Maxwell Limited and Contributors

Two recently reported cases shed light on the operation of the company Directors Disqualification Act 1986. Re Dawson Print Group Ltd [1975] BCLC 601 and Re Stanford Services Ltd [1987] BCLC 607 were cases where opposite conclusions were reached by the court. They should, therefore, afford some insight into the matters which the court will consider important when considering disqualification.

Both cases were in fact decided under s300 of the Companies Act 1985 (which was the predecessor to s6 of the Company Directors Disqualification Act) but there is no reason to believe that the principles applicble have been changed, although the new statute sets a lower threshold to its application. Thus under s300 of the Companies Act 1985 a director had to be associated with two successive insolvencies before being in peril of disqualification.

By s6 of the 1986 statute the court is obliged to make a disqualification order where it is: 'satisfied — (a) that [a person] is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently). and (b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) make him unfit to be concerned in the management of a company'.

In determining this question the court is directed (by s9 and Sched 1) to have regard to a number of matters, including breach of duty owed by a director to the company, a director's part in the misapplication of assets, failure to keep proper records, file annual returns and prepare annual accounts and reports.

So far as the insolvency of the company is concerned, the court is directed to have regard to a number of further matters including the extent of the director's responsibility for the insolvency and for the failure of the company to supply goods which have already been paid for, the director's involvement in any preference which may be set aside by the court, and failure to comply with duties imposed on a director by the Insolvency Act 1986 during the course of insolvency proceedings. In view of the judgments in the cases it is interesting to note that the extent of debts owed to the Crown is not specifically mentioned.

The list, however, is not exhaustive. Section 9 directs the court to have regard to the matters mentioned 'in particular,' thus not excluding other matters from consideration. Further it is clear that the extent of indebtedness to the Crown would be relevant to determining the extent of the director's responsibility for the causes of the company becoming insolvent, as it may well involve a breach of duty to the company and breaches of the duty to keep accounts, all of which are matters to which the court's attention is particularly directed. Use of discretion

Under s6 of the 1986 Act the minimum period of disqualification is two years and the maximum period is 15 years. Under the Companies Act 1985 there was no minimum period of disqualification. Where the court is satisfied that the case has been made out under the 1986 legislation there is now no discretion as to disqualification. This change may be significant with regard to the value of Dawson as a precedent, so far as the outcome is concerned, since Hoffman J in that case spoke of using his discretion. However, he also found that the director was not unfit.

The court no longer has a discretion whether to make an order if it is satisfied that the two criteria set out in s6(1) of the 1986 statute are satisfied, but it may be that the same factors could be taken into account to determine the 'unfitness' (the second criteria under s6) as were taken into account in order to determine whether a discretionary disqualification order ought to be made. Hoffman J in Dawson makes *98 no clear distinction between the exercise of his discretion and the finding that the director was not unfit.

Both cases retain their value in pointing to the principles that will be applied in order to determine the unfitness of the director, in particular to determine the degree of knowledge or mens rea which must be proved against the director before he is to be considered unfit, and the standard to which allegations against the director must be proved. The imposition of a disqualification order has decidedly criminal overtones. No compensation results from the order. The imposition of the order may be seen as having a deterrent effect, both on the party affected and on others involved in the management of companies.

An order clearly could deprive a director of his livelihood. Vinelott J regards the imposition of such an order as a matter of public interest. In Stanford (p620) he said: 'If it is shown that the respondent has been guilty of a serious breach of his obligatins as a director, and to have caused loss to the creditors of a company, the public interest requires that the misconduct be recognised and reflected in an order of disqualification. ' All these are factors which point towards the order being regarded as a criminal penalty, despite the fact that it is imposed by a civil court.

It is anomalous, then, that criminal procedure does not seem to be closely followed in these cases. In particular there is little or no discussion of the standard of proof which is carried by the applicant for a disqualification order. Small indications of the standard applied by the court can be gleaned from the judgment, but no true indication. In Dawson Hoffman J considered the business life of one of the companies and concluded: 'On the whole, though, it is probably true to say that the failure of the business was by mismanagement. '

Mismanagement is used as an indication that the director is 'unfit'. The proof of the indications of unfitness appears to be achieved by persuading the judge that the indicator is present as a matter of probability ie aplying the civil standard of proof. Later Hoffman J examines an allegation that stock had been improperly removed from one of the companies. He says: 'This, if true, would be an extremely serious matter, but it does not appear that the investigations of the Official Receiver produced any evidence to support such an allegation.

If was only when the respondent produced the accounts of Unit One Printers Ltd that the gross profit margins for the first year were relied on as an indication that stock had been taken. The respondent's evidence was that the gross profit margins were due to his being able to acquire stock during that year at very low prices partly from the Official Receiver acting on behalf of the two companies with which we are concerned, and partly from the sales of stock of other bankrupt companies in those circumstances I do not think the evidence comes anywhere near sustaining so serious an allegation.

' Varying standards of proof It is unclear what standard of proof the judge is requiring but this passage could be taken as indicating that the standard of proof varies with the seriousness of the allegation. This would conform with the views expressed by Denning LJ [FN1] in Bater v Bater [1951] p 35 at pp 36-37; 'It is of course true that by our law a higher standard of proof is required in criminal cases than in civil cases. But this is subject to the qualification that there is no absolute standard in either case.

In criminal cases the charge must be proved beyond reasonable doubt, but there may be degrees of proof within that standard … So also in civil cases the case must be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on the subject matter. A civil court, when considering a charge of fraud, will naturally require itself a higher degree of probability than that which it would require when asking if negligence is established.

It does not adopt so high a degree as a criminal court, even when it is considering a charge of a criminal nature; but still it does require a degree of probability which is commensurate with the occasion. ' If Lord Denning is right the standard of proof not only for the particular allegation which Hoffman J was considering but also throughout the proceedings should be something only a little short of the criminal standard.

The seriousness of the allegation of unfitness cannot be doubted in view of the penalty which may be imposed on an unfit director. It is all the more strange that so little attention appears to have been paid to this issue. Stanford throws no light on the issue. The only reference to matters of standard of proof is a refusal by the judge to accept allegations made by the Official Receiver in the absence of cross examination of the director on those matters.