Secretary of State for Business, Innovation & Skills v Pawson

The Secretary of State applied under section 8 of the Company Directors Disqualification Act 1986 for a disqualification order against Mr Pawson for conduct in relation to nine "Recovery" companies. The court held that, taken cumulatively, Mr Pawson's conduct made him unfit to be concerned in the management of a company: he had taken substantial remuneration and repeated legal opinion fees which largely depleted company working capital, adopted and replicated a remuneration package intended for a single company across multiple vehicles without proper justification, and failed to give due regard to the companies' interests. The judge found breaches of director's duties (including failure to promote the success of the companies and conflicts between his personal interest and shareholder interests), lack of probity in repeating a £5,000 legal fee across companies, and manufactured documentary evidence undermining his credibility. Applying the statutory guidance (Schedule 1 to the 1986 Act) and relevant authorities on unfitness and the discretionary nature of section 8, the court exercised its discretion to make an eight year disqualification order.

This was a first instance trial of a claim issued by the Secretary of State (November 2014) under section 8 of the Company Directors Disqualification Act 1986 seeking a disqualification order against Mr Philip Pawson for his conduct as sole or controlling director of nine related companies formed to pursue so-called "recovery" schemes.

Background and parties: The nine companies (all bearing the prefix "Recovery") had a common business model seeking to assemble plot owners to pursue planning-led land value. Judge Pelling had earlier, in December 2011, made winding-up orders against the companies on public interest grounds; that judgment and the investigators' material formed background evidence. The Secretary of State relied principally upon investigator evidence (Mr Fenton) and evidence from the other director (Mr Duggan). Mr Pawson, a chartered accountant and non-practising barrister, defended the claim and gave evidence.

Nature of the relief sought: A disqualification order under section 8 (expedient in the public interest) on grounds that Mr Pawson's conduct, either alone or cumulatively, rendered him unfit to manage a company.

Issues framed by the court:

• Whether Mr Pawson's conduct demonstrated unfitness under section 8 and Schedule 1 to the 1986 Act (including misfeasance, breaches of fiduciary or other duties);
• Whether his conduct amounted to lack of probity and/or incompetence sufficient to justify disqualification; and
• If unfitness established, whether the court should exercise its discretion to disqualify and, if so, for how long (applying the established banding approach).

Evidence and findings: The court found the investigator (Mr Fenton) and Mr Duggan to be credible and largely unchallenged. Key factual findings included that Mr Pawson had received at least £158,000 (possibly £159,250) in salary and opinion fees from the nine companies; that he repeatedly charged a £5,000 legal opinion fee to multiple companies for essentially the same advice; that the companies' working capital was materially used to pay his remuneration rather than to advance the company objectives; and that, although some reduction in salary occurred, it was because funds were insufficient rather than because of genuine consideration of the companies' best interests. The judge found that Mr Pawson had produced a back-dated or manufactured written employment contract after the earlier proceedings, which undermined his credibility.

Court's reasoning and outcome: The court applied the two-stage unfitness inquiry: whether conduct was culpable and, if so, whether it justified a finding of unfitness. Although section 8 gives the court a discretion (unlike section 6), the judge found that Mr Pawson's conduct, cumulatively, fell below standards of probity and competence required of directors. The objective test was applied in respect of Mr Pawson's decision to replicate the remuneration and fee structure across companies; an intelligent and honest director in his position could not reasonably have regarded that as for the companies' benefit. The judge also held that the conduct evidenced lack of probity and, in aspects, dishonesty. Having found unfitness, the court exercised its discretion under section 8 and, applying the middle Sevenoaks banding, imposed an eight year disqualification period. The judgment noted the comparative rarity of section 8 cases (not following insolvency) and explained the qualitative assessment leading to an eight year period.

The court made a disqualification order under section 8 of the Company Directors Disqualification Act 1986 for eight years. The judge found that Mr Pawson's cumulative conduct (excessive and repeated charges to related companies, depletion of working capital to his own benefit, lack of regard to the companies' interests, and manufacture of evidential material) rendered him unfit to be concerned in the management of a company and, exercising the discretionary power under section 8, disqualified him for eight years.