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

This was an application under section 7 of the Company Directors Disqualification Act 1986 to make disqualification orders under section 6. The court found that the second and third defendants, as directors of David M Aaron (Personal Financial Planners) Limited, were responsible for the mis‑selling of Structured Capital at Risk Products (SCARPS), had allowed inadequate compliance and record‑keeping systems to persist, and had permitted marketing material that was not clear, fair and not misleading in breach of the applicable regulatory guidance. The judge considered Schedule I to the Act (Part I paragraph 1 on misfeasance or breach of duty and Part II paragraph 6 on responsibility for causes of insolvency) and concluded that, although there was no dishonesty, the defendants were unfit to be concerned in the management of a company.

This is a first instance High Court application by the Secretary of State under s.7 CDDA seeking disqualification of two directors under s.6 CDDA following DMA's insolvency and regulatory findings arising from sales of SCARPS. The FSA investigated and produced a Report; the Court of Appeal previously held that that Report was admissible in evidence for these proceedings.

The facts: DMA sold a variety of Structured Capital at Risk Products. Many clients brought complaints; the Financial Ombudsman Service upheld some complaints and the FSA issued a Final Notice cancelling DMA's authorisation. DMA suffered significant client claims and a large deficit on insolvency.

The issues the court framed were primarily:

• whether the directors adequately assessed and understood the risks of SCARPS (risk‑rating);
• whether marketing and promotional material and direct mailings were clear, fair and not misleading in accordance with PIA/FSA guidance (RU38, RU85 and the Conduct of Business principles);
• whether individual recommendations were suitable for clients;
• whether record‑keeping and compliance procedures were adequate; and
• whether, in light of their roles, each defendant bore responsibility for the failures identified.

The court considered the statutory test of unfitness under s.6, the Schedule I factors and relevant authorities on competence and scope of a director's responsibilities. The judge accepted there was no dishonesty but held that the defendants had permitted marketing to prioritise sales over clear explanation of impact risk, had inadequate records and compliance monitoring, and had not taken reasonable steps to ensure regulatory compliance. The special roles of the defendants (Jones as investment director and compliance officer in practice; Michael Aaron as technical director and recognised SCARP expert) meant they ought to have been alert to and remedied the failings. The mis‑selling and the accompanying failures were held to have materially contributed to DMA's insolvency. Because disqualification under s.6 is mandatory where the statutory test is met, the court determined that disqualification must follow and directed that further submissions be heard on the appropriate length of the orders.

This is a first instance decision: the court found that the second and third defendants were unfit to be concerned in the management of a company under s.6 Company Directors Disqualification Act 1986 because their conduct (mis‑selling of SCARPS, inadequate compliance and record‑keeping, misleading marketing and failure to take reasonable steps given their roles) made them responsible for failures which materially contributed to DMA's insolvency. There was no finding of dishonesty but the degree of incompetence and abdication of responsibility made disqualification mandatory; the court will hear further submissions on the length of the orders.

Not an appeal; first instance High Court determination. The judgment records that, in an earlier application in this action, the Court of Appeal held that the FSA Investigation Report was admissible in evidence for the disqualification proceedings. The FSA had also issued a Final Notice cancelling DMA's authorisation. No neutral citation for the Court of Appeal decision is given in the judgment.