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

For disqualification under the Company Directors’ Disqualification Act 1986, a person may be a de facto and shadow director without formal appointment. Influence alone is insufficient: the person must perform functions belonging to a director and participate in the company’s governing structure. Holding out or use of the title is relevant but not essential.

A land-banking scheme may be a collective investment scheme where investors seek profit from rezoning an entire site and the operator manages the property as a whole. Contractual form cannot displace practical reality. Unfitness is a fact-sensitive value judgment measured against appropriate standards of probity and competence, assessed cumulatively and with personal responsibility. Improper related-party loans and dividends justified mandatory disqualification.

The Secretary of State sought disqualification orders against six defendants under section 6 of the Company Directors’ Disqualification Act 1986 following the insolvency of UKLI Limited, a land-banking company with a substantial deficiency. The Second to Sixth Defendants gave disqualification undertakings, and the trial proceeded against Mr Chohan alone.

The central issues were whether Mr Chohan, despite not being a de jure director for part of the relevant period, was a de facto or shadow director; whether UKLI’s replacement land-banking scheme was an unauthorised collective investment scheme under the Financial Services and Markets Act 2000; whether he was responsible for improper related-company loans and dividends; and whether that conduct made him unfit, and for what period. The judgment referred to an earlier stage of the proceedings reported at [2012] 1 BCLC 138.

1. Disposition. The court found the statutory requirements for disqualification satisfied and held that a disqualification order was mandatory. Mr Chohan was disqualified for 12 years. Orders accepting undertakings had already been made for the Second to Sixth Defendants.
2. Directorship. Under section 6 of the Company Directors’ Disqualification Act 1986, the Secretary of State had to establish that Mr Chohan was a director of an insolvent company and that his conduct made him unfit. Influence alone did not establish de facto directorship. The person had to perform functions properly dischargeable only by a director and participate in the corporate governing structure in relation to the matters complained of. The question was one of fact and degree. Holding out as a director was relevant but not essential. A person could be both a de facto and a shadow director, and the label or source of power was less important than the nature of the activities.
3. Collective investment scheme. The court examined the substance and practical operation of the Second Scheme. The relevant questions were the object of the investment, how it was to be achieved, what investors had to do, whether the arrangements involved pooling or management of the property as a whole, and whether they fell within section 235. Investors were offered profit from rezoning the whole site, rather than an investment in the land for its own use. UKLI was to deploy its expertise and manage the rezoning process with investor support. The arrangements therefore involved management as a whole. The court expressed no concluded view on the alternative pooling limb, but held that the management limb was sufficient. Individual title, the ability to sell, and the absence of contractual obligations did not alter the scheme’s collectivised substance.
4. Responsibility and unfitness. Mr Chohan knew of the scheme, the Financial Services Authority’s concerns, and the disparity between the theoretical model and its promotion and implementation. Reliance on legal advice did not assist where the factual assumptions underlying the advice were not observed. The unsecured loans to associated companies and dividends dictated by Mr Chohan’s personal loan account were not shown to be in UKLI’s interests. Unfitness was a value judgment measured against standards of probity and competence. Lack of moral probity was unnecessary, ordinary commercial misjudgment alone was insufficient, and the court assessed the conduct individually and cumulatively, including responsibility for supervision and scrutiny.
5. Period. Applying the broad-brush, sliding-scale approach to culpability, and weighing aggravating and mitigating considerations, the court placed the case in the top bracket and fixed the period at 12 years.

First-instance judgment. The judgment refers to an earlier stage of the same proceedings reported at [2012] 1 BCLC 138, but no appellate decision is stated.