Secretary of State for Trade & Industry v Swan & Ors

Under section 6 of the Company Directors Disqualification Act 1986, unfitness involves establishing the alleged conduct and deciding whether it falls below the standards expected of a fit director. A finding based on incompetence requires a high degree of incompetence. A director who signs extraordinary, high-value cheques without making the required enquiries may be unfit, even without dishonesty or loss. Non-executive directors must respond decisively and independently to serious allegations of financial impropriety. Retirement or a low risk of repetition does not prevent disqualification, although relevant circumstances may affect its length.

The Secretary of State sought disqualification orders against former directors of Finelist Group Limited and related companies following the Group’s insolvency. The proceedings continued at trial against Christopher Swan, the former chairman and chief executive, and Brian North, a former deputy chairman and audit committee chairman.

The allegations concerned cheque kiting, an inaccurate shareholder circular relating to the disposal of Maccess, and failures to investigate reported financial irregularities. The central issues were whether either defendant knew, or ought to have known, of the cheque-kiting practice and whether the proved conduct made him unfit under section 6 of the Company Directors Disqualification Act 1986.

1. Mr Swan. The court rejected actual knowledge of cheque kiting. It also rejected the case based on the Maccess circular and held that the December 1999 events could not support the alternative case that he ought to have known, because that case had not been clearly advanced before trial and its admission would cause serious injustice.
2. The June cheques were matching cheques for extraordinary sums, substantially exceeding the Group’s materiality level and unsupported by the usual requisition slips. They called for enquiry and explanation. Mr Swan’s failure to make a rigorous enquiry, and his signing of the cheques, established that he ought to have discovered the practice. His conduct was a serious dereliction of duty, although dishonesty, loss and causation of the insolvency were not proved.
3. The court applied the two-stage approach under section 6: first proving the conduct, then assessing whether it was sufficiently serious to amount to unfitness. The conduct fell below the competence expected of a chairman and chief executive of a listed company and justified a four-year disqualification.
4. Mr North. The allegations reported to him included under-declared debt, possible breaches of banking covenants, withholding information from auditors and off-site ledgers. A short meeting with the finance director, without consulting fellow non-executive directors or auditors and without properly questioning the reporting employee, was inadequate. Proper investigation would have disclosed the cheque-kiting practice.
5. Mr North’s failure to act decisively and independently amounted to unfitness. His retirement was irrelevant to whether unfitness was established. The court ordered disqualification periods of four years for Mr Swan and three years for Mr North.