Official Receiver v Heath & Anor

In director-disqualification proceedings, the question is whether the directors’ actual conduct amounted to unfitness, not whether the transaction could theoretically have been justified. Directors of an insolvent company must scrutinise payments to associated companies and consider the interests of creditors. A hopeful prospect of future solvency does not, without more, justify paying an associated company in full while other creditors remain unpaid. A payment may amount to misconduct where it lacks a contractual or properly assessed restitutionary basis, is authorised without adequate scrutiny, is made to transfer cash for the benefit of another group company, or is made when creditors will not be paid in full.

The Official Receiver brought disqualification proceedings against John Heath and Kenneth Jack Palmer, directors of Telford Insulations Ltd. The company was found to have been insolvent when the directors authorised and paid a management charge of £176,250 to an associated company.

The district judge considered whether the charge was objectively justifiable by reference to historic turnover and management charges. On appeal, His Honour Judge Boggis QC held that there was no clear debt, contract or established basis for the payment and that the directors’ conduct demonstrated unfitness. The applicants sought permission for a second appeal, arguing that the charge was objectively justified, that the company might later become solvent, and that the payment was not alleged to be a preference.

1. Application refused. The applicants had no real prospect of success on a second appeal.
2. The relevant inquiry was whether the directors’ actual conduct constituted misconduct making them unfit to be directors. It was insufficient to ask whether the management charge was potentially capable of objective justification. The court had to examine what the directors actually considered and did when they authorised and made the payment.
3. There was no agreed formula for calculating the charge and no clear contractual basis. At most, the company might have had a restitutionary liability to pay a reasonable sum for services supplied. Establishing that sum would have required proper negotiation and consideration by both companies.
4. The company was insolvent when the payment was authorised and made. The directors’ hope that future contracts would restore solvency was uncertain and did not justify paying the associated company in full while other creditors would remain unpaid.
5. There were several independent bases for finding breach of duty: inadequate scrutiny of the amount; failure to consider the interests of creditors; use of the payment to transfer cash into the associated company’s hands; and making the payment when the company could not pay its creditors in full.
6. The absence of an allegation of preference did not prevent the payment being treated as a breach of duty. If the payment had not been made, the company’s assets would have been increased by £176,000.
7. Lady Justice Arden delivered the judgment. Lord Justice Latham agreed. The application for permission to appeal was refused.

• Court of Appeal (Civil Division): Permission for a second appeal refused.
• High Court, Chancery Division: His Honour Judge Boggis QC allowed the appeal from the district judge and held that the directors’ conduct demonstrated unfitness.
• District judge: The management charge was treated as objectively justified by reference to previous charges and turnover.