Secretary of State for Trade & Industry v Aviss & Ors

For the purposes of director disqualification, a person may be a de facto director, a shadow director, or both. The court examines the functions actually undertaken and the influence objectively exercised, rather than the individual’s title.

Unfitness may be established where a company is unable to pay its debts, the relevant director knows or ought to know that fact, trading continues, and the continuation increases creditor risk or the company’s deficit and is unreasonable in the circumstances. Diverting the receipts of an insolvent company to support separate companies in which the director is interested is not a reasonable attempt to trade out of insolvency. Each company in a group retains separate legal personality, and directors must act in the interests of the particular company to which they owe duties.

The Secretary of State applied under section 6 of the Company Directors Disqualification Act 1986 for disqualification orders against John Aviss and William Berry. The claim concerned their alleged involvement in the management of Mea Corporation Ltd, Mea Projects Ltd and CJ Bartley & Co Ltd, notwithstanding that Mr Berry had no formal appointment and Mr Aviss was formally appointed only to Mea.

The companies entered insolvency with an aggregate deficiency of nearly £19.5 million. The central issues were whether the defendants were directors in fact or shadow directors, whether they caused or permitted the companies to trade to the detriment of creditors, and what periods of disqualification were appropriate.

1. Jurisdiction and procedural matters. The civil disqualification proceedings were not an abuse of process merely because some of the alleged conduct might also constitute a criminal offence under section 13 of the Company Directors Disqualification Act 1986. The civil jurisdiction protects the public, whereas criminal proceedings punish offending. The application for an adjournment was refused, and the defendants’ evidence was given limited weight because they did not attend for cross-examination.
2. Status as directors. Section 22 (4) of the Company Directors Disqualification Act 1986 extends the jurisdiction to persons occupying the position of director, whatever their title. Applying Re Hydrodam (Corby) Ltd [1994] BCC 161, a de facto director is someone who assumes to act as a director and undertakes functions which could probably be discharged only by a director. The question is what the person did, not what he called himself. The court must consider all relevant factors, including holding out, use of the title, access to information, major decisions and participation in the corporate governing structure.
3. Shadow directors. Under sections 6 (3C) and 22 (5), the inquiry is whether the directors were accustomed to act in accordance with the alleged shadow director’s directions or instructions. Following Secretary of State for Trade and Industry v Deverell [2001] Ch 340, communications and their consequences are assessed objectively. The influence need not extend across every aspect of the company’s affairs, and advice may amount to a direction or instruction. A person may simultaneously be a de facto director and a shadow director.
4. The evidence showed that Mr Aviss and Mr Berry acted together, dictated strategy and controlled the central treasury and payment of creditors. The boards complied with their instructions despite repeated protests. Mr Berry was therefore a shadow director of all three companies, and Mr Aviss was a shadow director of Projects and CJB.
5. Unfitness. The relevant inquiry was whether: the company could not pay its debts as they fell due; the director knew or ought to have known that; trading continued; the deficit increased; creditors faced greater risk; and continuation was unreasonable. The first five matters were established. The decisive matter was the diversion of receipts away from the companies’ businesses to support other companies outside the group in which Mr Aviss had an interest. That was not a reasonable decision for a responsible director.
6. Applying Secretary of State for Trade and Industry v Goldberg [2004] 1 BCLC 597, respect for each company’s separate legal personality and the duty to exercise powers in that company’s interests were essential attributes of fitness. Both defendants failed to respect those principles, causing substantial prejudice to creditors. Mr Berry’s breach of an existing disqualification order was an additional aggravating factor.
7. The appropriate starting point was seven years for each defendant. Mr Aviss was disqualified for seven years. Applying the aggravating principle identified in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, Mr Berry was disqualified for eleven years.