Breach of commercial morality

Very little explanation of these standards was given. From Dawson it appears that mismanagement, under-capitalisation, failure to keep overheads in control and failure to pay Crown debts do not automatically lead the court to find that the director has been in breach of one of the above standards. From both the cases it appears that a multitude of indicators may be taken into account when the issue of unfitness is determined.

What is lacking in both cases is any attempt to define the standard by which the sum of all the indicators must be judged. Breach of commercial morality In Dawson a breach of commercial morality was said to occur when 'the commercial world generally' would condemn the relevant action. This view was disapproved by Vinelott J in Stanford. He said: 'It is, I think misleading (or at least unhelpful) to ask whether a failure to pay debts of this character would be generally regarded as a breach of commercial morality.

' This enquiry seems to be replaced by the court's view of the morality of the behaviour, which appears to be stricter and to include the notion that a director who fails to keep himself informed, with reasonable accuracy, as to the company's current financial position is in breach of commercial morality. There is thus considerable doubt as to the meaning of this term. Really gross incompetence This test appears only in Dawson without further elaboration.

It is unclear, for example whether it is intended to be an objective test or whether, shadowing Re City Equitable Fire [1925] Ch 407 the standard would take into account the 'degree of skill [which] may reasonably be expected from a person of his knowledge and experience. ' The stress that Hoffman J laid on the youth and inexperience of the director in Dawson in concluding that he was not unfit, suggests that the personal qualities of the director concerned will be important if this test is adopted.

Recklessness In both cases the test of recklessness is used apparently as an alternative test to the others listed. Again, however, there is no discussion as to the meaning of the term. It is quite clear that recklessness has two distinct meanings. [FN2] So called 'Cunningham' recklessness requires proof that the accused foresaw the relevant risk (in this case presumably the risk of insolvency) whereas 'Caldwell' recklessness can be established by proof that the accused did not give a thought to the risk.

This is distinguishable from negligence, since negligence can be established by evidence that the accused considered the risk but wrongly, and contrary to the conclusion a reasonable man would have reached, came to the conclusion that there was no risk or that the risk was negligible. It is not clear in what sense the term is used in Dawson and Stanford. The appearance in Dawson of the test of really gross incompetence as an apparent alternative serves further to confuse matters. The evidence from the way the judges considered whether the test had or had not satisfied gives little guidance as to which meaning is relevant.

Thus in Stanford Vinelott J said: 'In my judgment the evidence as a whole, including the evidence as to the arrears of PAYE, national insurance contributions and VAT, does found the inference that the business of LFR was acquired, and that the business of Sports were commenced recklessly, and that those businesses were continued at a time when Mr lvens ought to have known that they were insolvent. ' This makes it plain that the continuation of a business when the director ought to have known it was insolvent is an indication of unfitness (an indication of actions contrary to commercial morality perhaps?) but if it amounts to recklessness there is no indication of that fact and recklessness appears to be used in the sentence as a separate term with a distinct meaning.

There is no discussion in the judgment as to whether the director knew of the tax situation at the time of aquisition and commencement referred to in the passage cited, so it is not clear whether actual knowledge of the risk of defaulting on those debts is required. Danger to the public in future This test appears only in Dawson and appears to be disapproved in Stanford.

Thus in Dawson it was held to be an indication of fitness to act as a director, that a new company, soundly based, was currently trading at a profit with the respondent director acting as a director. However, in Stanford it was held to be no answer to an application to disqualify the director, that he had no intention of acting as a director in future and thus could not constitute a danger to the public in that capacity. The status of this test is also a matter of confusion. It can be seen, therefore that there is pressing need for the clarification of the meaning of 'unfitness'.

Crown debts A further issue which surfaces in the cases is the type of indicators which may be taken as evidence of, or evidence to rebut an allegation of unfitness, and the relative weight to be placed on each indicator. The future intentions of the directors is one area of doubt which has already been referred to. Other areas of difficulty are the extent to which bad luck played a part in the eventual insolvency, the relevance of the number of companies involved and the personal attributes of the director (eg his age and experience).

Perhaps the major area of difficulty is the existence of Crown debts. In Dawson Hoffman J said (at p604); 'In this case the matters which are relied on as taking the case out of the ordinary run are, first of all, that the company paid very little of what it owed by way of PAYE, VAT and national insurance contributions. In Re Howard Davey & Co Ltd (7 December 1984, unreported) … Harman J said that these are serious matters because the money in question is not the company's money to be spent on the company's business but is what he called quasi-trust money.

I can see that in some cases that view can be taken, but the fact is that, no doubt for good reasons, the Exchequer and the Commissioners of Customs and Excise have chosen to appoint traders to be tax collectors on their behalf with the attendant risk. That risk is to some extent compensated by the preference which they have on insolvency … I cannot accept that failure to pay these debts is regarded in the commercial world generally as such a breach of commercial morality that it requires in itself a conclusion that the directors are unfit to be involved in the management of the company. '

In Stanford Vinelott J made it plain that he considered the existence of substantial 100 Crown debts a powerful indication of unfitness leaving yet another aspect of the application of this legislation in doubt. It is interesting to note in the light of Vinelott J's reliance on Crown debts that the 1986 statute does not refer specifically to existence of Crown debts as a matter to be particularly taken into account by the court. In view of the seriousness of allegations made under this legislation and the penalties which may be imposed, it is to be hoped that clarification of these issues will be rapidly forthcoming.