Summary

The fact that a director had caused an insolvent company to make a payment which was detrimental to the general body of creditors did not, in all the circumstances, justify a finding that the director was unfit.

Facts

Appeal by Daniel Baker ('B') from the decision of Deputy Registrar Brougham QC ('the Registrar'), disqualifying B pursuant to s.6 Company Directors Disqualification Act 1986 for a period of four years. B's arguments on the appeal were: (i) his conduct had not been detrimental to the general body of creditors; (ii) in any event, his conduct did not show unfitness; and (iii) the period of disqualification imposed was excessive. B had been a director of Tate Access Floors Ltd ('the company') from 14 July 1977 and its sole director since 1 July 1994. The company was a wholly-owned subsidiary of Tate Global Corporation ('Global') and a sister of Tate Access Floors Inc ('Inc'), two companies ultimately owned by B and his family, and behind which he was the driving force. By early 1994, with the company in financial difficulties, B was considering ways of restructuring the company's business. He instructed a surveyor ('PB') to negotiate surrenders of the two leases of the premises from which the company traded. The company ceased trading on 31 May 1994, at which date it was clearly insolvent. The company's business was taken over by its principal trade creditor ('C') on terms which were agreed to have been for the benefit of the company and its creditors. B was hopeful about the prospects for a solvent liquidation, given that over 80 per cent of the company's indebtedness of £3 million was owed to C and Inc. Without advice from solicitors or accountants, B decided to conduct an informal liquidation of the company in accordance with a scheme devised by the company's finance director and based upon the projected realisation of book debts. The essence of the scheme was that: (i) the company's creditors other than C and Inc ('the trade creditors'), would be paid in full by November 1994; (ii) in December C would be paid in full, and Inc would be paid £342,000; (iii) Inc would forego the balance of the debt owed to it. The scheme assumed that the leases would be surrendered by the end of December 1994. Between May and September 1994, B caused the company to pay about £350,000 to the trade creditors. B gave evidence that he was specifically advised by PB in October 1994 that the position with regard to surrendering the leases by the end of the year remained hopeful. On 10 October 1994 the company received £388,750 in settlement of an arbitration dispute. On 13 October, and in advance of the time scale laid down by the scheme, B caused the company to pay £200,000 ('the Payment') to Inc. This sum was less than the amount that Inc would have received if there had been a pro rata distribution of the settlement monies amongst all the company's creditors on that date. There was no clear evidence as to whether the balance of £188,750 had been applied in favour of the trade creditors. In November 1994 B consulted solicitors, who in turn consulted accountants. No agreement to surrender the leases was reached. Thereafter B concluded that there was no longer a realistic possibility of avoiding an insolvent liquidation, which followed in March 1995. The secretary of state made no complaint about the scheme that B had attempted to implement, nor about the monies paid to trade creditors between May and September 1994. She did, however, contend that the Payment had been: (i) to the detriment of the general body of creditors; and (ii) a preference. The Registrar, after finding that there were "respectable commercial reasons" for implementing the scheme, held that the preference charge was not made out since he was satisfied that at the time of the Payment the prospect of an insolvent liquidation was excluded from B's mind. However, the Registrar upheld the first charge, concluded that the Payment demonstrated unfitness within s.6(1) of the Act, and disqualified B for a period of four years.

Held

(1) The Payment was detrimental to the general body of creditors, even though it represented substantially less than the sum that Inc would have received on a pro rata distribution of the settlement monies since: (i) it was made at a time when the company was insolvent, and at a time when B should have appreciated that it was insolvent and that there was a real risk of an insolvent liquidation; (ii) B, even though he had not intended a preference, had been unable to show that the balance of the settlement monies had gone to the trade creditors, which might otherwise have mitigated the reality that, in the event, Inc had been singled out for payment. (2) However, given that the informal liquidation had been implemented for "respectable commercial reasons" and the earlier payments to creditors in May to September 1994 had not been the subject of any criticism by the secretary of state, it was difficult to see why, in the absence of a change of circumstances, the making of one more payment to one more creditor (in this case the Payment to Inc) should warrant specific criticism. B's evidence as to the advice received from PB was unchallenged. In the circumstances, a finding of unfitness was not justified. (3) If disqualification had been justified, a period of 30 months would have been appropriate.

Appeal allowed.