Disqualifying Directors: A Remedy Worse than the Disease?

Abstract

The disqualification of company directors for unfitness to be concerned in the management of companies is offered by UK policy makers as a desirable form of regulation that effectively protects the public from so-called “abuse of limited liability”. However, placing disqualification in its proper context as an attempt by the state to reduce agency costs from conflicts of interest between corporate constituencies because of a perceived failure of private bargaining, this article argues that there is little, if any, evidence to suggest that disqualification under section 6 of the Company Directors Disqualification Act is an effective form of regulation. In so doing it asserts that public interest regulation, such as disqualification, can be seen as desirable only if it brings about a real improvement on outcomes that would result from market transactions alone and considers evidence from various sources in concluding that disqualification is unlikely to do so. It suggests that reform of the existing disqualification regime is pressing if meaningful protection is to be offered to the public, but argues that the prospects for useful reform are limited. By way of conclusion the article states that the failure of disqualification poses an urgent and profound challenge for policy makers, and suggests that as things stand little would be lost by the abolition of the disqualification regime altogether.