Secretary of State for Business, Innovation & Skills v Doffman & Anor

Under section 6 of the Company Directors Disqualification Act 1986, the court must decide whether the director’s conduct makes him unfit to be concerned in company management. Breach of duty is neither necessary nor sufficient, but a series of breaches benefiting the directors or associated entities may establish unfitness where they show disregard for the separate interests of the companies concerned. Unanimous shareholder consent cannot validate an unlawful distribution or transactions which prejudice creditor interests. A director may also be liable as a de facto or shadow director, but the relevant status must be proved. Disqualification proceedings require fair notice of the case, although the court should avoid an over-technical approach to the formulation of allegations.

The Secretary of State sought disqualification orders against two solicitor-directors under section 6 of the Company Directors Disqualification Act 1986. The application concerned four insolvent property companies and allegations including excessive or improper borrowing, diversion of company assets, unlawful distributions, waiver of inter-company debts, and misleading lenders or valuers.

The defendants denied impropriety and relied, among other matters, on shareholder consent, professional advice, and the absence of direct evidence from certain lenders and valuers. The central issue was whether the proved conduct, considered individually and cumulatively, made either defendant unfit to be concerned in the management of a company.

1. Statutory test. Section 6 required the court to determine whether each defendant’s conduct as a director of insolvent companies made him unfit to be concerned in company management. The matters in Schedule 1 were relevant but non-exhaustive. Breach of duty was neither necessary nor, by itself, sufficient to establish unfitness.
2. Proof and fairness. The Secretary of State bore the burden of proof on the ordinary civil standard. Serious allegations could require cogent evidence because of their inherent improbability in the particular circumstances. A defendant had to receive fair notice and a fair opportunity to answer the allegation, but the court should adopt a broad and practical approach rather than treat the proceedings as a criminal indictment.
3. Company interests and shareholder consent. The Duomatic principle could not validate an unlawful distribution. It did not apply where shareholders had not addressed their minds to the relevant transaction, where the transaction was an unauthorised return of capital, or where creditor interests had become relevant because of insolvency or doubtful solvency. Directors owed duties to each individual company and could not treat companies in a group as interchangeable.
4. Findings. The court found proved: the undervalue option granted by Cindan Southampton; Cindan Littledean’s payment of £1,216,487 and associated borrowing for the Humbrol Site option; Stakefield’s transfer of 70 Mansfield Street to Axelpark Hull at an undervalue; and Stakefield’s waiver of substantial inter-company debts. Other allegations, including several alleged failures to disclose purchase prices, the diversion of £632,000, and the Dunbar fraud allegation, were not proved.
5. Disposition. The proved matters formed a series of breaches benefiting the defendants or associated entities and sharing a common disregard for the separate interests of the companies. Each defendant was therefore unfit, and disqualification orders had to be imposed. The length of the orders was reserved for further submissions.