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 liability.1 N M Butler, President of Columbia University, claimed that â[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 companyâ.2
Len Sealy, who held the SJ Berwin Chair in Corporate Law at Cambridge Universityâs 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 âlimited liabilityâ 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 âcorporate governanceâ is still of such importance worldwide.
The Limited Liability Act 1855 (UK) made it compulsory for all companies incorporated as âlimited liabilityâ companies to add the word âLimitedâ 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 âunlimitedâ 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 âbe 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 Officeâ.5 In other words, the underlying principle of âunlimited liabilityâ for shareholders changed to âlimited liabilityâ for 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 âlimitedâ to what they paid for their shares or undertook to pay for their shares if they did not hold fully paid-up shares â 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 âDisqualification of directorsâ in regulation 47, stipulating several grounds on which the office of director would be vacated, including âbankruptcyâ, 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 âdisqualification of company directorsâ throughout the book. The term âdisqualificationâ 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
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 âdisqualified from managing corporationsâ. In Australia, it is an offence for a disqualified person to manage a corporation. However, âmanaging corporationsâ is then given a specific meaning: namely, it is an offence if such disqualified persons âmake, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporationâ; or âexercise the capacity to affect significantly the corporationâs financial standingâ. This also applies to âshadow directorsâ. 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 âmanaging corporationsâ would automatically be disqualified from being an âofficerâ 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, âofficerâ 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 arr...