Re Lo-Line Electric Motors Ltd

JurisdictionEngland & Wales
Date1988
CourtChancery Division (Companies Court)
[CHANCERY DIVISION] In re LO-LINE ELECTRIC MOTORS LTD. AND OTHERS 1988 Jan. 21, 22; March 30 Sir Nicolas Browne-Wilkinson V.-C.

Company - Director - Disqualification - Four related companies going into insolvent liquidation between 1979 and 1984 - Respondent director of three and de facto director of fourth - Whether conduct as de facto director relevant - Insolvent trading when debts to Crown unpaid - Whether respondent to be disqualified from being director - Companies Act 1985 (c. 6), s. 300(1)

The respondent, B., had been a director of three companies, and had acted as a director of a fourth company, all of which went into insolvent liquidation between 1979 and 1984. When the first company, L. Ltd., was incorporated in 1969 B. became one of three directors but had little to do with its financial affairs, which were in the hands of his father and of a financial director. In 1977 the company's bankers appointed a receiver, who employed K. to manage its business. It was compulsorily wound up in October 1979, having assets of about £74,000 and liabilities in excess of £142,000 which included Crown debts of £14,861 in respect of VAT, PAYE and national insurance. No annual returns were ever made, and no accounts were filed after July 1975. The receiver sold its business in 1977 to a newly-formed company, M. Ltd., of which B. and K. were directors. From its inception M. Ltd. traded at a loss, its losses being made good from time to time by further but inadequate capital introduced by K. who was in control of its financial affairs. On 2 June 1982, unhappy at K.'s refusal to reduce the work force and overheads, B. resigned as a director but carried on as production manager. In November 1982, K. absconded to the US.A. and B. took over the running of the company, though he was never re-appointed as a director. M. Ltd. ceased trading in March 1983, and was compulsorily wound up, with assets of £49,000 and liabilities of £762,000, including £131,000 of Crown debts. No annual accounts or returns were ever filed. In December 1982, S. Ltd. was set up, in order to take over the remains of M. Ltd.'s business, B. being the moving spirit and a director. S. Ltd. traded until compulsorily wound up in October 1984, and, again, the liabilities included Crown debts and no returns or accounts were ever filed. The fourth company, P. Ltd., had been formed in 1980, by M. Ltd. in order to execute two specific contracts, its financial affairs being primarily the responsibility of K., but B., though never appointed as a director, acted as such. It was wound up in January 1982, with assets of £200 and liabilities of £17,502, no accounts or returns ever having been filed.

On the official receiver's summons for an order under section 300 of the Companies Act 1985F1 disqualifying B. from being a director for a period not exceeding 15 years:—

Held, (1) that the primary purpose of section 300 of the Companies Act 1985 was to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others; but that, since the power to disqualify, if exercised, involved a substantial interference with freedom and penal consequences, natural justice required that a person facing disqualification should know the case he had to meet; and that, since there had been a fundamental change in the official receiver's case concerning S. Ltd. without B. being given proper notice of the new and modified allegations of misconduct, B. had not been given an opportunity to put in evidence to meet the new charge and, therefore, the court would not consider that charge in determining whether B. should be disqualified as a director (post, pp. 32A–H, 37E–F).

In re Churchill Hotel (Plymouth) Ltd. (unreported), 4 December 1987, Peter Gibson J. distinguished.

(2) That, in considering whether a person was unfit to be a director under section 300, only his conduct “as director” was relevant; that, since the definition of director in section 741 was inclusive and not exhaustive and “director” was capable of including a de facto director but could not do so for all purposes in the Act of 1985, its meaning must vary according to its context; that, as a matter of construction, “director” in section 300 did include a person de facto acting as a director, though not appointed as such; and that, accordingly, the court must have regard to B.'s conduct as director, whether validly appointed or merely de facto acting as a director (post, pp. 31H, 34D–F, H–35D, 36C).

(3) That, though the Crown debts were not strictly trust moneys, the failure to pay them over not only prejudiced the Crown, as creditor, but in the case of PAYE and national insurance might also have had a prejudicial effect on the company's employees; and that the use of such moneys to finance continuance of an insolvent company's business was more culpable than a failure to pay commercial debts (post, pp. 33C–E, 34A–B).

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

(4) That, on the evidence, B. had been shown to have behaved in a commercially culpable manner in trading through limited companies when he knew them to be insolvent and in using unpaid Crown debts to finance such trading; but that, since it was no longer suggested that he was consciously dishonest, his case did not call for prolonged disqualification; and that he would be disqualified for three years from being a director of a company, save two family companies so long as his brother-in-law remained a director of those companies and his brother-in-law and his family had voting control thereof (post, pp. 37H–38D).

The following cases are referred to in the judgment:

Canadian Land Reclaiming and Colonizing Co., In re (1880) 14 Ch.D. 660, C.A.

Churchill Hotel (Plymouth) Ltd., In re (unreported), 4 December 1987, Peter Gibson J.

Dawson Print Group Ltd., In re [1987] B.C.L.C. 601

Eurostem Maritime Ltd., In re [1987] P.C.C. 190

Morris v. Kanssen [1946] A.C. 459; [1946] 1 All E.R. 586, H.L.(E.)

New Par Consols Ltd., In re [1898] 1 Q.B. 573, D.C.

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

Wedgecroft Ltd., In re (unreported), 7 March 1986, Harman J.

The following additional cases were cited in argument:

Andrey Fashions Ltd., In re (unreported), 17 July 1987, Harman J.

Douglas Construction Services Ltd., In re (unreported), 24 July 1987, Harman J.

Flatbolt Ltd., In re (unreported), 21 February 1986, Harman J.

Lynch (I & B) (Builders) Ltd., In re (unreported), 26 January 1988, Mervyn Davies J.

V.A.B. Plating Ltd., In re (unreported), 11 April 1987, Hoffmann J.

SUMMONS

By a summons dated 25 April 1986 the official receiver applied under section 300 of the Companies Act 1985 for an order that the respondent, Peter Roy Pattinson Browning, should not, without the leave of the court, be a director 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 not exceeding 15 years from the date of such order. The summons further stated that the grounds of the application were that the conduct of the respondent as a director of (i) Lo-Line Electric Motors Ltd. which was insolvent when wound up by the court on 15 October 1979, (ii) Maldon Pressure Diecasting Co. Ltd. which was insolvent when wound up by the court on 18 January 1982, (iii) Lo-Line Electric Motors (Maldon) Ltd. which was insolvent when it was wound up by an order of the Chelmsford County Court on 24 April 1983, and (iv) Special Electric Motors Ltd. which was insolvent when it was wound up by the court on 27 October 1984, made him unfit to be concerned in the management of a company.

The facts are stated in the judgment.

Anthony Bompas for the official receiver.

Charles Turnbull for the respondent, Mr. Browning.

Cur. adv. vult.

30 March. SIR NICOLAS BROWNE-WILKINSON V.-C. read the following judgment. This is an application by the official receiver for an order under sections 295 and 300 of the Companies Act 1985 seeking the disqualification of Peter Roy Pattison Browning from acting as a director. Mr. Browning has been a director of four companies, all of which went into insolvent liquidation between 15 October 1979 and 27 October 1984.

The background is that there is a long established family company, Browning's Electric Co. Ltd. This company was formed in 1919 and has traded continuously down to the present day. In 1968, when Mr. Browning was 21, he was appointed a director, his father then being the managing director. The company was engaged in the repair and manufacture of electric motors for machine tools and industrial floor cleaning. Mr. Browning's father was primarily interested in the repair side of the business and Mr. Browning was put in charge of the manufacturing side. The manufacturing prospered and it was therefore decided to form a new company, Lo-Line Electric Motors Ltd., to take over the manufacturing side of the business. That was the first company to become insolvent.

Lo-Line Electric Motors Ltd. (“Lo-Line”)

Lo-Line was incorporated on 11 August 1969 with an issued and paid-up capital of £100. Both Mr. Browning and his father were directors, his father being the managing director. According to the evidence, Mr. Browning's father had the last word in the running of the company. There was also a finance director. On 31 December 1977 the company's bankers appointed a receiver who employed a Mr. Kanter to manage the business. The receiver sold the business to a newly incorporated company, Lo-Line Electric Motors (Maldon) Ltd. Lo-Line was compulsorily wound up on 15 October 1979. It was then insolvent having assets of £74,000, or thereabouts, and liabilities in excess of £142,000. The liabilities included £14,861 owed in...

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