PKF VIEWPOINT - Unfitness examined

The Company Directors Disqualification Act 1986 lists the grounds on which a director may be disqualified. These can be described under three broad headings: general misconduct, unfitness and other.

Unfitness is the most common reason for the disqualification of directors of insolvent companies. In certain insolvency procedures, the office holder must submit to the Department of Trade and Industry (DTI) a report on the conduct of any individual who was a director, or shadow director, during the three years preceding the formal insolvency. An adverse report may lead the DTI to apply to the court to qualify the director for unfitness.

The DTI can investigate a director's conduct not only in the insolvent company, but also in any other companies at which that person was a director.

Also, the DTI may investigate a director's conduct after that person ceased to be a director, if it concerns a matter connected with or arising out of the insolvency of that company.

If the court finds a director, or shadow director, guilty of unfitness, it must disqualify that person for a minimum of two years and a maximum of 15 years.

When will the insolvency practitioner file an adverse report?

An adverse report must be made if, in the opinion of the office holder, two conditions have been met: the director has been a director of a company that has been insolvent; and that his or her conduct as a director of that company (or any other companies) makes him or her unfit to be concerned with the management of a company.

There is no obligation on the office holder to make extensive enquiries or investigations into the conduct of a director, but he has to report on matters that come to his attention during the course of his administration.

For example, on the state of the accounting records and on evidence of wrongful trading or preferences.

Investigations may be carried out during an insolvency procedure but their purpose is usually for the better recovery of assets.

There are several recent cases that may influence the way in which an insolvency office holder reports. One was Secretary of State for Trade and Industry v Baker and Others.

The implications of this case are that most documents held by the insolvency practitioner in relation to a particular insolvency are discoverable.

In Re Pinemoor (1997) BCC 708, the judge noted that it is important to distinguish between the facts that insolvency practitioners were able to establish by direct evidence, the inferences they invited the court to draw from those facts and the matters said to amount to unfitness on the part of the respondent director.

In the case of Secretary of State v Hickling (1996) BCC 678, the judge commented that the affidavit of the office holder should not omit significant available evidence in favour of any respondent director.

It should attempt to deal with any explanation already proffered by any of the respondent directors.

The practical implications of these cases means that insolvency practitioners are going to approach by reporting on directors and swearing affidavits in directors' disqualification proceedings professionally and rigorously.

John Alexander and Nitin Joshi of Pannell Kerr Forster are accountants and insolvency practitioners specialising in the computer sector.