Cathie & Anor v Secretary of State for Business, Innovation and Skills

In directors’ disqualification proceedings, the statutory question is whether specified conduct falls below the standards of probity and competence required of a fit director. There is no separate, universally applicable requirement to establish exceptional circumstances before misconduct can justify a finding of unfitness. The court must evaluate the misconduct cumulatively, taking account of mitigating circumstances. An appellate court should be slow to interfere with a trial judge’s assessment of mixed fact and law, particularly where it depends on oral evidence and demeanour, but may intervene where the primary facts are substantially undisputed and the trial judge was wrong. A director relying on matters within his knowledge may bear an evidential burden of establishing them, although the legal burden remains on the applicant.

Two former directors of Janus Technologies Limited appealed against disqualification orders made by the Manchester County Court under section 6 of the Company Directors Disqualification Act 1986. The company had become insolvent after accumulating substantial PAYE and NIC liabilities. The Secretary of State alleged that the directors had discriminated against HMRC by failing to make payments while continuing to pay other creditors and had failed to provide HMRC with sufficient accurate information to decide whether to allow further time for payment.

The trial judge found misconduct and unfitness, imposing disqualification periods of two years and two years and six months. The appeals raised issues concerning the evidential burden, adverse factual findings, the significance of communications with HMRC, the alleged requirement for exceptional circumstances, and the proper appellate approach.

1. Appeals dismissed. The findings of misconduct and unfitness were upheld. There was no appeal against the periods of disqualification.
2. The statutory legal burden remained on the Secretary of State. However, where directors sought to rebut a prima facie case by relying on matters within their own knowledge, it was in practice necessary for them to satisfy the judge, on the balance of probabilities, that they had supplied HMRC with sufficient accurate information. The judge had not misdirected himself on the evidential burden.
3. The trial judge was entitled to find that the directors had operated a policy of discrimination against HMRC, that free funds had been available, and that HMRC had not received a fully accurate and informed account. The May 2006 letter materially misstated or omitted the directors’ personal payments. Mr Cathie had continued to draw his normal salary, and Mr Kellar had received £11,000 which was not disclosed. The failure to disclose the Daily Mail contract was also a finding open to the judge.
4. The absence of the company’s tax file and of evidence from the relevant HMRC officer did not require adverse inferences. The directors could have sought disclosure or called the officer themselves. There was no monopoly in a potential witness.
5. The reference in Re Structural Concrete Limited to exceptional circumstances was not a separate test applicable in every case. The correct task was the statutory evaluation of whether the misconduct made the directors unfit, taking account of mitigating factors. Any error by the trial judge on this point caused no material prejudice.
6. The conclusion of unfitness was properly open to the trial judge. Although the directors acted honestly, intended eventually to pay creditors, faced commercial pressure and suffered personal losses, those matters did not outweigh the prolonged non-payment, the absence of meaningful payments to HMRC and the materially misleading letter.

• High Court (Chancery Division): appeals against the Manchester County Court’s disqualification orders dismissed.
• Manchester County Court: disqualification orders made against both directors under section 6 of the Company Directors Disqualification Act 1986.