Directors' rights

Investors and the public need to be protected from rogue directors whose incompetence has contributed to business failures. But directors also need to be protected against unfair accusations. Britain's disqualification process does not strike the right balance. 

Insolvency does not automatically lead to a ban on directors or managers. But the risk that the government will issue a disqualification order is a real one, particularly given the new corporate governance codes. Even directors who have acted honestly may be accused of failing in their collective responsibility for the way in which the company has been run. 

Disqualification orders present a legal Hobson's choice for directors. Either accept the ban, and be barred from business for at least two years; or run the risk of a long, extremely expensive court battle to try to clear your name. The potential damage is enough to make anyone think twice before joining the board of a high-risk company. 

The system also ties up a lot of court and government time and money. More than 100 directors are barred a month on average. Any of those orders that are contested have to be fought through the courts. 

The government's decision to change this system is to be applauded. Proposals for the Insolvency Act would allow directors to cut a deal by accepting an instant ban for a set period, without the case ever having to go to court. The changes are destined to offer a swift and cheap way of dealing with rogue "cowboy" directors. 

It is a sensible approach. The aim of banning directors is to protect the public. Other laws can be used to punish criminal acts such as fraud. 

But the reforms to not address the problem of directors who have a valid case against a disqualification order. The legal scales are heavily weighted against them. The government  should heed the warning of Sir Richard Scott, the Vice-Chancellor, that fear of costs was driving some directors to accept disqualification despite having a valid case.

Sir Richard's proposed solution - costs being allocated on a fair and reasonable, rather than loser-pay-all, basis - is unlikely to find favour with the government. Using taxpayers' money to fund trials of directors who lose their cases is not a vote winner.

The answer may be to let some of the contested orders be decided out of court. Using arbitration may seem a radical step, given that these are effectively criminal proceedings. But provided the mechanism protected human rights, and was used only with the agreement of both sides, it could provide a much-needed additional route for redress.

"Financial Times"