Secretary of State for Business, Innovation & Skills v Pawson

Under section 8 of the Company Directors Disqualification Act 1986, disqualification is discretionary and does not require the company to have become insolvent. The court must decide whether the director’s conduct, viewed cumulatively and with any extenuating circumstances, falls below the standards of probity and competence appropriate for company directors.

Repeatedly applying a remuneration package designed for one company to further companies, without proper regard to their interests or resources, may amount to breach of duty and unfitness. A director’s genuine commercial misjudgment alone is insufficient, but conduct involving serious incompetence, lack of probity or placing personal interests above those of shareholders may justify disqualification.

The Secretary of State sought an order under section 8 of the Company Directors Disqualification Act 1986 against Mr Pawson, arising from his conduct as the controlling director of nine solvent companies operating related land-recovery schemes.

The companies had been wound up on public-interest grounds following a judgment of His Honour Judge Pelling QC dated 21 December 2011. The present claim concerned the alleged exhaustion of company funds through Mr Pawson’s remuneration and repeated legal opinion fees, the resulting failure to advance the companies’ objectives, and the impact on shareholders.

The central issues were whether Mr Pawson was unfit to be concerned in the management of a company and, if so, whether the court should exercise its discretion to disqualify him and for what period.

1. The claim succeeded. The court made an eight-year disqualification order under section 8 of the Company Directors Disqualification Act 1986.

2. Section 8 differs from section 6. Disqualification is not mandatory, insolvency is not required, and there is no statutory minimum period. The court retains a discretion, although refusing to disqualify after unfitness has been established is likely to be unusual.

3. Unfitness is a question of fact. The court must assess whether the director has acted culpably and, if so, whether the conduct justifies a finding that he is unfit. The relevant conduct is assessed cumulatively, including any extenuating circumstances. Schedule 1 provides guidelines but is not exhaustive.

4. The court accepted that the original remuneration arrangement for the first company might not itself have involved breach of duty. Its repeated application to the later companies was materially different. Mr Pawson had given no actual consideration to the interests and resources of those companies. The proper question was therefore objective: whether an intelligent and honest director in the relevant circumstances could reasonably have believed that carrying forward the arrangement benefited the company.

5. The court found that Mr Pawson prioritised his own remuneration, repeatedly charged substantially overlapping legal opinion fees, and failed to preserve resources needed to pursue the companies’ objectives. The conduct went beyond mere commercial misjudgment. It demonstrated lack of probity and integrity, or, alternatively, incompetence to a very high degree, and established unfitness.

6. The case fell within the middle bracket of seriousness. On the qualitative assessment required, the appropriate period of disqualification was eight years.

This was a first-instance claim. The judgment records that the proceedings followed winding-up orders made against the nine companies by His Honour Judge Pelling QC on 21 December 2011.