Summary

Two directors of a company were disqualified for the maximum period of 15 years where they had procured that company to purchase assets and liabilities of a partnership knowing, or being recklessly indifferent or grossly negligent to the fact, that it was effectively worthless.

Facts

The applicant secretary of state applied under the Company Directors Disqualification Act 1986 s.6 to disqualify the respondents (X and Y) from acting as company directors. X, Y and another man (L) formed a partnership (P) which was involved in selling spirits and wines to the United States. The assets and liabilities of P were subsequently acquired by a company (V), to which X, Y and L were appointed as directors. Resolutions were passed to remove all three from office. Y resigned and L and X were removed. V then went into creditors' voluntary liquidation. L took his own life and X and Y faced disqualification proceedings. The case against both X and Y was that they had carried on the business of P by making fraudulent misrepresentations to so-called investors regarding the profits that could be made from purchasing wines and spirits. It was submitted that P had undertaken obligations to repurchase the goods from investors at prices which were unrealistically high and which it knew it had no prospect of being able to satisfy. Further, the secretary of state contended that when V acquired the assets and liabilities of P, X and Y knew that its liabilities were just under £52 million and its assets could not realistically be valued at anything over £5 million. He maintained that V was able to discharge its liabilities by fraudulently misrepresenting to investors that it had acquired assets of substantial value and that, from then on, X and Y carried on the business of V in the same fraudulent manner as that of P. In the alternative, the secretary of state submitted that both X and Y were recklessly indifferent or grossly negligent in relation to the allegations. Both X and Y vehemently denied dishonesty.

Held

In assessing both X and Y's fitness to be concerned in the management of a company, only their conduct in relation to V could be taken into account. However, it was recognised that their activities in relation to P formed an essential background to the issues that had to be determined. Both X and Y were equal partners in P with L and were joint managing directors of V. Therefore, it was expected that they would have had a good general knowledge of the nature of the business of P at the time that it was sold to V, and would have had a general knowledge of V then and thereafter. That V had carried on a business in much the same manner as P had done, that investors were persuaded to invest in spirits and wines which they never received and that investors were persuaded to roll their investment into other products or promissory notes was a fair account of their practices. The directors had been recklessly indifferent and grossly negligent by procuring that V should purchase the business from P which was insolvent and had liabilities which V had no reasonable prospect of discharging by honest means; by procuring V to pay some £59 million for assets from P which were worth significantly less; and by persuading others to subscribe for shares in V by falsely and knowingly misrepresenting that its assets were much more valuable than they in fact were. Those factors in themselves rendered both X and Y utterly unfit to be concerned in the management of a company. They both had actual knowledge of, or deliberately turned a blind eye to, the practices of the business and the fact that it was raising money by offering impossible returns to credulous clients. Accordingly, their disqualification, for the maximum period of 15 years, was ordered.

Application granted