Directors’ disqualification/// unusual recent cases

Blog by Gordon Hollerin.

Most directors’ disqualification cases concern an application for the disqualification of an individual who has acted inappropriately in his duties as director of a company. However, two unusual recent cases widen the range of disqualification actions usually seen in the UK courts.

Wood v Mistry (10 July 2012)///

Facts of the case

The liquidators of a group of companies successfully brought disqualification proceedings in the English High Court against the companies’ former liquidator under the Company Directors Disqualification Act 1986. The case is unusual in that the proceedings were initiated by liquidators (rather than the Secretary of State) and were against a former liquidator rather than a director.

The subsequent liquidators of the companies initiated disqualification proceedings against Mr Mistry who they claimed had, while acting as liquidator, dishonestly diverted funds from the companies for his own financial benefit, paid invoices that he knew to be fraudulent and failed to recover sums from third parties for the benefit of the companies.

Judgement

The judge said that the court should make a disqualification order against a liquidator only where “serious misconduct” was established. He rejected the defence submission that the liquidators must have a financial interest in the disqualification order being made, and noted that the purpose of disqualification is essentially for the protection of the public, and a liquidator’s functions include the consideration of criminal or civil sanctions in respect of misconduct.

The judge was satisfied that Mr Mistry’s conduct had been “grossly improper” and granted a 12-year disqualification order.

Comment

It is worth noting that where a liquidator pursues disqualification proceedings, there is no financial gain for the insolvent company’s creditors. Therefore, before making an application, a liquidator may wish to obtain confirmation of support from the company’s creditors including funding in appropriate cases.

Cunningham v HM Advocate (16 May 2012)///

Facts of the case

Mr Cunningham was appealing against a conviction by a jury in Edinburgh Sheriff Court for contravening a twelve year directors’ disqualification order made in 1999 by being concerned in the management of a company in 2003 and 2004.

As the original disqualification order contained the condition that Mr Cunningham could not be a director or take part in the promotion, formation or management of a company “without the leave of the court”, it was submitted on behalf of Mr Cunningham that it was for the prosecution to establish by corroborated evidence that leave had not been granted, and that as this had not been established the prosecution must fail.

Judgement

The appeal court held that if Mr Cunningham had received leave from a court to act in contravention of his disqualification order, this could easily be proved by him and that the onus was on him to establish that leave had been granted. For this reason, the defence submission was not well-founded and was rejected. Proceedings were continued for an appeal against sentence.

Comment

The facts of these cases are unusual. Nevertheless, the two judgements do provide useful guidance on the court’s approach and highlight the serious consequences of engaging in fraudulent activities or acting in contravention of a disqualification order.

Validity of administration appointments – Law now settled?

In BXL Services, an English High Court decision of 10 July 2012, Judge Purle has stated

Blog by Gordon Hollerin.

that it is now “settled law” that a failure by directors to notify the Company of their intention to appoint administrators does not result in the appointment being invalid

BXL is the latest in a series of High Court decisions, some of them reaching contradictory conclusions, on whether a failure to comply with the requirement for notice of intention to appoint administrators to be given by the directors to the Company itself and to various other parties set out in the Rules invalidated an administration appointment

In BXL Services the directors of a charitable company limited by guarantee resolved to appoint administrators. There was no floating charge holder. So there was no party entitled to appoint an administrative receiver or administrator and upon whom a notice of intention to appoint administrators had to be given in terms of the Act. The Rules also prescribe that other parties, including the Company itself, are to be given notice. This didn’t happen, no doubt because the directors regarded it as unnecessary to notify their Company when they were making the appointment.

In some previous cases such as National Westminster Bank v Msaada Group and Minmar (929) Ltd v Khalatschi such an omission had been held to be fatal to the appointment. However in a decision issued in May 2012 – Re Ceart Risk Services Ltd – Judge Arnold had considered the previous decisions and nonetheless decided that failure to give notice to the FSA (in circumstances where notice was required to be given to it) had not invalidated the appointment

Judge Purle in BXL Services described the judge’s decision in Ceart Risk Services as a choice to adopt a purposive rather than literal approach and went on to say that “it is that choice which must now be taken to settle the law at first instance”

The case decides that in these circumstances a Court can declare the administration appointment valid not that notice on the Company is not required. The decision will be welcomed by most but it remains the case that even where there is no floating charge holder it is appropriate for notice of intention to appoint to be given to the Company and any other party (such as the FSA) on whom notice might be prescribed in the circumstances”