A director has a duty to keep proper books and accounts of his company.  However, in the compulsory winding-ups of failed companies, the liquidators often fail to recover any books or accounts of the company.  The directors of such companies may be disqualified from acting as a director or being concerned with the management of a company for up to 15 years.

Disqualification of Directors under the Companies Ordinance (the “Ordinance”)

Under section 168I of the Ordinance, the Official Receiver or the Financial Secretary may apply to Court for an order that a person shall not, without the Court’s leave, be a director of or in any way concerned with the promotion, formation or management of a company.  So long as the Court is satisfied that the person was a director of a company which becomes insolvent and that person’s conduct makes him unfit to be a director, the Court may make a disqualification order against that person. 

This applies not only to persons who have been formally appointed as directors but also to those who have carried out the functions of a director and to shadow directors.

Time for Making an Application for Disqualification

Under section 168I(2)(a), except with the leave of the Court, an application to disqualify a director must be made before the expiry of a 4-year period starting from the commencement of the winding up of the company.

Misconducts leading to Disqualification

Ordinary commercial misjudgment is in itself insufficient to justify disqualification.  The misconduct complained of must display a lack of commercial probity, or an extreme case of gross negligence or total incompetence.  In determining the unfitness of a person, the Court would have regard to, but not limited to, matters set out in Parts I and II of the Fifteenth Schedule to the Ordinance.  A civil standard of proof, i.e. proof on balance of probabilities, applies.   

In addition, besides taking into account the director’s conduct in the insolvent company, the Court can take into account his conduct as a director of any other company in determining his unfitness. 

Here are a few examples of misconduct which may lead to disqualification (not an exhaustive list):

1.       Failure to keep books and accounts;

2.       Failure to lay profit and loss account/ income and expenditure account before the company at its annual general meeting;

3.       Failure to keep proper books and records for two years before the winding up of the company;

4.       Failure to submit statements of affair to the Official Receiver;

5.       Entering into unfair preference transactions to the detriment of the general creditors of the company;

6.       Insolvent trading;

7.       Misuse of bank accounts and issuing cheques which are dishonoured;

8.       Misapplication/ misappropriation of the company’s funds; and

9.       Failure to pay MPF contributions, etc.

Readers should note that these misconducts might attract criminal liabilities as well.

Period of Disqualification

The Court has a discretion to decide the period of disqualification within the statutory period of minimum 1 year and maximum 15 years, having regard to the established principles laid down in Re Seven Oaks Stationers Retail Limited [1990] BCC 765:

(1)      The top bracket of disqualification for periods over ten years should be reserved for particularly serious cases.  These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.

(2)      The minimum bracket of two to five years’ disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.

(3)      The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket.

Relevant Factors in Determining the Period of Disqualification

The period of disqualification generally reflects the gravity of the offence.  There is no precise or exhaustive test but the Court would consider the likelihood of repeated offence, the general ability, conduct, age and stage of health of the director, as well as any mitigation factors like showing remorse and no evidence of dishonesty.  Nevertheless, it is observed that the Court is unlikely to attach much weight to the fact that the director has already been prevented from acting as a director because of criminal sentence or bankruptcy.

Disqualification Order: Real Threat or Paper Tiger?

The Court has repeatedly explained that the primary purpose of disqualification is not to punish an individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others.  However, since disqualification involves stigma and substantial interference with the freedom of individual to start afresh after business failure, its penal effect is hard to overlook.

In addition, anyone who acts in contravention of a disqualification order or acts on the instructions of someone who they are aware is subject to a disqualification order can be made personally liable for the debts of the company.  Moreover, where someone has to be disqualified for a second time, the court might consider imposing a disqualification order which warrants a disqualification period of 11 to 15 years.