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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

20 DEC 2011

Guest Post: Bavoso on Williams' Directors' Disqualification Undertakings

My colleague, Vincenso Bavoso, has supplied the following review of Dr Williams' book on Directors' Disqualification Undertakings:

"R. Williams, “Disqualification Undertakings - Law, Policy and Practice”, Jordans 2011

Dr Richard Williams’ monograph provides a very valuable contribution to the debate on the effectiveness of disqualification undertakings regime post-2001, as an alternative route to disqualification (by administrative action rather than by court order). In exploring the law, policy and practice of the undertaking system, the author assesses the new regime by questioning whether the new procedure in place has brought about improvements in the way the public interest policy has been successfully implemented. The analysis is conducted initially by illustrating the chronological development of disqualification, and subsequently by pointing at the theoretical recognition of the nature of disqualification with particular emphasis on its regulatory purpose that clearly highlights a creditor-protection focus. The appraisal of directors’ disqualification undertaking effectiveness is then complemented by a comprehensive study of the undertaking system. This part of the monograph is aimed at illustrating how the system works in practice, by discussing the powers of the Secretary of State, different conditions for disqualification under s.6 and s.8 of the CDDA 1986, and the nature of the unfit conduct among other legal aspects of the procedure. Finally, the assessment is completed by a survey of around four hundred disqualifications accepted by Secretary of State in 2008. 

Fundamental stage of the critique provided by Williams is the appraisal of the scope and nature of disqualification. This debate proves to be of high interest for both insolvency and corporate scholars as it draws attention into corporate dynamics from the perspective of insolvency law. Once in fact the initial recognition of disqualification’s intrinsic nature is made, throughout the exploration of both its punitive and deterrent aspects, the central question revolves around understanding whose interests this procedure seeks to protect. In this quasi corporate governance debate, Williams defines the “agency problem” arising as a result of the relationship between the company on one hand (differentiating herein between the position of shareholders and directors) and its creditors on the other. Furthermore, the analysis points at different risks borne by creditors according to the type of ownership structure characterising the company. The author looks at the classical dichotomy between companies with separated ownership and control, and those with ownership and management united in the same individuals. Interestingly, by noting that this latter corporate structure has attracted the vast bulk of disqualification procedures, Williams observes that the rather permissive legal framework allowing the formation of companies and the limitation of liability through nominal investments has potential to exacerbate managerial opportunistic conducts at the expense of creditors, especially in owner-managed companies. This reflection finds corroboration in the highlighted public interest rhetoric behind disqualification and in its inherent intention to curb abuses of limited liability.

The more specific legal and procedural features of the administrative action are brilliantly introduced by firstly laying out the main difference with disqualifications by court orders, and then by introducing the reader to the powers of the Secretary of State and to the three steps necessary for a valid disqualification undertaking to arise under s.6 and s.8 of the CDDA 1986. The broad and unfettered power of the Secretary of State is herein emphasised as necessary to maximise the efficiency of the new administrative procedure through a rather simple route to disqualification. It is however also observed that the authority vested in the Secretary of State (equivalent to that of courts) may be inappropriate with regards to certain matters where his position may lack the impartiality that traditionally belongs to courts.  

The book definitely provides both academics and practitioners with an exceptional tool to explore the nature and implications of disqualification undertakings. By contextualising the current post-2001 regime, the author illustrates the theoretical background to the procedure, which is a fundamental step for engaging in further reflections on the socio-economic nature and effects of the undertaking system. The second part of the monograph is also of great value as it offers an ideal platform to understand the practical mechanisms under which disqualification undertakings operate, and to assess eventually the extent of their success.       


Vincenzo Bavoso

Lecturer in Law, Kingston University.

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