199

responsible was thrust into the spotlight, shaking up the complacent attitude of the 1990s that considered corporate governance an almost unnecessary burden on Australian business: du Plessis, above n 74, 228, 236. Comino, above n 177. Devendra, above n 43; du Plessis, above n 74. See also Ramsay, above n 177, 71–3 who compares the powers and motivations behind the regulator and shareholders bringing actions for breaches of directors’ duties and notes in conclusion that ‘it is inappropriate to conclude that the enforcement of directors’ and officers’ duties should be undertaken exclusively by ASIC or shareholders’. McQueen, above n 1, 22. CCH, above n 6. Bird, above n 177; du Plessis, above n 74; Comino, above n 177; Ramsay, above n 177. Ramsay, above n 177, 72; Comino, above n 177; du Plessis, above n 74, 237; Devendra, above n 43. 2001 Act ss 206B and 206EAA already deal with some issues of foreign markets, regulation and incorporation, but to date the operation of ss 206B and 206EAA is limited by the definition of ‘foreign jurisdiction’ in the Corporations Regulations 2001 (Cth) r 2D.6.01. Under that rule, only New Zealand is a foreign jurisdiction to which those provisions apply.

Table 3.12 Cases by year – 2009 to 2016: Sections 206A and 206B Case name

Case reference

Murdaca v ASIC Arnautovic v Kukulovski ASIC v Somerville Calabretta v Redpen Developments Pty Ltd (in liq) (recs and mgrs apptd) Dhami v Martin CGU Insurance Ltd v Bazem Pty Ltd Watts, in the matter of Watts Phillips and Inspector-General in Bankruptcy Sbirakos v ASIC Catalano v Managing Australia Destinations Pty Ltd (No 2) Re Ryan Re Gay Kerkhoffs v Registrar of Aboriginal and Torres Strait Islander Corporations Garrett v Deputy Commissioner of Taxation Caratti v Caratti (No 3) Trustee for Oenoviva (Australia & New Zealand) Plant and Equipment Trust and Commissioner of Taxation, Re Vaysman v Deckers Outdoor Corp Inc Devren Pty Ltd v Old Coach Developments Pty Ltd Re Garrett and Commissioner of Taxation Garrett v Legal Services Commissioner Scott (Trustee) v Icicek Holdings Pty Ltd Edens Landing Pty Ltd v Thornton Place Pty Ltd Berardi v Salvatore Russo T/as Russo & Partners Re Frugtniet and Migration Agents Registration Authority ASIC v Activesuper Pty Ltd (in liq) (No 2) Bryers v Official Assignee Garrett; Company One, Re National Australia Bank Ltd v Garrett

[2009] FCAFC 92 [2009] NSWSC 1444 [2009] NSWSC 1149 [2010] FCA 81 [2010] NSWSC 770 [2011] NSWCA 81 [2011] FCA 1185 [2012] AATA 788 [2013] VSC 731 [2013] FCA 672 [2014] QSC 018 [2014] TASSC 22 [2014] FCAFC 66 [2014] FCA 576 [2014] WASC 246 [2014] AATA 614 [2014] FCAFC 60 [2015] QSC 053 [2015] AATA 247 [2015] VSC 465 [2015] FCA 1387 [2015] QSC 365 [2015] NSWSC 1520 [2015] AATA 554 [2015] FCA 527 [2015] NZHC 384 [2016] FCA 703 [2016] FCA 714

Table 3.13 Cases by year – 2009 to 2016: Section 206C Case name

Case reference

Period of disqualification

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Macdonald (No 12)

[2009] NSWSC 714

ASIC v Somerville (No 2) ASIC v Somerville (No 2)

[2009] NSWSC 998 [2009] NSWSC 998

ASIC v Somerville (No 2)

[2009] NSWSC 998

ASIC v Somerville (No 2) ASIC v Somerville (No 2)

[2009] NSWSC 998 [2009] NSWSC 998

ASIC v Somerville (No 2)

[2009] NSWSC 998

ASIC v Somerville (No 2)

[2009] NSWSC 998

ASIC v Somerville (No 2)

[2009] NSWSC 998

ASIC v Sydney Investment House Equities Pty Ltd ASIC v Sydney Investment House Equities Pty Ltd ASIC v Citrofresh International Ltd (No 2) ASIC v Lindberg Idylic Solutions Pty Ltd, Re; ASIC v Hobbs

[2009] NSWSC 144

First defendant for 15 years Second defendant for 7 years Third defendant for 5 years Fourth defendant for 5 years Sixth defendant for 5 years Seventh defendant for 5 years Eighth defendant for 5 years Ninth defendant for 5 years Tenth defendant for 5 years First defendant for 6 years Third defendant for 2 years Fourth defendant for 2 years Sixth defendant for 2 years Seventh defendant for 2 years Eighth defendant for 2 years Ninth defendant for 2 years Tenth defendant for 2 years Third defendant for 25 years Fourth defendant for 5 years Second defendant for 7 years Defendant for 3 years First defendant disqualified permanently

[2009] NSWSC 144 [2010] FCA 27 [2012] VSC 332 [2013] NSWSC 106

Case name

Case reference

Idylic Solutions Pty Ltd, Re; ASIC v Hobbs

[2013] NSWSC 106

Idylic Solutions Pty Ltd, Re; ASIC v Hobbs

[2013] NSWSC 106

Idylic Solutions Pty Ltd, Re; ASIC v Hobbs

[2013] NSWSC 106

Registrar of Aboriginal and Torres Strait Islander Corporations v Matcham (No 2) Registrar of Aboriginal and Torres Strait Islander Corporations v Berto ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2)

[2014] FCA 27

Period of disqualification Third defendant disqualified permanently from operating the Hobbs Scheme or any other unregistered management investment scheme and from providing any financial services without a licence Disqualified for 20 years from managing corporations Fourth defendant disqualified for 4 years from managing corporations and 8 years from providing financial services Eighth defendant for 6 years from managing corporations and 8 years from financial services First respondent for 15 years

[2014] FCA 100

Respondent for 2 years

[2014] FCA 1308

Second defendant for 15 years

[2014] FCA 1308

Third defendant for 4 years

[2014] FCA 1308

Fourth defendant for 4 years

[2014] FCA 1308

Fifth defendant for 2 years and 3 months

[2015] FCA 527

First defendant for 10 years Second defendant for 7 years and 6 months

[2015] FCA 527

(continued)

Table 3.13 Cases by year – 2009 to 2016: Section 206C (continued) Case name ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) (No 2) ACCC v Safety Compliance Pty Ltd (in liq) (No 2) ACCC v Safety Compliance Pty Ltd (in liq) (No 2) ACCC v Safety Compliance Pty Ltd (in liq) (No 2) Registrar of Aboriginal and Torres Strait Islander Corporations v Murray Registrar of Aboriginal and Torres Strait Islander Corporations v Murray Registrar of Aboriginal and Torres Strait Islander Corporations v Murray

Case reference [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 527 [2015] FCA 1469 [2015] FCA 1469 [2015] FCA 1469 [2015] FCA 346

Period of disqualification Third defendant for 10 years Fourth defendant for 7 years and 6 months Fifth defendant permanently Sixth defendant permanently Seventh defendant permanently Eighth defendant permanently Ninth defendant permanently Tenth defendant permanently Eleventh defendant permanently Twelfth defendant permanently Thirteenth defendant for 7 years and 6 months Fifteenth defendant for 7 years and 6 months Sixteenth defendant for 10 years Seventeenth defendant permanent Second respondent for 8 years Third respondent for 2 years and 6 months Fourth respondent for 1 year and 6 months First respondent for 7 years

[2015] FCA 346

Second respondent for 3 years

[2015] FCA 346

Third respondent for 3 years

Case name

Case reference

Period of disqualification

Registrar of Aboriginal and Torres Strait Islander Corporations v Murray ASE16 v ASIC ASE16 v ASIC

[2015] FCA 346

Fourth respondent for 3 years

[2016] FCA 321 [2016] FCA 321

ACCC v Online Dealz Pty Ltd ASIC v Cassimatis (No 6)

[2016] FCA 732

First applicant for 5 years Second applicant for 5 years Disqualification order not granted Date for the delivery of judgment is yet to be published

[2016] FCA 622

Table 3.14 Cases by year – 2009 to 2016: Section 206D Case name

Case reference

Period of disqualification

Murdaca v ASIC ASE16 v ASIC ASE16 v ASIC

[2009] FCAFC 92 [2016] FCA 321 [2016] FCA 321

Appellant for 2 years First applicant for 5 years Second applicant for 5 years

Table 3.15 Cases by period of disqualification: Section 206E Case name

Case reference

Period of disqualification

ACCC v Safety Compliance Pty Ltd (in liq) (No 2) Gillfillan v ASIC

[2015] FCA 1469

Fourth respondent for 1 year and 6 months

[2012] NSWCA 370

Gillfillan v ASIC

[2012] NSWCA 370

Gillfillan v ASIC

[2012] NSWCA 370

Gillfillan v ASIC

[2012] NSWCA 370

Appellant (Mr Gillfillan) for 1 year and 11 months Appellant (Mr Koffel) for 1 year and 11 months Appellant (Mr Brown) for the following periods: 24 September 2009 to 17 December 2010 and 3 May 2012 to 30 April 2013 Appellant (Ms Hellicar) for the following periods: 24 September 2009 to 17 December 2010 and 3 May 2012 to 30 April 2013 (continued)

Table 3.15 Cases by period of disqualification: Section 206E (continued) Case name

Case reference

Gillfillan v ASIC

[2012] NSWCA 370

Gillfillan v ASIC

[2012] NSWCA 370

Gillfillan v ASIC

[2012] NSWCA 370

JTMJ and ASIC Musumeci and ASIC

[2010] AATA 350 [2009] AATA 524

ACCC v Excite Mobile Pty Ltd (No 2) ACCC v Safety Compliance Pty Ltd (in liq) (No 2) ACCC v Excite Mobile Pty Ltd (No 2) ASIC v Lindberg In the matter of Idylic Solutions Pty Ltd; ASIC and Investments Commission v Hobbs ACCC v Stott Re Vault Market Pty Ltd

[2013] FCA 1267

ACCC v Artorios Ink Co Pty Ltd (No 2)

[2013] FCA 1292

[2015] FCA 1469

[2013] FCA 1267 [2012] VSC 332 [2012] NSWSC 1276

[2013] FCA 88 [2014] NSWSC 1641

Period of disqualification Appellant (Mr Terry) for the following periods: 24 September 2009 to 17 December 2010 and 3 May 2012 to 30 April 2013 Appellant (Mr O’Brien) for the following periods: 24 September 2009 to 17 December 2010 and 3 May 2012 to 30 April 2013 Appellant (Mr Willcox) for the following periods: 24 September 2009 to 17 December 2010 and 3 May 2012 to 30 April 2013. Applicant for 2 years Applicant’s 4-year ban from providing financial services reduced to 2 years Third respondent for 2 years and 6 months Third respondent for 2 years and 6 months Second respondent for 3 years Defendant for 3 years Fourth defendant for 4 years

Respondent for 5 years First defendant for 5 years Also restrained from carrying on, either directly or indirectly, a financial services business, for 8 years First respondent gave an undertaking in place of a disqualification order: not to manage corporations for 5 years

Case name

Case reference

Period of disqualification

ASIC v Axis International Management Pty Ltd (No 5) ACCC v ColgatePalmolive Pty Ltd (No 2) Gillfillan v ASIC ASIC v Activesuper Pty Ltd (in liq) (No 2) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) Re Vault Market Pty Ltd

[2011] FCA 60

Sixth defendant for 6 years

[2016] FCA 528

ACCC v Safety Compliance Pty Ltd (in liq) (No 2) ASIC v Astra Resources Ltd (No 2) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ACCC v Halkalia Pty Ltd (No 2) ASIC v Axis International Management Pty Ltd (No 5) ASIC v Axis International Management Pty Ltd (No 6)* *This is an appeal from the above case Axis International [2011] FCA 60.

[2015] FCA 1469

Third respondent for 7 years Mr Shaffron for 7 years Second defendant for 7 years and 6 months Fourth defendant for 7 years and 6 months Thirteenth defendant for 7 years and 6 months Fifteenth defendant for 7 years and 6 months Second defendant restrained from carrying on, either directly or indirectly, a financial services business, for 8 years Second respondent for 8 years Fifth defendant for 9 years

[2012] NSWCA 370 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2014] NSWSC 1641

[2016] FCA 560 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2012] FCA 535 [2011] FCA 60 [2011] FCA 811

Sixteenth defendant for 10 years Third defendant for 10 years First defendant for 10 years Sixteenth defendant for 10 years Third defendant for 10 years First defendant for 10 years Fourth respondent for 15 years Seventh defendant for 20 years Seventh defendant for 20 years

(continued)

Table 3.15 Cases by period of disqualification: Section 206E (continued) Case name

Case reference

Period of disqualification

In the matter of Melinda Scott and Roach Graham Scott Pty Ltd In the matter of Idylic Solutions Pty Ltd; ASIC v Hobbs In the matter of Idylic Solutions Pty Ltd; ASIC v Hobbs In the matter of Idylic Solutions Pty Ltd; ASIC v Hobbs In the matter of Idylic Solutions Pty Ltd; ASIC v Hobbs ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) ASIC v Activesuper Pty Ltd (in liq) Queensland Building Services Authority v Meredith

[2012] NSWSC 1643

First defendant for a period of 25 years

[2012] NSWSC 1276

First defendant permanently

[2012] NSWSC 1276

Third defendant permanently

[2012] NSWSC 1276

Fourth defendant permanently

[2012] NSWSC 1276

Eight defendant permanently

[2015] FCA 342

Fifth defendant

[2015] FCA 342

Re Reef Cove Resort Ltd Ms Jacqueline Espie v Studio 301 Pty Ltd Deputy Commissioner of Taxation v Jane Maria Sakovits; Deputy Commissioner of Taxation v Ronald Rudolf Sakovits ASIC v Cassimatis (No 7)

[2009] QSC 378 [2009] AIRC 655

Sixth defendant permanently Seventh defendant permanently Eighth defendant permanently Ninth defendant permanently Tenth defendant permanently Eleventh defendant permanently Twelfth defendant permanently Seventeenth defendant permanently Court reinstated QBSA’s decision to take the defendant’s licence as a builder Not specified Not specified

[2010] NSWSC 865

Not specified

[2016] FCA 624

Not specified

[2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2015] FCA 342 [2010] QCATA 50

Case name Matthews v Hargreaves (No 4) Transport Workers’ Union of Australia, NSW Branch v No Fuss Liquid Waste Pty Ltd Medical Board of Australia v Wong

Case reference

Period of disqualification

[2013] FMCA 4

Not specified

[2011] FCA 982

Disqualification order not granted

[2015] QCAT 439

Respondent’s medical licence/registration not cancelled

Table 3.16 Cases by year – 2009 to 2016: Sections 206EAA-206EA Case name

Case reference

Period of disqualification

Murdaca v ASIC Phillips and InspectorGeneral in Bankruptcy Phillips and InspectorGeneral in Bankruptcy Bolton and ASIC ACCC v Clinica Internationale Pty Ltd (No 2)

[2009] FCAFC 92 [2011] AATA 25

Appellant for 2 years Appellant for 8 years

[2011] AATA 288

Appellant for 8 years

[2015] AATA 977 [2016] FCA 62

Applicant for 3 years Second respondent for 5 years

4

South Africa Neels Kilian,* Jean Jacques du Plessis** and Jeanne Nel de Koker***

Contents 4.1

Introduction

112

4.2

Companies Act 1926 4.2.1 Share qualifications 4.2.2 Automatic disqualification under the 1926 Act 4.2.3 Disqualification in Table A of Schedule 1 to the 1926 Act

113 113 114 114

4.3

Companies Act 1973 4.3.1 Automatic disqualification 4.3.2 Disqualification by court order

116 116 128

4.4

Companies Act 2008 4.4.1 Automatic disqualification 4.4.2 Disqualification on application

130 130 143

4.5

Court case analysis of the 2008 Act 4.5.1 Application to have person declared as delinquent under section 162 of the 2008 Act 4.5.2 Automatic disqualification (section 69) 4.5.3 Constitutionality of delinquency orders (section 162(5))

148 148 151 152

Conclusion

153

4.6

4.1 Introduction In line with the analysis in other chapters, this chapter focuses on automatic disqualification as well as disqualifications by a court order, in some jurisdictions * BProc, LLM (UP), Mastergrad (Regensburg), LLD (UFS). Research Fellow of the Centre for Comparative Corporate Governance (CCC-G), Deakin Law School, Deakin University (Australia) and Research Fellow of the Department of Mercantile Law, Faculty of Law, University of the Free State (South Africa). ** BProc, LLB, LLM, LLD (UFS). Professor of Corporate Law, Deakin Law School, Deakin University (Australia). *** BIuris, LLB, LLM (UFS) Deakin Law School, Deakin University (Australia).

South Africa

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instigated by the primary corporate regulator. For purposes of a proper comparative approach, previous disqualification provisions in South African legislation will also be analysed briefly. An overview of the statutory provisions contained in former Companies Acts is given to illustrate the overlap and difference between former and current statutory provisions addressing director disqualification. This chapter also analyses two court cases addressing relevant sections of the Companies Act 2008 (SA) (2008 Act) to illustrate the differences between automatic disqualification and disqualification on application. South Africa’s (SA) first Companies Act was the Companies Act 1926 (SA) (1926 Act). This Act was derived from the United Kingdom’s (UK) Companies Consolidation Act 1908 (UK) (1908 Act), with some differences to reflect local South African circumstances. The UK influence was therefore quite strong until 1973, when South Africa adopted a new Companies Act 1973 (SA) (1973 Act). The 1973 Act steered South African company law away from UK legislation when some fundamental changes that took place in the UK by way of the Companies Act 1948 (UK) were not followed.1 In addition, the Companies Act 2006 (UK) did not influence the 1973 Act at all. However, the underlying principles of South African company law were, until 2011, firmly based on UK company law principles. The current 2008 Act in South Africa came into effect on 1 May 2011. It was developed over a number of years from 2002 and is not based on any particular company law model. Most of the provisions and underlying principles can, however, be traced back to legislation in Australia, Canada, the UK and the United States (US). Nevertheless, there is currently a significant part of the 2008 Act that can be described as unique to South Africa.2 As will be seen below, the provisions dealing with the disqualification of directors have been rewritten almost entirely, now providing for declaring directors as delinquents or placing a person under probation.

4.2 Companies Act 1926 4.2.1 Share qualifications Section 68 of the 1926 Act provided for the ‘qualification of directors’, but it only dealt with ‘share qualifications’, namely the minimum number of shares to be acquired by directors if so provided for in the articles of association. There was no statutory requirement for directors to hold shares in a company, but section 68 applied when there were such requirements stipulated in the articles of association. For instance, Article 80 of Table A (the model set of articles of association for companies limited by shares) provided that ‘a director shall be the [sic] holding of at least one share in the company, and it shall be his duty to comply with the

1 See generally H S Cilliers, M L Benade, J J du Plessis, P A Delport, L De Koker and J T Pretorius, Corporate Law (Butterworths, 3rd edn, 2000) 21–2 [2.06]–[2.17]. 2 See generally P Delport, New Entrepreneurial Law (LexisNexis, 2014) 6–10.

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provisions of section 68 of the Companies Act, 1926’. Section 68 of the 1926 Act was re-enacted as section 213 of the 1973 Act. Thus, the term ‘share qualification’ will be discussed further below. 4.2.2 Automatic disqualification under the 1926 Act Section 68bis of the 1926 Act provided for the disqualification of directors.3 This section formed the basis for section 218 of the 1973 Act. As the overlap between the two sections is almost complete, it will not be discussed here, but it can be mentioned that section 68bis provided for disqualification of: s s s s s

MINORS UNREHABILITATEDINSOLVENTS PERSONSCONVICTEDOFCERTAINOFFENCES APERSONWHOHASBEENDISQUALIlEDBYWAYOFACOURTORDER ANYPERSONREMOVEDFROMANOFlCEOFTRUSTONACCOUNTOFMISCONDUCT

4.2.3 Disqualification in Table A of Schedule 1 to the 1926 Act Article 95 of Table A, taken up in Schedule 1 to the 1926 Act, contained provisions dealing with the ‘disqualification of directors’. Table A served as a model set of articles of association for the management of companies limited by shares. Article 12(1) of the 1926 Act made it optional4 for companies limited by shares to register, with the memorandum of incorporation, a set of articles of association ‘prescribing regulations for the company’. By ‘regulations for the company’ was meant internal arrangements, which were comparable to the ‘constitution’ 5 of voluntary associations not incorporated under specific legislation. Table A of Schedule 1 to the 1926 Act was derived from Table A of Schedule 1 to the UK 1908 Act as it was the 1908 Act on which the 1926 Act was based.6 Article 77 of Table A of the UK 1908 Act formed the basis of Article 95 of Table A of the 1926 Act. However,

3 Section 68bis was inserted in the 1926 Act by the Companies Amendment Act 1939 and was amended by the Companies Amendment Act 1946 and the Companies Amendment Act 1952; see M A Diemont and M A Boehmke, Pymont’s Company Law of South Africa (Juta & Co Ltd, 1953) 132. 4 The 1926 Act s 12(1) provided as follows: ‘There may, in the case of a company limited by shares, and there shall in the case of an unlimited company or a company limited by guarantee, be registered with the memorandum, articles of association prescribing regulations for the company’ (emphasis added). 5 In Australia the term ‘constitution’ is indeed used if a company opted to adopt a ‘constitution’ (it is not required) for the internal arrangements of the company – Australian Corporations Act 2001 (Cth) s 136. Companies that do not adopt a constitution are governed by all the provisions of the Corporations Act 2001, including those who are designated as ‘replaceable rules’. These could be replaced by provisions in the constitution if a company opts to adopt a constitution. 6 Cilliers et al., above n 1, 21 [2.06].

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the South African provision included additional grounds of disqualification or grounds on which a director would vacate their office as follows.7 Under the heading ‘Disqualification of directors’, Article 95 of the South African 1926 Act provided that the office of director shall be ‘vacated’ if the director: (a) ceased to be a director under the disqualification provisions of the 1926 Act (sections 68 and 68bis); or (b) without the consent of the company in a general meeting holds any other office of profit under the company except that of managing director or manager; or (c) becomes insolvent; or (d) is found to be a lunatic or becomes of unsound mind; or (e) resigns his office by notice in writing to the company; or (f) is directly or indirectly interested in any contract with the company or has participated in the profits of any contract with the company; or (g) becomes prohibited from being a director by reason of any order made under section 180ter of the 1926 Act, which dealt with orders made as part of the winding up of companies. Not all these instances could be considered disqualification grounds in the strict sense of the word, but the implication is that if a director vacated their office on any one of the listed grounds, they would then also be disqualified from being a director of that company. It will be noted that there was some overlap with section 68 of the 1926 Act, but points (b), (d), (e) and (f) were added. It will be seen below that both Table A and Table B of the 1973 Act also contained some of these circumstances under which a director would have vacated their office.

7 Article 77 of Table A to the UK 1908 Act provided as follows: ‘Disqualifications of Directors 77 The office of director shall be vacated, if the director — (a)

ceases to be a director by virtue of section seventy-three of the Companies (Consolidation) Act, 1908; or (b) holds any other office of profit under the company except that of managing director or manager; or (c) becomes bankrupt; or (d) is found to be a lunatic or becomes of unsound mind; or (e) is concerned or participates in the profits of any contract with the company: Provided, however, that no director shall vacate his office by reason of his being a member of any company which has entered into contracts with or done any work for the company of which he is director: but a director shall not vote in respect of any such contract or work, and if he does so vote his vote shall not be counted.’ Thus, in comparison with art 95 of Table A of the 1926 Act, art 77 of Table A of the UK 1908 Act did not contain provisions comparable to 5 and 7 listed in the text under art 95 of Table A of the 1926 Act.

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It is to be noted again that companies were not required to adopt Table A under the 1926 Act (or Table A or B under the 1973 Act) as their articles of association, but most companies that adopted separate sets of articles of association did at least adopt most of the articles from these Tables, with deviations or special articles inserted where required. It is therefore to be expected that most companies incorporated under the 1926 Act would have a provision similar to Article 95 in their articles of association.

4.3 Companies Act 1973 4.3.1 Automatic disqualification 4.3.1.1 Introduction and general explanation As mentioned, the 2008 Act came into effect on 1 May 2011.8 There are some similarities between the statutory provisions pertaining to the disqualification of company directors in the 1973 Act and those in the 2008 Act. However, as will be seen later, the terminology used and the general approach to disqualification of company directors changed fundamentally.9 The disqualification provisions of the 1973 Act were contained in sections 218 and 219.10 4.3.1.2 Section 218 of the 1973 Act 4.3.1.2.1 GENERAL PROVISIONS

Section 218 dealt with automatic disqualification of directors and provided that the following persons were automatically disqualified from being a company director:11 (a) (b) (c) (d)

body corporate (juristic person or association of persons); a minor or any other person under legal disability; a person who is subject to any court order in terms of the 1973 Act; save under the authority of the court, an unrehabilitated insolvent, any person removed from an office of trust on account of misconduct, any person who has at any time been convicted of theft, fraud, forgery or uttering a forged document, perjury, an offence under the Prevention and Combating of Corrupt Activities Act 2004, or any offence or act

8 As amended by the Companies Amendment Act 2011, together with the Companies Regulations 2011. 9 J S McLennan, ‘Disqualification of Company Directors and the Court’s Discretion’ (1991) South African Law Journal 4. 10 See generally J J du Plessis, ‘Diskwalifikasie en Persoonlike Aanspreeklikheid van Direkteure: Belangwekkende Ontwikkelinge in die Engelse Reg’ (1989) De Rebus 435. 11 1973 Act s 218(1)(a)–(d).

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involving dishonesty or a person who has been sentenced to imprisonment with or without the option of a fine exceeding R100 or a person who has contravened an Act of Parliament for not being a fit and proper person. In addition, it was provided that the articles of association of the company could stipulate additional circumstances to disqualify a person from being a director of the company – for example, share ownership qualifications and educational qualifications.12 Schedule 1 of the 1973 Act contained Table A and Table B which served as model sets of articles of association. Table A contained the model set of articles of association for public companies having a share capital, whereas Table B served as a model for private companies having a share capital. Articles 65 (Table A) and 66 (Table B) were the model articles comparable to Article 95 of Table A of the 1926 Act. However, they were simplified by removing the obvious automatic disqualification ground, if a person is an ‘insolvent’, already contained in the 1973 Act. The following grounds on which a director would vacate their office remained in Articles 65 and 66, namely if the director: (a) ceased to be a director or became prohibited from being a director by virtue of any provision of the 1973 Act; or (b) without the consent of the company in general meeting held any other office of profit under the company except that of managing director or manager; or (c) resigned his office by notice in writing to the company and the registrar; or (d) was directly or indirectly interested in any contract or proposed contract with the company and failed to declare his interest and the nature thereof in the manner required by the 1973 Act. One additional ground on which a director would have vacated their office under these articles was added, namely if the director was ‘absent for more than six months without permission of the directors [meaning the board] from meetings of directors held during that period’.13 What should be remembered is that there will be a large number of private companies and also some public companies in South Africa that still have these provisions as part of their internal managerial arrangements because they would have adopted them as part of their articles of association. 4.3.1.2.2 MINORS

Although a minor, per se, is disqualified from acting as a company director, the South African common law principle of emancipation is relevant and applicable

12 Ibid. s 218(2). 13 Art 65(d) (Table A) and art 66(d) (Table B).

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to this discussion.14 The term ‘emancipation’ denotes a situation when, in certain circumstances recognised by the common law, a person not yet having reached 21 years of age, the age required at that stage to be a person of full capacity, is deemed to have full legal capacity. The purpose of emancipation is to grant a minor full legal capacity; in other words, the minor is allowed to enter into contracts without the assistance of their parents or guardian.15 Whether an emancipated minor was entitled to act as a director of a company remained unclear under the 1973 Act.16 In the case of Ex parte Velkes,17 the Court had to consider whether an emancipated minor was entitled to act as company director.18 The minor was born in 1942 and was 20 years of age. Before his application, he was enrolled for a BA degree and successfully passed his first year examinations at the age of 18.19 Thereafter he worked for his father in their clothing factory and was employed as the factory manager.20 He was very successful in finding customers, to such an extent that it negatively affected his relationship with his father. As a direct consequence, he started his own business until Issy Mannie Segal’s company offered him a position in its business.21 He managed the entire company successfully. Issy Mannie Segal offered the applicant the opportunity to participate as a company director and shareholder due to the remarkable success he brought to the company. The Court referred to section 68(1)(a) of the 1926 Act (similar to section 218(1)(b) of the 1973 Act) pertaining to the disqualification of a minor as a company director.22 The Court held that the emancipation of a minor had the effect of waiving this disqualification but also held that it was not willing to express any positive views on the common law interpretation of the Companies Act23 or to alter section 68(1)(a) to include emancipation through a court order as a method to void the disqualification.24

14 Children’s Act 38 2005 s 17 requires one to be 18 years of age to enjoy full contractual capacity and alters the common law position of 21 years of age. 15 See in general Pleat v Van Staden 1921 (Provincial Division) 91; Louw v MJ &H Trust 1974 (4) SA 268 (Provincial Division); Nel v Divine (1890) 8 (Supreme Court of Appeal) 16; Woods v Davies 1934 (Provincial Division) 250; Meyer v The Master 1935 (South West Africa) 3; Dickens v Daley 1956 (2) SA 11 (Provincial Division); Sesing v Minister of Police 1978 (4) SA 742 (Local Division). 16 Cilliers et al., above n 1, 124–5 [9.23]–[9.25]. 17 1963 (3) SA 576 (Provincial Division). 18 Ibid. 578. 19 Ibid. 577. 20 Ibid. 577. 21 Ibid. 578. 22 Ibid. 579. 23 Ibid. 580 [4]. 24 Cf. Ex parte K 1971 (4) SA 289 (Provincial Division) where it was held that the court has unfettered discretion and the causes to determine disqualification are not set in stone.

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Other difficulties were also associated with the interpretation of what was meant by a ‘minor’. In Meyer v The Master25 a will or testament expressed that the heir was not entitled to inherit any money until he reached 21 years of age.26 However, before turning 21 the heir married.27 The Court considered the reasons why the marriage was concluded: to allow the heir to receive his portion of a testamentary will before reaching the age of 21 years.28 It was also clear that the marriage was arranged under the influence of the groom’s father. Based on these surrounding circumstances, the Court did not grant the minor the status of an emancipated minor, which would have been the result if he had married without any ulterior motives.29 4.3.1.2.3 UNREHABILITATED INSOLVENTS

There were some uncertainties pertaining to the legal status of a person as an unrehabilitated insolvent after a court declared the person insolvent following a lengthy sequestration court process.30 Once declared an insolvent, the rehabilitation period commences,31 ten years from the date of the sequestration order.32 During this ten-year period the insolvent is automatically disqualified from acting as a director.33 It is therefore not necessary to obtain a court order in terms of the 1973 Act to disqualify an unrehabilitated insolvent, since only a court could have declared a person an insolvent. In terms of section 218(1)(d), an unrehabilitated insolvent may apply to a court for an order not to be disqualified from being a director of a company. The unrehabilitated insolvent in Ex parte Dworsky applied for a court order to become a director of a company.34 The applicant was a qualified pharmacist and had acquired two unsuccessful companies, the failure of which led to the applicant’s sequestration.35 He had decided to open a pharmaceutical business. The Pharmacy Act 1928 required that a pharmacy must be managed by a qualified pharmacist as

25 26 27 28 29 30 31 32

33 34 35

1935 (South West Africa) 3. Ibid. 3. Ibid. 4. Ibid. 13. Ibid. 14 [1]. Ex parte Bester 1937 (Provincial Division) 45. One member of a partnership is not an agent of all the other partners/members for purposes of s 3(2). Prokureurs v Van Aarde 1999 (4) SA 1333 (Provincial Division) 1335. It follows that a debtor’s estate may be declared insolvent even if he is technically solvent. Robert Sharrock, Hockly’s Insolvency Law (Juta & Co Ltd, 2006) 15–29, 192. As a general rule, insolvency does not put an end to a business contract. See e.g. Bryant & Flanagan (Pty) Ltd v Muller 1978 (2) SA 807 (Appellate Division) 812; Nedcor Investment Bank v Pretoria Belgrave Hotel (Pty) Ltd 2003 (5) SA 189 (Supreme Court of Appeal) 192. Insolvency Act 1936 s 127(A)(1). See also Grevler v Landsdown 1991 (3) SA 175 (Provincial Division). 1970 (2) SA 429 (Provincial Division). Ibid. 431.

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its managing director.36 The Court focused on section 68(1)(b) of the 1926 Act (as mentioned, similar to section 218) which grants a discretionary power to a court to allow an ‘unrehabilitated insolvent’ to become a director of a company. A similar discretion is granted to a court to allow a person to be a director irrespective of convictions of offences such as theft, fraud and forgery. Boshoff J argued as follows: [D]isqualification imposed in the latter sub-sections [68(1)(c) and 68(2)(b)] was not simply a punishment, nor was it one imposed on persons in similar positions simply as a personal consequence to them. The reason for the provisions was to be found in the public interest in the clean government and administration of companies, and the interest involved was not merely the interest of the applicant himself, but the public interest in the administration of companies.37 Boshoff J also stated that discretionary power to allow a person to be a director irrespective of a conviction of the listed offences (for instance, theft, fraud and forgery) should only be exercised in exceptional circumstances and that every case must be decided on its own facts (the ‘match the facts’ test).38 In this instance, the Court held that no special circumstances existed as to why the automatic disqualification of the applicant should be lifted.39 It should be noted that if the applicant’s insolvency had not been the result of poor business decisions, it might have been a special circumstance to lift the automatic disqualification ban for the applicant.40 The general aims of the disqualification of directors are well summarised in Henochsberg on the Companies 2008 Act in the context of factors which courts should take into consideration to grant a disqualified director special leave to act as director: [T]he essential reason for disqualification is the public interest in the clean and proper administration of companies, and since a director may, by virtue of his position as such, inflict injury not only upon the members of the company, but also on members of the public having dealings with it, the essentially relevant factors [a court should consider to grant a disqualified director leave to act as a director] are those bearing upon the honesty and the trustworthiness of [the disqualified director].41

36 37 38 39

Ibid. Ibid. 432. Ibid. Ibid. 433. See in general B Pettet, ‘Towards a Competitive Company Law’ (1998) The Company Lawyer 134, in which the author discusses the provisions of company law that restrict economic growth/competitiveness. 40 Cf. Ex parte Dworsky 1970 (2) SA 429 (Provincial Division) 430. 41 P Delport, Henochsberg on the Companies 2008 Act, Looseleaf service (Issue 11) (LexisNexis, November 2015) 261.

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4.3.1.2.4 MISCONDUCT

‘Misconduct’ and ‘conviction’ are not synonyms in the law. ‘Misconduct’ as a term is frequently referred to in civil or criminal law, but its application to convict a person for an offence differs drastically in civil and criminal law.42 Misconduct is a ground to dismiss or to remove a director from office in terms of the labour law. The labour law merely requires a disciplinary hearing to establish ‘misconduct’ and this misconduct is excluded from the 1973 Act since section 218(1)(d) requires a formal court procedure to give effect to a disqualification order. On the other hand, misconduct may also refer to criminal activities in either the criminal law or statutory legislation in South Africa; for example, the Prevention and Combating of Corrupt Activities Act 2004.43 This Act lists the following offences, which would have been applicable for purposes of the 1973 Act:44 (a) general offence of corruption;45 or (b) corrupt activities relating to public officers, foreign public officers, agents, members of parliament, the judiciary;46 or (c) corrupt activities relating to an employment contract, contracts in general, tenders, auctions, sporting events, gambling games, investments, obstructing the investigation of an offence, conspiracy to commit a crime and/or being an accessory to or after a crime.47 It is clear that the above resulted in automatic disqualification under the 1973 Act but not per se for a disciplinary hearing in terms of the labour law which is less formal than a court procedure, even if the said hearing was used to remove a person from an office of trust based on misconduct.48 The courts were not expected to interpret section 218 to take cognisance of the possibility or probability that the disciplinary hearing was mala fide conducted to disqualify a person as a director in terms of the labour law. To illustrate the point, the next paragraph

42 Shawn Kopel, Guide to Business Law (Oxford University Press, 2006) 162–3; J C van der Westhuizen, Section 424 of the Companies Act No 61 of 1973: Civil Liability of Directors and Others for Fraudulent or Reckless Conduct of the Business of a Company (LLM, University of South Africa, 1994) 14–15; Ex parte Schreuder 1964 (3) SA 84 (Provincial Division) where the applicant was refused on the fact that he had been convicted of fraud in 1937 and did not know he was prohibited from acting as director. 43 P J Visser and M C Mare, General Principles of Criminal Law through the Cases (Butterworths, 1990) 179–80. 44 Van der Westhuizen, above n 42, 12, 14. 45 Prevention and Combating of Corrupt Activities Act 2004 s 3. For example, to influence a person so to act in a manner that amounts to dishonesty or bias. 46 Ibid. s 4. For example, a public officer who directly or indirectly accepts any gratuity from any other person. 47 Ibid. ss 10–11, 13–18, 20. For example, a person who directly or indirectly offers to accept any gratuity from any other person for the benefit of himself. 48 See 1973 Act s 218(2).

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focuses on the situation of a minor and the consequences of such interpretations in the law.49 Disqualification on the basis of misconduct is problematic and probably more technical than the Ex parte Velkes interpretation of the term ‘minor’.50 The Labour Relations Act 1995 contains no definition for misconduct.51 Misconduct takes on many forms but all dismissals based on misconduct share a common ground: the employee breached the terms of their employment contract52 in some way or other. Dismissal for misconduct involves a process that must be followed in order for the dismissal to be fair. It could be an off-the-record procedure determined by the employer and varies from employer to employer.53 Thus, labour law dismissals are not recorded in the courts of law; there is no central register to record previous dismissals, making it impossible to determine, based on information available to the public, whether a person has been ‘dismissed’.54 Generally, a company would devise a questionnaire to be completed by a prospective director, including whether they have been previously dismissed on the basis of labour law – and/or other civil law – and/or criminal law procedures relevant to misconduct. If the prospective director answers these questions in the negative, it may be difficult for the company to verify the correctness of these answers due to the Constitution of the Republic of South Africa 1996 that protects the rights attached to privacy and/or additional legislation – for example, the Protection of Personal Information Act 2013 in contemporary times.55 In terms of this Act, a person under scrutiny must give their consent to access their personal information – that is, their employment history.56 On the other hand, every director must act in the best interests of the company and with honesty. This is the basic fiduciary duty expected of every director in South Africa. Any breach of honesty and/or best interest may be interpreted as civil or labour law misconduct although corporate or company law provides no suitable definition of either.57 The Botha case illustrates the difficulties associated

49 F H I Cassim, The Practitioner’s Guide to the Companies Act 71 of 2008 (Juta & Co Ltd, 2011) 3. 50 See in general E Keller and G Ghelmann, ‘A Historical Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934’ (1988) Ohio State Law Journal 329. 51 See sch 8 s 2(2) of the Labour Relations Act 1995. The Schedule refers to ‘employee conduct’, not to ‘misconduct’. 52 Ibid. s 3(1). Misconduct depends on written rules of the employer that were breached by the employee – for example, employee honesty. 53 Ibid. s 3(3). 54 Ibid. s 4. See also s 218(1)(A), which stipulates reportable misconduct to the Registrar of Companies and Close Corporations. 55 See in general S Copp, ‘The Failure of Criminal Law to Control the Use of Off Balance Sheet Finance during the Banking Crisis’ (2015) The Company Lawyer 99. 56 See also Protection of Personal Information Act 2013 ss 4, 11. 57 Nusca v Da Ponte 1994 (3) SA 251 (Local Division) 261: honesty is either a common law or statutory duty.

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with the lack of a proper definition. In Botha v Swanepoel58 liquidators were appointed to jointly administer an estate. One liquidator believed his portion of the fees amounted to a 60/40 split whereas the other believed there was a 50/50 split. Although the Court did not investigate who was honest in their belief, it did rely on external information to establish the true split between the parties. On the basis of evidence, the Court held that the split should be 50/50.59 Obviously, one could argue that assuming a 60/40 split might be a dishonest act clearly intended to benefit one liquidator; however, irrespective of belief, a court will most likely interpret the assumption of the 60/40 split as a mistake. A mistake is not equal to misconduct or dishonesty. However, breach of fiduciary duty remains a reportable misconduct in terms of section 218(1A)(a)(i)(bb) of the 1973 Act. In terms of this section, the Registrar of the Court informs the Registrar of Companies and Close Corporations of the misconduct order granted.60 The Registrar of Companies will note this order on a central register as a method of disqualifying the person from future board appointments.61 4.3.1.3 Court order Disqualification is implied when a person is subject to a court order in terms of the 1973 Act within the framework of section 218.62 The general offences in this Act include: (a) (b) (c) (d)

insider trading; forging/altering a share certificate or other securities; disclosing secret information pertaining to shares or other securities; committing an offence when the subsidiary company loans money to a holding company; (e) making a false disclosure of beneficial interests in shares or securities; (f) offering shares to the public contrary to the Companies Act.63 In view of the fact that the 1973 Act imposed offences, it is submitted that the above offences are only recorded once the court’s registrar has notified the Registrar of Companies to assign the offence to a national register in terms of

58 [2002] 1 All SA 85 (Provincial Division); cf. Techni-Pak Sales (Pty) Ltd v Hall 1968 (3) SA 231 (Local Division) 236. 59 [2002] 1 All SA 85 (Provincial Division) 100. 60 J Henning, ‘Southern African Small Business Corporations in Comparative Perspective’ (2006) Transnational Law & Contemporary Problems 287. 61 See e.g. Ex parte Schreuder 1964 (3) SA 84 (Provincial Division); Ex parte R 1996 (1) SA 84 (Supreme Court); Ex parte Barron 1977 (3) SA 1099 (Provincial Division). 62 J J Henning et al., ‘Future Development of South African Corporate Law’ (1994) 1 Corporate Law Development Series 102. More than 180 offences could have been committed under the 1973 Act. 63 1973 Act s 441(a)–(d).

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section 218(1A) of the 1973 Act. It is also noted that the Registrar of Companies had a statutory duty to inform other companies of disqualified persons to prevent such a person from acting as a company director in the future.64 Under such circumstances a company was also expected to notify its shareholders of disqualified directors within 60 days of the date of the Registrar’s notification. This notification or notification letter pertained only to certain offences committed, and only those offences were expected to be communicated to the company’s shareholders.65 The company’s shareholders were only to receive the following notification of offences in terms of section 218(1A)(a)(iii): (a) sequestration order; and/or (b) that a person has been removed from an office of trust due to misconduct (includes dishonesty); and/or (c) an offence has been committed in terms of section 218(1)(d)(iii) such as theft, forgery and dishonesty as listed above. Only items (a) to (c) were subject to the Registrar’s notifications. It is interesting to note that the removal of a person from an office of trust could be based on the offences listed in section 218(1)(d)(iv) – for example, any person who has been removed in terms of an Act of Parliament such as the Financial Services Board Act 1990 – but it is not clear whether those offences listed in other Acts of Parliament were part of the notification process listed above.66 Although these offences would have been supported by a court order, those court orders were not considered public records (nor were they required to be reported to the company’s shareholders in terms of section 218(1A)(a)(i)(cc)), making it impossible to notify companies or shareholders of disqualifications in terms of other offences committed in terms of other Acts of Parliament. 4.3.1.4 Statutory instruments Statutory instruments dealing with the disqualification of directors include the Financial Services Board Act 1990 and the authorisation to issue directives by the Financial Services Board (FSB),67 such as Directive 101.68 This directive was issued in 2004 and is solely relevant to insurance companies. Directive 101

64 Ibid. s 218(1A)(a)(ii). 65 Ibid. s 218(1A)(i)(aa)–(cc). 66 See in general S v Nixon 1971 (4) SA 495 (Provincial Division) 497; Ex parte Hemphill 1967 (3) SA 101 (Provincial Division) 103; Ex parte Jacobson 1944 (Provincial Division) 112, 116. 67 See also Financial Services Board Act 1990 s 19. The Act does not make any reference to directives. The FSB may make any rules and may call on those rules in such manner as it may deem fit. 68 This directive was issued on 30 January 2004 and became effective on 1 February 2004. It is still being enforced and is applicable to the 2008 Act. This directive regulates the ShortTerm Insurance Act 1998 and the Long-Term Insurance Act 1998.

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regulates not only director appointments but also the circumstances necessary to vacate the office.69 For example, the Registrar of Insurance issues a notice to an insurance company informing the latter of certain irregularities in its appointment of a person as a director.70 The moment the insurance company receives the notice, the director must cease to act as such, pending the final outcome of the FSB’s investigation.71 The company or the director may appeal the final outcome in terms of section 26 of the Financial Services Board Act 1990.72 However, the appeal is subject to a final determination by a court and is even applicable to the 2008 Act.73 The FSB may, for example, investigate the following two circumstances to disqualify a person from acting as an independent director:74 (a) an independent director acts as a representative of a shareholder who has the ability to manage/control the company; or75 (b) an independent director who partakes in the management of the insurance company or is employed by the insurance company on a full-time basis who contravened, for example, a directive.76 The Registrar of Insurance may (applicable also to the 2008 Act) relax a disqualification provision concerning (a) or (b) above.77 The same applies to an executive director. For instance, the appointment of such a director entails the submitting of personal documents (such as a curriculum vitae) to the FSB, and the completion of an FSB questionnaire pertaining to offences committed but only to those offences that are non-reportable in terms of section 218(1A) as discussed above.78 The FSB will consider the academic qualifications or the severity of these offences of the applicant. If the applicant, for example, had obtained an engineering degree, the FSB may nevertheless approve that the applicant can act as a director of an insurance company.79

69 Directive 101 r 1.2. Advocate Faizel Ismail states that some directives are contrary to the Promotion of Administrative Justice Act 2000. See Pension Lawyers (online, 15 June), available at www.pensionlawyers.co.za/downloads/2008/FaizelIsmail2.pdf (accessed 16 November 2016). 70 Directive 101 r 1.2(b). 71 Ibid. r 1.3(a). 72 Ibid. r 1.3(c). 73 Ibid. 74 Ibid. r 21. 75 Ibid. r 21(b). 76 Ibid. 77 Ibid. 78 This form is called a notification form. See clause 5 of this form (11 May 2014), available at www.fsb.co.za/Departments/Insurance/Documents/NotifyLTST18AppointTerminate ResignDirectors2.doc (accessed 16 November 2016). 79 Government Gazette No 31514 (15 October 2008) which contains Board Notice 60 of 2010. Board Notice 2010 s 1 explains the qualification and qualifying criteria to participate in the insurance industry.

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The Stock Exchange Control Act 1 of 1985 was amended by means of Board Notice 91 of 2000.80 In terms of this 1985 Act, the Johannesburg Stock Exchange (JSE) applied for amendment of its Rules in terms of section 12(6), which was consequently published in Board Notice 91 of 2000.81 The general requirements for directors/officers of listed JSE companies since 2000 have included the following:82 (a) being of full legal capacity;83 (b) complying with such criteria for good character and high business integrity as the JSE deems fit;84 (c) not being an unrehabilitated insolvent;85 (d) not having been convicted of activities constituting a criminal offence in South Africa or abroad;86 (e) not having been the subject of any formal investigation by any regulatory or government agency;87 (f) not having been expelled whether as a member or otherwise from any stock exchange or financial exchange whether in South Africa or abroad;88 (g) not having been employed by or associated with a member of any stock exchange or financial exchange, which member was expelled from that exchange or in the opinion of the JSE contributed to the circumstances leading to the expulsion;89 (h) not having been declared a defaulter on the JSE or any other stock exchange in South Africa or abroad;90 (i) not having been refused entry to or expelled from any profession or vocation or been dismissed or requested to resign from any office or employment or from any fiduciary office or position of trust.91 Only certain offences were reported in terms of the 1973 Act. There existed no central register for other Acts of Parliament where a person was dismissed on the basis of dishonesty, as previously indicated in our discussion of the Labour Relations Act 1995. The JSE devised other circumstances to disqualify a person

80 Government Gazette No 21702 (31 October 2000) which contains Board Notice 91 of 2000. 81 Ibid. first paragraph explaining the purpose of this board notice, signed by the Registrar of JSE Ltd. 82 Ibid. s 3.20. 83 Ibid. s 3.20.1.1. 84 Ibid. s 3.20.1.2 85 Ibid. s 3.20.1.3. 86 Ibid. s 3.20.1.4.1. 87 Ibid. s 3.20.1.4.2. 88 Ibid. s 3.20.1.4.3. 89 Ibid. s 3.20.1.4.4. 90 Ibid. s 3.20.1.4.5. 91 Ibid. s 3.20.1.4.6.

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even though section 218 did not specifically refer to such disqualification criteria as point (g) above. To be ‘associated’ with a person is a ground for disqualification from the JSE and it remains unclear whether the term ‘associated’ includes social friendship. However, if a person has committed one of the above-listed acts, they could nevertheless apply for JSE membership, and the JSE could consent thereto and/or make a specific order that would make it possible for the person to act as a member/director for a specified period.92 The latter convictions should not be confused with involuntary termination of membership.93 Circumstances relevant to involuntary termination or termination on the basis of a notice include, inter alia: provisional or final sequestration of the director’s estate,94 a director’s attempts to reach a compromise with the business’s creditors,95 a JSE disciplinary hearing that indicates the fact of termination of office,96 member defaults,97 and where a member fails to have at least one JSE share right.98 4.3.1.5 Qualifications instead of disqualifications Similar to other jurisdictions, no academic qualifications were required under the 1973 Act to become a director of a South African company.99 However, a company could provide in its articles of association that its directors must hold a certain number of shares in the company. When such a provision was contained in the articles of association, the acquisition of these shares was seen as a ‘qualification’ – namely a ‘share qualification’.100 The requirement was normally for a minimum number of shares to be purchased and held by the directors of such companies in order to become directors of such companies.101 Although the articles of association might have required share qualifications for directors, under South African law the articles of association do not constitute a contract between the company and its directors.102 The articles of association only constitute a contract between the company and its shareholders and the shareholders inter se.103 This meant that if a

92 93 94 95 96 97 98 99 100 101

Ibid. s 3.120. Ibid. s 3.60. Ibid. s 3.60.1.2. Ibid. s 3.60.1.3. Ibid. s 3.60.1.5. Ibid. s 3.60.1.6. Ibid. s 3.60.1.7. See in general Bainbridge v Smith (1889) 41 (Provincial Division) 462, 474. 1973 Act s 213. Article 56 of Table A to the 1973 Act fixed the share qualification of directors as one share for each director. See further Flegg v McCarthy 1942 (Provincial Division) 109. 102 Gohlke v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (Appellate Division); Ex parte Premier Paper Ltd 1981 (2) SA 612 (Local Division) 615. See also A Nwafor, ‘The Unending Debate on the Contractual Effect of the Company’s Constitution – a Comparative Perspective’ (2013) International Company and Commercial Law Review 261. 103 Cilliers et al., above n 1, 79–80 [6.38]–[6.39].

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person acted as a ‘director’ without having acquired the minimum number of shares, it was not considered to be a breach of a contract. The implication of share qualifications is therefore that they comprise a sui generis requirement.104 There were, however, other statutory requirements applicable when a company stipulated a share qualification for its directors. They were contained in section 213(1)(a)–(c) of the 1973 Act, which provided that when a share qualification was stipulated in a company’s articles of association, the directors were granted two months from the date of their appointment to acquire/purchase the minimum number of shares required. If a director did not acquire the shares within the two-month period, a quite remarkable statutory consequence followed: namely that such a director committed an offence and was subject to a fine for every day the contravention continue.105 It should be noted that if a director was disqualified under the terms of section 218, they could appeal the disqualification to a higher court.106 The disqualification was, however, valid and enforceable until the Appeal Court issued a final order to grant leave to a person to be a director irrespective of being ‘automatically disqualified’ under section 218 of the 1973 Act. 4.3.2 Disqualification by court order As pointed out above, section 218 of the 1973 Act stipulated the grounds for automatic disqualification.107 However, some grounds also required a court application before it could be said that the director was disqualified ‘automatically’. For example, it required a court order for a person to be considered ‘insolvent’ and thus automatically disqualified under section 218(1)(d)(i) of the 1973 Act as an ‘unrehabilitated insolvent’. Section 219 of the 1973 Act dealt with the disqualification of directors by a court order. A court had the power to order that a person, director or officer could not be a director of or could not in any way, whether directly or indirectly, be concerned with or take part in the management of any company. It was within the complete discretion of the court to determine the period of disqualification. There was the possibility that a disqualified person could apply for leave to be exonerated from such an order, but because the section had never been used to disqualify any directors, there are no precedents to determine under which circumstances a court would have granted such leave. A court could suo motu (‘on its own motion’) make a disqualification order under two circumstances:

104 P J J Olivier, ‘Die Grondslag van Maatskappy Gebondenheid aan die Akte van Oprigting en Statute en in Verband Daarmee Rektifikasie’ (1989) Tydskrif vir die Hedendaagse Romeins Hollandse Reg 409. 105 1973 Act s 441(1)(p). 106 Von Steen v Von Steen 1984 (2) SA 198 (Provincial Division). 107 R Cassim, ‘Delinquent Directors under the Companies Act 71 of 2008’ (2013) De Rebus 26.

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(a) when a person, director or officer has been convicted of an offence in connection with the promotion, formation or management of a company;108 and (b) when it ‘appeared’ to the court that, in the course of the winding up or judicial management of a company, a person had been guilty of an offence referred to in section 424 (‘Liability of directors and others for fraudulent conduct of business’) whether or not they had been convicted of that offence. The power under the second provision was indeed remarkable as a disqualification order could be made even though a person had not been convicted of the section 424 offence. However, it should be pointed out again that no disqualification order has ever been made under this section. A court could also disqualify persons on application from the Master, the Attorney-General, the liquidator, the judicial manager, a creditor, or a member or past member of the company.109 The circumstances under which such application could be made included where a person had been found guilty, while an officer of the company, of any fraud in relation to the company or of any breach of their duty to the company or when a declaration had been made in respect of any person under section 424(1) of the 1973 Act. Declarations under sections 424(1) dealt with persons involved with ‘reckless trading’ or ‘the intent to defraud creditors’. Section 424 of the 1973 Act was hardly ever used successfully against defendants because of the difficulties proving ‘reckless trading’ or ‘the intent’ to defraud creditors. However, even when directors were held to be in breach of section 424,110 courts did not make disqualification orders under section 219(1) (d) of the 1973 Act. One of the reasons why a court never had to make a disqualification order under section 219 is the obvious overlap between sections 218 and 219. For example, section 218(1)(d)(iii) contained as a ground for disqualification ‘any offence involving dishonesty or in connection with the promotion, formation or management of a company’.111 Section 219(1)(a) contained similar wording. In short, if a person was already disqualified automatically under section 218, there was no need for a court to make a disqualification order under section 219. It is more difficult to determine whether section 219 made provision for other types of offences pertaining to the formation, promotion and management of the company, other than the offences mentioned in section 218(1)(d)(iii). This poses the question whether section 219 was really required. Section 218 is relevant to

108 1973 Act s 219(1)(a). 109 Ibid. s 219(2)(a)(i). 110 Philotex (Pty) Ltd v Snyman; Braitex (Pty) Ltd v Snyman (334/93) [1997] ZASCA 92; 1998 (2) SA 138 (Appellate Division) (13 November 1997). 111 The Constitution of South Africa was a relevant factor in S v Coetzee 1997 (3) SA 527 (Constitutional Court). The Constitutional Court focused on s 332(5) of the Criminal Procedure Act 1977 concerning offences.

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automatic disqualification whereas section 219 deals with an application to grant a disqualification to prevent a person from acting as a director for a certain fixed period.112 In other words, automatic disqualifications (section 218) have a common law time period attached to them; for example, the person/minor becomes of full capacity, while an insolvent becomes rehabilitated after ten years, or after 20 years from the date the applicable crime was committed.113 It should be noted that the 2008 Act makes reference to ‘reckless trading’ and section 162(5)(c)(iv)(aa) enables a court to declare a person a ‘delinquent director’ if the person acted in a manner that amounted to ‘gross negligence (equal to recklessness), wilful conduct or breach of trust’ in the performance of directors’ statutory duties.114

4.4 Companies Act 2008 Although automatic disqualification did not change significantly in the 2008 Act, an almost completely new approach was adopted regarding disqualification by court order or, as it could also be called now, disqualification on application. This section discusses the different forms of disqualification while accentuating new terminology used and the differences between the 1973 Act and the 2008 Act. 4.4.1 Automatic disqualification 4.4.1.1 Ineligibility Section 69 (broadly comparable to section 218 of the 1973 Act) is titled ‘Ineligibility and disqualification of persons to be director or prescribed officer’.115 Section 69(7) lists the following persons as being ineligible: s s

JURISTICPERSONS116 UNEMANCIPATEDMINORSORTHOSEWITHSIMILARLEGALDISABILITYAND117

112 Cilliers et al., above n 1, 125 [9.25]. 113 R Sharrock, K Van der Linde and A Smith, Insolvency Law (Juta, 2016) 192; C R Snyman, Strafreg (Butterworths, 1992) 66; Criminal Procedure Act 1977 s 18 does not require prescription for murder, war crimes, etc., but for all other offences the period of prescription is 20 years. 114 See 2008 Act s 22. 115 See generally on s 69 Delport, above n 41, 261–266(3). W A Joubert et al., The Law of South Africa (LexisNexis, 2013), electronic reference to Companies: Part 2, Other Disqualifications. The authors state that the 2008 Act is silent on the issue of additional qualifications/disqualifications in the memorandum of incorporation, but there is no impediment to such provisions being included in the memorandum of incorporation. 116 2008 Act s 69(7)(a). 117 Ibid. s 69(7)(b).

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APERSONWHODOESNOTSATISFYANYQUALIlCATIONINTHECOMPANYSMEMORANDUM of incorporation (generally comparable to the articles of association under the 1973 Act).

4.4.1.1.1 JURISTIC PERSONS

This provision is comparable to section 218(1)(a), but whereas that section used the term ‘body corporate’, section 69(7)(a) uses the term ‘juristic person’. The definitions (section 1 of the 2008 Act) of companies, close corporations, co-operatives and holding companies specifically refer to them as ‘juristic persons’. In addition, the definition of ‘juristic person’ in the 2008 Act also mentions ‘foreign companies’ and ‘trusts (irrespective of whether these were established within or outside the Republic of South Africa)’ as juristic persons. Thus they are also excluded from becoming a director of companies. 4.4.1.1.2 UNEMANCIPATED MINOR OR SIMILAR LEGAL DISABILITY

The 2008 Act recognises the common law term ‘emancipation’. An unemancipated minor or persons with similar legal disabilities enjoy no, or limited, contractual capacity. As the 2008 Act explicitly refers to ‘unemancipated minor’, the difficulties associated with ‘emancipation’ illustrated by the Ex parte Velkes case are no longer of any relevance.118 If a court emancipates a minor today, for all practical purposes the minor is no longer disqualified to act as a company director. A person with ‘similar legal disability’ includes a person who has been declared by a court to be incapable of managing their own affairs – for example, a prodigal. A prodigal is a person who squanders their assets or business assets to such an extent that they threaten to reduce the financial position of their personal estate to destitution. A High Court in South Africa may appoint a curator bonis who will administer the prodigal’s personal affairs and may conclude contracts on behalf of the prodigal. The prodigal is therefore similar to a minor, with limited or no contractual capacity, and will be automatically disqualified from becoming a director under South African law.119 4.4.1.1.3 QUALIFICATION SET OUT IN THE COMPANY’S MEMORANDUM OF INCORPORATION

It is possible that any form of qualification or disqualification could be contained in a company’s memorandum of incorporation. In its simplest form this could entail academic qualifications and/or other qualifications. The Electricity Act 1958 (SA) (1958 Act) does make use of disqualification terminology in section 6(1) – for

118 Ex parte Velkes 1963 (3) SA 576 (Provincial Division). 119 Kopel, above n 42.

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example, unsound mind and dishonesty. The Electricity Act 1987 (SA) (1987 Act) in section 5(3)–(4) contains disqualification criteria when persons are not eligible to serve as ESKOM (the South African electricity public utility) directors, which are similar to those in the 1958 Act.120 For example any person shall be ineligible from being appointed or serving as a member/director of the board if: (a) they are of unsound mind;121 (b) they have been absent without leave of the board for more than two consecutive meetings;122 (c) their contract of appointment was terminated on the grounds that they are incompetent or unfit to fulfil their duties.123 Section 5(1)(b) of the 1987 Act merely declares that any board appointments could be subject to employment contractual conditions/requirements; for example, a director should be a university graduate as a contractual requirement of employment. Section 5(1)(c) of the 1987 Act states that directors should have sufficient knowledge of matters relating to, for instance, accounting and law, which tacitly implies academic qualifications. Another hint as to what could be contained in a company’s memorandum of incorporation is to be found in the Friendly Society Act 1956, which provides that:124 (a) The principal executive officer shall be an individual who is resident in the Republic.125 (b) If they are absent from the Republic or unable for any reason to discharge any duty imposed upon them by any provision of this Act, the society shall appoint another within 30 days.126 (c) An auditor may not act as an officer of the society.127

120 The Eskom Amendment Act 1991 contains additional disqualification criteria in a separate s 6. It should be noted that the 1987 Act was amended, especially the disqualification criteria, a few times until s 5 of the 1987 Act was repealed by the National Energy Regulator Act 2004. 121 1958 Act s 5(3). 122 Ibid. s 5(4). 123 Ibid. 124 Y Kleitman, ‘Prescribed Officers’ (2011) Without Prejudice 18, in which the author refers to regulations in company law that define a prescribed officer. A prescribed officer includes the term ‘director’. 125 Friendly Society Act 1956 s 10(2). 126 Ibid. 127 Ibid. s 11(1).

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Apart from ‘ineligible’ persons mentioned in section 69(7) of the 2008 Act, section 69(8) of the 2008 Act lists the persons who are ‘disqualified’, and this is dealt with below. 4.4.1.2 Disqualified persons In terms of section 69(8) of the 2008 Act: (8) A person is disqualified to be a director of a company if – (a) a court has prohibited that person to be a director, or declared the person to be delinquent in terms of section 162, or in terms of section 47 of the Close Corporations Act, 1984 (Act No 69 of 1984); or (b) subject to subsections (9) to (12), the person – (i) is an unrehabilitated insolvent; (ii) is prohibited in terms of any public regulation to be a director of the company; (iii) has been removed from an office of trust, on the grounds of misconduct involving dishonesty; or (iv) has been convicted, in the Republic or elsewhere, and imprisoned without the option of a fine,128 or fined more than the prescribed amount, for theft, fraud, forgery, perjury or an offence – (aa) involving fraud, misrepresentation or dishonesty; (bb) in connection with the promotion, formation or management of a company, or in connection with any act contemplated in subsection (2) or (5); or (cc) under this Act, the Insolvency Act, 1936 (Act No. 24 of 1936), the Close Corporations Act, 1984, the Competition Act, the Financial Intelligence Centre Act, 2001 (Act No. 38 of 2001), the Securities Services Act, 2004 (Act No. 36 of 2004), or Chapter 2 of the Prevention and Combating of Corruption Activities Act, 2004 (Act No. 12 of 2004). As the provision dealing with an order to declare a person a ‘delinquent’ is quite unique, it will be discussed separately. Persons declared ‘delinquents’ are

128 The prescribed fine is subject to the presiding officer’s discretion as allowed in terms of the Criminal Procedure Act 1997 s 283. However, other legislation may stipulate a maximum prescribed fee; for example, the Insolvency Act 1936 requires a fine not exceeding R500 in s 144 dealing with criminal liability of a trustee. Various other pieces of legislation mentioned in s 69(8) may impose different fines. The 1973 Act required a prescribed fine of R100 in s 218 as a method to cast the net of disqualification as far as possible; in other words, even fines awarded for petty theft would disqualify a person as a director.

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considered to be automatically disqualified to be a director of a company.129 The other grounds of disqualification mentioned in section 69(8) will be dealt with briefly in this part. 4.4.1.2.1 DISQUALIFICATION UNDER SECTION 47 OF THE CLOSE CORPORATION ACT 1984

Since the adoption of the 2008 Act, no new close corporations were allowed to be incorporated under the Close Corporations Act 1984 (1984 Act).130 However, there are a large number of close corporations still registered and active in South Africa and the law of close corporations is still applicable to all of these.131 This also means that the disqualification grounds for members of close corporations are still relevant and if a person is disqualified under section 47 of the 1984 Act, such a person is then also automatically disqualified, under section 69(5) of the 2008 Act, to be a director of a company. The 1984 Act was aimed at recognising that in small or closely held companies there is normally a distinction between the shareholders and the directors, and that in these companies even principles of the law of partnerships could apply. The distinction between directors and shareholders was removed and the 1984 Act was designed around a maximum of ten natural persons being ‘members’ of the close corporation, with each member holding a specific stake or interest in the corporation (called a membership interest), which must always add up to 100 per cent. In other words, if there are only two members, each can hold a 50 per cent member interest, or one can hold 60 per cent and the other 40 per cent. If a third member is allowed into the close corporation, a proportionate redistribution of the members’ interests should be done – for instance, 50 per cent, 40 per cent, and 10 per cent. All members have, as in the case of partnerships, the right to participate in the management of a close corporation. However, if a person is disqualified under the 2008 Act to be a director of the company, the person is also disqualified from participating in the management of a close corporation. No detailed discussion of section 47 of the 1984 Act is required for current purposes, but for completeness it is quoted:132

129 2008 Act ss 69(5), 69(8)(a). 130 The 2008 Act did not repeal the 1984 Act. The two Acts exist concurrently, and close corporations are required to comply with the provisions of the new 2008 Act only insofar as it amends the 1984 Act. 131 The Editors of SAICA, Notice to Customers (online, 13 December 2011), available at www. saica.co.za/Portals/0/Technical/LegalAndGovernance/Companies%20Act/Close%20 corporation%20registration%20discontinued.pdf (accessed 16 November 2016). On 13 December 2011, the Commissioner of the Companies and Intellectual Property Commission (CIPC) informed the public that the 2008 Act brought an end to the incorporation of new close corporations. 132 See J J Henning, ‘The South African Close Corporation under the Companies Act of 2008’ (2009) 80 Amicus Curiae 22 for an instructive article on the status and future of close corporations in South Africa.

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47. Disqualified persons regarding management of corporation (1) Notwithstanding any other provision of this Act or in any association agreement or any other agreement to the contrary, the following persons shall be disqualified from taking part in the management of a corporation: (a) Any person under legal disability, except– (i) . . . repealed (ii) a minor who has attained at least the age of 18 years and whose guardian has lodged with the corporation a written consent to the minor’s participation in the management of the business of the corporation; (b) save under authority of a Court – (i) an unrehabilitated insolvent; (ii) . . .repealed (iii) . . .repealed (c) any person who is disqualified from being a director of a company in terms of section 69(8) to (11) of the Companies Act 2008, subject to subsection (1B). (1A) A person who has been placed under probation by a court in terms of section 162 of the Companies Act or subsection (1C), must not participate in the management of the business of a corporation, except to the extent permitted in the order of probation. (1B) Despite being disqualified in terms of section 69(8)(b) of the Companies Act, read with subsection (1)(c), a person may participate in the management of a corporation if 100% of the members’ interest in the corporation is held by – (a) that person; or (b) that person and other persons, all of whom are related to that disqualified person, and each such person has consented in writing to that disqualified person participating in the management of the corporation. (1C) Section 162 of the Companies Act 2008, read with the changes required by the context, applies to a corporation, but a reference in that section to – (a) a company must be regarded as referring to a company or a corporation; or (b) a director, must be regarded as referring to a director of a company, or a member participating in the management of a corporation. (2) . . .repealed.

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It will be clear that, with some amendments to refer to the 2008 Act and some other refinements, this section is broadly comparable to section 218 of the 1973 Act. 4.4.1.2.2 UNREHABILITATED INSOLVENT

The same legal principles apply to an unrehabilitated insolvent, as were discussed above, relevant to the 1973 Act. 4.4.1.2.3 PROHIBITED IN TERMS OF ANY PUBLIC REGULATION

There are several regulations dealing with specific qualifications and specific grounds for disqualifications for particular industries, and specific legislation applying to these industries, as well as for directors of listed companies. These provisions are unique to South Africa and here only a few examples will be given. Board Notice 158 of 2014 issued by the FSB deals with director appointments in the insurance industry. This Notice contains certain director disqualifications. Section 3(1)(a) stipulates that every insurance company must have an equal number of non-executive directors in relation to executive directors and further regulations thereto stipulate that: (a) the person should not participate in any management decisions of the insurer for at least 12 months prior to their appointment;133 (b) they should not in the past three years have acted as an employee of the insurer;134 (c) they should not be a family member of an individual working for the insurer;135 (d) they should not supply the company with any materials or goods;136 (e) they should not be a policyholder of the insurer;137 (f) and the same disqualifications apply to the insurer’s holding company in the appointment of non-executive directors.138 Board Notice 158 of 2014 in section 2(a)(ii) also requires that a certain number of persons must be qualified in, for instance, accountancy, law and actuarial sciences. Although the Board Notice is silent on explicitly stating the academic qualifications required, such a qualification will apply to some board members because only persons with such qualifications can be involved in the professions mentioned, which makes this a unique requirement for the insurance industry. If the insurer

133 134 135 136 137 138

Board Notice 158 of 2014 s 3(1)(a). Ibid. Ibid. s 3(1)(b)(i)(aa). Ibid. s 3(1)(b)(i)(cc). Ibid. Ibid. s 3(1)(b)(i)(cc)(ii).

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is unable to comply with the latter requirement, the insurer should apply to the FSB for exemption. Board Notice 113 of 2015 contains additional disqualifications for insurance company directors.139 In section 4(1) the following disqualifications are observed: (a) convicted of an offence or pending such proceedings which may lead to such a conviction; (b) any other offence committed after the Constitution of the Republic of South Africa took effect in 1996; (c) civil liability for fraud or misrepresentation under any law; (d) having been the subject of enforcement actions by the Registrar of Insurance; (e) having been removed from an office of trust otherwise than at his own request; (f) having breached a fiduciary duty; (g) conflict of interest or an impaired ability to discharge their duties in respect of the insurance business of the insurer; (h) having seriously failed to manage their own personal debts, including civil judgment for unpaid debts or been sequestrated or pending such proceedings; (i) having been dismissed to act as director in terms of any other law; (j) having been unable to provide a satisfactory credit record; (k) having been refused registration of membership by a regulatory authority; (l) having been denied membership of any professional body pertaining to integrity or business conduct; (m) being disciplined by a regulatory body pertaining to dishonesty and or integrity; (n) being untruthful or providing false or misleading information; (o) having demonstrated a lack of willingness or readiness to comply with any legal, regulatory requirements; (p) being found not fit and proper by the Registrar; (q) being connected to a company which is subject to business rescue. Other unique qualification and disqualification requirements are contained in the Johannesburg Stock Exchange (JSE) Equity Rules and apply to companies listed on the JSE.140 Rule 4.10.1 provides as follows: An officer, non-executive director of a member or a shareholder who is a natural person who directly or indirectly holds in excess of 10% of the issued shares of a member, must, subject to any waiver by the JSE:

139 Government Gazette No 38832 (29 May 2015). 140 The Editors of JSE Ltd, JSE Equity Rules, available at www.jse.co.za/content/ JSERulesPoliciesandRegulationItems/EquitiesRules.pdf (accessed 25 November 2016).

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The requirement of good character and high business integrity made applicable to natural persons as shareholders where they own more than 10 per cent of the listed company’s share capital is particularly unique.142 In addition to the ‘fit and proper requirements’, the following general qualifications also apply to equity trading companies: (a) A director of a company dealing in equities/shares must employ adequate resources, procedures and systems that are necessary for the effective performance of the regulated services that it provides and/or ensuring compliance with the rules and directives that are relevant to the performance of such regulated services and or ensuring compliance with the Financial Intelligence Centre Act 2001.143 (b) A director must ensure that the employees are suitable, adequately trained and properly supervised.144 Rule 4.10.2 provides that the following persons are disqualified from being directors of companies listed on the JSE: (a) persons convicted of an activity constituting a criminal offence involving fraud, theft, dishonesty or market abuse, whether in South Africa or abroad; (b) persons who were held civilly or administratively liable for, inter alia, fraud, theft, dishonesty or market abuse, whether in South Africa or abroad; (c) persons declared to have contravened legislation in respect of market abuse, money laundering or terrorist or related activity, with or without the imposition of an administrative penalty, whether in South Africa or aboard; (d) persons disqualified by a court from acting as a director of a company; (e) persons who are subject to a formal investigation by any regulatory or government agency; (f) persons expelled from any exchange or external exchange; (g) persons employed by or associated with any authorised user of any exchange or external exchange, which authorised user was expelled from the exchange and where the person has in the opinion of the JSE contributed to the circumstances leading to the expulsion; (h) persons who have been declared defaulters by the JSE or any other exchange or external exchange;

141 142 143 144

Ibid. rr 4.10.1.1–4.10.1.3. Ibid. r 4.10. Ibid. r 3.30.1. Ibid. r 3.30.1.2.

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(i) persons who were refused entry to or expelled from any profession or vocation or who have been dismissed or requested to resign from any office or employment or from any fiduciary office or similar position of trust; (j) persons who were refused approval or had approval involuntarily withdrawn in respect of any status granted by a regulatory authority – for example, the FSB in terms of the Financial Advisory and Intermediary Services Act 2004. The above disqualifications and ‘fit and proper requirements’ are generally listed in an application form to be completed by the director/JSE member applicant. If, however, any of the above disqualifications is answered with deliberate omission or dishonesty, the JSE can immediately disqualify the applicant. Nonetheless, if the applicant is subject to previous convictions145 or is an insolvent,146 the applicant may apply for an exemption from the JSE in terms of rule 4.20.1.1. The JSE may withdraw its provisional exemption in terms of rule 4.20.1.1 with at least one month’s notice issued to the director/JSE member. The Equity Rules in rule 4.50 provide for certain academic qualifications as listed in the JSE Equities Directives in directive A subparagraph AD, which also regulates JSE stockbroker firms authorisations and approvals. To participate or to trade in listed JSE equities, the directors of these firms must obtain the following academic qualifications:147 For a stockbroker firm – qualified as a Regular or Charterholder Member of the Chartered Financial Analyst Institute and passed the examination modules of the South African Institute of Financial Markets or the South African Institute of Stockbrokers examination. Thus, it should be noted that although the 2008 Act does not require academic qualifications per se, a director must possess an academic qualification to enable the company to participate in equity trade on the JSE. It should be noted that alongside the JSE Equity Rules, the JSE also has Derivative Rules specifically designed to regulate directors’ appointments for companies who trade in JSE derivatives.148 Rule 3.20 is broadly comparable to Equity Rule 4.10.1.3. The JSE has the sole prerogative to add any disqualification(s) from time to time as allowed for in rule 3.40.6. If the JSE disqualifies a person in

145 Ibid. r 4.10.2.1. 146 Ibid. r 4.10.1.2. 147 The Editors of JSE Ltd, JSE Equity Directives, available at www.jse.co.za/content/ JSERulesPoliciesandRegulationItems/EquitiesDirectives.pdf (accessed 25 November 2016). This is only a general outline of the qualifications since individual examination modules differ for derivative, agriculture or equities brokers, etc. The qualification acronym is a CFA. 148 The Editors of JSE Ltd, JSE Derivative Rules, available at www.jse.co.za/content/ JSERulesPoliciesandRegulationItems/DerivativesRules.pdf (accessed 25 November 2016).

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terms of rule 3.20, the disqualified person may appeal the JSE’s decision to a court. Another example of unique rules comprises those contained in the Interest Rate and Currency Rules. They are also similar to the Equity Rules (as an example, refer to rule 3.30).149 4.4.1.2.4 REMOVED FROM AN OFFICE OF TRUST ON THE GROUNDS OF MISCONDUCT INCLUDING DISHONESTY

It will be noted that this disqualification ground is similar to the one contained in section 218(1)(d) of the 1973 Act, except for the fact that ‘dishonesty’ was added. Thus, the same considerations and the difficulties experienced under the 1973 Act, as discussed above, remain. The term ‘dishonesty’ will only add to the complexity as it is not a term easily defined. Since no court order is required to confirm the removal from a position of trust based on ‘misconduct’ or ‘dishonesty’, this disqualification ground will remain problematic. It will remain an aspect that all companies will have to self-regulate by requiring that all directors indicate, before appointment to the office of director, whether they have been removed from an office of trust on the grounds of misconduct including dishonesty. This will then have other legal consequences if it is later discovered that the person was indeed removed from such an office based on ‘misconduct’ or ‘dishonesty’. Such a person will then be in breach of the disqualification provisions of the 2008 Act. In terms of section 214(1)(b) of the 2008 Act any person appointed as a director on the basis of false or misleading information pertaining to previous disqualification criteria or orders is guilty of an offence. For this reason it is recommended that any company should issue a disqualification questionnaire to any prospective director before their appointment. Previous employment dismissals on the basis of dishonesty or misconduct are not contained in any register in South Africa. Thus, if the company is not making use of a questionnaire to verify the answers provided by the prospective director, it would be very difficult to rely on section 214(1)(b).150 4.4.1.2.5 CONVICTION AND IMPRISONMENT WITHOUT THE OPTION OF A FINE FOR THEFT, FRAUD, FORGERY, PERJURY OR OTHER OFFENCES

Section 69(8)(iv) of the 2008 Act is in part similar to section 218(d)(iii) of the 1973 Act with regard to conviction and imprisonment without the option of a fine for theft, fraud, forgery, perjury or other offences committed by a director of a company. A notable difference is that the 1973 Act only referred to offences

149 The Editors of the JSE Ltd, JSE Interest Rate and Currency Derivatives Rules, available at www.jse.co.za/content/JSERulesPoliciesandRegulationItems/Interest%20Rate%20 and%20Currency%20Rules.pdf (accessed 25 November 2016). 150 Protection of Personal Information Act 2013.

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under one Act, namely the Prevention and Combating of Corrupt Activities Act 2004. The 2008 Act refers to offences under the 2008 Act as well as the Insolvency Act 1936, the Close Corporations Act 1984, the Competition Act 1999, the Financial Intelligence Centre Act 2001, the Securities Services Act 2004 and Chapter 2 of the Prevention and Combating of Corruption Activities Act 2004. The offence of ‘misrepresentation’ was also not listed in the 1973 Act. This implies that if a director was convicted on the basis of misrepresentation (as a criminal offence), they would be disqualified. 4.4.1.3 Ending of disqualification and extensions of disqualification periods The period of disqualification for a person removed from an office of trust, on the grounds of misconduct involving dishonesty, ends at the later of five years after the date of removal from office or at the end of one or more extensions, as determined by a court from time to time, on application by the Companies and Intellectual Property Commission (hereafter ‘the Commission’) under section 69(10) of the 2008 Act. Similarly, the disqualification of a person convicted of one of the offences listed in section 69(8)(b)(iv) ends at the later of five years after the completion of the sentence imposed for the relevant offence or at the end of one or more extensions, as determined by a court from time to time, on application by the Commission under section 69(10) of the 2008 Act. Section 69(10) provides that at any time before the expiry of a person’s disqualification because of removal on the grounds given above or the offences mentioned above, the Commission may apply to a court for an extension of the disqualification. The court may extend the disqualification for no more than five years at a time, if the court is satisfied that an extension is necessary to protect the public, having regard to the conduct of the disqualified person up to the time of the application.151 As mentioned above in section 4.3.1.2.3, ‘the public interest in the clean government and administration of companies’152 is one of the main considerations for a court to determine whether a person disqualified should be exempted from disqualification, and this will also apply for purposes of the current provisions of disqualification under the 2008 Act as discussed in the next paragraph. 4.4.1.4 Exempting a person from being disqualified under section 69 Under section 69(11) a court may exempt a person from the application of any provision in section 69(8)(b), as discussed above. Under the 1973 Act there was no specific statutory provision giving a court the power to exempt a person from disqualification. However, under South African common law, a court had an

151 2008 Act s 69(10)(b). 152 Ex parte Dworsky 1970 (2) SA 429 (Provincial Division) at 432.

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unfettered discretion to give a disqualified person authority to act as director irrespective of the fact that the person had been automatically disqualified, but the person must bring such an application to the court.153 It is submitted that the same considerations whether or not to grant a disqualified director authority to act as director under the common law will still be relevant under current law as was illustrated by the case of Gihwala v Grancy Property Ltd154 discussed below in section 4.5. The court will only grant such leave under exceptional circumstances, exercising a discretion regarding the expectations of high standards of honesty and trustworthiness of directors.155 Factors such as whether leave is sought to act as director of a private or public company, the type of offence the director was convicted of, that resulted in disqualification, whether or not the shareholders support the applicant, and the attitude of the ‘prominent associates of an applicant’ will be taken into consideration by a court.156 4.4.1.5 Notification of disqualification Under section 69(11A) the Registrar of the Court must, upon the issuing of a sequestration order, the issuing of an order for the removal of a person from any office of trust on the grounds of misconduct involving dishonesty, or a conviction for an offence referred to in section 69(8)(b)(iv), send a copy of the relevant order or particulars of the conviction, as the case may be, to the Commission. The Commission is obliged, under section 69(11B), to notify each company that has a director to whom the order or conviction relates, of the order or conviction. 4.4.1.6 Register of disqualified persons Under section 69(13) the Commission is required to establish and maintain in the prescribed manner a public register of persons who are disqualified from serving as a director, or who are subject to an order of probation as a director, in terms of an order of a court pursuant to this Act or any other law.157

153 154 155 156 157

Delport, above n 41, 261. [2016] ZASCA 35 (Supreme Court of Appeal). See cases referred to in Delport, above n 41, 261. Ex parte Barron 1977 (3) SA 1099 (Provincial Division) at 1100. While the 1973 Act was still in force, the Registrar issued a public notice on the Registrar’s website as to why the disqualification register was not up to date. This website contained a public search function to search for disqualified directors. The main reason the register was not up to date was due to poor communication between the office of the Registrar of Companies and the various Registrars of Court. See Public Notice (online, undated), available at www.cipro.gov.za/2/ddr/ddrintro.aspx (accessed 16 November 2016). Since the inception of the 2008 Act there is no longer a public search function to search for disqualified directors; see www.cipc.co.za/index.php/line-transacting (accessed 16 November 2016). Such a register exists under the terms of the 2008 Act but it is not open

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In order to ensure that names of disqualified persons are reflected on the register, the Registrar of the Court must inform the Commission of any sequestration order, removal from an office of trust or where a person has been convicted of the listed offences.158 In addition, the Commission must notify each company that has a director to whom the sequestration order or conviction relates, of the order or conviction.159 4.4.2 Disqualification on application 4.4.2.1 A unique and complex approach Section 162 of the 2008 Act deals with what is normally called ‘disqualification of directors on application’. The heading of the section is ‘Application to declare a director delinquent or under probation’. It is a unique provision, using terminology never used previously in South Africa. It is also a very long section, stretching over about three and a half pages, containing approximately 1,500 words. It commences by defining the term ‘legislation’ very widely, including any national and provincial legislation: (a) relating to the promotion, formation or management of a juristic person; (b) regulating an industry or sector of an industry; or (c) imposing obligations on, prohibiting any conduct by, or otherwise regulating the activities of, a juristic person. The section lists who has standing to bring an application under this section and then deals with the requirements and consequences of orders to declare a person ‘delinquent’ or ‘under probation’. It also contains the grounds on which persons could be declared as such and provides that the court can add conditions to these orders. Some of the main aspects will be discussed below. 4.4.2.2. Standing to apply for a court order to declare a director delinquent or to place a person under probation Section 162 of the 2008 Act sets out by whom and in what circumstances the court may be approached to declare a person be declared ‘delinquent’ or ‘under probation’. A company, a shareholder, a director, a company secretary, a prescribed officer of the company, a registered trade union of the company or an employee

for inspection by the public. This was confirmed by Mrs Christel Katz of the Shelf Company Warehouse Pty (Ltd) in Pretoria (South Africa). 158 2008 Act s 69(11A). 159 2008 Act s 69(11B). The CIPC website, however, indicates that some court orders are still outstanding from January 2006 and that, consequently, the register is not up to date; see www.cipro.gov.za/2/ddr/ddrintro.aspx (accessed 16 November 2016).

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representative scheme may apply in terms of section 162(2). Section 162(3) authorises the Companies and Intellectual Property Commission160 and the Takeover Regulation Panel (hereafter ‘the Panel’) and Section 163(4) provides for an application by any organ of the state – that is, a liquidator in terms of company liquidations or the Department of Home Affairs in respect of legislation administered by it. In comparison with all the other jurisdictions dealt with in this book, the South African law is unique for several reasons, including the fact that in none of the other jurisdictions are there so many parties given standing to bring an application that will disqualify a person from being a director. As will be recalled, a person declared as a delinquent is disqualified from being a company director in South Africa. The South African disqualification regime in the 2008 Companies Act is also unique in that the Act predominantly utilises a system of administrative enforcement rather than criminal sanctions to ensure compliance with the Act. Whereas acting as an officer or director while disqualified or delinquent in itself does not constitute an offence, it could result in non-compliance with a section 171 Compliance Notice, which is an offence punishable with a fine and/or imprisonment for a maximum of 12 months.161 4.4.2.3 Orders under section 162 of the 2008 Act 4.4.2.3.1 ORDER TO DECLARE A PERSON A ‘DELINQUENT’

It should be noted that a unique distinction is made between an order to declare a person ‘delinquent’ (discussed here) and an order to place a person under ‘probation’ (discussed in part 4.4.2.3.2 below). As far as applications to declare a person a delinquent are concerned, a court must make an order declaring a person to be a delinquent director if the person was disqualified while acting as a director or member of a close corporation (under section 69 of the 2008 Act and section 47 of the 1984 Act as quoted above)162 and such an order must also be made by the court if the person, while being a director: (a) consented to serve as a director, or acted in the capacity of a director or prescribed officer, while ineligible or disqualified in terms of section 69;163 (b) contravened an order of probation in terms of either section 162(7) of the 2008 Act or section 47 of the 1984 Act ;

160 Established under s 185 of the 2008 Act. 161 2008 Act s 214(3) read with s 171(7) For a more detailed analysis of ‘delinquency’ and ‘probation’, see J du Plessis and P Delport, ‘“Delinquent Directors” and “Directors under Probation”: A Unique South African Approach Regarding Disqualification of Company Directors’ (2017) 133 SALJ (forthcoming). 162 2008 Act s 162(5)(a)–(b). 163 2008 Act s 162(5)(a). There are exceptions pertaining to persons acting under the protection of a court order contemplated in s 69(11) of the 2008 Act as a director, as contemplated in s 69(12).

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(c) grossly abused the position of director, took personal advantage of information or an opportunity (see section 76(2)(a) of the 2008 Act); (d) intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company (see section 76(2)(a)of the 2008 Act); or (e) acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company; or in a manner specifically provided for and where the director would be liable for any loss, damages or costs sustained by the directors because of specified wrongful acts (listed in section 77(3) (a)–(c) of the 2008 Act). They differ from orders to place a person under ‘probation’. 4.4.2.3.2 ORDER TO PLACE A PERSON UNDER ‘PROBATION’

For a person to be paced under probation, the court must be satisfied that the declaration is justified, having regard to the circumstances of the company’s or close corporation’s failure, and the person’s conduct in relation to the management, business or property of the company or close corporation at the time.164 Also, it should be noted that a probation order could contain any appropriate conditions, including conditions limiting the application of the declaration to one or more particular categories of companies.165 On application of any of the ‘other parties’, the Commission or Panel (‘an organ of state responsible for the administration of any legislation’ has no standing under this section), a court has a discretionary power under section 162(7)(a) of the 2008 Act to make an order placing a person under probation, if, while serving as a director, the person: (i) was present at a meeting and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test, contrary to this Act; (ii) otherwise acted in a manner materially inconsistent with the duties of a director; or (iii) acted in, or supported a decision of the company to act in, a manner contemplated in section 163(1) [of the 2008 Act]. On application of the Commission or Panel (the other parties mentioned above do not have standing under this section), section 162(7)(b) of the 2008 Act gives a court the discretionary power to place a person under probation if within any ten-year period from 1 May 2011, the date on which the 2008 Act became effective:

164 Ibid. s 162(8)(b)(ii). 165 Ibid. s 162(9)(a).

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Neels Kilian/Jean Jacques du Plessis/Jeanne Nel de Koker (i) the person has been a director of more than one company, or a managing member of more than one close corporation, irrespective of whether concurrently, sequentially or at unrelated times; and (ii) during the time that the person was a director of each such company or managing member of each such close corporation, two or more of those companies or close corporations each failed to fully pay all of its creditors or meet all of its obligations, except in terms of – (aa) a business rescue plan resulting from a resolution of the board in terms of section 129; or (bb)a compromise with creditors in terms of section 155.

This section simply attempts to ensure that people involved in several companies and/or close corporations over a ten-year period could be placed under probation even though they were not automatically disqualified or nobody applied for an order to declare them as delinquents. 4.4.2.4 Conditions attached to delinquency and probation orders Section 162(10) of the 2008 Act provides as follows: Without limiting the powers of the court, a court may order, as conditions applicable or ancillary to a declaration of delinquency or probation, that the person concerned – (a) undertake a designated programme of remedial education relevant to the nature of the person’s conduct as director; (b) carry out a designated programme of community service; (c) pay compensation to any person adversely affected by the person’s conduct as a director, to the extent that such a victim does not otherwise have a legal basis to claim compensation; or (d) in the case of an order of probation – (i) be supervised by a mentor in any future participation as a director while the order remains in force; or (ii) be limited to serving as a director of a private company, or of a company of which that person is the sole shareholder. It will be seen that these provide constructive ways of guiding individuals under probation towards becoming fully fledged directors. 4.4.2.5 Periods of being declared a ‘delinquent’ or ‘under probation’ 4.4.2.5.1 DELINQUENCY

The different periods for which a person can be declared to be a delinquent person are also unique. The first category of such declarations applies ‘for the lifetime of

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the person declared delinquent’ – the equivalent to a lifetime sentence of imprisonment – and these persons do not have the right to apply for this order to be suspended or set aside,166 which seems quite drastic. This category is, however, limited to cases where a person was already automatically disqualified, including having been declared a delinquent director, but in defiance of this disqualification acted as a director, a prescribed director or a member of a close corporation.167 The minimum number of years the court can order a person to be a delinquent director is seven years from the date the order is made.168 It is, however, within the court’s discretion to make an order for a person to be declared a delinquent director for a period longer than seven years.169 4.4.2.5.2 UNDER PROBATION

The maximum period a person can be placed under probation is five years.170 4.4.2.6 Application to suspend or substitute delinquency and probation orders Except for a person who was disqualified for a lifetime because they acted as director or member of a close corporation while disqualified,171 others declared delinquent can, at any time more than three years after the order of delinquency was made, apply to a court for the suspension of the order of delinquency and for such an order to be substituted with an order of probation, which may or may not contain conditions.172 A person under a probation order (contrasted with a delinquency order) can only apply to a court for the setting aside of such an order two years after such an order was made.173 With reference to the application of substitution or suspension explained above, section 162(12) of the 2008 Act provides as follows: 162(12) On considering an application contemplated in subsection (11), the court may – (a) not grant the order applied for unless the applicant has satisfied any conditions that were attached to the original order, or imposed in terms of subsection (11)(a); and

166 167 168 169 170 171

Ibid. s 162(11) read with s 162(6)(a) and s 162(5)(a)–(b). Ibid. Ibid. s 162(6)(b)(ii). Ibid. Ibid. s 162(9)(b). Ibid. See again s 162(6) read with s 162(5)(a) or (b). See further Du Plessis and Delport, above n 161. 172 Ibid. s 162(11)(a). 173 Ibid. s 162(11)(b)(ii).

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This seems to be quite a novel approach, but terms such as ‘rehabilitation’ and a ‘reasonable prospect’ for the person ‘to serve successfully as a director of a company in the future’ will probably provide some challenges for the courts. Section 69(13) of the 2008 Act requires the Commission to establish and maintain a public register of persons automatically disqualified from serving as a director or who are subject to an order of probation as a director in terms of a court order. However, the 2008 Act does not require the Commission to maintain a register of directors whose declaration as a delinquent is pending. Companies may therefore unknowingly appoint a person as director while proceedings to declare the person a delinquent are pending.174

4.5 Court case analysis of the 2008 Act 4.5.1 Application to have a person declared as delinquent under section 162 of the 2008 Act In the matter between Kukama Koketso v Lobelo Lamber and The Companies and Intellectual Property Commission (CIPC), an unreported judgment of the South Gauteng High Court,175 Tshabalala J had to consider an application from Kukama in his capacity as shareholder to declare Lobelo a delinquent director and remove him as director from two other companies.176 The application also sought to recover R23 million for costs and costs on the attorney and client scale.177 The following background facts are common cause in this matter. Kukama and Lobelo were equal (50 per cent each) shareholders of Peolwane Properties Pty (Ltd) and Diphuka Construction Pty (Ltd). Lobelo was the sole director of Diphuka Pty

174 Companies should therefore consider requiring prospective directors, prior to their appointment, to certify or declare that they have not been declared delinquent by a court order and that no such proceedings are pending against them. Such an approach is comparable to the German provisions on directors’ disqualification. 175 Case Number 38587/2011 (12 April 2012) (GSJ). See further Du Plessis and Delport, above n 161. 176 The Court did not indicate specifically in which capacity – neither director nor shareholder was mentioned, although it is assumed to be shareholder since he was a shareholder of both companies. 177 Case Number 38587/2011 (12 April 2012) (GSJ) 2.

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(Ltd) whereas Kukama and Lobelo were directors of Peolwane Pty (Ltd).178 Lobelo submitted partially false tax invoices to the South African Revenue Services (SARS) which totalled R39 million.179 Subsequently, SARS paid an amount over to Diphuka Pty (Ltd) instead of the bank account of Peolwane Pty (Ltd) in the form of a tax rebate. The tax rebate was calculated in excess of R280 million more than the actual expenses of the company. SARS paid the money into Diphuka’s bank account on the basis of Lobelo’s instruction as company director. Lobelo used the money to pay other entities, chief among these being his own personal liabilities.180 The Court was asked to consider sections 22 (reckless trading), 76(2) (a)–(b) (to cause harm to the company), 76(3) (communicate information to the company), 77(3) (liable for any loss) and 162(5)(c) (refers to a disqualification court order) of the 2008 Act.181 The Court quoted the statutory sections in full, but did not indicate which sections were breached by Lobelo. Lobelo’s defence was that the applicant had shown no real interest in the companies and had shown no interest in their proper management. Even if the latter is true, it is clear that neither shareholder could exercise a majority vote on how to run the businesses or to vote for the removal/appointment of directors since each had 50 per cent of the shares. This 50 per cent shareholding implies the co-operation of both shareholders in the running of both companies. The court held that Lobelo did not notify SARS of the irregular payment, nor did he notify the co-shareholder of the company of the SARS payment in terms of section 76(2)(a); nor did he alert his co-director and co-shareholder to the possibility of fraud in terms of section 76(2)(b).182 This alone is clear evidence that Lobelo breached his statutory fiduciary duties in terms of section 76(3) as it amounts to wilful misconduct, breach of trust and gross abuse of his position of director with clear intent to defraud the company. In addition, Lobelo utilised the SARS payments, inter alia, to pay his own personal expenses in conflict with his duties to the company and to act in the best interests of the company. He acted with gross negligence, which supported a disqualification order in terms of section 162(5)(c)(iii). In addition to the latter, the Court held that Kakuma could proceed with legal action on behalf of the company to claim R23 million from Lobelo under section 77(3). The Court held that Lobelo was a delinquent director and it was not necessary to issue an order to remove him as a director since a delinquency order automatically implies removal from the board in terms of section 69.183

178 179 180 181 182 183

Ibid. Ibid. Ibid. 4. Ibid. 10. Ibid. 11–12. Ibid. 18, 20.

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In Gihwala v Grancy Property Ltd184 the Appeal Court delivered judgment on 24 March 2016 concerning the correctness of a delinquency order made by the High Court where it was held that Gihwala was a delinquent director. The Appeal Court’s judgment consists of 124 pages in total explaining the complicated business ventures of Gihwala and relevant court orders in detail. In summary, the facts of the matter are briefly as follows. Spearhead Property Holdings Ltd is a listed company on the Johannesburg Stock Exchange. During 2005 the listed share price was R20. The company decided to transform Spearhead Property Holdings Ltd into a black empowerment company as a result of Black Economic Empowerment legislation (commonly known as BEE) to increase the number of people from groups other than white becoming shareholders. The shares to be issued to black shareholders (Ngatana Property Investments Pty (Ltd)) were valued at R15.50 per share, nearly R5 less in value than a listed share.185 Spearhead set aside 3.5 million shares for this BEE transaction. Ngatana Property Investments Pty (Ltd) was solely managed by Gihwala. To finance the 3.5 million shares at R15.50, Gihwala approached Standard Bank of South Africa. Standard Bank was only willing to pay R12.75 per share, nearly R3 less than BEE value. To make up for the difference, Gihwala decided to sell one-third of the 58 per cent of the 3.5 million shares to Grancy Property Ltd represented by Mawji, one-third of the 58 per cent to Gihwala and one-third of the 58 per cent to another investor, and in addition advance a loan to Ngatana.186 The other investor was unable to purchase his one-third of the shares; therefore, Gihwala and Mawji contributed equally to acquire an additional one-third of the shares.187 Besides the latter transactions, Spearhead issued a rights offer financed by Standard Bank whereby Ngatana obtained an additional 2 million shares in Spearhead. Mawji was unaware of this transaction at the time. When he questioned the additional rights issue and asked for financial statements, Gihwala ignored his requests. Mawji decided to sell his portion of the shares to another person at R31 per share.188 Gihwala denied the fact that Mwaji was a shareholder and therefore denied his right to sell his portion of the shares to another investor.189 During this dispute, Gihwala authorised the payment of R750,000 remuneration as director of Ngatana and paid legal fees without the knowledge of Mawji.190 In addition, Ngatana declared dividends and Gihwala received his portion of the dividends, excluding Mawji. Mawji was also

184 [2016] ZASCA 35 (Supreme Court of Appeal). This case is not currently in print circulation and therefore the case page numbers are not consistent, with the case reference citation. See further Du Plessis and Delport, above n 161. 185 Ibid. 11. 186 Ibid. 13. 187 Ibid. 14. 188 Ibid. 16. 189 Ibid. 103. Eventually, Gihwala did register Mwaji as a shareholder on the register of shareholders and produce financial statements to Mwaji. These statements were hopelessly inaccurate, as stated by the Court of Appeal. 190 Ibid. 27, 43.

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unaware of the dividend payments. On this basis Mawji lodged an application in terms of section 424 of the 1973 Act for reckless business practices carried on by Gihwala and to declare the latter a delinquent director in terms of section 162(5) of the 2008 Act.191 In section 4.3.2 above, the relevance of section 424 of the 1973 Act is discussed. Section 424 is only available when the creditors of the company suffered financial losses due to the reckless business practices of company directors. A shareholder is not a creditor of the company, making section 424 irrelevant.192 Similarly, only companies may use section 77(3) as a statutory claim against any unscrupulous directors as a result of financial loss suffered. Section 77(3) cannot be used by a shareholder or a creditor of the company to recover any of their financial losses suffered.193 Nevertheless, the court held that Mawji was entitled to receive company information, to receive similar dividend payments, to be made aware of any proposed director payments or to know of any rights offers or proposed rights offers in shares.194 To exclude Mawji as a shareholder of the company amount to reckless (or gross negligence) business practice.195 On that basis, the Appeal Court confirmed the correctness of the High Court’s order declaring Gihwala a delinquent director.196 4.5.2 Automatic disqualification (section 69) The decision was appealed in Kukama Koketso v Lobelo Lamber and The Companies and Intellectual Property Commission (CIPRO).197 Lobelo raised a new defence that he should have been placed on probation in terms of section 162(7)(a)(ii) of the 2008 Act instead of being declared a delinquent director in terms of section 162(5).198 This defence was not raised as an alternative to delinquency in the court a quo. Kukama submitted new evidence to the Appeal Court. He was unable to submit any court case as a precedent to support his defence.199 The Appeal Court held that the presentation of new evidence was not permissible on appeal. Nevertheless, the Appeal Court referred to the conclusion of the court a quo that: Lobelo’s conduct fell short of the standard expected of directors, he was grossly

191 Ibid. 32, 35. 192 Ibid. 91. The Appeal Court held that the attorneys tried to link legal fees, director remuneration with s 424 and not to the inability of the company to pay its debts as they became due. 193 Ibid. 94. See ss 20(6) and 218(2) of the 2008 Act where third parties can hold directors liable for their losses suffered. 194 Ibid. 44, 50–2. 195 Ibid. 105–6. 196 Ibid. 102. 197 Appeal Case Number 389/2012. See further Du Plessis and Delport, above n 161. 198 Ibid. 7. 199 Ibid. 9. Generally, it is the appellant who submits new evidence to void the order of a court a quo. In this instance it was Kukama who submitted new evidence to bolster the order of the court a quo.

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negligent in failing to report fraud, his gross negligence inflicted harm upon the company, and Lobelo should not have paid his personal expenses/debt. The Appeal Court held that it could not find any fault in the reasoning of the court a quo.200 The conduct of Lobelo was particularly inexcusable considering the fact that he holds a Master’s Degree in Business Administration (MBA), was a director of various other companies, had been active in the business world for more than a decade and therefore had the required educational and practical experience to familiarise himself with the obligations of a company director.201 Even if an auditor had submitted false or fictitious invoices to gain a further R39 million in VAT payments from SARS, it also constituted gross negligence on Lobelo’s part for not asking questions as to how such an amount could have been calculated.202 In addition, the VAT refunds were paid over into different bank accounts on the sole instructions of Lobelo, which was a clear contravention of section 76(2)(a). Not only did he use his position to gain an advantage for himself, but he also gained advantage for Diphuka and Peolwane.203 Further, he used the VAT refunds to settle some company debts and to settle his own personal debts, which constituted a breach of section 76(2)(a). The Appeal Court considered the above and held that the court a quo was obliged to issue a delinquency order in terms of section 162(5). Since the facts were more than sufficient to justify an order of delinquency, and far exceeded the level of seriousness that might have led to probation, the Court had no discretion to consider probation.204 In addition, the Appeal Court upheld Kukama’s right to institute legal action on behalf of the company to recover the R23 million from Lobelo, and consequently the appeal was dismissed.205 4.5.3 Constitutionality of delinquency orders (section 162(5)) In 4.3.2 above, it is stated that a court of law must declare a director a delinquent if the requirements of section 162(5) are met. In Gihwala v Grancy Property Ltd206 the Appeal Court had to decide on the constitutionality of section 162(5). Gihwala, who is an attorney and chairman of one of the largest firms of attorneys in South Africa, asked the court to refer to the constitutionality of section 162(5) after the High Court found him in breach of section 162(5). The basis of his argument was simple: section 162(5) allows no discretion to reject an order of delinquency if the requirements of section 162(5) are met.207 The Appeal Court held that the purpose of section 162(5) is to protect the investing public against the type of conduct that leads to a delinquency order and/or to protect the public

200 201 202 203 204 205 206

Ibid. 12. Ibid. 12–13. Ibid. 10, 14. Ibid. 15. Ibid. 18. Ibid. 19. [2016] ZASCA 35 (Supreme Court of Appeal). See further Du Plessis and Delport, above n 161. 207 Ibid. 108, 111.

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from the future actions of those declared a delinquent director.208 The Appeal Court referred to the circumstance that Gihwala used his company’s information to promote his own personal interests and/or used business opportunities to his own advantage which should have been accrued to the company. Based on the latter, the Appeal Court held that section 162(5) would only be unconstitutional if this section is irrational in its application.209 Gihwala was unable to prove that section 162(5) is capricious or erratic in its application to protect the public from delinquent directors. Besides the latter, Gihwala indicated that an order of delinquency would infringe his constitutional right of dignity since he would be unable to practise as an attorney in the future.210 The Appeal Court found the latter statement surprising since it is trite law that a practising attorney can lose his license to practise when found guilty of misconduct by any law society of South Africa. The actions of a law society are not unconstitutional since the law society has a duty to protect the public from unscrupulous attorneys, etc. 211 The same rationale applies to section 162(5) and the court thus held that it was not unconstitutional.

4.6 Conclusion The introduction of the 2008 Act constituted a major overhaul of South African company law aimed at promoting corporate transparency and accountability and improved corporate governance in the South African corporate sector.212 The preceding analysis clearly shows that the Act amended the South African directors’ disqualification regime fundamentally. It clarified the application of directors’ disqualification provisions and introduced innovative substantive and procedural improvements to the law relating to the disqualifications of directors. Section 69, which addresses automatic disqualification, improved the directors’ disqualification provisions in that it clarified the application of the section and addressed problematic aspects of section 218 in the 1973 Act.213

208 209 210 211

Ibid. 108. Ibid. 111, 113. Ibid. 115. Ibid. 111, 113, 115. Other legislation prevents a person from taking part in the economy – that is, a person who is declared an insolvent; the process and the declaration of insolvency is not unconstitutional. 212 W J L Calkoen, ‘South Africa’ in David Walker and Stimela Moekoena (eds), The Corporate Governance Review (Law Business Research, London, 2011) 275. See further Du Plessis and Delport, above n 161. 213 Cassim, above n 107. In particular, s 69 introduced the common law requirement for the emancipation of minors to avoid the substantive application of the section to such minors, and made it abundantly clear that the section not only relates to Acts of Parliament but is also applicable to all types/kinds of public regulations, which include board notices of the FSB; s 69 also clearly stipulated applicable qualifications and introduced a fixed time period for disqualifications in order to avoid a continuous disqualification.

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A significant innovation under the 2008 Act is that it provides for a court application to declare a director delinquent or placed under an order of probation.214 Section 162 introduces a new remedy for shareholders and certain stakeholders to hold directors (including non-executive directors) accountable. Such orders can have far-reaching implications for directors.215 The provisions of the 2008 Act, in particular the delinquency provisions, significantly impact on the standard of conduct required and the personal liability of directors. The fundamental aim remains to ensure that directors who may pose a risk to others should be disqualified and removed from the business community. These provisions are therefore ultimately aimed at protecting the public from delinquent directors.

214 Cassim, above n 107. Section 162 stipulates the procedure for applying to declare a director a delinquent. The Act allows a broad range of parties to apply to the court for such an order if a director has grossly abused his or her position or taken personal advantage of information to enhance his or her own personal interests. In addition, the court may impose a range of restrictive conditions when granting such an order. For example, the disqualified director must participate in community service or attend a remedial educational programme as stipulated in s 162(10) if the disqualification is to be rescinded. 215 Cassim, above n 107. In contrast to s 69, disqualification under s 162 is continuous or for the lifetime of the person declared delinquent unless otherwise decided by a court. Even if a director were successful in having the order of delinquency or probation suspended or set aside, the concomitant reputational damage is likely to be significant and irreparable.

5

The United States Hannah Marie Farhan* and Jeanne Nel de Koker**

Contents 5.1

Introduction

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5.2

Disqualification legislation 5.2.1 General background to US corporate law: the Model Business Corporation Act (MBCA) and the Delaware General Corporation Law (DGCL) 5.2.2 The development of disqualification legislation in the US

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Disqualification of company directors in the US 5.3.1 Automatic disqualification 5.3.2 Disqualification by the court on application of the regulator 5.3.3 Disqualification by the regulator 5.3.4 Qualifications for directors

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Court case analysis 5.4.1 Disqualification on application of the regulator

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5.1 Introduction United States (US) corporate law functions at both federal and state levels.1 Traditionally, the US divides authority over corporate regulation between federal and state authorities, with federal law governing corporate disclosure obligations and state governments regulating conduct standards for officers and directors.2

* JD, Boston College Law School. ** B Juris LLB, LLM (Free State UFS). Deakin Law School, Deakin University (Australia). 1 See Donald C Langevoort, ‘Federalism in Corporate/Securities Law: Reflections on Delaware, California, and State Regulation of Insider Trading’ (2006) University of San Franciso Law Review 879–92. 2 Renee M Jones and Michelle Welsh, ‘Toward a Public Enforcement Model of Directors’ Duties of Oversight’ (2012) 45 Vanderbilt Journal of Transnational Law 343, 348–91.

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Therefore, every state and territory has its own basic corporate code that sets standards for director conduct,3 whereas federal law creates minimum standards for trade in company shares and governance rights.4 Similar to most jurisdictions, corporate law in the US provides for the removal5 as well as the disqualification (more commonly known in the US as suspension or debarment) of directors.6 However, director removal provisions developed as a tool to enforce and regulate director and officer conduct in state legislation, whereas suspension or debarment is primarily regulated on a federal level through the Securities and Exchange Commission (SEC)7 and the affiliated statutes.8 As a

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However, Jones argues that academic and judicial efforts to define appropriate boundaries between federal and state authority over corporate regulation are incoherent: Renee M Jones, ‘Does Federalism Matter? Its Perplexing Role in the Corporate Governance Debate’ (2006) 41 Wake Forest Law Review 879. See Lucian A Bebchuk, ‘The Case for Increasing Shareholder Power’ (2005) 118 Harvard Law Review 833, 844–7; William J Carney, ‘The Production of Corporate Law’ (1998) 71 Southern California Law Review 715, 731–4; see also John C Coffee, Jr, ‘The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications’ (1999) 93 Northwestern University Law Review 641, 702; Jones and Welsh, above n 2. Notwithstanding the array of different statutes and regulations, these codes have many similarities, to each other and to the Model Business Corporation Act (MBCA). The MBCA is a model statute prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by 24 states. The history and development of the MBCA is discussed further below. For the most of it, regulated by the Securities Act 1933 and the Securities Exchange Act 1934 as amended by the Sarbanes–Oxley Act 2002 and the Dodd–Frank Act 2010. Public laws are incorporated into the Code of Laws of the United States of America (USC), which is a codification of all general and permanent laws of the United States. The USC is arranged by subject matter, and it shows the legislation in its current form. The Securities Act 1933 and the Securities Exchange Act 1934 are contained in Title 15 of the USC. The term ‘removal’ refers to the process of terminating an individual’s status as a director of a particular company with the result that the individual will no longer be a director, will not be able to enjoy the benefits of being a director and will not be required to perform and observe any directors’ duties for the specific company any longer. The removal relates to a position in a particular corporate entity and it is not a general bar to holding an office. The term ‘disqualification’ will be used in order to maintain consistency across all chapters. It is important to note, however, that the US terminology is different. Whereas most jurisdictions use the term ‘disqualification’ to indicate a process that prohibits/disqualifies a person from holding the office of a director, the terms ‘debarment’, ‘suspension ‘and ‘director and officer bars’ are used in the US. An ‘officer and director bar’ is a court declaration prohibiting an individual from serving as an officer or director of a public company: 15 USC s 78u(2)(d). See Steven W Shuldman, ‘An Officer Walks into a Bar: Acknowledging the Need for Deterrence in Officer and Director Bars’ (2014) 83 Fordham Law Review 333, 335, 339. The SEC is a federal regulatory body, established by the Securities Exchange Act 1934. The SEC aims to protect investors, promote ethical behaviour, honesty and fair dealing in financial markets, and facilitate capital formation. See Shuldman, above n 6, 338. Securities Act 1933 s 20(e), 15 USC s 77t(e); Securities Exchange Act 1934 s 21(d), 15 USC s 78u(d); Clayton Antitrust Act 1914 s 8, 15 USC s 19 (2015); Sarbanes–Oxley Act 2002, PL 107–204, 116 Stat 745, s 305. Except for state legislature providing for debarment or suspension of mentally incapacitated, bankrupt and imprisoned directors, provisions on

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result, US corporate law is skewed toward removal,9 and the suspension or debarment (disqualification) provisions are narrow and limited in their application.10 This chapter will address how disqualification legislation in the US operates in theory as well as in practice. First, the Model Business Corporation Act (MBCA) and the Delaware law, as well as federal regulatory statutes will be discussed.11 Following some historical perspectives, the statutes and regulations will be assessed, with specific focus on and reference to automatic disqualification, disqualification on application and disqualification by the regulator. Thereafter, major and recent court cases will be analysed, addressing disqualification of company directors in practice.

5.2 Disqualification legislation 5.2.1 General background to US corporate law: the MBCA and the Delaware General Corporation Law In the US, the chartering of corporations has always been deemed the purview of the legislature.12 This method deviates from the early English system, which permitted charters from the Crown as well as parliamentary bills. Originally, this

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suspension and debarment of directors are contained in the Securities Act 1933 and the Securities Exchange Act 1934. See Jayne W Barnard, ‘SEC Debarment of Officers and Directors after Sarbanes–Oxley’ (2003) 59 Business Lawyer 391, 394; Renee Jones, ‘Unfit for Duty: The Officer and Director Bar as a Remedy for Fraud’ (2014) 82 University of Cincinnati Law Review 439, 439–64. The US regime allows for removal of directors by shareholders as well as judicial removal on application. This is primarily an internal mechanism initiated by shareholder or board of director action. See Rivka Weil, ‘Declassifying the Classified’ (2006) 31 Delaware Journal of Corporate Law 891; Olga N Sirodoeva-Paxson, ‘Judicial Removal of Directors: Denial of Directors’ License to Steal or Shareholders’ Freedom to Vote?’ (1998) 50 Hastings Law Journal 97; Robert C Clark, Corporate Law (Little Brown, 1986) 21–4 [92–140]. The MBCA regulates the removal of directors by shareholders in s 8.08 and removal of directors by judicial proceeding in s 8.09. The US director disqualification regime focuses on securities laws violations, barring individuals from acting as an officer or director of, in particular, publicly traded or registered securities. Furthermore, under current law, the officer and director bar is available only for securities violations involving scienter, a state of mind encompassing intent or recklessness. See Jones, above n 8, 456. In practice, US corporate law is primarily that of Delaware, with the largest plurality of other states following the MBCA. More than 50 per cent of all publicly traded companies in the US (including 64 per cent of the Fortune 500) are incorporated in Delaware; see Department of State, About Agency, available at www.corp.delaware.gov/aboutagency.shtml (accessed 17 November 2016). See also Lucian A Bebchuk and Alma Cohen, ‘Firms’ Decisions Where to Incorporate’ (2003) 46 Journal of Law and Economics 383, 391 table 2; Carney, above n 3, 731–4; Zabihollah Rezaee (ed.), Corporate Governance Post-Sarbanes–Oxley: Regulations, Requirements, and Integrated Processes (John Wiley & Sons, 2015) 246. ABA, Comments to Model Business Corporation Act (1960).

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meant that US corporations were formed exclusively by special legislation. However, vast abuses of this system prompted the adoption of general enabling statutes as early as 1795.13 The MBCA was first envisioned by the Committee on Corporate Laws of the Section of Corporation, Banking and Business Law of the American Bar Association in 1943.14 Operating in three-year intervals, the Committee began work on the MBCA three years after its inception in 1940 and subsequently released the first draft in 1946.15 The MBCA was modelled after the Illinois Business Corporation Act 1933, although from the first draft it deviated in several aspects, including the role of shareholders.16 Reliance on existing Delaware law, already established as a preferential jurisdiction for incorporation, was rejected because of its poor sequence, insufficiency of provisions and failure to protect the rights of investors.17 The purpose of preparing the MBCA was not to have states adopt it verbatim, but rather to ‘present a base from which a group undertaking the revision of the corporate statutes in any state might obtain an appropriate starting place’.18 Its release in 1946 led to a flurry of corporate law reform among the states, with 13 states adopting the MBCA by 1956.19 By 1963, Delaware determined that a revision of state corporate law was necessary to remain competitive in the new national economy.20 The Delaware

13 Ibid.; see also Mont Code Ann s 35-1-112: ‘The forerunners in the adoption of such general enabling legislation were North Carolina (1795), Massachusetts (1799) and New York (1811).’ 14 Whitney Campbell, ‘The Model Business Corporation Act’ (1956) 11 The Business Lawyer 98, 98. 15 Ibid.; see e.g. ABA, above n 12; Ray Garrett, ‘History, Purpose and Summary of the Model Business Corporation Act’ (1950) 6 The Business Lawyer vii; Jeffrey M Gorris, Lawrence A Hammermesh and Leo E Strine, Jr, ‘Delaware Corporate Law and the Model Business Corporation Act: A Study in Symbiosis’ (2011) 74 Law and Contemporary Problems 107. 16 Gorris, Hammermesh and Strine, above n 15, 109–10; Campbell, above n 14, 100–2; Garrett, above n 15, viii. 17 One major element of Delaware law that was included in the MBCA is the provision that enables corporations to indemnify directors except in cases where the director may be liable for negligence and/or misconduct. Campbell, above n 14, 101–2; Gorris, Hammermesh, Strine, above n 15, 107–8; Garrett, above n 15, viii; see also Mont Code Ann s 35-1-112. 18 Campbell, above n 14, 98. 19 Gorris, Hammermesh, Strine, above n 15, 109–10; see Campbell, above n 14, 100–2; Ernest L Folk III, ‘State Statutes: Their Role in Prescribing Norms of Responsible Management Conduct’ (1976) 31 The Business Lawyer 1031, 1054: ‘The Model Act Committee was also given to proselytizing its own work’; George D Gibson, ‘The Chairman’s Report to the Members of the Section’ (1960) 15 The Business Lawyer 247, 247: ‘The present stature of the Model Business Corporation Act is further shown by its use, in whole or in part, in 13 States during the decade of the ’Fifties . . .’; see also Garrett, above n 15, viii. 20 Minutes of the Delaware Corporation Law Revision Committee, 1st Meeting, 21 January 1964, 1: ‘The Committee discussed the advisability of making a comprehensive study of the Delaware Corporation Law with the possibility of revising the law so as to make it comparable

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Corporation Law Revision Committee, created to revise the Delaware General Corporation Law (DGCL),21 relied heavily on the MBCA.22 Although in some cases this was nothing more than the codification of existing Delaware case law, revisions occurred on the duration of corporations,23 the role of the secretary of state,24 the annual election of directors,25 statements of purpose for special meetings,26 the vesting of bylaw power in the director27 and posting security by certain derivative plaintiffs.28 This is not to say that Delaware, or any other state, necessarily deferred to the MBCA; in many cases Delaware proffered innovations in corporate law that were subsequently adopted by the MBCA.29 Whereas the MBCA and the DGCL are the models for state corporate law, corporate law at the federal level takes an entirely different form. In contrast to state legislation where the removal of company directors is addressed as a private and primarily internal mechanism,30 disqualification (or barring directors and officers) is primarily regulated by federal legislation in the public domain.31

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with recently enacted legislation in other states.’ See Gorris, Hammermesh, Strine, above n 15, 109–12. Act of Dec 31, 1963 ch 218 s 1, 54 Del Laws 724, 724: ‘WHEREAS, many states have enacted new corporation laws in recent years in an effort to compete with Delaware for corporate business.’ See S Samuel Arsht, ‘A History of Delaware Corporation Law’ (1976) 1 Delaware Journal of Corporate Law 1, 14–17, noting that the drafting subcommittee looked ‘to the Folk Report, to the minutes of the Revision Committee and to other sources such as the Model Business Corporation Act for guidance’. See also Gorris, Hammermesh, Strine, above n 15, 110–12. Ernest L Folk III, Review of the Delaware Corporation Law (1967) 19, available at http:// delawarelaw.widener.edu/files/resources/folkreport.pdf (accessed 25 November 2016). The report suggested that the DGCL follow the MBCA’s default that a corporation is of perpetual duration unless otherwise stated in its charter. Ibid. 178–9, suggesting the DGCL follow the MBCA in allowing the corporation to prepare a restated charter rather than requiring the Secretary of State to do so. Ibid. 111, suggesting the DGCL follow the MBCA in expressly codifying the Delaware case law requiring a corporation to hold an annual meeting to elect directors. Ibid. 117, suggesting the DGCL follow the MBCA in expressly codifying the Delaware case law requiring a statement of the purpose of any special meeting. Ibid. Ibid. 117, citing the MBCA’s requirement that certain derivative plaintiffs post security; see also Gorris, Hammermesh, Strine, above n 15, 111–12. Michael P Dooley and Michael D Goldman, ‘Some Comparisons Between the Model Business Corporation Act and the Delaware General Corporation Law’ (2001) 56 The Business Lawyer 737, 739; Gorris, Hammermesh, Strine, above n 15, 112–6 (specific changes between the MCBA and the DGCL are delineated in fns 32–55). See generally Weil, above n 9; Sirodoeva-Paxson, above n 9; Clark, above n 9 [92–140]. Mechanisms for the removal of company directors are primarily internal, instigated by shareholders or the board of directors and, to a lesser extent, triggered by judicial proceedings. The provisions containing these internal mechanisms are comparable to the provisions on directors’ removal in Australia found in s 203 of the Corporations Act 2001 (Cth). Norman Veasey, Shawn Pompian and Christine Di Guglielmo, ‘Federalism vs Federalization: Preserving the Division of Responsibility in Corporation Law’, Yale Law & Economics

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5.2.2 The development of disqualification legislation in the US Applicable statutes for the disqualification of company directors have existed since the enactment of the Securities Act 1933 and the Securities Exchange Act 1934. However, prior to the enactment of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (Remedies Act), the SEC could only approach the federal court to seek temporary and permanent injunctions forbidding defendants from violating securities laws in the future. The Commission had no specific authority to permanently suspend or debar defendants from serving as directors or officers.32 Therefore, the language that actually regulates present-day disqualification is quite recent. Rather than addressing the dozen-plus amendments to disqualification statutes since 1936,33 this section will focus on the recent development of federal disqualification legislation. The Remedies Act effected radical change.34 The statute was changed to explicitly include judicial authority to bar officers and directors as a matter of enforcing

Research Paper No 324 (2005) 2, available at http://ssrn.com/abstract =878246 (accessed 17 November 2016). 32 The objective of these injunctions was preventative rather than punitive. Injunctions, if found to be primarily punitive, could be overturned. SEC injunctions were therefore only to be issued where there was a risk of future violations. See Philip F S Berg, ‘Unfit to Serve: Permanently Barring People from Serving as Officers and Directors of Publicly Traded Companies after the Sarbanes–Oxley Act’ (2003) 56 Vanderbilt Law Review 1871, 1875–6. The SEC could also seek orders imposing a receivership on misbehaving corporations, and other ancillary orders such as those requiring the appointment of a compliance officer or new board-level committee. The Court did confirm, however, in SEC v Posner, 16 F 3d 520, 521–2 (2d Cir 1994) that, although the SEC had no express statutory authority to seek an order suspending or barring a defendant from serving as an officer or director of any public company, it could seek such an order as an ancillary remedy. See Shuldman, above n 6, 339. 33 See e.g. Securities Exchange Act 1934, 15 USC s 78u(d) (2010): History of (June 6, 1934, ch 404, Title I, s 21, 48 Stat 899; May 27, 1936, ch 462, s 7, 49 Stat 1379; Oct 15, 1970, PL 91-452, Title II, s 212, 84 Stat 929; June 4, 1975, PL 94-29, s 17, 89 Stat 154; Oct 10, 1980, PL 96-433, ss 3, 4, 94 Stat 1855, 1858; Aug 10, 1984, PL 98-376, s 2, 98 Stat 1264; Dec 4, 1987, PL 100-181, Title III, s 323, 101 Stat 1259; Nov 19, 1988, PL 100-704, ss 3(a)(1), 6(b), 102 Stat 4677, 4681; Oct 15, 1990, PL 101-429, Title II, s 201, 104 Stat 935; Dec 22, 1995, PL 104-67, Title I, s 103(b)(2), 109 Stat 756; Dec 21, 2000, PL 106554, s 1(a)(5), 114 Stat 2763; July 30, 2002, PL 107-204, s 3(b)(2), Title III, ss 305(a)(1), (b), 308(d)(1), Title VI, s 603(a), 116 Stat 749, 779, 785, 794) (as amended July 21, 2010, PL 111-203, Title IX, Subtitle B, ss 923(b)(1), 929F(c), (d), (g)(2), Subtitle I, s 986(a)(3), 124 Stat 1849, 1854, 1855, 1935). 34 Securities Law Enforcement Remedies and Penny Stock Reform Act of 1990, HR Rep No 101–616, 101st Congress (1990) 27, reprinted in 1990 USCCAN 1379, 1394, 1990 WL 256464. See Jones, above n 8, 448. Before the enactment of the Remedies Act, apart from insider trading violations, the SEC could only enjoin future violations of the securities laws and, when appropriate, obtain disgorgement or restitution. Even in the federal courts the bar could be applied only in cases where a person violated one of the scienter-based fraud provisions. Furthermore, application of such a bar required evidence of substantial unfitness to serve as an officer or director. See Philip R Lochner Jr, ‘The SEC’s New Powers Under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990’ (4 October

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federal securities law, and, for the first time, it explicitly granted the SEC the authority to bring an application in a federal court to bar a person from being a director of a company.35 The act was driven in no small part by the desire to more effectively prosecute violators of securities law, especially given the fact that, as of 1989, the SEC had never successfully suspended or debarred a company director by means of a court order.36 Although the Congressional discussions indicate the presumption of authority as a result of the judiciary’s equitable powers, the explicit inclusion was meant to provide a remedy to fraudulent misconduct that would exist in addition to state law.37 This change, which granted federal courts the explicit authority to disqualify directors of ‘substantial unfitness’ and gave the SEC the power to issue cease-and-desist orders against securities law violators, 38 remained the status quo until the promulgation and enactment of the Sarbanes– Oxley Act 2002.39 The Sarbanes–Oxley Act, passed in the wake of corporate scandals involving misstated financial reports, introduced some of the most sweeping changes in the areas of corporate governance, financial disclosure, audit independence and corporate criminal liability in recent decades.40 The Act brought about two significant changes. First, it granted the SEC the power to impose officer and

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1990), available at www.sec.gov/news/speech/1990/100490lochner.pdf (accessed 17 November 2016). Securities Exchange Act 1934, 15 USC s 78u(d)(1) (2010). Before the enactment of the Remedies Act, the SEC was only able to seek temporary and permanent injunctions that prohibited future violations of securities laws. See Berg, above n 32, 1875; Shuldman, above n 6, 339–40. The SEC did, however, secure a number of consent decrees for temporary or permanent suspension of individuals. Berg, above n 32, 1876–7. See the Remedies Act, HR Rep No 101-616, 101st Congress (1990) 27, reprinted in 1990 USCCAN 1379, 1394, 1990 WL 256464 and Securities Law Enforcement Remedies Act of 1990, S Rep No 101-337, 101st Congress (1990) 21, 1990 WL 263550. See also Shuldman, above n 6, 339–40. See Barnard, above n 8, 393, for an explanation of cease-and-desist powers vis-à-vis injunctions. Permanent cease-and-desist orders were regarded as being one of the SEC’s most used remedies during the first decade after enactment of the Remedies Act. Sarbanes–Oxley Act of 2002, Pub L No 107-204, s 305(a)(1), 116 Stat 745, 778–79 (2002) (amending 15 USC s 78u(d)(2)); see also Shuldman, above n 6, 344–5; Berg, above n 32, 1875–88. It is important to note, particularly in the context of a comparative review of disqualification regimes, that the US disqualification provisions only apply to violations of federal securities laws and only prohibit the defendant from acting as an officer or director of a public company. However, the SEC has used the officer and director bar particularly to prevent perpetrators of fraud from serving as fiduciaries to the public. See Jon Carlson, ‘Securities Fraud, Officer and Director Bars and the “Unfitness” Inquiry after Sarbanes– Oxley’ (2009) Fordham Journal of Corporate and Financial Law 679, 686. See Jones and Welsh, above n 2, 403 where the authors argue in favour of a public enforcement model for directors’ duties as an alternative mechanism for director accountability to failing private shareholder litigation. Lisa H Nicholson, ‘The Culture of Under-Enforcement: Buried Treasure, Sarbanes–Oxley and the Corporate Pirate’ (2007) 5 DePaul Business and Commercial Law Journal 321, 328.

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director bars in administrative proceedings without the need to file charges in federal court.41 Second, the Act dramatically lowered the standard by changing42 the statutory language from ‘substantial unfitness’ to ‘unfitness’.43 This change granted courts significantly more discretion in both the determination of whether or not a director should be disqualified and the precise form such a disqualification might take.44 Unfortunately, ‘unfitness’ remained as ill-defined in the Sarbanes–Oxley Act as ‘substantial unfitness’ had been under the Remedies Act.45 Ultimately, the Remedies Act standard of ‘substantial unfitness’ was set through case law, only to be up-ended after the passage of the Sarbanes–Oxley Act.46 The legislative history of the Sarbanes–Oxley Act does provide insight, with the initial draft of the bill tracking the language established in SEC v Patel with one crucial difference: it enabled the SEC to bypass the court system entirely.47 Notwithstanding this expanded authority, the SEC remained reluctant to impose bars as a remedy for director oversight failures, and only sought to impose it against outside directors in the most egregious cases, where directors flagrantly disregarded multiple red flags indicating fraud.48 The SEC’s reticence may, in part, be attributed to the court’s interpretation and application of ‘unfit’ as opposed to ‘substantially unfit’ post 2002.49

41 Berg, above n 32, 1885–8: ‘Section 305 of Sarbanes–Oxley changed the judicial standard from “substantial unfitness” to “unfitness” without defining either term, and section 1105 gave the SEC authority to bar people from serving as officers and directors even in the absence of an order by a federal court.’ See Jones, above n 8, 452, who also comments on the SEC’s reluctance to use the power. 42 See Public Company Accounting Reform and Investor Protection Act of 2002, S Rep No 107205, 107th Congress (2002) 27, 2002 WL 1443523, explaining that the standard was changed to ‘unfitness’ because the ‘“substantial unfitness” standard . . . [was] inordinately high, causing courts to refrain from imposing bars even in cases of egregious misconduct’. 43 See Shuldman, above n 6, 344–5; Carlson, above n 39, 693–4; Jayne W Barnard, ‘Rule 10b-5 and the “Unfitness” Question’ (2005) 47 Arizona Law Review 9, 20. 44 See SEC v Bankosky, 716 F 3d 45 (2d Cir 2013): ‘Whatever the contours of the new standard, “unfitness” is clearly a lower hurdle than “substantial unfitness”. See S Rep No 107-205, at 27 (2002).’ However, Jones argues that, despite the fact that Congress expanded the SEC’s power, the agency seldom pursues bars against directors or senior executives of large firms: Jones, above n 8, 441. 45 See Berg, above n 32, 1879: ‘The statute did not define “substantial unfitness”, nor did the legislative history of the Remedies Act reveal Congress’s intent in adding that phrase. It was therefore left to the courts to decide when a person should be deemed “substantially unfit” to serve as an officer or director of a publicly traded company.’ 46 See Berg, above n 32, 1879–84. 47 SEC v Patel 61 F 3d 137 (2d Cir 1995). See Berg, above n 32, 1884–5. 48 Jones and Welsh, above n 2, 343–4. 49 To date, however, no court has had occasion to interpret the new ‘unfitness’ standard: Barnard, above n 43.

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5.3 Disqualification of company directors in the US 5.3.1 Automatic disqualification As stated before, there is a near-complete lack of clear legislative provisions regarding the automatic disqualification of company directors in the US. At the federal level, the provisions that do exist are enacted and enforced by the SEC and affiliated statutes.50 The only real automatic disqualification of directors and officers is contained in the Clayton Antitrust Act 1914.51 Section 8 of the Act bars a person from being a director of two or more corporations, with the exception of banks, banking associations and trust companies.52 Holding two such director positions may, but does not necessarily, mean committing a violation of antitrust law. In addition to federal statutes and regulatory measures, there are a few notable statutory provisions in state legislation that provide for the automatic ‘removal’ from an existing management position.53 The provisions occur infrequently and are explicit carve-outs for automatic removal. In some states, for example, to be found ‘of unsound mind’ merits the automatic removal of a company director.54 The other such situations, each of which only exists explicitly in a single state’s statutes, are where the company director is declared bankrupt or imprisoned.55 5.3.2 Disqualification by the court on application of the regulator Under the existing statutory language of the Securities Act 1933, any district court of the United States can prohibit a person who has committed fraudulent

50 Securities Act 1933 s 20(e), 15 USC s 77t(e) (2010); Securities Exchange Act 1934 s 21(d), 15 USC s 78u(d) (2010); Clayton Antitrust Act 1914 s 8, 15 USC s 19 (2015); Sarbanes– Oxley Act 2002 PL 107-204, 116 Stat 745, s 305. 51 The Clayton Antitrust Act 1914 was enacted to supplement the Sherman Antitrust Act 1890 in order to strengthen anti-trust (competition law) policy in the US. 52 Clayton Antitrust Act 1914 s 8, 15 USC s 19(a)(1) (2015): ‘No person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking associations, and trust companies) . . . if each of the corporations has capital, surplus, and undivided profits aggregating more than $10,000,000.’ 53 Although comparable to s 206B of the Australian Corporations Act 2001 (Cth), these provisions merely refer to a vacancy on the board, rather than the capacity to be a director in general. 54 Alaska Stat Ann s 10.06.458 (West): ‘Declaration of board vacancy where director of unsound mind’; Cal Corp Code s 302 (West); Ohio Rev Code Ann s 1701.58 (West): A director may be removed if and when ‘the director has been found to be of unsound mind’; 15 Pa Cons Stat Ann s 1726(b) (West): ‘[T]he office of a director who has been judicially declared of unsound mind [may be declared vacant].’ 55 Ohio Rev Code Ann s 1701.58 (West): A director may be removed if and when ‘the director is adjudicated a bankrupt’; 15 Pa Cons Stat Ann s 1726(b) (West): A director ‘who has been convicted of an offense punishable by imprisonment for a term of more than one year’ may be removed.

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transactions from acting as a director.56 The Securities Act 1933 specifically allows the conditional or unconditional removal of a company director exclusively on the grounds of having committed a fraudulent transaction on application of the SEC ‘in any district court of the United States’.57 Upon a finding that such an act has occurred, the disqualification is immediate and automatic pursuant to the holding of the court, but the SEC has neither the power to determine whether the director actually violated the provision58 nor the power to determine the precise form that the removal will take.59 The statutory language of the Securities Exchange Act 1934 has a broader array of possible violations – whereby a violation of any section of the four-part provision would result in a prohibition from acting as a director.60 All of the included violations are for ‘manipulative and deceptive devices’ regardless of whether the act was done directly or indirectly. The barred actions include anything outside of the SEC regulations with regard to short sales of any non-government security,61 the use of any securities-based swap,62 loaning or borrowing of securities,63 as well as fraud, manipulation and insider trading.64 As is the case with the Securities Act 1933, this is a disqualification that relies upon both a court finding of the requisite violation having occurred and a court determination of the resulting removal.65 By contrast, the Securities Exchange Act 1934 specifically allows for ‘any other Federal department . . . [affiliated with] transactions involving the loan or

56 Securities Act 1933 s 20(e), 15 USC s 77t (2010), which prohibits ‘any person who violated section 17(a)(1) of this title from acting as an officer or director’; cf. Securities Act 1933 s 17(a)(1), 15 USC s 77q(a)(1): Use of any interstate communication, transportation, or instrument in an attempt to directly or indirectly ‘employ any device, scheme or artifice to defraud’. 57 Note that the Securities Act 1933 only allows such a finding to occur through the SEC bringing ‘an action in any district court of the United States’. These provisions are similar to the provisions on disqualification on application of the regulator contained in ss 206C–206E of the Australian Corporations Act 2001 (Cth) except for the fact that the US provisions apply only to securities law violations committed by officers of public companies. 58 The SEC does have the power to investigate, but not to declare the results of its investigation as a legal finding: Securities Act 1933 s 20(e), 15 USC s 77t(a) (2010). 59 Securities Act 1933 s 20(e), 15 USC s 77t(b) (2010). 60 Securities Exchange Act 1934 s 21(d), 15 USC s 78j. 61 Securities Exchange Act 1934 s 21(d), 15 USC s 78j(a)(1). 62 Securities Exchange Act 1934 s 21(d), 15 USC s 78j(b). 63 Securities Exchange Act 1934 s 21(d), 15 USC s 78j(c)(1). 64 Securities Exchange Act 1934 s 21(d), 15 USC s 78j: While short sales, securities-based swap agreements and loaning/borrowing of securities may be permissible pursuant to SEC regulations, the use of fraudulent or manipulative tactics or of insider trading are always prohibited under this statute. 65 Securities Exchange Act 1934 s 21(d)(2), 15 USC s 78u: ‘[T]he court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 10(b).’

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borrowing of securities’ to act without restrictions to their authority when addressing violations in loaning or borrowing of securities.66 The Sarbanes–Oxley Act 2002 has also codified part of the US rationale for trusting company directors.67 Under the Sarbanes–Oxley Act 2002, all public companies must disclose whether there is an adopted code of ethics for senior officers and, if not, it must explain why not.68 Although this statute cannot yield the removal of a director either through a regulatory agency or through a judicial proceeding, it is indicative of the rationale in US corporate law that yields so few methods for the removal of company directors. 5.3.3 Disqualification by the regulator The Sarbanes–Oxley Act 2002 grants the SEC the authority to disqualify people from serving as either company officers or directors without a court order.69 The Sarbanes–Oxley Act 2002 also has the most truly automatic disqualification mechanism in US law. This statute provides for cease-and-desist proceedings to issue orders: to prohibit, conditionally or unconditionally, and permanently or for such a period of time as it shall determine, any person who has violated . . . the rules and regulations . . . from acting as an officer or director of any issuer [with the requisite class of securities].70

66 Securities Exchange Act 1934 s 10(c)(2), 15 USC s 78j(c)(2): ‘Nothing in paragraph (1) may be construed to limit the authority of the appropriate Federal banking agency.’ 67 Sarbanes–Oxley Act 2002 s 406, 15 USC s 7264. 68 Sarbanes–Oxley Act 2002 s 406, 15 USC s 7264(c): ‘[T]he term “code of ethics” means such standards as are reasonably necessary to promote: (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer; and (3) compliance with applicable governmental rules and regulations.’ 69 Sarbanes–Oxley Act 2002 s 1105, 15 USC ss 77h-1, 78u-3. It should also be noted that 15 USC ss 77h-1 and 77t are currently subject to proposed legislation adding the following maximum penalty: ‘[T]he maximum amount of penalty for each such act or omission shall be 3 times the otherwise applicable amount in such subparagraphs if, within the 5-year period preceding such act or omission, the person who committed the act or omission was criminally convicted for securities fraud or became subject to a judgment or order imposing monetary, equitable, or administrative relief in any Commission action alleging fraud by that person.’ Note also that 15 USC s 78u is subject to proposed legislation adding the following maximum penalty: ‘[T]he maximum amount of penalty for each such violation shall be 3 times the otherwise applicable amount in such clauses if, within the 5-year period preceding such violation, the defendant was criminally convicted for securities fraud or became subject to a judgment or order imposing monetary, equitable, or administrative relief in any Commission action alleging fraud by that defendant.’ Stronger Enforcement of Civil Penalties Act of 2015, S Res 1730, 114th Congress (2015). 70 Sarbanes–Oxley Act 2002 s 1105, 15 USC ss 77h-1, 78u-3.

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This provision is, however, limited and narrow in its application: it only applies to issuers of the class of securities registered as per section 12 of the Securities Exchange Act 1934.71 5.3.4 Qualifications for directors The DGCL permits companies to prescribe qualifications for their directors via charter amendment or by-laws.72 As a minimum, the legislation requires that each director be a ‘natural person’ and it prohibits the enactment of any qualification that is ‘inconsistent with’ the law or corporate charter.73

5.4 Court case analysis 5.4.1 Disqualification on application of the regulator This section will focus on cases pertaining to the filing of charges by the SEC. Although the bulk of applicable case law is relatively recent, starting with SEC v Posner’s application of jurisdiction under the Remedies Act, 74 the court’s jurisdiction does stretch back much further.75 Leading up to the enactment of the Sarbanes–Oxley Act 2002, the case of SEC v Patel initiated a major shift in identifying the parameters to be assessed when

71 The Securities Exchange Act 1934 s 21C(f) specifies that the SEC’s power to prohibit persons from serving as officers or directors is limited to violations of s 10(b) or the rules or regulations thereunder and bars individuals from acting as an officer or director of ‘any issuer that has a class of securities registered pursuant to section 12, or that is required to file reports pursuant to section 15(d)’. Officer and director bars therefore only prohibit management of a public company. Removal of directors serves this purpose in the context of private companies. 72 DGCL s 141(b) (West 2010). 73 Ibid. s 109(b). Case law developed the further mandates that all qualifications be reasonable and equitable such that they are related to the objectives and purposes of the corporation, and it proscribes qualifications that are ‘unreasonably vague’. See Mark Gerstein, Steven Stokdyk and Anthony Bruno, ‘Establishing and Enforcing Qualifications for Directors of Delaware Corporations’, boardmember.com (1 January 2011), available at https://m. lw.com/thoughtLeadership/4024-EstablishingandEnforcingQualificationsforDirectorsof DelawareCorporations (accessed 25 November 2016). 74 SEC v Posner, 16 F 3d 520 (2d Cir 1994) recognising the Commission’s inherent authority to seek officer and director bars despite explicit statutory directive. 75 Ibid. 521–2 (emphasis added): ‘We need not reach the issue of the applicability of the Remedies Act, however, since the court relied on a viable, alternative basis for the injunction – its “general equitable powers” to fashion appropriate relief for violations of the federal securities laws. SEC v Drexel Burnham Lambert Inc., 837 F. Supp. 587 (S.D.N.Y. 1993) at 614. The court has broad equitable power in this area. See SEC v Drexel Burnham Lambert Inc., 837 F. Supp. 587 (S.D.N.Y. 1993) at 614. SEC v Manor Nursing Centers, Inc., 458 F 2d 1082, 1103 (2 Cir 1972): “Once the equity jurisdiction of the district court has been properly invoked by a showing of a securities law violation, the court possesses the necessary power to fashion an appropriate remedy.”’

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dealing with potential disqualification of company directors.76 In Patel, the director of a generic drug manufacturer submitted false documents regarding testing for FDA requirements and knowingly sold 75,000 shares of the company’s common stock.77 After the falsification of the application became known and the company’s stock price dropped drastically, the SEC sought a permanent injunction against Patel, the director responsible. 78 The SEC successfully obtained a permanent director bar against Patel at a district level.79 However, the Second Circuit reversed Patel’s lifetime suspension.80 While disagreeing with the District Court’s assessment of Patel’s behaviour, the Second Circuit affirmed the District Court’s use of a six-factor test to determine Patel’s level of ‘unfitness’ to serve as a company director: (1) the ‘egregiousness’ of the underlying securities law violation; (2) the defendant’s ‘repeat offender’ status; (3) the defendant’s ‘role’ or position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that misconduct will recur.81 The court in Patel is careful to say neither that these six factors are the only factors to be considered nor that all six factors ought necessarily to be considered in each case. However, the most relevant and crucial holding in Patel is the Second Circuit’s statement on how courts should, in the future, address the imposition of a permanent disqualification of a company director: Finally, we take note of the fact that the governing statute provides that a bar on service as an officer or director that is based on substantial unfitness may be imposed ‘conditionally or unconditionally’ and ‘permanently or for such period of time as [the court] shall determine.’ We take these provisions to suggest that, before imposing a permanent bar, the court should consider whether a conditional bar (e.g., a bar limited to a particular industry) and/ or a bar limited in time (e.g., a bar of five years) might be sufficient, especially where there is no prior history of unfitness.82

76 SEC v Patel, 61 F 3d 137, 141 (2d Cir 1995). 77 Ibid. 138–9. 78 Ibid. 141: ‘In permanently enjoining Patel from serving as an officer or director of any public company at the behest of the SEC’ (emphasis added). 79 Ibid. 139. 80 Berg, above n 32, 1882; Jones, above n 8, 450. 81 SEC v Patel, 61 F 3d 137, 141 (2d Cir 1995); see Jayne W Barnard, ‘When is a Corporate Executive “Substantially Unfit to Serve”?’ (1992) 70 North Carolina Law Review 1489, 1492–3, 1515: ‘the presence of premeditation and the defendant’s leadership role in the crime – both of which are indicators of scienter’. 82 SEC v Patel, 61 F 3d 137, 142 (2d Cir 1995).

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The factor that made the greatest impact is the first: egregiousness. Precedent indicates a strong tendency for courts to reference specific egregious behaviour rather than pinpointing a bright-line definition.83 Although the court has found behaviour to be egregious both when the behaviour is part of a single fraudulent scheme and when it occurs over an extensive period of time, there is open acknowledgement that the distinction between ‘egregious’ and ‘non-egregious’ behaviour is often a fine one.84 With regard to the factor of repeat offences – which go toward the court’s concern to prevent recidivism85 – it is particularly important to note that not having a history of securities law violations does not preclude the court from disqualifying a company director.86 Furthermore, the likelihood that the person will repeat their misconduct in the future is incredibly important to the decisionmaking process of courts, especially in comparison with factors such as ‘role’ or ‘degree of scienter’ or ‘economic stake’.87 After the enactment of the Sarbanes–Oxley Act in 2002, the explicit changing of the statutory language from ‘substantial unfitness’ to ‘unfitness’ presented a significant lowering of the standard whereupon a company director could be

83 See especially SEC v Bankosky, No 12 Civ 1012 (HB), 2012 WL 1849000, *2 (SDNY May 21, 2012), aff’d 716 F 3d 45 (2d Cir 2013) citing all of the following fact-specific examples of egregious behaviour: SEC v Gunn, No 08 Civ 1013, 2010 WL 3359465, *4 (NDTex Aug 25, 2010): ‘Insider trading is a flagrant, deliberate, and serious violation of the federal securities laws’; SEC v Pallais, No 08 Civ 8384, 2010 WL 2772329 (SDNY July 9, 2010) involving the repeated release of fraudulent press releases with material falsifications and omissions; SEC v Resnick, 604 F Supp 2d 773, 784 (D Md 2009) regarding a fraudulent scheme to overstate results by $700 million; SEC v Robinson, No 00 Civ 7452, 2002 WL 1552049, *5 (SDNY July 16, 2002) in which the defendant lied about having a product to market, about ties to telecommunications companies and about having an expectation of reaping billions in revenue. 84 SEC v Aimsi Techs, Inc., 650 F Supp 2d 296, 299, 308 (SDNY 2009), finding that conduct was ‘egregious’ even when in furtherance of a single ‘pump and dump’ scheme spanning multiple months; SEC v Johnson, 595 F Supp 2d 40, 44 (DDC 2009), holding that several actions of concealment with the goal of an ultimate false ‘inclusion of one item of revenue’ still constituted a single incident, citing SEC v Savoy Indus, 587 F 2d 1149, 1168 (DC Cir 1978); SEC v Maxxon, Inc, No 02 Civ 975 H(J), 2005 WL 6090229, *5 (ND Okla Mar 11, 2005) in which making ‘misleading statements over a period of years’ was sufficient to impose a five-year bar against a company director. 85 SEC v Manor Nursing Centers, Inc, 458 F 2d 1082, 1100 (2d Cir 1972): ‘[F]raudulent past conduct gives rise to an inference of a reasonable expectation of continued violations.’ 86 See SEC v Bankosky, No 12 Civ 1012 (HB), 2012 WL 1849000, *2 (SDNY May 21, 2012) aff’d, 716 F 3d 45 (2d Cir 2013); see also Berg, above n 32 at 342. 87 SEC v Patel, 61 F 3d 137, 141–2 (2d Cir 1995): ‘[I]t is not essential for a lifetime ban that there be past violations.’ See SEC v Levine, 517 F Supp 2d 121, 147 (DDC 2007): ‘In determining whether a proper showing has been made, the court must find a reasonable likelihood that past wrongdoing will recur’; see also SEC v Selden, 632 F Supp 2d 91, 99 (D Mass 2009); SEC v Bausch & Lomb Inc, 565 F 2d 8, 18 (2d Cir 1977); SEC v Johnson, 2006 WL 2053379, *4 (SDNY July 24, 2006).

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disqualified. Despite this change, it took five years before any court ventured to address the specific change in the statutory language.88 In SEC v Levine, the Court shifted away from the six-factor test use in Patel and adopted a nine-element, non-exhaustive and holistic analysis that addressed: (1) the nature and complexity of the scheme; (2) the defendant’s role in the scheme; (3) the use of corporate resources in executing the scheme; (4) the defendant’s financial gain (or loss avoidance) from the scheme; (5) the loss to investors and others as a result of the scheme; (6) whether the scheme represents an isolated occurrence or a pattern of misconduct; (7) the defendant’s use of stealth and concealment; (8) the defendant’s history of business and related misconduct; and (9) the defendant’s acknowledgment of wrongdoing and the credibility of his contrition.89 Despite the Court’s adoption of new, post-Sarbanes–Oxley factors, it is important to note that the Court in Levine made a point of using the Patel factors as a comparative means of assessing the gravity of the violation.90 It took another six years before any court directly discussed the difference between the Patel factors and the Levine factors.91 In SEC v Bankosky, the Court acknowledged the usefulness of the Patel factors while also delineating that the standard is ‘unfitness’ rather than ‘substantial unfitness’.92 Although the Court in Bakosky denied the SEC’s request to do away with the Patel factors in favour of a lesser standard, it specifically cited legislative intent to lower the standard because of the ‘inordinately high’ standard that had been in place prior to the Sarbanes– Oxley Act.93

88 See SEC v Levine, 517 F Supp 2d 121, 144 (DDC 2007): ‘While other courts have assessed post-Sarbanes–Oxley requests for officer/director injunctions, they have tended to simply continue using the pre-Sarbanes–Oxley standard, and none appears to have addressed the Act’s alteration of the Commission’s burden of persuasion.’ See also Shuldman, above n 6, 344–5; but see SEC v Patterson, No 03 Civ 0302 (CVE) (PJC), 2006 WL 770626, *3 (ND Okla Mar 23, 2006); SEC v Save The World Air, Inc., No 01 Civ 11586 (GBD) (FM), 2005 WL 3077514, *16 (SDNY Nov 15, 2005); SEC v Global Telecom Services, LLC, 325 F Supp 2d 94, 121 (D Conn 2004). 89 SEC v Levine, 517 F Supp 2d 121, 145 (DDC 2007). 90 Ibid. 146: ‘In addition to the aforementioned nine factors, the factors previously assessed by courts also favor a finding of unfitness. Defendants’ conduct clearly meets four out of the six Patel criteria for injunctive relief.’ 91 SEC v Bankosky, 716 F 3d 45, 47–9 (2d Cir 2013). 92 Ibid. 48: ‘The 2002 Amendment, by lowering the threshold of misconduct required to impose the officer and director bar, did not undermine the usefulness of the Patel factors, which indicate where evidence of unfitness might be found in a defendant’s misconduct. Whatever the contours of the new standard, “unfitness” is clearly a lower hurdle than “substantial unfitness”. See S Rep No 107-205, at 27 (2002).’ 93 SEC v Bankosky, 716 F 3d 45, 48 (2d Cir 2003) (emphasis added): ‘Although textually this change is ambiguous, the legislative history demonstrates that Congress’s intent was to lower the threshold of misconduct for which courts may impose director and officer bans. See S

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The current state of the law, in application, is that established by Levine and upheld in Bankosky. However, the law as it stands allows significant room for caseby-case discretion that can yield inconsistent responses just as often as it intends to yield holistically fair ones.94 This can be seen in two cases from 2010, one that resulted in a five-year disqualification of the company director 95 and one that resulted in no disqualification whatsoever.96 In SEC v Miller, the Court was ruthless in its assessment of Miller’s character, stating that ‘Miller’s constant finger-pointing, rationalisations, and self-pity are both unattractive and a cause for concern as to the future likelihood of his behaving responsibly and honorably, should he acquire a position of great corporate responsibility’.97 The Court went so far as to say that a 15-year ban would be appropriate, but that given the age of the defendant, five years was sufficient to act as an effective lifetime disqualification.98 The ruling in SEC v Conaway is a sharp contrast to that of Miller. In Conaway, even while professing to deplore the defendant’s conduct, the judge stated: I was considering a ten year injunction or bar from the time of the offense. Yet, in reality I cannot find that there is a realistic likelihood that Mr Conaway in the short term will be hired to serve as an officer or director of a publically traded corporation given the serious damage to his reputation this case and the jury’s findings have caused him.99 Although both cases deal with directors acting with gross misconduct by implementing ‘plans’ that yielded huge losses as a result of fraudulent behaviour, the sentences enacted are vastly different.100 Despite variations in outcomes as a result, the factors themselves are used consistently and remain clear across case precedent.

5.5 Conclusion This chapter has addressed how the disqualification and removal of company directors in the US operate in practice. First, the history of such statutes was

94 95 96 97 98 99 100

Rep No 107-205, at 27 (2002) . . . explaining that standard was changed to ‘unfitness’ because [the] ‘“substantial unfitness” standard . . . [was] inordinately high, causing courts to refrain from imposing bars even in cases of egregious misconduct.’ Shuldman, above n 6, 351. SEC v Miller, 744 F Supp 2d 1325 (ND Ga 2010). SEC v Conaway, 697 F Supp 2d 733 (ED Mich 2010). SEC v Miller, 744 F Supp 2d 1325, 1348 (ND Ga 2010). Ibid. SEC v Conaway, 697 F Supp 2d 733, 773 (ED Mich 2010). See Shuldman, above n 6, 351: ‘As a result, courts purporting to apply Patel or Levine have reached vastly different results using a variety of analyses’ and including string citations of other cases with widely variant results.

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discussed with respect to the MBCA, the Delaware law and federal statutes. The chapter proceeded with an assessment of the actual statutes and regulations for automatic disqualification, disqualification upon application and disqualification by the regulator without judiciary involvement. Second, the case law addressing disqualification of company directors on a federal level was analysed. The division between the scope and reach of federal legislation and state-based legislation in the US led to the development of a corporate law that bows to corporate charters and shareholder interests above all else. Federal regulations are only present for a small subsection of corporations and almost exclusively address criminal or fraudulent actions that fall under the purview of the SEC. State regulations provide copious protections for shareholder interests, with minimal, if any, means of corporate governance by automatic action or by judicial proceeding. Delaware corporate law, which governs the majority of US corporations, unequivocally limits the removal of company directors to actions initiated internally by shareholders.101 The focus on the role of shareholders over that of legislation or the judiciary dates back to the original drafting of the MBCA in the 1940s.102 Although the MBCA has consistently varied from the Delaware statutes that seem to otherwise dominate, the focus on internal over external corporate governance is a consistent part of the recurring dialogue between the statutes.103 The attributed internal locus of control, while clearly visible at the state level in particular, manifests in federal law as well.104 The trend in federal corporate law echoes that of state law, with the most protection for shareholder interests, some opportunity for judicial intervention and the most restricted provisions for automatic intervention. Although rarely used and fairly contentious, there are nonetheless mechanisms that can result in automatic disqualification, primarily through federal statutes and agency regulations. These all echo fundamental notions in US corporate law, embodied by both state and federal statutes regarding the disqualification and removal of company directors. The fact that the removal of unqualified directors is primarily an internal mechanism is indicative of the focus and trust placed on the internal operations of a corporation – and on the fundamental importance of a company’s incorporation charter.105 Even measures that provide for automatic or judicial intervention exist with an eye on shareholder interests. Such federal statutes exist in large part to

101 Del Code Ann, Title 8, s 141(k); Bebchuk and Cohen, above n 11, 391, tbl 2 finding that 59 per cent of Fortune 500 firms and 58 per cent of all publicly traded companies were incorporated in Delaware, as of 2002. 102 See Garrett, above n 15, viii; Campbell, above n 14, 98–102. 103 See Dooley and Goldman, above n 29, 739; Gorris, Hammermesh, Strine, above n 15, 111–6; see generally Weil, above n 9; Sirodoeva-Paxson, above n 9. 104 Sirodoeva-Paxson, above n 9, 97–9. 105 See e.g. Weil, above n 9; Sirodoeva-Paxson, above n 9; Clark, above n 9 [92–140].

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ensure that shareholders can effectively remove company directors acting fraudulently or otherwise in abuse of their authority.106 All in all, the comparatively scarce measures for automatic disqualification of company directors and disqualification on application are not necessarily reflective of a lack of government oversight. Rather, these measures are reflective of a longstanding prioritisation of the internal operations of companies and of the vested interests of a company’s shareholders.

106 See Shuldman, above n 6, 339–40.

6

Germany Andreas Rühmkorf*

Contents 6.1

Introduction

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6.2

History

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6.3

Grounds for automatic disqualification 6.3.1 Directors of a GmbH; members of the management board of the AG 6.3.2 Further grounds for disqualification outside the AktG and GmbHG 6.3.3 Supervisory board – grounds for disqualification 6.3.4 Grounds for disqualification in banking supervision law

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Grounds for disqualification on application 6.4.1 The power of courts to order an occupational ban in criminal law 6.4.2 Imposing a trade ban on company directors by an administrative body

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6.5

Court case analysis 6.5.1 OLG Naumburg (1999) 6.5.2 BGH (2007) 6.5.2.1 European Union Perspectives

194 194 195 196

6.6

Conclusion

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6.4

178 183 185 189

191 192

6.1 Introduction This analysis of German law will focus on directors of private limited companies (Gesellschaft mit beschränkter Haftung), abbreviated as ‘GmbH’, as well as public limited companies (Aktiengesellschaft), abbreviated as ‘AG’. These two different * LLM, PhD (University of Sheffield). Lecturer in Commercial Law, University of Sheffield (UK), Assessor Juris (Federal State of North Rhine Westphalia, Germany), Rechtsanwalt (Germany).

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types of companies are regulated by separate Acts of Parliament. The Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG) regulates private limited companies and the Aktiengesetz (AktG) regulates public limited companies. The word Aktiengesellschaft is often translated into English as ‘joint stock corporation’.1 However, the more widely used term in English is ‘public limited company’.2 In German law, there is no separate Act that deals with the disqualification of directors. This issue is primarily addressed in company law in the two Acts mentioned, the AktG and the GmbHG. Both Acts have identical provisions for the disqualification of directors.3 In terms of terminology, it is important to note that a director of a GmbH is referred to as Geschäftsführer, which could be translated directly as ‘manager of the company’, but more appropriately nowadays as ‘executive director’ of a GmbH4 (but we will use the term ‘director’ only). A GmbH needs to have at least one director.5 In the case of public limited companies, a two-tier board is compulsory which consists of a management board (Vorstand) and a supervisory board (Aufsichtsrat).6 The German two-tier board structure is characterised by the system of co-determination which ensures strong employee representation at the supervisory board level.7 In the German two-tier board system, the management board’s role is to undertake the daily management, whereas the task of the supervisory board is to supervise the work of the management board.8 The supervisory board is also in charge of appointing and removing the members of the management board.9 The management board must consist of at least one person, elected by the supervisory board for a maximum duration of five years.10 The management board

1 For example, the German Corporate Governance Code refers to the Stock Corporation Act; see German Corporate Governance Code, Foreword, available at www.dcgk.de/en/code// foreword.html (accessed 25 November 2016). 2 See the discussion of terminology in J J du Plessis et al., ‘An Overview of German Business or Enterprise Law and the One-Tier and Two-Tier Board Systems Contrasted’ in J J du Plessis, B Großfeld, B Luttermann, L Saenger, O Sandrock and M Casper, German Corporate Governance in International and European Context (Springer, 2nd edn, 2012) 5. 3 GmbHG s 6(2); AktG s 76(3). 4 See ‘Geschäftsführer’ in A Romain, Dictionary of Legal and Commercial Terms: Part II (German–English) (CH Beck’sche Verlagsbuchandlung, 2002). 5 GmbHG s 6(1). 6 AktG ss 76, 95. 7 For an overview of the German system of co-determination, see: O Sandrock and J J du Plessis, ‘The German System of Supervisory Codetermination by Employees’ in J J du Plessis et al., German Corporate Governance in International and European Context (Springer, 2nd edn, 2012) 149–96; J J du Plessis and O Sandrock, ‘The Rise and Fall of Supervisory Codetermination in Germany?’ (2005) 16 International Company and Commercial Law Review 67. 8 du Plessis et al., above n 2, 8–14. 9 AktG s 84. 10 AktG ss 76(2), 84(1).

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is directly responsible for the management of the company.11 Depending on the share capital of the company, the supervisory board has a minimum of three and a maximum of 21 members.12 The members of the supervisory board are appointed as representatives of the shareholders and the employees respectively.13 By way of an introduction, a brief historic overview of the development of the legislation concerning the disqualification of directors in German law will be provided. The grounds for the automatic disqualification of directors, starting with the disqualification of directors of German private companies and members of the management board of German public companies, will then be analysed. The focus will then be on the disqualification of members of the supervisory board. Banking supervision law, as a specific area with separate legislation including provisions for disqualifying directors, will be discussed separately. This analysis will be followed by a brief discussion of grounds for disqualification on application – that is, instances where a person is not automatically disqualified, but can be disqualified. The review of the law concerning the disqualification of directors is then complemented by a discussion of two illustrative cases. The chapter concludes that a critical discussion of the status quo of the German law on the disqualification of directors is long overdue. The German rules on disqualification of directors make it possible to disqualify persons from being company directors and thus aim to prevent unlawful or potentially unlawful acts being committed by the disqualified persons.14 Thus, the rules regarding the disqualification of directors are seen as an instrument of creditor protection and an instrument of protection of the capital market. They are seen as rules that complement criminal law sanctions and damages in civil law.15

6.2 History Historically, the disqualification of directors has not played a significant role in German company law.16 Such bans contradicted the basic liberal conception of the limited company form.17 However, expectations and perceptions of the role of directors has changed over time. Directors have become subject to legislative requirements outside company law and thus have to comply, for example, with social laws, tax laws and other duties.18

11 12 13 14

15 16 17 18

AktG s 76(1). AktG s 95. AktG s 96. H Hirte, T Lanzius and S Mock, ‘Tätigkeitsverbote für Organmitglieder als Gläubigerschutzinstrument’ in M Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa (De Gruyter, 2006) 301–2. Ibid. 303. T Drygala, ‘Zur Neuregelung der Tätigkeitsverbote für Geschäftsleiter’ (2005) Zeitschrift für Wirtschaftsrecht (ZIP) 423, 424. The GmbHG was enacted in 1892 and the AktG in 1937. Drygala, above n 16, 424.

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The changing perception of the role of directors led to the introduction of legislation regarding the disqualification of directors as part of the reform of the German GmbH in 1980.19 Prior to this reform, only occupational bans based on criminal law or trade law, which had limited relevance in practice for company directors, were possible. Parallel to the reform of the GmbH, the grounds for disqualification were also introduced into the AktG.20 These rules were intended to improve creditor protection and to prevent people who had been convicted of certain insolvency offences or who had been subject to an occupational ban from immediately resuming their business activities and endangering third parties.21 It is argued that there were two main stages to the introduction of the legislation on the disqualification of directors: first, a book by Klaus Tiedemann written in the mid-1970s, which proposed an expansion of occupational bans, based on comparative research and empirical studies of their high general preventive effect; and, second, an expert commission on the combatting of economic crime, established by the Federal Ministry of Justice in the early 1970s, which thoroughly studied insolvency laws. As part of this work, the commission also looked at the disqualification of directors.22 The expert commission submitted a legislative proposal that, by and large, was mirrored by the reform of the GmbH in 1980. This legislation was considered to be a rather defensive statutory regulation.23 In particular, it did not include a general clause that would have enabled courts to prevent unfit persons from being a company director. Such a provision was not introduced due to concerns about its constitutionality. The view was that only clearly defined grounds for disqualification would be constitutional.24 Disqualification orders based on criminal and trade law as well as insolvency offences were considered to meet this requirement – for example, disqualifying a person due to ‘bankruptcy’. Consequently, following the 1980 reform, both the GmbHG and the AktG contained grounds for the disqualification of directors that referred to convictions for insolvency offences as well as occupational bans by courts in criminal law and in trade law by an enforceable decision of an administrative body. The insolvency offences that the law referred to were bankruptcy, violation of book-keeping duties, and extending unlawful benefits to creditors or debtors.25 Anyone who was convicted of one of these insolvency offences was disqualified from being a company director for a period of five years once the sentence became legally valid. This period did not include the duration of imprisonment. Anyone who was

19 A Geist, Bestellungshindernisse und Tätigkeitsverbote von Geschäftsleitern im Kapitalgesellschafts-, Kapitalmarkt- und Bankaufsichtsrecht (Cuvillier Verlag, 2006) 181. 20 See H Fleischer, ‘Bestellungshindernisse und Tätigkeitsverbote im Aktien-, Bank- und Kapitalmarktrecht‘ (2004) Wertpapier-Mitteilungen 157, 157. 21 Begr RegE, BT-Drucks 8/1347 s 31. 22 See the overview by Geist, above n 19, 181 with further references. 23 Ibid. 184. 24 Ibid. 25 German Criminal Code (StGB) ss 283–283d.

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subject to an occupational ban in criminal law by a court or by an enforceable decision of an administrative body could not be a director for the duration of the ban if the purpose of the company corresponded fully or partially with a matter related to the ban.26 It has been pointed out by Fleischer that in the mid-2000s the German rules on the disqualification of directors in the GmbHG and the AktG were marginalised in the academic literature and that the existing debate, to a large extent, focused on the constitutionality of the provisions.27 The argument was made that it was too narrow to refer only to insolvency offences as grounds for disqualification. For example, many commentators were critical of the fact that not including the punishable violation of the duty to file insolvency proceedings in the list of offences leading to disqualification would contradict the aim of creditor protection.28 This offence would be closely linked to insolvency offences and should be treated in the same way.29 A further point of criticism was that the insolvency criminal offences in sections 283 to 283d of the German Criminal Code, referred to in the list of offences, could also be committed in a negligent way in order to constitute a ground for disqualification. The fact that this would lead to a five-year occupational ban was criticised as an inflexible sanction which would raise concerns about its proportionality.30 In 2008, German company law was reformed through the Act to Modernise the Law on Private Limited Companies and Combat Abuses (MoMiG).31 This Act also revised and expanded the rules on the disqualification of directors.32 The list of criminal offences that led to disqualification was expanded and now also includes some criminal offences against property such as fraud, intentional delay in filing insolvency proceedings, and giving false statements.33 Although the Act concerned the modernisation of the law on private limited companies, it also amended the disqualification of directors for public limited companies.34 The pertinent provisions in the AktG on the disqualification of directors continues to mirror the rules in the GmbHG.35 Although the list of criminal offences leading to disqualification was expanded through the company law reform, the new provision

26 StGB s 70; Trade Regulations (GewO) s 35. 27 H Fleischer in H Fleischer (ed.), Handbuch des Vorstandsrechts (CH Beck Verlag, 2006) s 1 Leitungsaufgabe des Vorstands [90]. 28 Ibid. [158]. 29 See Drygala, above n 16, 425. 30 U Stein, ‘§ 6 Abs 2 Satz 2 GmbHG, § 76 Abs 3 Satz 2 AktG: Verfassungswidrige Berufsverbote?’ (1987) Die Aktiengesellschaft 165, 175. 31 Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG). 32 L Fastrich in A Baumbach and A Hueck (eds), GmbHG (CH Beck Verlag, 20th edn, 2013) s 6 [1]. 33 Ibid. [2]. 34 H Fleischer in G Spindler and E Stilz (eds), Aktiengesetz (CH Beck Verlag, 2nd edn, 2010) s 76 [131]. 35 GmbHG s 6(2); AktG s 76(3).

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requires a wilful or intentional act; negligence alone is not adequate. The legislator thus addressed the concerns raised about the previous law that negligent acts could result in a disqualification. The negligent committing of these offences is still punishable in criminal law, but it now no longer constitutes a ground for disqualification as a director. Moreover, for some offences against property (such as fraud), which were added to the list of criminal offences, the conviction must be for at least one year’s imprisonment in order to disqualify the individual from being a director. It was argued during the legislative process that these new rules would triple the number of persons affected.36 The MoMiG reform extended the grounds for disqualification to branches of foreign companies in Germany so that these rules can no longer be circumvented by disqualified directors being able to become directors of foreign companies doing business in Germany.37 Although these rules are the primary provisions concerning the disqualification of directors, there are further grounds for disqualifying individuals from being a member of the supervisory board, which will also be discussed in this chapter.38

6.3 Grounds for automatic disqualification This part commences with a discussion of the disqualification of directors of a GmbH and the members of the management board of an AG. This will be followed by a discussion of the disqualification of the members of the supervisory board and, finally, a brief discussion of banking supervision law. 6.3.1 Directors of a GmbH; members of the management board of the AG Both the GmbHG and the AktG establish positive as well as negative eligibility criteria. 6.3.1.1 Eligibility criteria (positive requirements) The GmbHG and the AktG require some eligibility criteria (positive requirements) that company directors must meet in order to be appointed as a company director: only a natural person with full legal capacity may be appointed as a director.39 The requirement that a director must be a ‘natural person’ precludes the appointment of a corporate director.40 Domicile in Germany, gender or share ownership are not

36 37 38 39 40

Drygala, above n 16, 425. German Commercial Code (HGB) s 13e. AktG ss 100, 105. AktG s 76(3)1; GmbHG s 6(2). B Dauner-Lieb in M Hennsler and L Strohn (eds), Gesellschaftsrecht (CH Beck Verlag, 2nd edn, 2014) s 76 [16]; Fleischer, above n 34, s 76 [120].

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conditions for becoming a director in a German company.41 Directors do not need to have a place of residence in Germany. Although citizens of European Union (EU) member states have freedom of movement, other foreigners might be limited in their capacity to come regularly to Germany.42 The dominant view is, however, that the right to enter Germany at any time, such as through a work permit, cannot be required.43 This view is, inter alia, based on the argument that since 2008, German companies have been allowed to move their administrative seats abroad and can therefore fulfil their duties abroad.44 It is also not required that a director must be a shareholder of the company.45 In principle, directors do not have to be member shareholders of the legal person according to the principle of foreign organisation (Fremdorganschaft), which is enshrined in paragraph 3 of section 6 of the GmbHG. In the absence of one of the conditions for becoming a director, the appointment is void.46 Where a director subsequently ceases to meet one of the conditions, they lose their position immediately without any formal act of removal.47 There is a debate about the question of whether or not the articles of association of a company may prescribe further conditions, such as minimum age, that an individual needs to meet in order to be appointable.48 The dominant view is that companies are allowed to establish additional eligibility requirements for directors through the articles.49 However, these additional requirements are only allowed to the extent that they do not disproportionately restrict the discretion of the supervision board of a joint stock corporation with regard to selecting directors.50 It is widely argued that these criteria are only legitimate if they are relevant and in the best interests of the company – for example, the requirement of a domestic place of residence, specific professional qualifications or share ownership.51 That means that if a criterion establishes too high a barrier to become a director and if that criterion is not in the best interests of the company, then it is not legitimate. If an eligibility criterion that is established by the articles of association is not met, then this does not affect the validity of the appointment of the director concerned.

41 G Spindler in Münchener Kommentar zum Aktiengesetz (CH Beck Verlag, 4th edn, 2014) s 76 [106]. 42 W Goette in Münchener Kommentar zum GmbHG (CH Beck Verlag, 2nd edn, 2014) s 6 [20]. 43 M Weber in W Hölters (ed.), Aktiengesetz (CH Beck Verlag, 2nd edn, 2014) s 76 [70]; Fleischer, above n 34, s 76 [122]; J Tebben in L Michalski (ed.), GmbHG (CH Beck Verlag, 2nd edn, 2010) s 6 [32]. See also the judgments of the Higher Regional Court Düsseldorf (NZG 2009, 678, 679) and the Higher Regional Court München (NZG 2010, 157, 158). 44 Higher Regional Court Düsseldorf (NZG 2009, 678, 679). 45 Fleischer, above n 34, s 76 [123]. 46 BGB s 134. 47 Fleischer, above n 34, s 76 [121]. 48 Spindler, above n 41, s 76 [110]. 49 Dauner-Lieb, above n 40, s 76 [17]; Tebben, above n 43, s 6 [36]. 50 J Koch in U Hüffer, Aktiengesetz (CH Beck Verlag, 11th edn, 2014) s 76 [60]. 51 Fleischer, above n 34, s 76 [128].

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However, the director can be removed. This situation differs from the one discussed in the previous paragraph which referred to statutory eligibility criteria.52 6.3.1.2 Grounds for disqualifying an individual from being appointed as a director The statutory provisions in section 76 of the AktG and section 6 of the GmbHG determine the circumstances in which individuals are barred from being appointed as a company director.53 These grounds for disqualification are contained in a list which directly follows the eligibility criteria. As mentioned above, these requirements have been amended by the 2008 company law reform. This part will address the various situations in which an individual is disqualified from being appointed as a company director. 6.3.1.2.1 GUARDIANSHIP

First, no person under guardianship who, in managing their property, is fully or partially subject to the approval of their guardian when making a declaration of intent (section 1903 of the German Civil Code) may hold the office of director.54 6.3.1.2.2 OCCUPATIONAL BAN

Second, a person may not be a director if they have been prohibited by judicial decision or an enforceable administrative order from engaging in any profession, line of occupation, trade or branch of industry, as far as the purpose of the enterprise encompasses, in whole or in part, such prohibited activity.55 Criminal courts can ban someone from a profession by issuing an order for professional disqualification, and administrative authorities can ban persons from engaging in commercial activities if they are ‘unfit’.56 The conditions of this occupational ban will be looked at in more detail below as part of the discussion regarding disqualification of directors on application, as courts and the administrative bodies have discretion as to whether or not they use this form of punishment.

52 H Altmeppen in G Roth and H Altmeppen (eds), GmbHG (CH Beck Verlag, 7th edn, 2012) s 6 [43]. 53 AktG s 76(3)2; GmbHG s 6(2). 54 AktG s 76(3)2 No 1; GmbHG s 6(2) No 1. 55 AktG s 76(3)2 No 2; GmbHG s 6(2) No 2. 56 StGB s 70; GewO s 35. The provision of the German Criminal Code stipulates that someone who has been convicted of an unlawful act committed in abuse of their profession or trade can be banned from their occupation if the act indicates a risk that they will commit significant unlawful acts of the same kind if they continue with the profession or trade. The section in the Trade Regulations focuses on the unreliability (Unzuverlässigkeit) of the person concerned. In a wide sense this can be translated as a kind of ‘unfitness’.

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An occupational ban from the criminal court or an administrative order only disqualifies people from being a company director if the occupational ban at least partially corresponds with the purpose of the company. The duration of the disqualification depends on the occupational ban, in that the individual concerned is banned from being a company director for the duration of the occupational ban imposed by the criminal court or the administrative authority.57 The court determines the duration of the ban after exercising due discretion.58 The ban is either for a period of between one and five years or permanent. 59 An order for a lifelong ban is only made if it is to be expected that the maximum duration of five years is not sufficient to avert the risk posed by the offender.60 Moreover, this ground for disqualification does not presuppose that the person was convicted in their capacity as a director, as the reason for the disqualification is the personal unfitness that is evidenced by the committing of the offence.61 Examples of instances where individuals have abused the opportunities provided through their profession include arms smuggling by defence lawyers and the production of counterfeit money by print workers.62 It is important to note that this occupational ban is only relevant in those rare instances where the director has carried on a trade prior to or while being a company director.63 6.3.1.2.3 REFERENCE TO LIST OF CRIMINAL OFFENCES

Third, the pertinent provisions of the AktG and the GmbHG refer to a list of criminal offences which, if intentionally committed, disqualify convicted individuals from being a company director for a period of five years from the date the sentence takes legal effect.64 Any period of imprisonment is not included in the calculation of the five years. This regime also applies to convictions abroad for criminal offences that are comparable to the list of criminal offences in this statutory provision.65 However, the inclusion of foreign convictions is problematic as legal standards are not always comparable.66 The provisions in the AktG and the GmbHG refer to various criminal offences which will be looked at in the

57 H Oetker in M Henssler and L Strohn (eds), Gesellschaftsrecht (CH Beck Verlag, 2nd edn, 2014) s 6 [22]. 58 W Stree and J Kinzig in Schönke/Schröder Strafgesetzbuch (CH Beck Verlag, 29th edn, 2014) s 70 [22]. 59 StGB s 70(1). 60 StGB s 70(1)2. 61 Goette, above n 42, s 6 [32]. 62 G Athing and M Bockemühl, Münchener Kommentar zum StGB (CH Beck Verlag, 2nd edn, 2012) s 70 [9]. 63 Fleischer, above n 20, 158. 64 AktG s 76(3) No 3; GmbHG s 6(2) No 3. 65 AktG s 76(3)3; GmbHG s 6(2)3. 66 See Fastrich, above n 32, s 6 [14].

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following part. The list of crimes is exhaustive.67 It is worth noting that only wilful or intentional acts of the offences in this list lead to the disqualification, even in those cases where negligent acts are also punishable. The negligent committing of the offences is therefore not a ground for disqualifying someone as director.68 In case of a wilful or intentional act, a conviction for attempting to commit the offence or for committing the offence through omission is sufficient for the disqualification. The first offence is the delay in filing for insolvency proceedings which was added to the list through the 2008 reform.69 This offence is committed not only through failure to file for insolvency proceedings, but also in the case of late submission of the application.70 This is followed by a reference to insolvency offences contained in sections 283 to 283d of the German Criminal Code which were already part of the grounds for disqualification prior to the reform.71 The offence of delaying the filing for insolvency proceedings, contained in the German Insolvency Act, is the most common insolvency offence.72 The list of insolvency offences includes, inter alia, bankruptcy, violation of book-keeping duties, and the extension of unlawful benefits to creditors or debtors.73 Following on from the insolvency offences, there are further grounds for disqualification based on the conviction for false or incorrect statements, including statements made about the company’s financial circumstances in the annual accounts.74 In its reasoning accompanying the German Insolvency Act, the government stated that it considered the committing of these offences as an indication of the unfitness to be a company director.75 Such acts would reveal that the person neglects rules that benefit the general public and that this person is therefore unfit to be a company director.76 The aim of these provisions seems to be to prevent a person from being a director because it has been demonstrated that the person is not sufficiently reliable to hold a company directorship.77 Finally, the section refers to several criminal offences which, in the government’s reasoning, would demonstrate that the convicted person has a questionable attitude towards managing financial assets

67 68 69 70 71 72 73

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75 76 77

Oetker, above n 57, s 6 [23]. Ibid. [24]. AktG s 76(3) No 3(a); GmbHG s 6(2) No 3(a). OLG Celle OLG Celle (ZIP 2013, 1914, 1915). AktG s 76(3) No 3(c); GmbHG s 6(2) No 3(b). Spindler, above n 41, s 76 [116]. The offences in the German Criminal Code referred to here are: s 283 Bankruptcy, s 283a Aggravated bankruptcy, s 283b Violation of book-keeping duties, s 283c Extending unlawful benefits to creditors, and s 283d Extending unlawful benefits to debtors. AktG ss 76(3) No 3(c) and No 3(d); GmbHG s 6(2) No 3(c). These provisions refer to the offences in GmbHG s 82; AktG ss 399–400; HGB s 331; Transformation Act (Umwandlungsgesetz) s 313; Transparency and Disclosure Law (Transparenz- und Publizitätsgesetz) s 17. Begr RegE BT-Drucks 16/6140 s 32. Goette, above n 42, s 6 [36]. Ibid.

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belonging to others.78 The committing of these offences would demonstrate the person’s unreliability.79 The criminal offences listed in this subsection require a custodial sentence of a minimum of one year in order to disqualify a person from being a company director.80 The offences referred to in this subsection are general fraud, computer fraud, capital investment fraud, subsidy fraud, obtaining credit by deception, embezzlement and abuse of trust, as well as non-payment and misuse of wages and salaries.81 It has been argued that the minimum custodial sentence of one year would be appropriate to exclude petty crimes.82 The legislation does not require that the committing of these offences should be linked to company director activities. Anyone who commits such an offence against personal property would per se be unfit to be a director.83 There are doubts whether the disqualification of directors based on the listed criminal offences referred to in section 76(3)2 No 3 of the AktG and section 6(2) No 3 of the GmbHG is constitutional. Some commentators indicate that the general disqualification for five years when a person is convicted of one of the offences does not differentiate sufficiently between the levels of severeness of the committed offence. It would not allow courts to take into account the different levels of severity of the different offences.84 6.3.2 Further grounds for disqualification outside the AktG and GmbHG There are further grounds barring a person from becoming a company director which can be found outside the AktG and the GmbHG. For instance, members of the federal government and the governments of the federal states as well as the federal president are barred from taking up a position as company director.85 Tax advisors are also barred by professional laws from being a company director. Finally, statutory auditors of companies that are traded on capital markets are subject to a two-year cooling-off period.86 Due to the dual nature (two-tier board system) of the German board structure for joint stock corporations with a management board and a supervisory

78 Begr RegE BT-Drucks 16/6419 s 70. 79 Goette, above n 42, s 6 [37]. 80 AktG s 76(3) No 3(e); GmbHG s 6(2) No 3(e). A custodial sentence of a minimum of one year means that the person convicted has been sentenced to a period of imprisonment of no less than one year. A sentence to custody of maximum two years can be suspended on probation; see StGB s 56 para 2. 81 These criminal offences can be found in ss 263, 263a, 264, 264a, 265b, 266 and 266a. 82 Altmeppen, above n 52, s 6 [19]. 83 Begr RegE BT-Drucks 16/6419 s 70. 84 See the discussion in Spindler, above n 41, s 76 [119]. 85 See Art 66 of the German Basic Law for members of the government and art 55(2) of the German Basic Law for the federal president. 86 Public Accountant Act (Wirtschaftsprüferordnung) s 43(3).

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board, there is a further ground for disqualification which intends to prevent a conflict of interest: anyone who is a member of a supervisory board cannot be a member of the management board at the same time.87 This issue will be discussed below in the section on supervisory boards. The legal consequences of the existence of grounds for disqualification are the same as in the case where conditions for being a director are not met. The appointment of a director is void.88 Where a ground for disqualification arises after a director has been appointed, then the appointment automatically ends.89 When the ground for disqualification ceases to exist, the previous appointment of the person concerned does not automatically revive again. A new act of appointment is necessary.90 Where a disqualified director acts for the company, third parties are protected through the principles of authority, allowing them to rely on the information contained in the register of companies,91 meaning that the acts are considered to be valid irrespective of the person executing the acts being disqualified at that time. Finally, when a company applies to the court for registration in the register of companies, all directors of the management board of a joint stock corporation and the directors of a private limited company must be named. They are required to certify that there are no grounds that would prevent them from being appointed and that they have been informed about their unrestricted duty of disclosure to the court.92 This rule applies both to members of the management board and their deputies.93 Each member of the management board and each deputy must issue the relevant declaration independently.94 Some regional courts require that the directors must list all the grounds for disqualification individually in their certification and that they must indicate specifically that they are not disqualified by any one of these grounds.95 The certification given by the directors must show that they are aware of all the grounds for disqualification. It must also show that, after careful examination, the directors are certain that none of the grounds for disqualification apply to them.96 The Federal Court of Justice has clarified that,

87 88 89 90 91

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93 94 95 96

AktG s 105(1). BGB s 134; OLG Hamm 20.12.2010, NJW-RR 2011, 772, 773. Fleischer, above n 34, s 76 [140]; Fastrich, above n 32, s 6[17]; BGH NJW 1991, 2566. Spindler, above n 41, s 76 [120]; BayObLG GmbHR 1993, 224. HGB s 15; H Wicke, Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG) (CH Beck Verlag, 2nd edn, 2011) s 6 [6]. Third parties can rely on the information that is published in the register of companies. AktG s 37(2)1; GmbHG s 8(3). The directors have a duty to fully inform the register of companies if there are circumstances which would prevent them from being appointed as a company director. AktG s 94. D Solveen in W Hölters (ed.), Aktiengesetz (Vahlen Verlag, CH Beck Verlag, 2nd edn, 2014) s 37 [11]. OLG München ZIP 2009, 1321. The fact that there is no justification for requiring the reproduction of the whole text has been criticised. ibid.

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with regard to the criminal offences listed in the statutory provisions, the certification that the director ‘has never been sentenced for a criminal offence, either domestically or abroad’ is sufficient.97 Where a director is banned from exercising a business by an administrative authority decision, they must mention the subject matter of the prohibition so that the registry court can assess if that ban precludes the person from being a company director. 98 An inaccurate certification by a director is a criminal offence.99 6.3.3 Supervisory board – grounds for disqualification 6.3.3.1 Eligibility criteria As mentioned above, German companies are subject to the rules of co-determination. Like the directors on the management board, the members of the supervisory board of public limited companies must also comply with eligibility criteria. Thus members of the supervisory board must be natural persons with full legal capacity.100 This stipulation corresponds with the requirements for members of the management board.101 Moreover, capital market-oriented companies must have at least one independent member of the supervisory board with expert knowledge in the fields of accounting or annual auditing.102 As members of the supervisory board must be natural persons, it is only possible to appoint personal representatives of legal persons.103 Legal persons cannot be members of the supervisory board.104 The Federal Court of Justice has established the requirement that each member of the supervisory board must have sufficient knowledge and skills to comprehend and to assess all usual business processes without assistance.105 6.3.3.2 Disqualification provisions for members of supervisory board Members of the supervisory board are also subject to disqualification provisions, found in section 100 of the AktG. As with directors of the management board, a person under guardianship who, in managing their property, is fully or partially subject to the approval of their guardian when making a declaration of intent

97 BGH NZG 2010 829 [8]. 98 C Döbenreiner in G Spindler and E Stilz (eds), Aktiengesetz (CH Beck Verlag, 2nd edn, 2010) s 37 [14]. 99 AktG s 399(1) No 6. 100 AktG s 100(1). 101 AktG s 76(3). 102 AktG s 100(5). 103 M Henssler in M Henssler and L Strohn (eds), Gesellschaftsrecht (CH Beck Verlag, 2nd edn, 2014) s 100 [2]. 104 Koch, above n 50, s 100 [2]. 105 BGH 15.12.1982, BGHZ 85, 293, 295f, NJW 1983, 991.

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(section 1903 of the Civil Code) may not be a member of the supervisory board.106 The provision lists a number of further specific grounds for disqualification of members of the supervisory board: a person may not be a member of the supervisory board if they are already a member of the supervisory board in ten commercial enterprises that are required by law to form a supervisory board; if they are the legal representative of a controlled enterprise of the company; or if they are the legal representative of another corporation whose supervisory board includes a member of the management board of the company. In addition, a person may also not be a member of the supervisory board if they were a member of the management board of the same listed company during the past two years. However, an exception to this disqualification applies if the person is elected upon nomination by shareholders holding more than 25 per cent of the voting rights in the company.107 These grounds for disqualification are intended to ensure that members of the supervisory board are able to adequately discharge their duties. The first ground on the list, the limitation of supervisory board memberships to ten, is intended to prevent a concentration of the most important supervisory posts in German companies in very few individuals.108 The dominant view is that roles as nonexecutive directors in foreign corporations are not to be counted in the calculation.109 However, this approach has been criticised for not adequately taking into account the process of internationalisation and positions held in foreign companies.110 An important exemption from this rule for corporate groups allows legal representatives of the controlling enterprise of a group to hold up to five seats in supervisory boards of commercial enterprises which are not counted as part of the ten permitted board memberships. The condition is that they hold board memberships in companies which are members of the corporate group and that these companies are required to form a supervisory board under the co-determination rules. The reason that up to five of such memberships of supervisory boards within a corporate group are not taken into account for the limit of ten such memberships is that directors in a corporate group usually hold such board memberships as part of their directors’ duties.111 The second ground for disqualification which excludes legal representatives of a controlled enterprise of the company is intended to ensure that the organisational structure of groups prevents members of the management board from, in fact, controlling themselves. Moreover, interlocking directorates are not allowed in

106 AktG s 100(1). 107 AktG s 100(2)1 No 1–No 4. 108 Henssler, above n 103, s 100 [5]; G Spindler in G Spindler and E Stilz (eds), Aktiengesetz (CH Beck Verlag, 2nd edn, 2010) s 100 [12]. 109 Koch, above n 50, s 100 [10]. 110 See Spindler, above n 108, s 100 [15]. 111 RegBegr BT-Drucks 13/9712 s 16.

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order to ensure that companies are independently and impartially supervised.112 Finally, the two-year ban imposed on previous members of the company’s management board was introduced in reaction to the global financial crisis after 2007. The intention of this ban is to prevent previous directors of the management board from covering up and hindering possible legal action by the supervisory board against the members of the management board because of strategic mistakes or irregularities that occurred during their time on the management board.113 6.3.3.3 Requirements placed on employee representatives The employee representatives of the supervisory board are also subject to personal qualifications which are determined by co-determination laws.114 In addition, similar to the provisions pertaining to members of the management board, the articles of association may stipulate personal qualifications for the members of the supervisory board; however, these qualifications115 only apply to those members who are elected by the shareholders’ meeting and not to those who are employee representatives as that would conflict with the rules on co-determination.116 In light of the international discussion about the independence of non-executive directors, it is worth noting that the AktG does not stipulate a general requirement of independence.117 However, the German Corporate Governance Code recommends that companies should have an adequate number of independent members.118 A supervisory board member is not to be considered independent if they have personal or business relations with the company, its executive bodies, a controlling shareholder or an enterprise associated with the latter which may cause a substantial and not merely temporary conflict of interests.119 It will be clear that none of the employee representives on the supervisory board could be considered to be ‘independent’ because of their ‘personal’ relationship (being employees) with the corporation. The Corporate Governance Code makes further recommendations about the requirements placed on non-executive directors,120

112 113 114 115 116 117 118 119 120

Henssler, above n 103, s 100 [9]. AusschussB BT-Drs 16/13433 s 11. AktG s 100(3). See 6.3.1.1 above, ‘Eligibility criteria (positive requirements)’. AktG s 100(4). Otherwise, there would be a danger that the rules on co-determination could be undermined; see Spindler, above n 108, s 100 [40]. M Habersack in Münchener Kommentar zum Aktiengesetz (CH Beck Verlag, 4th edn, 2014) s 100 [6]; Henssler, above n 103, s 100 [4]. German Corporate Governance Code r 5.4.2. Ibid. For example, r 5.4.5. of the German Corporate Governance Code regarding the time dedicated to the role: ‘Every member of the Supervisory Board must take care that he/she has sufficient time to perform his/her mandate.’ See the overview in C Simons in W Hölters (ed.), Aktiengesetz (Vahlen Verlag, CH Beck Verlag, 2nd edn, 2014) s 100 [16a]–[16b].

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but these go beyond the scope of this chapter which focuses on grounds for disqualification. Similar to the management board, there are further grounds for disqualification that apply to the federal president,121 the federal chancellor and the federal minister122 as well as the ministers of the governments of the federal states. 6.3.3.4 Further grounds for disqualification The election of a member to the supervisory board becomes void if the eligibility criteria are not met at the time they take up their position.123 The invalidity of the election cannot be rectified if the missing eligibility requirement is met subsequently.124 If a criterion established by the articles of association is not met at the time a member of the supervisory board takes up their post, then the election is rescindable.125 If conditions established in the articles of association are no longer met by a member of the supervisory board or grounds for disqualification in the articles subsequently arise, it does not affect the election of the nonexecutive director automatically. However, the director can be removed from office.126 Members of supervisory boards will automatically lose their position, without any further steps required if they lose their full legal capacity or become subject to approval in guardianship.127 This situation is different when any of the grounds for disqualification listed in section 100(2) of the AktG arise: if a member of the supervisory board subsequently takes up a further non-executive directorship and consequently exceeds the limit of ten such posts, then they remain a member of the supervisory boards of the original ten companies. Exceeding the maximum number of ten supervisory board appointments affects only the last company board where the supervisory board member ‘attempts’ to take up a seat. In that company, their election is void.128 In case of the second ground for disqualification on the list – that is, where the member of the supervisory board becomes the legal representative of a controlled enterprise of the company – the director must resign as member of the supervisory board before taking up the other position. If they do not, they lose their position as member of the supervisory board as soon as they are appointed as the legal representative of the controlled enterprise. Similarly, where a non-executive director subsequently becomes the legal representative of another corporation

121 122 123 124 125 126 127 128

Basic Law art 55. Basic Law art 66 unless the Federal Parliament allows an exception. AktG s 250(1) No 4. Habersack, above n 117, s 100 [55]. AktG s 251(1). AktG s 103(3). Habersack, above n 117, s 100 [60]. Ibid.

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whose supervisory board includes a member of the management board of the company, the latter’s appointment is void.129 As indicated above, a member of a supervisory board (in a German company) cannot be appointed as member of the management board of that German company and vice versa.130 A member of the supervisory board also cannot be a permanent deputy member of the management board, a registered authorised officer (Prokurist) or general manager of the same company. Fulfilling one of these leading and significant managerial roles in the company is incompatible with being a member of the supervisory board – the separation of the supervisory role and the management role is a core feature of the German two-tier board system.131 Consequently, a person on the management board cannot manage and supervise simultaneously.132 If a person violates this provision, the role that they have taken up first remains valid and the latter one is void. Therefore, if a member of the supervisory board is subsequently appointed as a member of the management board, the last-mentioned appointment will be void.133 This rule also applies to co-determined private limited companies in Germany.134 6.3.4 Grounds for disqualification in banking supervision law 6.3.4.1 Additional grounds for disqualification Banking supervision law provides further grounds for disqualification in German law in the German Banking Act (Kreditwesengesetz, abbreviated as KWG). The Act applies to credit as well as financial services institutions.135 The Act defines ‘credit institutions’ as businesses which undertake banking businesses professionally or to an extent that requires a commercially organised business operation.136 The aim of the Act is to protect and maintain the functionality of the credit industry in order to protect creditors of credit institutions from losing their deposits.137 In particular, the Act regulates the responsibilities of the Federal Financial Supervisory Authority.138 This organisation exercises institutional control (supervision) of the credit and financial services institutions and aims to ensure the proper execution of banking transactions. As part of its responsibilities, the Federal Financial

129 130 131 132 133 134 135 136 137

See the discussion in ibid. [61]. AktG s 105. Spindler, above n 108, s 105 [6]; Habersack, above n 117, s 105 [1]. Koch, above n 50, s 105 [1]. BGB s 134(1). Goette, above n 42, s 6 [39]. KWG s 1(1). Ibid. The Act intended to ensure that there are sufficient safeguards in place for the way the banking industry operates. This purpose is evidenced by the the role of the Federal Financial Supervisory Authority which is described in s 6 of the Act. 138 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). See KWG s 6.

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Supervisory Authority has the power to demand the removal of directors and it can also disqualify directors.139 The rules concerning the disqualification of managers/directors of credit institutions focus on the credit industry in particular, and are addressed here in addition to the rules pertaining to company directors discussed above. The removal of a director can be required where there are grounds that justify the revocation of the licence of a credit institution and when the director has violated prudential regulations in a sustained manner. Demanding the removal of the director or disqualifying a director is the less restrictive method in comparison with closing the credit institute.140 The purpose of this demand is the removal of certain unfit directors. The demand is directed at the credit institute and not the directors themselves.141 The disqualification of members of the supervisory board of legal persons in private and public law takes legal effect straight away.142 Instead of revoking the licence of the credit institution, the public body first has to assess whether the measurements taken against the directors are appropriate. This assessment is done in accordance with the principle of proportionality.143 Demanding the removal of a director and the disqualification of a director presupposes that a reason for revoking the licence of the credit institution exists.144 The classic reasons for demanding the removal or the disqualification of a director are the lack of reliability or professional competence of that person.145 This rule affects those cases where it was only detected after the granting of the licence that the director lacks skills or professional competence. Lack of required qualifications, involvement in money laundering or other criminal activities and lack of orderly running of the business are typical violations of the provision, but these broad categories are subject to the assessment of the Federal Financial Supervisory Authority.146 This organisation can also order the removal of and disqualification as director when insolvency proceedings have been started or when the performance of obligations of the institute to its creditors are at risk.147 A further ground is the sustained violation of provisions of the Act concerning the credit business.148

139 KWG ss 35–36. For purposes of the Act regulating the credit business, directors are those natural persons who are by virtue of law, articles or shareholders’ agreements appointed to run the business of and to represent a credit and financial services company which is organised in the legal form of a judicial person or a commercial partnership: KWG s 1(2). 140 R Fischer in K-H Boos, R Fischer and H Schulte-Mattler (eds), Kreditwesengesetz (CH Beck Verlag, 4th edn, 2012) s 36 [1]. 141 Ibid. 142 Ibid. [2]. 143 Ibid. [4]. 144 KWG ss 35(2) No 3, 4 or 6. 145 Fleischer, above n 20, 159. 146 Fischer, above n 140, s 36 [33]. 147 KWG s 36(1) in conjunction with KWG s 35(2) No 4. 148 KWG s 35(2) No 6.

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Demanding the removal and/or disqualification of a director is immediately enforceable.149 As such, appeals and actions for annulment do not have a suspensory effect.150 These orders therefore have a severe effect on the individual director involved. Third parties are protected as neither the demand for a removal nor the disqualification of the director has an effect on the validity of the transactions that have been undertaken by the director concerned. In particular, contracts that directors concluded, notwithstanding their disqualification, are valid.151

6.4 Grounds for disqualification on application The previous section discussed the situations where the legislation stipulates that a person cannot become a director or will be automatically disqualified from continuing to be a director due to a ground for disqualification. In contrast, this section addresses the instances in which a person is not automatically disqualified, but can be disqualified by the regulator. With regard to this scenario, German law is rather limited. The pertinent rules of German company law found in the AktG and the GmbHG, discussed above, stipulate that anyone meeting the conditions ‘may not be appointed as director’.152 Therefore, no discretion is given as to the question of whether or not the disqualification applies to the individual. If the conditions are met, then the person concerned is unable to be a company director. Outside German company law, there are however two situations discussed above which could be considered as being part of ‘disqualification on application’, at least because they involve the discretion of the competent institution and the disqualification is not automatic. These scenarios concern the occupational ban imposed by a criminal court153 and the trade ban by an administrative body.154 6.4.1 The power of courts to order an occupational ban in criminal law Courts have the power to order an occupational ban if a person has been convicted of an unlawful act committed in abuse of their profession or trade or in gross violation of duties, and a comprehensive evaluation of the offender and the offence shows that, by further engagement in the profession, branch of profession, trade or branch of trade, there is a danger that they will commit serious unlawful acts

149 150 151 152

KWG s 49. Fischer, above n 140, s 36 [65]. Ibid. [74]. GmbHG s 6(2). In case of the AktG, the relevant clause in s 76(3) reads: ‘A person may not be a member of the management board who . . .’. 153 StGB s 70(1). 154 GewO s 35(1).

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of the kind indicated above.155 Criminal courts have judicial discretion as to whether or not to make this order following the committing of an unlawful act.156 The offender must have consciously and systematically (i.e. wilfully) abused the opportunities provided by their profession in order to commit the offence.157 The discretion of the court in making this order must be based on the protection of the general public.158 It is important that the unlawful act is related to the profession of the person concerned. For the occupational ban to be relevant for the disqualification of a company director, it is necessary that the act has been committed in connection with a private limited company or public limited company.159 It has been argued that the wording which refers to ‘profession or trade’ significantly limits the scope of this order for disqualifying company directors.160 The person must have committed the unlawful act as a director to ensure that a general ban of the occupation can be ordered. The act must have been committed in abuse of the profession or trade or in gross violation of the attendant duties. With regard to the former, there is a range of possible offences from incorporation to the winding up of the company.161 It is also necessary that a comprehensive evaluation of the offender and the offence shows that further engagement in the profession, branch of profession, trade or branch of trade poses the risk that the individual will commit serious unlawful acts of the kind indicated above. Given the significant consequence of the ban on the individual’s constitutional right to freedom of occupation, the act of abuse must be sufficiently serious.162 The guiding principle is a high degree of probability that the individual will continue to commit serious unlawful acts.163 When exercising its discretion, the court must order the ban for a minimum of one year. The usual upper limit is five years. However, in exceptional cases, it can be ordered indefinitely if there is reason to believe that the statutory maximum period will not suffice to avert the risk posed by the offender.164 6.4.2 Imposing a trade ban on company directors by an administrative body The difficulty with applying the trade ban by an administrative body to company directors is that the ban is, first of all, directed at the business. However, it is also possible to ban the trader from acting as a representative. This could include

155 156 157 158 159 160 161 162 163 164

StGB s 70(1). Athing and Bockemühl, above n 62, s 70 [25]. Ibid. [9]. Stree and Kinzig, above n 58, s 70 [14]. Geist, above n 19, 188. Ibid. 189. Ibid. 194. T Fischer, Strafgesetzbuch mit Nebengesetzen (CH Beck Verlag, 61st edn, 2014) s 70 [9]. See the discussion in Geist, above n 19, 195. StGB s 70(1)2.

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company directors.165 Moreover, the ban can be ordered against authorised representatives of the business or anyone managing it.166 The trade ban by administrative order presupposes the unreliability of the trader.167 Unreliability means that the individual concerned is unlikely to operate their trade adequately in the future.168 This question depends on a prediction being made of future behaviour, taking into account the past conduct of the person.169 Relevant acts that can constitute unfitness of the trader are criminal insolvency offences as well as offences against property and assets, excessive debts, significant tax debts and the non-payment of social security contributions.170 Moreover, it is required that the ban must be ‘necessary’.171 It will be considered ‘necessary’ to prohibit someone from being a director of a company if it cannot be ruled out that the person will continue their unreliable conduct as a director of a company. The administrative body has a discretion as to whether or not to impose the prohibition on the person to act as company director. If it does make the prohibition order, the ban is valid until the body permits the individual concerned to resume their work as director. However, despite this potential use of the trade ban, it is important to bear in mind that the primary aim of the prohibition order in trade law is to ensure that other trade bans are not bypassed.172 It might seem that the occupational ban violates the constitutionally guaranteed basic right of ‘freedom of occupation’ in Article 12 of the German Basic Law.173 However, the German Federal Constitutional Court held that an occupational ban which is limited in time is justified if it protects overriding public interests.174 It is argued that a permanent ban can also be constitutionally justified if the principle of proportionality is strictly taken into account and if particularly important public goods are protected, such as the functioning of the judicial system.175 It is important that the order is aimed at protecting the general public against risk.176 This approach is also based on the fact that, after a disqualification

165 166 167 168

169 170 171

172 173 174 175 176

GewO s 35(1)2. GewO s 35(7a). GewO s 35. BVerwGE 65, 1f. Under 6.3 ‘Grounds for automatic disqualification’ above, it was mentioned that unreliability (Unzuverlässigkeit) could, in a wide sense, also be translated as ‘unfitness’. P Marcks in Landmann/Rohmer, Gewerbeordnung (CH Beck Verlag, 69th edn, March 2015) [32]. See Hirte et al., above n 14, 307. GewO s 35(1). It is necessary to prohibit someone from being a director of a company if it cannot be ruled out that the person will continue their conduct as a director of a company. See Geist, above n 19, 205. Geist, above n 19, 207. See Athing and Bockemühl, above n 62, s 70 [3]. BVerfGE 25, 101. Stree and Kinzig, above n 58, s 70 [7]. For example, solicitors who continuously misappropriate client funds might pose a permanent threat to the functioning of the judicial system. Athing and Bockemühl, above n 62, s 70 [2].

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order has been made, the order can be suspended for a probationary operational period if there is reason to believe that the risk of the offender committing serious unlawful acts has diminshed.177 Although both the occupational ban of a criminal court and the trade ban by an administrative body are discretionary orders, the orders are not primarily targeted at disqualifying company directors. These provisions are referred to in the list of grounds for disqualification in the AktG and GmbHG that were discussed above. They can then automatically lead to the disqualification if the further conditions established by the AktG and GmbHG are met.

6.5 Court case analysis This section focuses on cases to illustrate the practice of directors’ disqualification under German law. Due to the focus of German company law on grounds for automatic disqualification, both cases address the application of the pertinent provisions of German company law rather than the application of the occupational ban and trade ban found outside company law. 6.5.1 OLG Naumburg (1999) This case concerned the appointment of a director of a GmbH who, at the time of incorporation, inaccurately certified that he had not been convicted of any of the insolvency offences that lead to a disqualification from being a company director.178 The competent Local Court subsequently became aware of the previous conviction that he had not disclosed before the company was added to the register of companies.179 The Court ordered that the appointment of the director was void due to his conviction of an insolvency offence. Also, at the time he had made the inaccurate certification, the conviction was less than five years earlier. It therefore still disqualified him from being a company director. The official entry of the person into the register of companies did not change the fact that he was disqualified. The Court held that the legislator intended to protect third parties by preventing individuals that had been convicted of an insolvency offence from trading under the guise of an anonymous company.180 The entry of the name of the director in the register of companies was void and had to be deleted. Arguably, this case illustrates well how the grounds for disqualification, based on a criminal conviction, operate in German law. Here, the individual concerned could not circumvent his disqualification by concealing the true facts from the register of companies. Once these facts had been discovered, his entry into

177 178 179 180

StGB s 70a. OLG Naumburg, Beschluss vom 10.11.1999 (7 Wx 7/99), FGPrax2000, 121. The director was convicted of the violation of book-keeping duties under StGB s 283b. OLG Naumburg, Beschluss vom 10.11.1999 (7 Wx 7/99), FGPrax2000, 121.

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the register of companies was removed as it was void. Although this case is from 1999, it demonstrates a potential institutional weakness of the German system: that there is no official register of individuals that contains the conditions that lead to a disqualification. As a consequence of that, the register of companies cannot access such information about directors that are disqualified. The strength of the Court’s decision here is that it provides a clear remedy for the concealment of the disqualification by an individual. It is important that the incorrect entry into the register of companies is void. 6.5.2 BGH (2007) This case concerns the registration of a branch of an English private limited company (Ltd) in the German register of companies.181 The sole director of the English company was subject to an enforceable German trade ban that would have disqualified him from being a company director of a GmbH. The case is particularly relevant due to the popularity of the English private limited company among German incorporators in the 2000s.182 Prior to the enactment of the company law reform in 2008, the English private company enjoyed a boom among German incorporators who often used it purely to trade in Germany. According to the facts of this case, the ban prohibited the director of the private company from working as a bricklayer in Germany. He incorporated the company in order to operate in the same area. The English private company then registered a branch in Germany which was rejected by the registry court due to the director’s occupational ban. This case went through different courts and was finally decided by the Federal Court of Justice, Germany’s highest court of civil and criminal jurisdiction. The Court held that the registry court was correct in rejecting the application for entry in the register of companies as the company’s sole director was disqualified from being a company director. The relevant law for deciding the registration of a branch of a foreign company was German law. The Federal Court of Justice was of the opinion that the entry in the register of companies presupposes that the director of the foreign company complies with the German rules about directors’ disqualification.183 This rejection would not violate the freedom of movement that companies enjoy in the EU as there was no discrimination of the individual concerned. The decision provides clarity as it prevents individuals from circumventing German trade bans by operating as a director of the branch of a foreign company. The decision therefore contributes to and supports the free movement of companies by making it clear that free movement of companies cannot be used to play off national laws against each other. Foreign incorporation should not provide

181 BGH, Beschluss vom 07.05.2007 – II ZB 7/06 (OLG Jena). 182 See T Koller, ‘The English Limited Company – Ready to Invade Germany?’ (2004) 15 International Company and Commercial Law Review 334. 183 BGH, Beschluss vom 07.05.2007 – II ZB 7/06 (OLG Jena).

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a loophole to bypass disqualifications in Germany. To complete the picture it is worth noting that the GmbHG and AktG now also expressly stipulate that anyone who has been convicted of an offence abroad that is comparable to one of the insolvency offences which lead to a disqualification as a director in Germany will also be disqualified.184 6.5.2.1 European Union Perspectives BGH (2007) highlights the fact that rules on directors’ disqualifications have not been harmonised in the EU.185 This case also demonstrates that it is necessary to consider the German rules on directors’ disqualification in their European context. It is not possible to fully consider this issue within the scope of this chapter. In 2003, the European Commission stated in its Action Plan on Company Law that it intended to develop a directive on directors’ responsibilities which would include rules on directors’ disqualification.186 The European Parliament suggested in 2006 that the Commission should improve the cross-border availability of information on the disqualification of directors.187 However, the Commission did not progress this issue any further and it was not included in its 2012 Action Plan on European company law and corporate governance. 188 In his piece on disqualifying directors in the EU, Sørensen concluded that ‘presently, it seems unlikely that there will be substantive harmonization in relation to directors’ disqualification’.189 This issue was addressed in the Statute for a European Company (SE) stating that no person may be a member of any SE organ if they are disqualified from serving as a member of a company organ under the law of the Member State in which the SE has its registered office, or is disqualified from serving owing to a judicial or administrative decision of a Member State.190

6.6 Conclusion This analysis has shown that the system under German law is primarily based on automatic grounds for disqualification found in company law. The legislation that

184 GmbHG s 6(2)3; AktG s 76(3)2. 185 K E Sørensen, ‘Disqualifying Directors in the EU‘ in H S Birkmose, M Neville and K E Sørensen (eds), Boards of Directors in European Companies: Reshaping and Harmonising their Organisation and Duties (Wolters Kluwer, 2013) 328. 186 European Commission, Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward (COM (2003) 284 final) 16. 187 European Parliament, Resolutions on Recent Developments and Prospects in Relation to Company Law (2006/2051 (INI)) [18]. 188 European Commission, Action Plan: European Company Law and Corporate Governance – A Modern Legal Framework for More Engaged Shareholders and Sustainable Companies (COM (2012) 740 final). 189 Sørensen, above n 185, 332. 190 Article 47(2) of Council Regulation (EC) No 2157/2001 of 8 October 2001 on the SE.

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regulates German private limited companies, GmbHG, and the legislation that regulates German public limited companies, AktG, contain the same grounds for disqualification. The German approach focuses on and is based on the convictions for criminal offences that are listed in the pertinent statutory provisions of the GmbHG and the AktG. The grounds for disqualification are thus ancillary to criminal law.191 The strength of this reliance on criminal law is the clarity that it provides due to the absence of discretion. There is little discussion about the question of whether or not a director ought to be disqualified. On the contrary, a director who has been convicted of one or more wilfully committed crimes that are on the list is automatically disqualified for a period of five years. Since the list of criminal offences giving rise to a disqualification order was expanded as part of the 2008 company law reform, it can be said that the current approach provides a solid basis for creditor protection. The reform led to the inclusion of further insolvency offences, as well as other offences against property which indicate that the person concerned is unfit to act as a company director. In particular, the inclusion of delayed filing for insolvency in the list of offences is supported as it clearly demonstrates the inability to run a company.192 Given the aim of creditor protection, the focus on insolvency offences is sensible. Moreover, the fact that the disqualification depends on criminal convictions means that a criminal court would have assessed the facts before and would have decided whether or not the individual has intentionally committed the offence. This approach thus overcomes issues of proof and keeps that concern outside company law.193 The disqualification is therefore an additional penalty to the fine or the imprisonment.194 However, despite these advantages, the German system of directors’ disqualification also has several weaknesses which need to be highlighted here. First of all, it is questionable whether the one-size-fits-all approach that applies the same rules to sole directors of small family-owned private companies and to members of the management board of a multinational enterprise is appropriate. Although the German system with its reliance on criminal convictions might be clear in terms of the legal consequence of being disqualified if certain statutory conditions are met, it lacks the discretion that would be preferable for more nuanced disqualification orders. In particular, it could be said that the automatic disqualification for five years on meeting the conditions of the statutory provision is too harsh and inflexible. This system does not allow for an assessment of the facts of an individual case. Also, the reliance on criminal convictions raises the issue that, in criminal practice, deals are struck between prosecution and defence

191 U Haas, ‘Die Disziplinierung des GmbH-Geschäftsführers im Interesse der Gesellschaftsgläubiger‘ (2006) 29 Wertpaper-Mitteilungen 1369, 1372. 192 See Altmeppen, above n 52, s 6 [14]. 193 Sørensen, above n 185, 332. 194 Ibid.

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lawyers. The result may be no conviction of the person and thus no automatic disqualification. This means that the German focus on criminal offences can, at least in theory, have the effect of fewer people being automatically disqualified in comparison with other jurisdictions where the grounds for automatic disqualification are much wider and not restricted to criminal convictions. Moreover, the fixed and inflexible duration of the disqualification of five years raises the widely debated question of the constitutionality of the provisions.195 The five-year ban is a severe infringement of the basic right to occupational freedom (Article 12 of the German Basic Law) which lacks an appropriate differentiation as to the seriousness of the crime and prevents the chance to subsequently adapt the professional ban to the circumstances – for example, where the concerns about the fitness of the individual in question cease to exist. It has been argued that a close connection between the offence committed and the business activity ought to exist, but that this would not play a decisive role in case of fraud and abuse of trust.196 It is questionable whether purely because someone has committed these offences, they should be considered unable to act as company director. On the other hand, the balance found in the present approach is widely regarded as proportional, given that it would only affect those who have consciously disregarded the legal order – in particular, by committing an intentional offence linked to insolvency or property.197 It is important to bear in mind that, prior to the 2008 reform, the law was not restricted to offences committed intentionally, but that it also included negligence. It is also argued that the extended list of offences that lead to a disqualification is not unproportional as it requires a conviction with a minimum of one year’s imprisonment, which excludes petty offences.198 The discussion of the case law also highlights a further problem in the European Union: the lack of harmonised rules and the difficulty of applying disqualifications to company directors of foreign companies that rely on use of the freedom of movement. Germany does not have an institution that monitors the disqualifications. The enforcement of the disqualification is primarily a matter for the register of companies, which is informed about final convictions of the criminal courts that might raise concerns about the fitness of individuals. The primary source of information is the directors themselves who are obliged to certify that they have not been convicted of the listed offences before the company’s name can be added to the register of companies.199 The lack of institutional monitoring means that it

195 196 197 198 199

See Drygala, above n 16, 426; Fleischer, above n 20, 165. Drygala, above n 16, 425. Altmeppen, above n 52, s 6 [14]. Ibid. See GmbHG s 8(3) for the duty of the director to certify to the register of companies that they are not subject to a disqualification when they incorporate the company. See GmbHG s 39(3) for the duty of new directors to make the same certification. See also s 39(1) for

Germany

199

would be problematic to expand the grounds for disqualification beyond criminal offences as this would necessitate the introduction of adequate oversight/ monitoring procedures.200 It has been pointed out that administrative interventions can be more targeted and quicker than lengthy judicial proceedings.201 It has also been pointed out that an expansion of the rules on disqualification of directors requires appropriate institutional design in terms of having a public body that is in charge of the enforcement. At present, Germany does not have such an institution.202

directors to inform the register of companies about subsequent grounds for disqualification. False declarations are a criminal offence pursuant to s 83(1) No 5 to ensure that these statements are made correctly. 200 Hirte et al., above n 14, 305. 201 Fleischer, above n 20, 163. 202 H Fleischer, ‘Erweiterte Außenhaftung der Organmitglieder im Europäischen Gesellschaftsund Kapitalmarktrecht: Insolvenzverschleppung, fehlerhafte Kapitalmarktinformation, Tätigkeitsverbote‘ (2004) Zeitschrift für Unternehmens- und Gesellschaftsrecht 437, 474. It is interesting to note in this context that there are no data available about the number of disqualifications in German law. See generally J J du Plessis and N Cordes, ‘Claiming Damages from Members of Management Boards in Germany: Time for a Radical Rethink and Possible Lessons from Down Under?’ (2015) 36 Company Lawyer 11.

Index

acting while disqualified, consequences of, UK 60–1 Administrative Appeals Tribunal (Australia) 90 age of director, UK 49 appointment of company directors, Germany: eligibility criteria (positive requirements) 178–80 Australia: automatic disqualification 20; colonial limited liability 71, 99; disqualification by application 21–2; disqualification by ASIC see disqualification by ASIC; disqualification by the courts see disqualification by the courts, Australia; disqualification by regulator with no court involvement 24; disqualification for life 28; disqualification must be justified 86–8, 91; disqualification on application 21–2; disqualification orders see disqualification orders, Australia; disqualification regime comparison to UK 28–9; eligibility of company directors 19; enforceable undertakings 91–2; grounds for disqualification 3, 76–8; history of corporate legislation see history of corporate legislation, Australia; honest and dishonest bankrupts 81; indictable offences 80; leave by court for exemption to disqualification 25; leave to manage a corporation 94; limitations of regulatory model 101–2; limited liability corporations 79, 81; manage/managing corporations 4, 75–8, 80, 82, 84, 92, 94; management of a foreign company 78; meaning and

consequences of disqualification 75–6; notice of disqualification 89; periods of disqualification 82, 88, 91; personal insolvency agreement 78; phoenix activity 84, 89; pubic protection aim 77, 81, 86; punitive objective of disqualification 77; purposes of disqualification 5; register of disqualified persons 94–5; role of board of directors 5; role of regulator 95, 99–102; serious fraud 80–1; shadow directors 76; strengths of regulatory model 100–1; undischarged bankrupts, automatic disqualification of 78, 79–80; unfitness see unfitness, Australia; vacating the office 80; winding up offences 84 Australian Securities and Investments Commission (ASIC) 3, 22, 24, 25, 26, 70, 77, 80, 84–5; disqualification by see disqualification by ASIC; leave to manage a corporation 94; power to bring application for disqualification 81, 89, 91; regulatory model, limitations of 101–2; regulatory model, strengths of 100–1; role of 95, 99–102; s 206C of the 2001 Act 82 automatic disqualification 3; officers of companies 4; shadow directors 4 automatic disqualification, Australia 20, 78; grounds for 78; history of 78–80; interpretation of s 206B of 2001 Act 80–1; manage/managing corporations 4, 75–8, 80, 82, 84–92, 94 automatic disqualification, Germany 20; disqualification from appointment as director 178; eligibility criteria

Index (positive requirements) 178–80; grounds for 178–91; grounds outside AktG and GmbHG 183–5; guardianship 180; insolvency 177–8, 182; occupational ban 180–1; reference to list of criminal offences 181–3; register of companies 184–5; unfitness, 180, 183 automatic disqualification, South Africa 20; 1926 Act 114–116; statutory instruments 124–7 automatic disqualification, South Africa 1973 Act 116–30; court order 123–4; minors 117–119; misconduct 121–3; offences 121; qualifications instead of disqualifications 127–8; s 218 116–23; unrehabilitated insolvents, 1973 Act 116, 119–120, 128 automatic disqualification, South Africa 2008 Act 130–43; conviction and imprisonment without fine option 140–1; court analysis of s 69 151–2; disqualified persons 133–4; ending and extensions of disqualification periods 141; exempting disqualification under s 69 141–2; ineligibility 130–1; juristic persons 130, 131; notification of disqualification 142; prohibited in terms of any public regulation 136–40; qualification set out in memorandum of incorporation 131–3; register of disqualified persons 142–3; removed from an office of trust by misconduct including dishonesty 140; s 47 of Close Corporations Act 1984 134–6; unemancipated minor or similar legal disability 131; unrehabilitated insolvents 136 automatic disqualification, UK 20, 21, 38, 39, 48–9; undischarged bankrupts 38,39, 41, 45–9, 64–5 automatic disqualification, US 20–1 becoming insolvent, UK 51 board of directors, Australia, role of 5 CCDA 1986 (UK): automatic disqualification and 45; background to introduction of 46–7; inconsistent reporting under 36; reviews of operation of 35–6; unfitness

201

disqualification under s 6 51–2, 68; unfitness disqualification under s 8 52–3; use of private limited companies and 36 close corporations, South Africa 134–6, 144 Companies and Intellectual Property Commission (South Africa) 8, 25, 141, 142, 144, 145, 148 companies limited by shares: UK 40–1 company directors: de facto 4, 52–3; disqualification of see disqualification of directors; eligibility see eligibility of directors; removal of see removal of directors; shadow 4 compensation order, UK 64 compensation undertaking, UK 64 Competition and Markets Authority (UK) 50, 56–7 convictions for relevant foreign offences, UK 63 corporate governance 2, 5 Corporate Governance Code (UK) 34 corporate regulator see regulator court analysis, South Africa 2008 Act 148–53; automatic disqualification under s 69 151–2; constitutionality of delinquency orders under s 162(5) 152–3; delinquent person application under s 16 148–51 court order, South Africa: 1973 Act 123–4 credit institutions, Germany 189 de facto directors 4; UK 52–3 default in relation to company legislation provisions, UK 58 delinquent persons, South Africa 133–4, 143–4; application to suspend orders 147–8; conditions attached to delinquency orders 146; court analysis of applications under s 162 of 2008 Act 148–51; court analysis of constitutionality of orders under s 162(5) 152–3; orders to declare a person delinquent 144–5; periods of declaration of 146–7 Department for Business, Innovation and Skills (UK) 24–5, 63 directors’ duties, breach of: UK 55 disqualification by ASIC 89–92; appeals 90; disqualification must be justified 91; enforceable undertakings 91–2;

202

Index

procedural requirements and review of decisions 90; s 206F of 2001 Act 89–90 disqualification by banking supervision law, Germany: grounds for 189–91; lack of reliability or professional competence 190 disqualification by court order on application of regulator, US 163–5 disqualification by court order or by Disqualification Unit of the Insolvency Service, UK 45–8, 51–2 disqualification by court order, South Africa 1973 Act 123–4, 128–30 disqualification by regulator 3, 4; ASIC 89–92; US 165–6 disqualification by regulator with no court involvement; Australia 24; Germany 25; UK 24–5; US 25 disqualification by supervisory board, Germany: grounds for 185–9; disqualification provisions for members of supervisory board 185–7; eligibility criteria 185; further grounds for 188–9; requirements placed on employee representatives 187–8 disqualification by the courts, Australia 81–2; must be justified 86–8, 91; s 206 of 2001 Act 82–4; s 206D of 2001 Act 84; s 206 E of 2001 Act 85–6 disqualification for competition infringements, UK 50, 56–7 disqualification for fraudulent or wrongful trading, UK 50, 57, 68 disqualification for general misconduct in connection with companies, UK 50, 57–9 disqualification for life, Australia 28 disqualification from acting as independent director, South Africa 125 disqualification in Tables A and B of Schedules to former UK Companies Acts 40–5; origins and vacation grounds 40–1; purpose to Table B to 1956 Act and later refinements 41–5 disqualification legislation, US: Delaware General Corporation Law 158–9; development of 160–2;

general background to 157–9; Model Business Corporation Act 158–9; Sarbanes-Oxley Act 161–2 disqualification of company directors 18; as instruments of creditor and capital market protection, Germany 175, 197; automatic see automatic disqualification; banking supervision law, Germany 189–91; by application, UK 23, 29, 45, 50–9, 65–7; by application, US 24; by court order or Disqualification Unit of the Insolvency Service, UK 45–8; by court order or on application of regulator, US 163–6; by court order, South Africa 1973 Act 123–4, 128–30; by misconduct, South Africa 122; by regulator see disqualification by regulator; by supervisory board, Germany 185–9; by the courts, Australia see disqualification by the courts, Australia; case analysis, Germany 194–6; case analysis, US 166–70; CCDA 1986 (UK) and see CCDA 1986 (UK); comparison between Australia and UK 28–9; competition infringements, UK 50, 56–7; convictions for relevant foreign offences, UK 63; criminal offences, Germany 177–8; critical analysis of purpose and intentions of law of, UK 35–7; criticism of in academic literature, Germany 177; default in relation to company legislation provisions, UK 58; disqualification orders see disqualification orders; disqualification undertakings, UK 29, 39, 53, 59, 60, 62; disqualified persons, South Africa 133–4; ending and extension of disqualification periods, South Africa 141; European Union perspectives on German case law 196; for life, Australia, 28; former UK Companies Acts 40–45; forms of UK 38–9; fraudulent or wrongful trading, UK 50, 57, 68; from acting as independent director, South Africa 125; gatekeeper function of 5–6; general misconduct in connection with companies, UK 50, 57–9; Germany 6; grounds for, Australia 3, 76–8; grounds for, Germany 176–7; history, Germany 175–8; history, UK

Index 39–48; indictable offences, UK 58; insolvency, Germany 177–8, 182; lack of institutional monitoring of, Germany 198–9; leave by court for exemption to disqualification, Australia 25; manage/managing corporations, Australia 74, 5–8, 80, 82, 84, 92, 94; mandatory, by court order, UK 65–6; meaning and consequences of, Australia 75–6; must be justified, Australia 86–8, 91; notice of, Australia 89; negligent acts, Germany 178; on application see disqualification on application; on basis of misconduct, South Africa 122; periods of disqualification see periods of disqualification; mandatory, by court order, UK 65–6; occupational ban, Germany 180–1; persons instructing unfit directors, UK 63; provisions 19–25; public interest 29–30; public interest, South Africa 141; public protection aim 7, 17, 30, 34, 36, 76; public protection aim, Australia 77, 81, 86; punitive objective of 17–18; punitive objective of, Australia 77; purpose of 7–18; purposes of, Australia 5; South Africa 18, 29; statutory instruments, South Africa 124–7; summary offences, UK 59; undischarged bankrupts see undischarged bankrupts; unfitness see unfitness; unrehabilitated insolvents, South Africa 116, 119– 120, 128, 136; via disqualification undertakings, UK 29, 39, 53, 60, 62; winding up offences see winding up offences disqualification of unfit directors see unfitness disqualification by application, Australia 21–2 disqualification by application, Germany 24, 191–4; imposition of trade ban on directors by administrative body 192–4; power of courts to order an occupational ban in criminal law 191–2 disqualification by application, UK 23, 39, 45, 50–9, 65–7 disqualification by application, US 24 disqualification on application of the regulator, US: case analysis 166–70

203

disqualification on application, South Africa 22, 143–8; approach to 143; standing to apply for court order to declare delinquent director or place person under probation 143–4 disqualification on application, South Africa 2008 Act: application to suspend or substitute delinquency and probation orders 147–8; conditions attached to delinquency and probation orders 146; order to declare person delinquent 144–5; order to place person under probation 145–6; period of delinquency and under probation 146–7 disqualification on basis of misconduct, South Africa 122 disqualification orders, Australia 82, 84–6, 89; burdens of proof 92–3; enforcement of and defences 92–4; precautions under s 206A of 2001 Act 93–4 disqualification orders, UK 38–9, 50, 53, 57, 59 disqualification orders, South Africa 121 disqualification undertakings, UK 29, 39, 53, 60, 62 Disqualification Unit of the Insolvency Service, UK 29, 45–8, 52 disqualified persons, South Africa 133–4 egregiousness, US 168 eligibility of company directors 18; Australia 19; Delaware corporate law 19; Germany 19; South Africa 18; UK 19 emancipation, South Africa 118, 131 employee representatives, Germany, requirements placed on 187–8 enforceable undertakings, Australia 91–2 European Union, perspectives on German cases 196 exemption to disqualification: Johannesburg Stock Exchange 139; leave by court for, Australia 25; South Africa 25–6, 141–2; US 26 failure to pay under a county court administration order, UK 49 Federal Financial Supervisory Authority (Germany) 3, 25, 189–90

204

Index

Financial Services Board (South Africa) 124, 136–7, 139; Directive 101 124–5 fraudulent or wrongful trading, disqualification for, UK 50, 57, 68 Germany: appointment of company directors, automatic disqualification of company directors 20; automatic disqualification see automatic disqualification, Germany; credit institutions 189; criminal offences 177–78, 197; criticism of disqualification rules in academic literature 177; disqualification by application 24, 191–4; disqualification by banking supervision law 189–91; disqualification by regulator with no court involvement 25; disqualification by supervisory board 185–9; disqualification due to lack of reliability or professional competence 190; disqualification of directors 6; disqualification on application 24; eligibility criteria (positive requirements) 178–80; eligibility of directors 19; employee representatives, requirements placed on 187–8; EU perspectives on case law 196; grounds for disqualification 176–7; guardianship 180; history of disqualification of company directors 175–8; imposition of trade ban on directors by administrative body 192–4; insolvency 177–8. 197; management board 174–5; negligent acts 178; power of courts to order an occupational ban in criminal law 191–2; reference to list of criminal offences 184–5; register of companies 184–5; regulation of public limited companies 6; two-tiered board structure 174–5, 183–4 grounds for disqualification 3: Australia 76–8 guardianship, Germany, 180 history of corporate legislation, Australia: Australian companies law, co-operative methods 73–4; colonial inheritance 71–3; national corporate law 74–5

history of disqualification of company directors: Germany 175–8; UK 39–48 indictable offences, Australia 80 indictable offences convictions, UK 58 ineligibility, South Africa 130–1 insolvency, Germany 176–8, 197 insolvent companies, disqualification of unfit directors of, UK 50–4, 64, 67 Johannesburg Stock Exchange: Derivative Rules 139; Equity Rules 139; exemption from disqualification 139; requirements for directors of listed companies 126–7 juristic persons, South Africa 130, 131 lack of reliability or professional competence, Germany 190 leave by court for exemption to disqualification 25–6; Australia 25; South Africa 25–6; US 26 limited liability, colonial Australia 71, 99 limited liability corporations 2, 76; Australia 79, 81 manage/managing corporations, Australia 4, 75–8, 80, 82, 84, 92, 94 mandatory disqualification by court order, UK 65–6 minors, South Africa: automatic disqualification of, 1973 Act 117–119; unemancipated 130, 131 misconduct, South Africa 121–3; disqualification on basis of 122 nine-element analysis for unfitness, US 169 notice of disqualification, Australia 89 occupational ban, Germany: automatic disqualification and 180–1; power of courts to order in criminal law 191–2 periods of disqualification 28: Australia 82, 88, 91; UK 59–60 personal insolvency agreement, Australia 78 phoenix activity, Australia 84, 89 phoenix companies, UK 49 probation, South Africa see under probation, South Africa

Index prohibited in terms of any public regulation, South Africa 136–40 public interest, disqualification of company directors and 29–30 public protection aim in disqualifications 7, 17, 30, 34, 36, 76; Australia 77, 81, 86 public limited companies, Germany, regulation of 6 punitive objective of disqualification 17–18, Australia 77 qualifications for directors, US 166 reference to list of criminal offences, Germany 181–3 register of companies, Germany 184–5 register of disqualified persons 26–7; Australia 94–5; South Africa 142–3; UK 61–3 Registrar of Companies (South Africa) 123–4 Registrar of Companies (UK) 58, 59, 67 Registrar of Insurance (South Africa) 125 regulations for management, UK 40 regulator: active, benefits and drawbacks of 27–8; enforcement role 26; monitoring role 26–7; comparing regulatory environment role 27; role of, Australia 95, 99–102 Report of the Review Committee on Insolvency Law and Practice (Cork Committee) 46 Review Committee on Insolvency Law and Practice (Cork Committee) 29, 46–7 SBEEA 2015 (UK): legislative reform through 63–7; reviews in academic literature 37 Secretary of State, UK 23, 36, 50, 51–3, 57, 59, 61, 67 Securities Exchange Commission 24, 26, 156, 160–4, 167 serious fraud, Australia 80–1 shadow directors 4; Australia 76; UK 52, 60 share qualifications, South Africa 113–114, 117, 127, 128 share qualifications, UK 42 shareholder interest 21 shareholder intervention 21

205

shareholders liability 2–3 six-factor test for unfitness, US 167 South Africa: academic qualifications 139; administrative enforcement of compliance 144; automatic disqualification see automatic disqualification, South Africa; close corporations 134–6, 144; court analysis of 2008 Act 148–51; court order, 1973 Act 123–4; delinquent persons see delinquent persons, South Africa; disqualification by court order 1973 Act 123–4, 128–30; disqualification from acting as independent director 125; disqualification of directors 18, 29; disqualification on application see disqualification on application, South Africa; disqualification on basis of misconduct 122; disqualification orders see disqualification orders, South Africa; disqualified persons 133–4; eligibility of directors 18; emancipation 118, 131; exemption from disqualification 25–6, 141–2; exemption from disqualification, Johannesburg Stock Exchange 139; factors in courts granting disqualified director special leave to act as director 120; ineligibility 130–1; juristic persons 130, 131; leave by court for exemption to disqualification 25–6, 141–2; minors 117–119, 130, 131; misconduct 121–3; prohibited in terms of any public regulation 136–40; register of disqualified persons 142–3; share qualifications 113–114, 117, 127, 128; statutory instruments 124–7; under probation see under probation, South Africa; unrehabilitated insolvents 116, 119–120, 128, 136; unsound mind 132 standing to bring application and grounds for disqualification on application, UK 50 statutory auditors, UK 49 statutory instruments, South Africa 124–7 substantial unfitness, US 162, 168–9 summary offences convictions, UK 59 supervisory board, Germany, disqualification by 185–9

206

Index

Takeover Regulation Panel (South Africa) 144, 145 trade ban, imposition of by administrative body, Germany 192–4 two-tiered board structure, Germany 174, 183–4: management board 174–5 under probation, South Africa 143; application to suspend orders 147–8; conditions attached to orders to place person under 146; order to place person under 145–6; periods of declaration of 147; undischarged bankrupts, automatic disqualification of, Australia 78, 79–80 undischarged bankrupts, automatic disqualification of, UK 38, 39, 41, 44, 45, 48–9, 64–5 unfitness, Australia 79 unfitness, Germany 180, 183 unfitness, UK 23, 28, 29, 36, 39, 47, 51, 67; cases concerning competence 54; cases concerning probity 54; determination of 53–6; disqualification by disqualification undertaking 53, 59, 62; disqualification under s 6 CDDA 1986 (UK) 51–2; disqualification under s 8 CCDA 1986 (UK) 52–3; gross incompetence 54; insolvent companies 50–4, 64, 67; insolvent trading 54–5; lack of link to breach of directors’ duties 55; persons instructing unfit directors 63 unfitness, US 162, 168–9; egregiousness 168; nine-element analysis 169; six-factor test 167; substantial 162, 168–9 United Kingdom: acting while disqualified, consequences of 60–1; age of director 49; application to court for leave to act 60; automatic disqualification 20, 21, 38, 39, 48–9; becoming insolvent 51; breach of directors’ duties 55; CCDA 1986 and see CCDA 1986 (UK); companies limited by shares 40–1; compensation orders 64; compensation undertakings 64; consequences of acting while disqualified 60–61; convictions for relevant foreign offences 63;

Corporate Governance Code 34; critical analysis of purpose and intentions of disqualification law 35–7; de facto directors 52–3; default in relation to company legislation provisions 58; disqualification by court order or by Disqualification Unit of the Insolvency Service 45–8, 51–2; disqualification by regulator with no court intervention 24–5; disqualification for competition infringements 50, 56–7; disqualification for fraudulent or wrongful trading 50, 57, 68; disqualification for general misconduct in connection with companies 50, 57–9; disqualification in Tables A and B of Schedules to former Companies Acts 40–5; disqualification of unfit directors see disqualification of unfit directors, UK; disqualification on application 23, 39, 45, 65–7; disqualification orders 38–9, 50, 53, 57, 59; disqualification undertakings 29, 39, 59, 62; Disqualification Unit of the Insolvency Service 29, 45–8, 52; disqualification regime comparison to Australia 28–9; eligibility of directors 19; failure to pay under a county court administration order 49; forms of disqualification 38–9; fraudulent persons 43; general misconduct in connection to companies 50, 57–9; history of disqualification law 39–48; indictable offences 58; insolvent companies, disqualification of unfit directors of 50–4, 64, 67; mandatory disqualification by court order 65–6; one-tier board model 33; periods of disqualification 59–60; phoenix companies 49; public protection aim 34, 36; register of disqualified persons 61–3; regulations for management 40; SBEEA 2015 and see SBEEA 2015 (UK); shadow directors 52, 60; share qualifications 42; standing to bring application and grounds for disqualification on application 50; statutory auditors 49; statutory regulation of disqualification of directors 33; summary offences convictions 59; unfitness see unfitness,

Index UK; undischarged bankrupts, automatic disqualification of 38, 39, 41, 44, 45, 48–9, 64–5; vacating the office 41–4, 72; winding up offences 58–9 United States: automatic disqualification 20–1, 163; corporate law in 155–7, 171; disqualification by application 24; disqualification by court order on application of regulator 163–5; disqualification by regulator 165–6; disqualification by regulator with no court involvement 25; disqualification legislation 158–62; disqualification on application 24; disqualification on application of the regulator, case

207

analysis 166–70; egregiousness 168; eligibility of company directors 19; fraudulent transactions 163–4; leave by court for exemption to disqualification 26; qualifications for directors 166; unfitness 162, 167 unrehabilitated insolvents, South Africa 1973 Act 116, 119–120, 128, 136 unsound mind, South Africa 132 vacating the office: Australia 80; UK 41–4, 72 winding up offences: Australia 84; UK 58–9