“The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied- (a) that he 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 … makes him unfit to be concerned in the management of a company.” (a) that he 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 … makes him unfit to be concerned in the management of a company.”
“… an order that he shall not, without leave of the court- (a) be a director of a company, or (b) be a liquidator or administrator of a company, or (c) be a receiver or manager of a company's property, or (d) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order.” (a) be a director of a company, or (b) be a liquidator or administrator of a company, or (c) be a receiver or manager of a company's property, or (d) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order.”
“In all the circumstances of this case, and in light of the long minimum period for which the court would have to disqualify Mr Zannetou, the court is humbly invited to exercise its discretion not to make an order”
“My father was my best friend and business mentor. He was my support system.”
“My family had to take priority over my business [which] naturally suffered, and, whilst I know I was ultimately responsible and do not shirk that responsibility, those I trusted and relied upon to support me and manage my business during this difficult time let me down.”
“I feel guilty that I was unable to advise [Mr Zannetou] effectively during this time. I did not press [Mr Zannetou] as much as I should have in warning and advising him in relation to the financial issues the Company was facing. This caused certain issues relating to VAT returns and mounting VAT payments to spiral.”
“I would always check whether payments could be made with Mr Zannetou.”
“I probably did not keep him as up to date as I should have.”
“The Company was making a loss, so plainly there was juggling of payments. The payments that were prioritised were those that were necessary for the Company to carry on trading… VAT and PAYE arrears were accumulating. I tried to keep Mr Zannetou aware of how much was due.”
“HSBC have now closed their account and [the Company] have had to open [a] new Bank account with another Bank and will need to amend DD with new instructions”, that the Company had switched banks, and that the time to pay agreement direct debit for May had “failed”
“If HMRC receive any correspondence quoting a reference (HOD [i.e. Head of Duty] ie PAYE, VAT, Self Assessment, National Insurance) with payment attached HMRC will allocate this payment to this HOD. If a payment is made via bank giro it would be allocated to the HOD quoted on the bill. If HMRC receive a payment with no HOD on the correspondence but a [sic] address HMRC will write out to the address asking what HOD payment is this for or the name of the company. If only a payment arrives with no address & no HOD reference on this they will try to contact the bank it possibly came from.”
“Without Mr Zannetou or another source providing money it wasn’t possible to pay HMRC or some other suppliers (including me – I was never paid by the Company at all). He was using the money to keep the Company afloat. Not every month, but probably on 8 occasions, he himself paid in a substantial sum of money. He was progressing several methods to raise money: a Saudi Arabian franchise; a group of investors; and talking to the landlord to see if he would take an equity stake. He was aware that HMRC were not being paid. He set up a payment plan that he thought he’d be able to honour, and that he did honour.”
“The district judge held that there was a significant period in which the appellants discriminated against HMRC by making no payments when no other creditor in a similar position was treated in the same way. He further held that there was a policy of not paying HMRC and that there had been times when funds were available and payment could have been made. The district judge considered the communications between the company and HMRC and concluded that it could not be said that the company had kept HMRC fully informed of the position; in particular HMRC had not been told about a contract under which the company received commission of£221,000 . Citing dictum of Blackburne J in Re Structural Concrete Ltd; Official Receiver v Barnes[2001] BCC 578 , the district judge found that where the type of misconduct alleged was proved there needed to be exceptional circumstances if a disqualification order was not to be made. He considered all the circumstances and concluded that there were no exceptional circumstances and accordingly made disqualification orders. The decision of the district judge was upheld on appeal by Henderson J, who held that the district judge was entitled to make a finding of misconduct based on the factors summarised by him. He had reviewed all the evidence, and taken into account the mitigating factors, before deciding that the statutory test of unfitness was satisfied. The district judge’s reference to exceptional circumstances, based on its use in Structural Concrete (above), did not disclose any material error. [The Court of Appeal dismissed the directors’ further appeal.]”
“Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”
“Such statements may be helpful in identifying particular circumstances in which a person would clearly be unfit. But there seems to have been a tendency, which I deplore, on the part of the Bar, and possibly also on the part of the official receiver’s department, to treat the statements as judicial paraphrases of the words of the statute, which fall to be construed as a matter of law in lieu of the words of the statute. The result is to obscure that the true question to be tried is a question of fact – what used to be pejoratively described in the Chancery Division as ‘a jury question’.”
“It must decide whether that conduct, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.”
“[The director] made a deliberate decision to pay only those creditors who pressed for payment. The obvious result was that the two companies traded, when in fact insolvent and known to be in difficulties, at the expense of those creditors who, like the Crown, happened not to be pressing for payment. Such conduct on the part of a director can well, in my judgment, be relied on as a ground for saying that he is unfit to be concerned in the management of a company. But what is relevant in the Crown’s position is not that the debt was a debt which arose from compulsory deduction from employees’ wages or a compulsory payment of VAT, but that the Crown was not pressing for payment, and the director was taking unfair advantage of that forbearance on the part of the Crown, and, instead of providing adequate working capital, was trading at the Crown’s expense while the companies were in jeopardy. It would be equally unfair to trade in that way and in such circumstances at the expense of creditors other than the Crown.”
“I would accept the grave nature of an allegation of unfitness under s6(1)(b)of the 1986 Act must be borne in mind when considering whether that allegation is made out.”
“I do not think that [Morritt LJ] was intending to lay down, as a proposition applicable in all cases, that a policy of deliberate non-payment of a class of debt, whether Crown or otherwise, necessarily gives rise to a finding of unfitness although I find it difficult to envisage circumstances in which such conduct, if carried on over a lengthy period and if the non-payment is at the risk of the creditors in question, will not constitute misconduct justifying a finding of unfitness.”
“Those being the facts (either undisputed or as found by the district judge) it would, in my judgment, require exceptional circumstances to justify a finding that this did not amount to misconduct justifying a finding of unfitness on the part of those responsible. In reaching her firm conclusion that unfitness had not been demonstrated, the district judge appears to have laid emphasis on the fact that the directors’ intention was ultimately to pay the Revenue debt in full and on the fact that the length and depth of the recession and the number of contract disputes which they could expect to be raised far exceeded their reasonable expectation. At the heart of her decision appears to have been her view that the course of action pursued was a ‘commercial one’ taken by the respondents in good faith (i.e. with no attempt to benefit personally or conceal the company’s true state of affairs) and with thought and proper advice (from Mr O’Brien ‘who had once worked for the Revenue’), that the directors were being ‘realistic and prudent in relation to their projections as to income and payment’, that the choice was between immediate liquidation and deferred payment to the Revenue and that the directors were encouraged to take this action ‘having had direct experience of Inland Revenue debts before’ and, acting on Mr O’Brien’s advice, believing they could negotiate payment of the Revenue’s claim by instalments. With every respect to the district judge, whose experience in these cases (to which she drew attention in her judgment) I accept, I do not consider that these matters, even when coupled with the particular matters to which [Counsel] drew my attention (e.g. the fact that the respondents acted in good faith in reliance on the advice of Mr O’Brien, whose experience and competence they had no reason to question and that the company’s bank and auditors did not question the course which SCL was pursuing), justify the conclusion that the directors’ conduct `does not cross the threshold of even a marked degree of incompetence or negligence, let alone a very marked degree’. In my judgment, making every allowance for their good faith and reliance on the advice of others, their conduct clearly did cross that threshold. It would be to send out entirely the wrong message if it were to be thought that a deliberate policy, followed over very many months, of not making any payment of a Crown debt of this kind, allowing it to rise to£460,000 -odd and making no attempt to secure the Crown’s agreement to this course of action, while at the same time paying the company’s other pressing creditors, could not lead to a finding of unfitness and therefore to disqualification. The district judge’s error lay not in failing to identify the correct test to be applied but in failing correctly to apply that test to the facts as she had found them.”
“46 I do not consider that in Structural Concrete, Blackburne J was departing from the correct and traditional test. Having found misconduct of a type not dissimilar from the alleged misconduct in the present case, Blackburne J was stating that, upon such findings, it would require exceptional circumstances to justify not making a finding of unfitness. Blackburne J carefully analysed the conduct of the directors and, on the facts found by the district judge in that case, came to the conclusion that the threshold leading to a finding of unfitness was crossed. 47 The district judge performed a very similar exercise in the present case. The evidence and findings of fact were carefully set out. The district judge concluded, following Structural Concrete, and as he was entitled to conclude, that where he had found misconduct “of this type” exceptional circumstances would be required to avoid a finding of unfitness. The district judge then carefully set out … the points in the appellants’ favour and set against them … the points demonstrating misconduct, which had been established on the evidence. He reached his conclusion on the evidence as a whole, or to borrow [Counsel’s] word, on the totality of the evidence. He was justified in concluding that unfitness was established and disqualification required. 48 When Henderson J stated that he failed to see how the appellants “can have been prejudiced in any way by the judge’s error on this point, if error there was”, he was in my view intending to acknowledge that the district judge had considered the evidence and taken an overall view in accordance with the statutory requirement. 49 While the district judge was not in error, the use of the expression exceptional circumstances, even in the narrow sense intended, is better avoided. In Grayan, Hoffmann LJ used the expression “extenuating circumstances”
“At this stage I want to say a little about the applicant’s duties. It is accepted that these are not ordinary adversarial proceedings but have an element of public interest and may entail penal consequences. It follows that there is a duty on the applicant to present the case against each respondent fairly.”
“So far as the position between the beginning of March and the end of July 1994 is concerned, it is fair to Mr Carter to mention that he expected all to come right as a result of being able to re-finance his borrowing, and to obtain further money to put into the company, from replacing the secured loan from Barclays with a new secured loan from Bristol. However, as an intelligent man and as a person experienced in business, he must have known that there was no guarantee that he would be able to raise money from Bristol, or, that if he could, the terms would be wholly acceptable to him. Any optimism he had had in the past on this point must have been somewhat dented by his difficulties in raising finance during 1992 and 1993. He was carrying on business through the company in manner a which is unfortunately rather familiar in these sort of cases, namely paying creditors who were either pressing or who had to be paid in order for the company to carry on its business, but not paying the Customs & Excise Commissioners, who were not pressing for the money due to them to a sufficient degree to make it necessary for him to cause them to be paid in order to enable the company to carry on its business. In this connection, it seems to me that [the] passage in the judgment of Dillon LJ in Sevenoaks(at p779F–G; 183E–G) is apposite … I add at once that there are obvious dangers if a court in one case proceeds on observations made by a court (even the Court of Appeal) on the facts of another case: the facts of each case are different. One notes in particular the reference to ‘a deliberate decision’ and the fact that the conduct of the sort described by Dillon LJ ‘ can well … be relied on as a ground for saying that [a person] is unfit’. In the present case, I do not think that there was any deliberate decision to favour other creditors over the Customs & Excise Commissioners during 1994. There was, in practice, a policy but it was not a conscious one: it was attributable to the difficulties in which the company found itself and the failure of Mr Carter to get a grip on things, and, in particular, his failure to ensure, in accordance with his statutory duty and good commercial sense, that the accounts of the company at the end of its first year of trading were finalised and the amount of rent it had to pay was conclusively determined. Nonetheless, the effect was the same as that described by Dillon LJ: the company traded with insufficient working capital and was accordingly trading at the Crown’s expense.”
“It is accepted on behalf of the Secretary of State that a policy of unfair discrimination between creditors must be established before a finding of unfitness can be justified in a case such as this. I consider that that concession is right if the word ‘policy’ is given its normal meaning. That is because the concept of a policy involves some sort of decision; the decision may be conscious or subconscious, and the reasons for it may be conscious or unconscious. Without there having been a policy of discrimination, it is difficult to see how the discrimination could be unfair, and it is necessary for the discrimination to be unfair, as I read the judgment of Dillon LJ, before it can give rise to a finding of unfitness. … However, once the court finds, as it has done in the present case, that there has been what in normal language could be called a policy of unfair discrimination, it is not, in my judgment, possible to say that it is for some reason incapable of being a policy for the purposes of deciding whether a person is unfit under the 1986 Act because it continued only for a short time. In other words, once one finds a director permitting a company to engage in unfair discrimination between creditors, the only question for the court is whether, taking into account all the relevant factors relating to the policy (including the period for which the policy continued), that finding justifies the conclusion that the person concerned is unfit to be a director of a company.”
“The Secretary of State’s case against Mr Thornbury is that the failure to file the VAT and P35 returns resulted in the company continuing to trade at the expense or detriment of the Crown, and … whether this was deliberate or not it matters not … If there was no deliberate policy, such consistent failure over such a period of time could not be described as mere inadvertence. The analysis of payments and receipts, particularly from April 2002 onwards, shows the company trading profitably and paying trade creditors and remuneration, but not the Crown debts … Accordingly, I am satisfied that the Secretary of State’s case is made out. I consider that Mr Thornbury’s failure to get to grips with the financial affairs of IMG in the manner I have described does fall so far below the level of competence to be expected of a director in the circumstances as to amount to unfitness within s6(1)of the 1986 Act. It follows that I have a duty, regrettable as it is, because I can discern no lack of probity or integrity in Mr Thornbury, to impose a disqualification order by reference to his past conduct. I do so, appreciating also the likely professional and commercial consequences and difficulties for him. Mr Thornbury struck me as a decent, hard-working, well-motivated man, who was doing the best for his clients. Unfortunately, he failed to look over his own shoulder. Having regard to the policy of the 1986 Act that I have explained, to the periods covered by the undertakings accepted by the other two directors, and to the relative degrees of responsibility involved, not least that Mr Thornbury was not directly responsible for the failures to make the appropriate returns but, as the allegations of unfitness alleged, allowed it to happen by reason of his failure to get to grips with the company’s affairs, I consider that a fair and proper reflection of his share of the responsibility for the inappropriate action in this case is to impose a disqualification order for the minimum period of two years.”
“The law has to leave room for cases where it was acceptable for directors to take the view that their company, though insolvent in balance sheet terms for the present, was going to trade its way back into profit so that all the creditors would be paid. Further, there has to be room for cases like that even if in the event the directors turn out to have been wrong, so that the company does not succeed in trading out if its difficulties, and as it turns out the creditors, or some of them, are not paid.”
“… The unusual feature of the case is that the respondent specialises in assisting small and in many cases newly formed companies by providing financial advice and obtaining outside finance. The companies he assists are frequently companies which invite subscription for shares in companies formed under the Business Expansion Scheme. In this field, the provision of, in broad terms, venture capital, the respondent is often asked or required to accept a directorship. It is also a field in which there are inevitably a proportion of casualties - companies which are forced into insolvent liquidation not as a result of culpable misconduct or even a want of skill and care but because an expected market does not materialise or because of adverse circumstances which could not reasonably be foreseen. The complaint made by the official receiver relates to the conduct of the respondent in relation to ten companies over a period of fifteen years. During that period he has also been associated with a large number of successful, some very successful, companies. Moreover, the consequences for the respondent of a disqualification order are bound to be exceptionally severe. In most cases which come before the courts the effect of a disqualification order is that the respondent is deprived of the privilege of carrying on business through a company with the protection of limited liability unless the court is satisfied that a company of which he proposes to be appointed a director is on a sound financial footing and that the public dealing with it will not be put at risk. In the instant case the stigma of disqualification will make it difficult for the respondent to continue in his chosen field; moreover, it is likely to be impracticable for the respondent to apply to the court for leave to act as a director of every company which he may be asked to advise or for which he is instrumental in obtaining financial support from third parties and of which he may be required to act as a director.”
“They are that Mr Elliott and Mr Sharp caused Bath Glass to continue to trade whilst insolvent to the detriment of its creditors, and that they were responsible for Bath Glass retaining over£106,000 due to the Crown. The incurring of debts to the Crown is in itself not significant of unfitness unless the court can draw the inference therefrom that the directors knew or ought to have known that the company was trading whilst insolvent at the risk of its creditors and improperly using to finance its trading, in the case of VAT, moneys received from its customers, and in the case of PAYE tax and National Insurance contributions, moneys deducted from the wages of its employees, for which moneys it had to make returns and to account regularly. In the present case, Collective was paying the moneys needed for payment of the Crown debts to Bath Glass, but Bath Glass was failing to account to the Crown. It is plain that the directors knew that they were retaining such moneys: they explain their conduct on the ground that, unlike other creditors, the Crown did not press for payment. Mr Charles submitted that the directors knowingly allowed Bath Glass to trade for a substantial period at the risk of its creditors, benefiting themselves thereby because in the last six months of trading they reduced the borrowing from the Midland and so reduced their liability under the guarantees which they had given the bank, but increased the indebtedness owed to creditors other than the bank and in particular to the Crown … I return to Mr Charles’s main criticisms of the conduct of Mr Elliott and Mr Sharp. In my judgment they can be rightly criticised for certain aspects of their conduct of the affairs of Bath Glass as directors. By the middle of 1982 Bath Glass was insolvent, its liabilities exceeding its assets. The position grew worse in the next two years, as year after year forecasts and budgets were not achieved. They knew that Bath Glass could only survive with the support of the bank, but that Midland could call in its debts at any time. They knew that, even with that banking support, they were in arrears with the payment of Crown debts and that for a substantial period. They further knew that they were using amounts representing tax received from Collective to carry on business. In particular, they knew in the last six months of trading that the Crown debts were going unpaid and indeed increasing while the bank borrowings went down. There was an increasing risk that creditors would be left unpaid if the bank could not be persuaded to grant substantial overdraft facilities. In my judgment, that is improper conduct and a wrong way in which to conduct business. They must have known that they were trading at the risk of creditors.”
“In weighing in the scales those justified criticisms I must, however, take into account certain countervailing points”
“Imprudent and indeed improper in part although I think the directors’ conduct to have been, in all the circumstances I am not satisfied that their conduct as directors of Bath Glass alone is so serious as to make them unfit to be concerned in the management of a company.”
“To reach a finding of unfitness the court must be satisfied that the director has been guilty of a serious failure or serious failures, whether deliberately or through incompetence, to perform those duties of directors which are attendant on the privilege of trading through companies with limited liability. Any misconduct of the respondent qua director may be relevant, even if it does not fall within a specific section of the Companies Acts or the Insolvency Act. For example, the authorities under the previous disqualification legislation show that the court will regard as relevant misconduct the fact that a director, as he knew or ought to have known, caused a company to trade at the expense and jeopardy of moneys which the company has received, for instance in the form of VAT, from customers or which has been deducted from the emoluments of employees in the form of PAYE tax and National Insurance contributions and for which he ought to have accounted to the Crown on a regular basis. The director ought not to allow the company to use such moneys to finance the company’s trade (see Re Stanford Services Ltd & Ors(1987) 3 BCC 326 , at p334). Even if such conduct does not amount to wrongful trading within s214[of theInsolvency Act 1986 ], in my judgment it would still be conduct amounting to misconduct and so relevant to s6[of the 1986 Act]. Whether in any particular case that misconduct, or the various matters of misconduct, proved to the satisfaction of the court, will justify a finding of unfitness will depend on all the circumstances of the case.”
“The two directors of Moonlight were clearly faced with difficult decisions after the loss of the Safeway contract. They met in February 1991, after the presentation of the Exeter Micros petition and again in March 1991 when the BHS position had worsened. On both occasions they considered whether to continue trading. They did the right thing in the sense that they consulted a trusted, experienced accountant, Mr Cotterill, and had him make forecasts which they thought they could rely on. They consulted solicitors who gave advice which was reported to them in an encouraging way… 88. In this case I have found no dishonesty, no breach of common standards of commercial morality, no cynical disregard for others’ interests and no gross incompetence on the part of either Mrs Dean or Mr Tilly. At worst they were guilty of naivety, over-optimism and misplaced trust. In my judgment, their conduct as directors of Moonlight was not such as to make them unfit to be concerned in the management of a company. Accordingly, the summons will be dismissed.”