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

For the purposes of disqualification under Company Directors Disqualification Act 1986, the court must decide whether the director’s conduct, assessed on the balance of probabilities, makes the director unfit to be concerned in company management. The matters in Schedule 1 are important but not exhaustive. Each allegation must be assessed on its merits, and the court must avoid hindsight. Deliberately misleading accounts concerning material company debts, together with deliberate under-declaration of VAT to preserve cash flow and prefer other creditors, may establish unfitness. Directors cannot avoid responsibility by attributing financial misconduct to employees where the evidence shows that they knew of, directed or failed properly to supervise it.

The Secretary of State sought disqualification orders against Frederick Geraint Hawkes and Janis Hawkes under section 6 of the Company Directors Disqualification Act 1986. The defendants were the directors of F G Hawkes (Western) Limited, which entered administration on 3 October 2011.

The allegations concerned materially misleading accounts relating to debts owed by associated companies, deliberate under-declarations of VAT totalling approximately £1.5 million, and breaches of an invoice-discounting agreement with Barclays Sales Finance. The central issue was whether the defendants’ conduct made each of them unfit to be concerned in the management of a company.

1. Disqualification. The court found both defendants unfit and ordered their disqualification under section 6. The length of each order was reserved for further submissions.
2. Applicable approach. The claimant bore the burden of proof, assessed on the balance of probabilities. There was no rule requiring more cogent evidence merely because an allegation was serious, although the evidence had to be sufficient when viewed as a whole. The matters in Schedule 1 were not exhaustive. Each allegation had to be assessed on its merits, while avoiding hindsight.
3. Misleading accounts. The accounts and representations materially misrepresented the position concerning loans to Neath Rugby Limited. The loans were not intended to be called in, and the Asset Purchase Agreement had transferred, or purported to transfer, the relevant debt to another company whose ability to repay was doubtful. The accounts also omitted material facts concerning Amadora Co Limited’s insolvency-related status, thereby making the debt and guarantee doubtful. The omissions were deliberate and intended to present a falsely improved financial position to third parties.
4. VAT returns. The under-declarations were deliberate measures to preserve cash flow and enable continued trading. The directors knew of and directed the policy. It used deception to prefer trade creditors to HMRC. The conduct was aggravated by continued payments supporting associated companies while HMRC was being misled.
5. Invoice discounting. The evidence established awareness of rebate arrangements, but did not reliably establish unfitness arising from them. The evidence was insufficient to prove the alleged bill-and-hold arrangements or that the contra-trading matters demonstrated unfitness.