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Re Grayan Building Services Ltd

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Vincent
JurisdictionEngland & Wales
Judgment Date10 November 1994
Date10 November 1994
CourtCourt of Appeal (Civil Division)
[COURT OF APPEAL] In re GRAYAN BUILDING SERVICES LTD. (IN LIQUIDATION) 1994 Nov. 7, 8; 10 Neill, Hoffmann and Henry L.JJ.

Company - Director - Disqualification - Disqualification refused despite requisite findings of fact - Whether account to be taken of matters subsequent to conduct relied on - Whether discretion to order disqualification of directors shown to be unfit - Whether directors to be disqualified - Company Directors Disqualification Act 1986 (c. 46), ss. 6(1), 9, Sch. 1

The Secretary of State for Trade and Industry sought orders pursuant to section 6 of the Company Directors Disqualification Act 1986F1 for the disqualification of two former directors of an insolvent company. The matters on which the Secretary of State relied, pursuant to section 9 of and Schedule 1 to that Act, were allegations that the directors had caused the company to trade and incur substantial debts when there was no reasonable prospect that creditors would be paid, had failed to ensure that proper accounting records were kept, had failed to file audited accounts on time and had made preferential payments contrary to section 239 of the Insolvency Act 1986.F2 The judge found that the allegations, apart from the first, were proved. However, because the liquidator had pursued other remedies with regard to the preferences, thereby bringing home to the former directors the consequences of making a preference, the judge concluded that their conduct did not show that they remained unfit, and that despite serious shortcomings in their conduct they were not unfit to be concerned in the management of a company.

On the Secretary of State's appeal: —

Held, allowing the appeal, that on the true construction of section 6(1) of the Act of 1986, in considering whether a director remained unfit to be concerned in the management of a company, the court was not entitled to take into account matters subsequent to the conduct relied upon to obtain a disqualification order which showed that despite shortcomings in the past he was unlikely to offend again, but had to decide, on the evidence put forward at the hearing, whether his conduct, viewed cumulatively and taking into account any extenuating circumstances, had fallen below the standards of probity and competence appropriate for persons fit to be directors of companies; that the purpose of making disqualification mandatory was to ensure that everyone breaching the required standard was disqualified for at least two years, whether or not it was necessary in the public interest in the individual case; and that, accordingly, since on the judge's findings of fact, breach of the required standard had been established, a disqualification order should have been made (post, pp. 10F–G, 11B–H, 14G–H, 15A, F–16A).

Dicta of Peter Gibson J. in In re Bath Glass Ltd. [1988] B.C.L.C. 329, 332 and In re Pamstock Ltd. [1994] 1 B.C.L.C. 716 approved.

Dictum of Lindsay J. in In re Polly Peck International Plc. (No. 2) [1994] 1 B.C.L.C. 574, 583 considered.

Decision of Arden J. reversed.

The following cases are referred to in the judgments:

Bath Glass Ltd., In re [1988] B.C.L.C. 329

Benmax v. Austin Motor Co. Ltd. [1955] A.C. 370; [1955] 2 W.L.R. 418; [1955] 1 All E.R. 326, H.L.(E.)

Coventry, decd., In re [1980] Ch. 461; [1979] 3 W.L.R. 802; [1979] 3 All E.R. 815, C.A.

Hitco 2000 Ltd., In re (unreported), 29 July 1994, Jules Sher Q.C.

Mitchell (George) (Chesterhall) Ltd. v. Finney Lock Seeds Ltd. [1983] 2 A.C. 803; [1983] 3 W.L.R. 163; [1983] 2 All E.R. 737, H.L.(E.)

Pamstock Ltd., In re [1994] 1 B.C.L.C. 716

Polly Peck International Plc. (No. 2), In re [1994] 1 B.C.L.C. 574

Sevenoaks Stationers (Retail) Ltd., In re [1991] Ch. 164; [1990] 3 W.L.R. 1165; [1991] 3 All E.R. 578, C.A.

Swift 736 Ltd., In re [1993] B.C.L.C. 896, C.A.

The following additional cases were cited in argument:

Cedac Ltd., In re [1990] B.C.C. 555

Churchill Hotel (Plymouth) Ltd., In re [1988] B.C.L.C. 341

Cladrose Ltd., In re [1990] B.C.L.C. 204

Crestjoy Products Ltd., In re [1990] B.C.L.C. 677

ECM (Europe) Electronics Ltd., In re [1992] B.C.L.C. 814

Hadmor Productions Ltd. v. Hamilton [1983] 1 A.C. 191; [1982] 2 W.L.R. 322; [1982] 1 All E.R. 1042, H.L.(E.)

Infabrics Ltd. v. Jaytex Ltd. [1987] F.S.R. 529, C.A.

Lasercell Ltd., In re (unreported), 1 November 1991, Mary Arden Q.C.

Lo-Line Electric Motors, In re [1988] Ch. 477; [1988] 3 W.L.R. 26; [1988] 2 All E.R. 692

Looe Fish Ltd., In re [1993] B.C.L.C. 1160

New Generation Engineers Ltd., In re [1993] B.C.L.C. 435

Stanford Services Ltd., In re [1987] B.C.L.C. 607

Synthetic Technology, In re [1993] B.C.L.C. 378

Wimbledon Village Restaurant Ltd, In re [1994] B.C.C. 753

Winkworth v. Edward Baron Development Co. Ltd. [1986] 1 W.L.R. 1512; [1987] 1 All E.R. 114, H.L.(E.)

The following additional cases, although not cited, were referred to in the skeleton arguments:

Dicetrade Ltd., In re [1994] B.C.C. 371, C.A.

Firedart Ltd., In re [1994] 2 B.C.L.C. 340

Appeal from Arden J.

On 8 February 1991 the Secretary of State for Trade and Industry issued summonses against the defendants, Walter Gifford Gray and David Erskine Paterson, who were or had been directors of a company which had become insolvent, namely Grayan Building Services Ltd. (“Grayan”). The summonses sought orders pursuant to section 6 of the Company Directors Disqualification Act 1986 that they should not, without the leave of the court, be directors of or in any way whether directly or indirectly be concerned or take part in the promotion, formation or management of a company, for a period of not less than two years and not exceeding 15 years from the date of the order. On 5 August 1993 Arden J. refused the applications.

By a notice dated 2 September 1993 the Secretary of State appealed on the grounds, inter alia, that (1) the judge, having found that the partial repayment by Grayan of its bank overdraft, being an overdraft guaranteed by the defendants, by some £80,500 and £2,000 on 8 and 10 February 1989 respectively and the repayment by Grayan of some £12,000 of an outstanding loan from Grayan Construction Ltd. (“Construction”), a company owned by the defendants, on 8 February 1989, were voidable preferences within the meaning of section 239 of the Insolvency Act 1986, which conferred substantial personal benefits upon the defendants and were payments for which the defendants were responsible, erred in her conclusion that the defendants' conduct in relation to such matters did not render them unfit within the meaning of section 6(1) of the Act of 1986 in that (a) her conclusion that the consequences of effecting a preference would have been brought home to the defendants in the preference proceedings commenced by the liquidators, such that the defendants' conduct in relation to the preferences did not now render them unfit was inconsistent with, alternatively gave insufficient weight to, her findings that (i) the payments were made after professional advice from Ernst & Whinney that payments should not be made to creditors of Grayan, (ii) the payment to Construction was made in the knowledge that there was a risk that the liquidator would seek to claim it back and the defendants were prepared to take their chance on that, (iii) the payment to Construction was a serious error of judgment and (iv) the defendants appreciated that paying off Grayan's overdraft by credits into its bank account could amount to a preference, (b) in so far as the judge took into account the question of whether other remedies existed and had been pursued, she misdirected herself and failed to apply properly, or give sufficient weight to, section 9 of and paragraphs 2 and 8 of Schedule 1 to the Act of 1986 and the purposes of section 6 of that Act, being the protection of the public and, in particular, creditors, (c) the judge misdirected herself in considering whether or not the defendants had now had the consequence of effecting a preference brought home to them by other proceedings, that being a consideration that would only be relevant if the making of a disqualification order was discretionary and not mandatory (see In re Crestjoy Products Ltd. [1990] B.C.L.C. 677), (d) the judge's conclusion was inconsistent with, alternatively made after giving inadequate weight to, her findings that the preferences displayed serious shortcomings in the conduct of the respondents and (e) the judge failed to appreciate the importance and significance of the preferences and her conclusion was one which no reasonable tribunal, properly directed, could come to on the facts found; (2) the judge, having found that Grayan was insolvent from September 1988 and unable to meet its liabilities as they fell due and that that would have been known to the defendants, erred in her implicit conclusion that the defendants' conduct in relation to that matter was not such as to make them unfit within the meaning of section 6 of the Act of 1986 in that (a) such conclusion was inconsistent with, alternatively was reached giving inadequate weight to, her findings of serious shortcomings in the defendants' conduct as directors being based upon the following findings: (a) Grayan had overstretched itself in financial terms; (b) the defendants failed to foresee that possibility and to ensure that Grayan had adequate financial backing in terms of share capital and banking facilities such as would enable it to trade out of a difficult contractual situation; (c) the defendants caused Grayan to trade on and take on new work; (3) the judge, having found that Grayan failed to keep adequate accounting records in respect of work in progress and that the defendants bore responsibility for the resultant breach of section 221 of the Companies Act 1985, erred in her conclusion that the defendants' conduct in that connection was not such as to render them unfit within the meaning of section 6 of the Act of 1986 in that (a) her conclusion that the significance or consequences of the failure had...

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