Sec of State for Business Innovation and Skills v Chohan

The court determined that the Secretary of State had established the requirements of section 6 of the Company Directors' Disqualification Act 1986 against the First Defendant, Mr Baljinder (Bally) Chohan. The judge found that Mr Chohan acted as both a de facto and a shadow director of UKLI Ltd in the relevant period and that his conduct made him unfit to be concerned in the management of a company.

The principal legal findings were:

• The Second Scheme operated by UKLI, in the manner it was promoted and implemented, was properly characterised as a collective investment scheme within section 235 of the Financial Services and Markets Act 2000 because investors bought plots with the object of benefiting from an uplift produced by rezoning of the whole sites and UKLI managed that process.
• Mr Chohan was aware of, and participated in, the promotion and operation of the Second Scheme; his resignation as a de jure director did not remove his substantive influence.
• UKLI made substantial unsecured loans to companies connected to Mr Chohan and paid dividends credited to his account at times and in amounts that were not reasonably in the interests of UKLI; those matters weighed heavily in the unfitness assessment.

Applying the statutory test of unfitness (section 9 and Schedule 1 CDDA) and relevant authorities, the court concluded that disqualification was mandatory and fixed the period at 12 years.

This was a first instance disqualification claim brought by the Secretary of State under the Company Directors' Disqualification Act 1986 following the insolvency of UKLI Limited. The Secretary of State sought disqualification orders against six defendants; five gave undertakings and the trial proceeded against the First Defendant, Mr Baljinder Chohan, in his absence.

Background and nature of the application

• UKLI ran land-banking schemes selling small plots of land on large sites on the expectation of rezoning and substantial uplift in value. The company became insolvent and was later liquidated with a very large deficiency.
• The Secretary of State alleged (i) that the Second Scheme was an unauthorised collective investment scheme (CIS) contrary to the Financial Services and Markets Act 2000 (the Land Banking Allegation) and (ii) that Mr Chohan caused UKLI to make substantial unsecured loans to related companies and to permit dividends which were not in the company’s interests (the Loans and Dividends Allegation).
• The relief sought was a disqualification order under section 6 CDDA because Mr Chohan’s conduct as a director/shadow director made him unfit to be concerned in the management of a company.

Issues framed by the court

• Whether the Secretary of State proved that Mr Chohan was a de facto or shadow director during the relevant period.
• Whether the Second Scheme, in the way it was actually promoted and operated, amounted to a CIS within section 235 FSMA.
• Whether the unsecured loans and declared dividends were improper and contrary to the interests of UKLI.
• Whether, taking the matters together, Mr Chohan was unfit within the meaning of the CDDA and, if so, the appropriate period of disqualification.

Court’s reasoning and conclusions

• The judge reviewed the legal tests for de facto and shadow directorship and concluded that the indicia overlap; a person may be both, and the question is ultimately fact sensitive. On the available evidence — contemporaneous emails, witness accounts from UKLI personnel, and the company’s promotion materials — Mr Chohan exercised pervasive influence and was the ultimate directing mind of UKLI notwithstanding his formal resignation for part of the period. He was therefore a de facto and, in other respects, a shadow director.
• On the Land Banking Allegation, the court examined section 235 FSMA and authorities dealing with the concept of a CIS. Looking at substance over form, and the way UKLI actually marketed and operated the Second Scheme (including brochures, seminar and video statements, and internal emails), the judge concluded the arrangements collectivised plots, relied on rezoning promoted and managed by UKLI to generate uplift and sale to developers, and therefore met the management/collectivisation characteristics of a CIS.
• On the Loans and Dividends Allegation the judge accepted that substantial unsecured loans were advanced to companies connected with Mr Chohan and that dividends had been declared/credited in circumstances inconsistent with the company’s financial position. The documentary evidence (auditors’ resignation letter, loan ledgers, administrators’ investigations) indicated that the loans were largely irrecoverable and that dividend credits were used to reduce a directors’ loan account and to meet Mr Chohan’s needs rather than the company’s interests.
• Applying the unfitness test in section 9 CDDA and Schedule 1 and relevant authorities, the judge found Mr Chohan’s cumulative conduct fell below the standards required of those who manage companies with limited liability and made him unfit to be concerned in management. Disqualification was mandatory and, on the facts and culpability, 12 years was the appropriate period.

The judgment also records that five co-defendants gave undertakings so the substantive contested hearing related only to Mr Chohan.

The Secretary of State's claim succeeds. The court found that Mr Baljinder Chohan acted as both a de facto and a shadow director of UKLI and that his conduct (operation and promotion of a collectivised land-banking scheme and causing or allowing improper unsecured loans and dividends) made him unfit to be concerned in the management of a company. A disqualification order under section 6 of the Company Directors' Disqualification Act 1986 was made against Mr Chohan for 12 years.