The Official Receiver v Watson & Anor

Under Company Directors Disqualification Act 1986 s.6, unfitness is assessed in two stages. The court must first establish the facts relied upon and then decide whether the conduct, viewed cumulatively and with relevant extenuating circumstances, falls below the standards of probity and competence expected of a director.

A finance director must actively assess and present the company’s ability to pay dividends. Directors cannot simply acquiesce in financial decisions made by an inner group, particularly where there is no effective delegation or board ratification. Serious incompetence may establish unfitness without dishonesty. Disqualification is mandatory once unfitness is proved.

The Official Receiver sought disqualification orders against former directors of AG (Manchester) Ltd, formerly the Accident Group, under s.6 of the Company Directors Disqualification Act 1986. The company had entered administration and later compulsory liquidation with a substantial deficiency.

The proceedings continued against Michael Watson and Deborah Langford. The issues included whether substantial dividends paid in 2001 were unlawful or imprudent, whether financial decisions had been taken by an unauthorised inner group without proper board involvement, whether an employee benefit trust had been established and operated without board approval, and whether Mr Watson had knowingly or recklessly sent misleading minutes to the auditors.

1. Mr Watson: TAG’s inner group routinely made key financial decisions, including dividend decisions, without effective delegation, prior consideration by the full board or subsequent ratification. Mr Watson knew, or should have known, that this system excluded the board and allowed it to continue. A finance director must assess the company’s ability to pay dividends, inform the board of relevant concerns and refuse to rubber-stamp or acquiesce in inappropriate decisions. If shareholders insist on unaffordable dividends, directors must resign rather than acquiesce.
2. The August 2001 management accounts, issued on 28 September 2001, implemented the changed income-recognition policy and were relevant accounts for Companies Act 1985 s.270. They showed insufficient distributable profits. The £3m dividend paid on 23 October 2001 was therefore unlawful under s.263. The court did not need to decide the wider prudence issue. The evidence did not safely establish that failure to provide fully for swing-premium liabilities or uncertainties surrounding ATE premium recoverability was itself imprudent.
3. The EBT and sub-trusts were artificial tax-planning arrangements, but artificiality did not make them unlawful or sham transactions. The court was inclined to construe the trust restrictions so that a loan was not a prohibited benefit. There was no evidence that Mr Watson intended to defraud the Revenue. His material failing was the absence of proper board approval for using company funds to establish and operate the arrangement.
4. The evidence did not establish to the requisite standard that Mr Watson knowingly or recklessly made the false statement to the auditors. His failure to check the minutes was grossly negligent, but dishonesty was not proved.
5. Applying the principles summarised in Secretary of State for Trade & Industry v Swan (No.2), unfitness involved a two-stage inquiry. Conduct was assessed cumulatively, with relevant contemporary circumstances, against the standards of probity and competence appropriate for company directors. High incompetence was required where dishonesty was not alleged, but breach of duty was not essential.
6. Mr Watson’s acquiescence in the defective governance arrangements, unlawful dividends and unauthorised EBT, together with the financial incentives he received, fell well below the required standards and made him unfit. A disqualification period was inevitable, with its length to be determined after further submissions.
7. Mrs Langford abdicated responsibility for financial and strategic decisions, allowed the inner group to run the company and accepted substantial dividends without ensuring proper board consideration. That conduct amounted to unfitness. She was disqualified for four years.

First-instance decision. No prior appellate decision is stated in the judgment.