Summary

Where the defendants had exercised control over three companies in an area of corporate affairs as critical as the application of trading income and the payment of trade creditors, they had been directors or shadow directors, and their conduct in trading to the detriment of creditors and failing to respect the fundamental principle that each company had a separate legal personality made them unfit to be concerned in the management of a company.

Facts

The applicant secretary of state applied for disqualification orders under the Company Directors Disqualification Act 1986 s.6 against the first and second respondents (J and B), who were alleged to have been directors or shadow directors of a lead company (M) and two collateral companies (P and C). The secretary of state's case was that the conduct of J and B as directors had made them unfit to be concerned in the management of a company, as they had caused or allowed M, P and C to trade to the detriment of creditors. All three companies were compulsorily wound up with combined liabilities of nearly £19.5 million. At the relevant time B had been subject to a disqualification order resulting from criminal convictions. J accepted that, technically, he had been recorded as a director of M, but claimed that he had not realised that he had been appointed. He had never been formally appointed as a director of either P or C, and B had never been formally appointed as a director of any of the companies. The secretary of state contended that in any event both J and B had been directors in fact or shadow directors of the three companies, in that they had dictated company policy and given instructions to the directors of the companies on which they were accustomed to act.

Held

(1) J's formal appointment as a director of M had reflected the reality of his position and he must have known that he was a duly appointed director of M. The most significant feature of the allegations against J and B was the decision to have a central treasury for the three companies, into which the recoveries of the companies were paid, and to pay moneys out of that treasury to other companies, outside M's group, in which J had a substantial interest. There was no doubt that it was J and B who had made that decision: there was no reason for the other directors independently to have done so; only J stood to benefit from it; there was no record of the board of M having discussed and agreed it; and the evidence was that other directors had protested it. Despite the other directors' protests and unease, the policy had been complied with until the companies ceased trading, which emphasised the control exerted by J and B. In an area of corporate affairs as critical as the application of trading income and the payment of trade creditors, the policy of all three companies had been dictated by J and B, and that made B a shadow director of all three companies, and J a shadow director of P and C. (2) The secretary of state's essential allegation, that J and B had caused the companies to trade to the detriment of creditors, was made out. Their actions had not been reasonable. They had failed to respect the fundamental principle that each company had a separate legal personality. That failure, resulting as it had in a very substantial increase in the deficiency of each of the three companies, to the detriment of their respective creditors, made them unfit to be concerned in the management of a company. In the case of B, there was the additional and aggravating factor, that in being concerned in the management of a company he was in breach of a disqualification order that had already been imposed on him. That showed a disregard for the whole system of regulation of the conduct of directors. Secretary of State for Trade and Industry v Goldberg (2003) EWHC 2843 (Ch) , (2004) 1 BCLC 597 applied. (3) J would be disqualified for 7 years, B for 11 years.

Application granted.