Secretary Of State for Trade and Industry v Creegan & Ors

For disqualification based on incompetence, it will usually be necessary to establish both that the company traded while insolvent and that the director knew or ought to have known that there was no reasonable prospect of meeting creditors’ claims. Insolvency, particularly balance-sheet insolvency, and knowledge of it do not by themselves satisfy the test. The court must assess the evidence concerning the company’s prospects as a whole, including its profitability, creditor pressure and the circumstances producing the apparent deficit.

The Secretary of State appealed against the decision of His Honour Judge Howarth, who had allowed Mr Burgess’s appeal from a disqualification order made under section 6 of the Company Directors' Disqualification Act 1986. The order followed the district judge’s finding that Mr Burgess had caused Delta Distribution Ltd to trade while insolvent without a reasonable prospect of meeting creditors’ claims.

The district judge’s decisive reasoning relied on insolvency and knowledge of it, without separately addressing the prospect of paying creditors. The central issue was whether that was the correct test and, if not, whether the evidence established the additional requirement.

1. Appeal dismissed. The district judge had applied an incorrect test under section 6 of the Company Directors' Disqualification Act 1986. It was generally necessary to establish both that the company traded while insolvent and that the director knew or ought to have known that there was no reasonable prospect of meeting creditors’ claims.
2. Insolvency and the director’s knowledge of it were insufficient. A company may be balance-sheet insolvent without there being no reasonable prospect of meeting creditors’ claims. The two matters were distinct.
3. On reviewing the evidence, Judge Howarth had been entitled to conclude that the additional requirement was not established. Delta’s under-capitalisation was not decisive. The management accounts were materially affected by the payment of approximately £120,000 of another company’s debts; without those payments, they would have shown a profit of about £70,000. The aged debtors analysis, creditor pressure and absence of substantial evidence of prejudice did not establish that creditors had no reasonable prospect of being paid.
4. It was therefore unreasonable to conclude that Mr Burgess knew or ought to have known, before his dismissal, that there was no reasonable prospect of meeting creditors’ claims. The order of the lower court was upheld, with costs agreed at £7,612.24.

• Court of Appeal (Civil Division): appeal from the order of His Honour Judge Howarth, sitting as a judge of the Chancery Division, dismissed with costs.
• Liverpool County Court: District Judge Sykes made a two-year disqualification order against Mr Burgess under section 6 of the Company Directors' Disqualification Act 1986.