Company Lawyer1988ArticleDISQUALIFICATION ORDERSJanet M. Dine.Copyright (c) 1988 Sweet & Maxwell Limited and ContributorsCases: Dawson Print Group Ltd, Re [1985] B.C.L.C. 601Stanford Services Ltd, Re [1987] B.C.L.C. 607Subject: COMPANY LAWKeywords: Directors; Disqualification ordersAbstract: Recent cases.*97 Two recently reported cases shed light on the operation of the company Directors Disqualification Act 1986. Re Dawson Print Group Ltd [1975] BCLC 601 and Re Stanford Services Ltd [1987] BCLC 607 were cases where opposite conclusions were reached by the court. They should, therefore, afford some insight into the matters which the court will consider important when considering disqualification. Both cases were in fact decided under s300 of the Companies Act 1985 (which was the predecessor to s6 of the Company Directors Disqualification Act) but there is no reason to believe that the principles applicble have been changed, although the new statute sets a lower threshold to its application.Thus under s300 of the Companies Act 1985 a director had to be associated with two successive insolvencies before being in peril of disqualification. By s6 of the 1986 statute the court is obliged to make a disqualification order where it is:'satisfied --(a) that [a person] is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently). and(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) make him unfit to be concerned in the management of a company'.In determining this question the court is directed (by s9 and Sched 1) to have regard to a number of matters, including breach of duty owed by a director to the company, a director's part in the misapplication of assets, failure to keep proper records, file annual returns and prepare annual accounts and reports. So far as the insolvency of the company is concerned, the court is directed to have regard to a number of further matters including the extent of the director's responsibility for the insolvency and for the failure of the company to supply goods which have already been paid for, the director's involvement in any preference which may be set aside by the court, and failure to comply with duties imposed on a director by the Insolvency Act 1986 during the course of insolvency proceedings.In view of the judgments in the cases it is interesting to note that the extent of debts owed to the Crown is not specifically mentioned. The list, however, is not exhaustive. Section 9 directs the court to have regard to the matters mentioned 'in particular,' thus not excluding other matters from consideration. Further it is clear that the extent of indebtedness to the Crown would be relevant to determining the extent of the director's responsibility for the causes of the company becoming insolvent, as it may well involve a breach of duty to the company and breaches of the duty to keep accounts, all of which are matters to which the court's attention is particularly directed.Use of discretionUnder s6 of the 1986 Act the minimum period of disqualification is two years and the maximum period is 15 years. Under the Companies Act 1985 there was no minimum period of disqualification. Where the court is satisfied that the case has been made out under the 1986 legislation there is now no discretion as to disqualification. This change may be significant with regard to the value of Dawson as a precedent, so far as the outcome is concerned, since Hoffman J in that case spoke of using his discretion. However, he also
found that the director was not unfit.The court no longer has a discretion whether to make an order if it is satisfied that the two criteria set out in s6(1) of the 1986 statute are satisfied, but it may be that the same factors could be taken into account to determine the 'unfitness' (the second criteria under s6) as were taken into account in order to determine whether a discretionary disqualification order ought to be made. Hoffman J in Dawson makes *98 no clear distinction between the exercise of his discretion and the finding that the director was not unfit. ...
This is a preview of the whole essay
found that the director was not unfit.The court no longer has a discretion whether to make an order if it is satisfied that the two criteria set out in s6(1) of the 1986 statute are satisfied, but it may be that the same factors could be taken into account to determine the 'unfitness' (the second criteria under s6) as were taken into account in order to determine whether a discretionary disqualification order ought to be made. Hoffman J in Dawson makes *98 no clear distinction between the exercise of his discretion and the finding that the director was not unfit. Both cases retain their value in pointing to the principles that will be applied in order to determine the unfitness of the director, in particular to determine the degree of knowledge or mens rea which must be proved against the director before he is to be considered unfit, and the standard to which allegations against the director must be proved.The casesIn Re Dawson Print Group the director in question had become a director of one of the companies involved when not quite 20 years old. The company expanded over a number of years but was eventually wound up insolvent with assets of approximately £3,850 and debts of approximately £111,000 of which £40,000 was represented by unpaid VAT, PAYE and NIC. The second company had been bought off the shelf to carry on the business of a specialised printer . It too was wound up insolvent, with assets of approximately £3,450 and debts of approximately £ 21,000 of which £5,500 was for VAT, PAYE and NIC. After the winding up of those two companies the director had formed another business which traded profitably. He was the sales representative of that company. Hoffman J refused to make a disqualification order against the director. In his judgment he referred to four different standards by which the conduct of a director should be judged and took into account a considerable number of factors in deciding not to exercise his discretion to make an order.In Re Stanford Services the director had originally acquired a company to carry on the business of selling motor cycles. Three years later he acquired two other companies which marketed sports equipment. It was clear at the time of acquisition that those companies were seriously short of working capital. Eventually all three companies were wound up. The first compay had assets of just under £7,000. Liabilities amounted to approximately £238,000 of which £ 42,400 were due in respect of PAYE, VAT and NIC. The other two companies were wound up with assets of £451,800 and liabilities of £779,600. The liabilities included £90,000 due for PAYE, VAT and NIC. In this case the Official Receiver made a number of detailed charges against the director some of which were accepted by the court as affording indications of unfitness.Civil court, criminal penaltyThe imposition of a disqualification order has decidedly criminal overtones. No compensation results from the order. The imposition of the order may be seen as having a deterrent effect, both on the party affected and on others involved in the management of companies. An order clearly could deprive a director of his livelihood. Vinelott J regards the imposition of such an order as a matter of public interest. In Stanford (p620) he said:'If it is shown that the respondent has been guilty of a serious breach of his obligatins as a director, and to have caused loss to the creditors of a company, the public interest requires that the misconduct be recognised and reflected in an order of disqualification.'All these are factors which point towards the order being regarded as a criminal penalty, despite the fact that it is imposed by a civil court. It is anomalous, then, that criminal procedure does not seem to be closely followed in these cases. In particular there is little or no discussion of the standard of proof which is carried by the applicant for a disqualification order. Small indications of the standard applied by the court can be gleaned from the judgment, but no true indication. In Dawson Hoffman J considered the business life of one of the companies and concluded:'On the whole, though, it is probably true to say that the failure of the business was by mismanagement.'Mismanagement is used as an indication that the director is 'unfit'. The proof of the indications of unfitness appears to be achieved by persuading the judge that the indicator is present as a matter of probability ie aplying the civil standard of proof. Later Hoffman J examines an allegation that stock had been improperly removed from one of the companies. He says:'This, if true, would be an extremely serious matter, but it does not appear that the investigations of the Official Receiver produced any evidence to support such an allegation. If was only when the respondent produced the accounts of Unit One Printers Ltd that the gross profit margins for the first year were relied on as an indication that stock had been taken. The respondent's evidence was that the gross profit margins were due to his being able to acquire stock during that year at very low prices partly from the Official Receiver acting on behalf of the two companies with which we are concerned, and partly from the sales of stock of other bankrupt companies in those circumstances I do not think the evidence comes anywhere near sustaining so serious an allegation.'Varying standards of proofIt is unclear what standard of proof the judge is requiring but this passage could be taken as indicating that the standard of proof varies with the seriousness of the allegation. This would conform with the views expressed by Denning LJ [FN1] in Bater v Bater [1951] p 35 at pp 36-37;'It is of course true that by our law a higher standard of proof is required in criminal cases than in civil cases. But this is subject to the qualification that there is no absolute standard in either case. In criminal cases the charge must be proved beyond reasonable doubt, but there may be degrees of proof within that standard ... So also in civil cases the case must be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on the subject matter. A civil court, when considering a charge of fraud, will naturally require itself a higher degree of probability than that which it would require when asking if negligence is established. It does not adopt so high a degree as a criminal court, even when it is considering a charge of a criminal nature; but still it does require a degree of probability which is commensurate with the occasion.'If Lord Denning is right the standard of proof not only for the particular allegation which Hoffman J was considering but also throughout the proceedings should be something only a little short of the criminal standard. The seriousness of the allegation of unfitness cannot be doubted in view of the penalty which may be imposed on an unfit director. It is all the more strange that so little attention appears to have been paid to this issue. Stanford throws no light on the issue. The only reference to matters of standard of proof is a refusal by the judge to accept allegations made by the Official Receiver in the absence of cross examination of the director on those matters.Definition of 'unfitness'The serious nature of the allegations cannot be doubted, but it is by no means clear precisely what the allegation *99 of 'unfitness' comprises. The standards applied to judge the conduct of the director were variously:(a) breach of commercial morality;(b) really gross incompetence;(c) recklessness;(d) the director would be a danger to the public if he were allowed to continue to be involved in the management of companies.Very little explanation of these standards was given. From Dawson it appears that mismanagement, under-capitalisation, failure to keep overheads in control and failure to pay Crown debts do not automatically lead the court to find that the director has been in breach of one of the above standards.From both the cases it appears that a multitude of indicators may be taken into account when the issue of unfitness is determined. What is lacking in both cases is any attempt to define the standard by which the sum of all the indicators must be judged.Breach of commercial moralityIn Dawson a breach of commercial morality was said to occur when 'the commercial world generally' would condemn the relevant action. This view was disapproved by Vinelott J in Stanford. He said:'It is, I think misleading (or at least unhelpful) to ask whether a failure to pay debts of this character would be generally regarded as a breach of commercial morality.'This enquiry seems to be replaced by the court's view of the morality of the behaviour, which appears to be stricter and to include the notion that a director who fails to keep himself informed, with reasonable accuracy, as to the company's current financial position is in breach of commercial morality.There is thus considerable doubt as to the meaning of this term.Really gross incompetenceThis test appears only in Dawson without further elaboration. It is unclear, for example whether it is intended to be an objective test or whether, shadowing Re City Equitable Fire [1925] Ch 407 the standard would take into account the 'degree of skill [which] may reasonably be expected from a person of his knowledge and experience.' The stress that Hoffman J laid on the youth and inexperience of the director in Dawson in concluding that he was not unfit, suggests that the personal qualities of the director concerned will be important if this test is adopted.RecklessnessIn both cases the test of recklessness is used apparently as an alternative test to the others listed. Again, however, there is no discussion as to the meaning of the term. It is quite clear that recklessness has two distinct meanings. [FN2] So called 'Cunningham' recklessness requires proof that the accused foresaw the relevant risk (in this case presumably the risk of insolvency) whereas 'Caldwell' recklessness can be established by proof that the accused did not give a thought to the risk. This is distinguishable from negligence, since negligence can be established by evidence that the accused considered the risk but wrongly, and contrary to the conclusion a reasonable man would have reached, came to the conclusion that there was no risk or that the risk was negligible. It is not clear in what sense the term is used in Dawson and Stanford. The appearance in Dawson of the test of really gross incompetence as an apparent alternative serves further to confuse matters. The evidence from the way the judges considered whether the test had or had not satisfied gives little guidance as to which meaning is relevant. Thus in Stanford Vinelott J said:'In my judgment the evidence as a whole, including the evidence as to the arrears of PAYE, national insurance contributions and VAT, does found the inference that the business of LFR was acquired, and that the business of Sports were commenced recklessly, and that those businesses were continued at a time when Mr lvens ought to have known that they were insolvent.'This makes it plain that the continuation of a business when the director ought to have known it was insolvent is an indication of unfitness (an indication of actions contrary to commercial morality perhaps?) but if it amounts to recklessness there is no indication of that fact and recklessness appears to be used in the sentence as a separate term with a distinct meaning. There is no discussion in the judgment as to whether the director knew of the tax situation at the time of aquisition and commencement referred to in the passage cited, so it is not clear whether actual knowledge of the risk of defaulting on those debts is required.Danger to the public in futureThis test appears only in Dawson and appears to be disapproved in Stanford. Thus in Dawson it was held to be an indication of fitness to act as a director, that a new company, soundly based, was currently trading at a profit with the respondent director acting as a director. However, in Stanford it was held to be no answer to an application to disqualify the director, that he had no intention of acting as a director in future and thus could not constitute a danger to the public in that capacity. The status of this test is also a matter of confusion.It can be seen, therefore that there is pressing need for the clarification of the meaning of 'unfitness'.Crown debtsA further issue which surfaces in the cases is the type of indicators which may be taken as evidence of, or evidence to rebut an allegation of unfitness, and the relative weight to be placed on each indicator. The future intentions of the directors is one area of doubt which has already been referred to. Other areas of difficulty are the extent to which bad luck played a part in the eventual insolvency, the relevance of the number of companies involved and the personal attributes of the director (eg his age and experience). Perhaps the major area of difficulty is the existence of Crown debts. In Dawson Hoffman J said (at p604);'In this case the matters which are relied on as taking the case out of the ordinary run are, first of all, that the company paid very little of what it owed by way of PAYE, VAT and national insurance contributions. In Re Howard Davey & Co Ltd (7 December 1984, unreported) ... Harman J said that these are serious matters because the money in question is not the company's money to be spent on the company's business but is what he called quasi-trust money. I can see that in some cases that view can be taken, but the fact is that, no doubt for good reasons, the Exchequer and the Commissioners of Customs and Excise have chosen to appoint traders to be tax collectors on their behalf with the attendant risk. That risk is to some extent compensated by the preference which they have on insolvency ... I cannot accept that failure to pay these debts is regarded in the commercial world generally as such a breach of commercial morality that it requires in itself a conclusion that the directors are unfit to be involved in the management of the company.'In Stanford Vinelott J made it plain that he considered the existence of substantial *100 Crown debts a powerful indication of unfitness leaving yet another aspect of the application of this legislation in doubt. It is interesting to note in the light of Vinelott J's reliance on Crown debts that the 1986 statute does not refer specifically to existence of Crown debts as a matter to be particularly taken into account by the court.In view of the seriousness of allegations made under this legislation and the penalties which may be imposed, it is to be hoped that clarification of these issues will be rapidly forthcoming.Janet DineFN1. See also Burdens of Proof ed Albert Kiralfy 1987.FN2. See R v Cunningham [1957] 2 QB 396, contrast R v Caldwell [1982] AC 341.COMPLAW 1988, 9(4), 97-100END OF DOCUMENT Copr. (c) West 2004 No Claim to Orig. Govt. Works