Secretary of State for Business Innovation and Skills v Aaron & Ors

Under section 6 of the Company Directors Disqualification Act 1986, the court must decide as a question of fact whether the director’s conduct, viewed cumulatively and in context, makes him unfit to participate in company management. A director of a regulated company has a duty to take reasonable steps to ensure compliance with regulatory obligations. That duty cannot be avoided by delegating compliance to another person where the director’s role, expertise or involvement makes the failures apparent. Serious mis-selling, inadequate records and deficient corporate governance may together establish unfitness even without dishonesty.

The Secretary of State applied under sections 7 and 6 of the Company Directors Disqualification Act 1986 to disqualify Andrew Cameron Jones and Michael Meyer Aaron. The application concerned their conduct as directors of David M Aaron (Personal Financial Planners) Ltd, a regulated investment business that marketed structured capital at risk products. The alleged failures included inadequate risk assessment, misleading promotional material, unsuitable recommendations, poor record-keeping and ineffective compliance procedures.

David Meyer Aaron had given a disqualification undertaking and did not attend trial. The court considered the admissibility and weight of an FSA investigation report, while excluding other inadmissible material. The central issue was whether the defendants’ conduct, and their responsibility for it in their respective roles, made them unfit to be concerned in the management of a company.

1. Outcome. The court found that the SCARPS had been mis-sold and that both defendants shared responsibility for the mis-selling, inadequate records, failures of corporate governance and DMA’s resulting insolvency. Disqualification under section 6 was mandatory. The length of each disqualification period was left for further submissions.

2. The statutory question was whether each defendant’s conduct as a director made him unfit to be concerned in company management, having regard to all relevant circumstances and the specified matters in Schedule 1. Regulatory breach was not itself the decisive question. The court applied the fact-sensitive approach described in In re Sevenoaks Stationers Ltd [1991] Ch 164 and Re Grayan Limited [1995] Ch 241.

3. A director of an FSMA-authorised company owes the company a duty to take all reasonable steps to ensure compliance with its regulatory obligations. Risk assessments which were wrong did not, viewed alone, establish unfitness because they were not so obviously incompetent that they could not sensibly have been reached. Their significance had to be assessed alongside the way risks were explained, presented and recorded.

4. SCARPS involved complex and potentially substantial capital risks. Direct marketing had to distinguish information, explanation and recommendation, and had to present the product and its risks clearly, fairly and without misleading consumers. The marketing material in issue overstated benefits, understated or technically obscured capital-loss risks, used back-testing in a misleading context and failed to explain the worst-case outcome adequately. The products were therefore mis-sold.

5. The defendants’ roles and expertise determined the scope of their responsibilities. Mr Jones had responsibility for compliance in practice and gave sales priority over compliance. Mr Michael Aaron could not rely on delegation to a competent compliance manager because he was an expert on SCARPS, actively advised clients and had been made aware of compliance concerns. Delegation did not discharge the directors’ duty to remain alert to evident failures.

6. The court rejected the argument that the conduct was limited to a specialist regulatory function and therefore could not establish unfitness to act as a director generally. Under the approach in Re Barings plc (No 5) [1999] 1 BCLC 433, the court assessed the defendants’ competence in the context of their actual management roles. The possibility that they might competently perform another role was relevant to leave or the length of disqualification, not to the existence of unfitness under section 6.

The judgment records that, in an earlier application in the same proceedings, the Court of Appeal ruled that the FSA investigation report was admissible, leaving its weight to be assessed by the judge. No citation for that procedural decision is stated. The present court then determined the disqualification application at first instance.