Official Receiver v Stern & Anor

A director of an insolvent company breaches his duty by extracting company money for his private benefit without a corporate purpose. Agreement by the ultimate shareholders cannot authorise or ratify that conduct because the interests of creditors have intruded.

Continuing to trade while insolvent may establish unfitness where the director lacks reasonable grounds for believing that creditors will be paid within a reasonable time. Uncertain future support, negotiations with creditors and the concurrence of other directors provide no answer without a sound evidential basis.

A disqualification period within the top bracket of 10 to 15 years is reserved for particularly serious cases. An appellate court will interfere with the judge’s chosen period only for an error of principle or a plainly wrong assessment.

Mr Stern managed two group management companies, DLM and Westminster. Both traded while insolvent and accumulated substantial Crown debts. He and his son drew more than £1.8 million from their accounts. Westminster also assumed interest payments on a DLM loan which Mr Stern had guaranteed.

Lloyd J found that the drawings, insolvent trading and Diligent Finance transaction established Mr Stern’s unfitness. He imposed a 12-year disqualification order. Mr Stern appealed the findings concerning the trading and Diligent charges and the length of the order. He also sought permission to appeal the drawings findings and to adduce fresh evidence.

The central questions were whether the additional evidence should be admitted, whether the established conduct demonstrated unfitness, and whether 12 years was an excessive disqualification period.

1. Appeal and applications dismissed. The court, delivering a joint judgment to which all three members contributed equally, refused permission to adduce the proposed evidence. Under rule 52.11(2)(b) of the Civil Procedure Rules 1998, the matters reflected in Ladd v Marshall remained relevant to the court’s discretion. Mr Angus had already been available and had testified. Mr Neumann’s evidence could have been sought for trial, lacked specificity on a crucial issue and was unlikely to affect the result.

2. Permission to appeal the drawings findings was refused. A director must act in what the director considers to be the company’s best interests and for a proper corporate purpose. Once a company is insolvent, unanimous shareholder agreement cannot waive or ratify a breach because creditors’ interests intrude. Mr Stern’s private extraction of money from insolvent DLM and Westminster was therefore a breach even if an arrangement with Keristal existed and the drawings were transferred between group accounts.

3. The judge was entitled to find that the drawings were misapplications of corporate funds and unlawful loans. Their amount, Mr Stern’s knowledge of the companies’ insolvency and the absence of any corporate purpose established his unfitness on the drawings charges alone.

4. The appeal on the trading charges was dismissed. DLM and Westminster traded while insolvent, used Crown money and operated through a phoenix arrangement. Negotiations with the Revenue did not excuse that policy. The Revenue had required current liabilities to be paid, and Mr Stern had supplied an overoptimistic and incomplete account. Nor did the alleged confidence of other directors make reliance on uncertain future support from Keristal reasonable.

5. The Diligent charge was also established. Westminster’s assumption of interest on DLM’s loan favoured group and personal interests while Westminster could not pay its own creditors. It was a calculated example of placing liabilities in the insolvent management company and confirmed Mr Stern’s unfitness.

6. The 12-year order stood. The top bracket of 10 to 15 years is reserved for particularly serious cases. The drawings and trading charges each aggravated the other, while the Diligent transaction increased the overall seriousness. Lloyd J committed no error of principle and his assessment was not plainly wrong.

1. Court of Appeal (Civil Division): By [2001] EWCA Civ 1787, dismissed the appeal against the trading and Diligent findings and the 12-year disqualification order. It also dismissed the applications to adduce fresh evidence and for permission to appeal the drawings findings.
2. High Court, Chancery Division: Lloyd J found the drawings, trading and Diligent charges established, held Mr Stern unfit to manage a company and imposed a 12-year disqualification order. No citation is stated in the judgment.