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

When deciding whether an insolvent company’s director is unfit under section 6 of the Company Directors Disqualification Act 1986, the court must assess the conduct cumulatively, consider any extenuating circumstances, and determine whether it fell below the standards of probity and competence appropriate for a company director.

A prolonged policy of paying other creditors while allowing tax liabilities to accumulate may establish unfitness, particularly where the revenue authority was denied accurate information needed to decide whether to permit deferred payment. The phrase “exceptional circumstances” should be avoided because it risks obscuring the statutory test. The Secretary of State bears the legal burden, although directors relying on informed forbearance must produce evidence of the information supplied.

The appellants were former directors of an insolvent company which had accumulated more than £190,000 in unpaid PAYE and national insurance contributions. The company paid numerous other creditors while making virtually no payments to HM Revenue and Customs. The County Court found that the directors had pursued an unfairly discriminatory payment policy and had supplied seriously misleading or incomplete information about the company’s position.

District Judge Smith made disqualification orders under section 6 of the Company Directors Disqualification Act 1986. Henderson J dismissed the directors’ first appeal in [2011] EWHC 3026 (Ch). On the second appeal, the principal questions were whether the District Judge had misdirected himself by requiring “exceptional circumstances”, wrongly allocated the burden of proof, or reached unsafe findings because of deficiencies in the Secretary of State’s investigation and presentation of the case.

1. Appeal dismissed unanimously. The District Judge was entitled to find both directors unfit and to make disqualification orders. His findings were carefully made, explained and supported by the evidence. Henderson J had correctly declined to disturb them.

2. The governing inquiry under section 6 of the Company Directors Disqualification Act 1986 was whether the directors’ conduct, viewed cumulatively and with any extenuating circumstances, fell below the standards of probity and competence appropriate for persons fit to be company directors. Ordinary statutory language governed that factual assessment.

3. The District Judge had not substituted an erroneous test of “exceptional circumstances”. Read as a whole, his judgment assessed all the evidence, including the directors’ honesty, good faith, commercial expectations, personal losses and pressure. He balanced those matters against the prolonged non-payment, payments to other creditors and directors, and misleading communications with HM Revenue and Customs. Nevertheless, the expression “exceptional circumstances” was better avoided because it could obscure the statutory test. “Extenuating circumstances” was the preferable formulation.

4. The Secretary of State bore the legal burden of proving misconduct and unfitness. An evidential burden could, however, fall on directors seeking to rebut the inference arising from prolonged non-payment by asserting that the revenue authority had knowingly accepted or tolerated the position. Information about contracts and prospects was peculiarly within the company’s knowledge. It was therefore for the directors to produce evidence showing what accurate information had been supplied.

5. The evidence established an unfair policy of paying other creditors while allowing the tax debt to increase, despite the availability of funds from which some payment could have been made. The directors did not provide HM Revenue and Customs with the information required for a fully informed decision about deferred payment. The court did not need to decide precisely what degree of consent or forbearance could exculpate directors.

6. Deficiencies in the Secretary of State’s investigation or presentation did not prevent disqualification where the evidence at trial proved unfitness. Fairness and frankness were required, but procedural remedies were available during the trial. The criticisms made of the Secretary of State did not undermine the factual findings.

7. Once permission for this second appeal had been granted, the court could analyse the evidence as on a first appeal. It nevertheless gave full weight to Henderson J’s appraisal and did not lightly depart from it.

1. Court of Appeal (Civil Division): By [2012] EWCA Civ 739, unanimously dismissed the directors’ second appeal and upheld the disqualification orders.
2. High Court, Chancery Division: Henderson J dismissed the first appeal in [2011] EWHC 3026 (Ch).
3. Manchester County Court: District Judge Smith made disqualification orders under section 6 of the Company Directors Disqualification Act 1986, disqualifying Mr Cathie for two and a half years and Mr Kellar for two years.