The Secretary of State for Business, Innovation and Skills v Akbar & Ors

For disqualification under the Company Directors Disqualification Act 1986, unfitness is a factual value judgment measured against the standards of probity and competence expected of company directors. Ordinary commercial misjudgment is insufficient, but gross incompetence, breach of duty, or failure to supervise may establish unfitness.

Where a company is insolvent, on the brink of insolvency, or faces a serious risk of insolvency, creditors’ interests intrude into the directors’ duty to promote the company’s interests. A distribution removing substantial value for shareholders while leaving creditors exposed may constitute unfit conduct. Disqualification is mandatory once unfitness is established.

The Secretary of State applied under section 6 of the Company Directors Disqualification Act 1986 for disqualification orders against five directors of Mumtaz Food Industries Ltd, subsequently Greentabs Ltd.

The application concerned gold-bullion arrangements which transferred approximately £1 million of value from the company for the principal benefit of one director during a wider corporate reorganisation. The company later entered creditors’ voluntary liquidation with a substantial deficiency. The issues were whether each defendant’s conduct made that defendant unfit to be concerned in the management of a company and, if so, the appropriate period of disqualification.

1. Unfitness. Unfitness is a question of fact and value judgment. The court must assess the director’s personal conduct against the standards of probity and competence expected of a fit director. The statutory factors are not exhaustive. Lack of moral probity is unnecessary, while ordinary commercial misjudgment is insufficient. Incompetence must be substantial, but the court must consider the conduct cumulatively and may apply a broad-brush assessment.
2. Directors’ duties. The duty under section 172 of the Companies Act 2006 is subjective: the issue is whether the director honestly believed that the act promoted the company’s interests. That does not prevent a finding of gross incompetence where the decision was made without proper consideration. When the company is insolvent, on the verge of insolvency, or in a parlous financial position with a serious risk of insolvency, creditors’ interests intrude. Directors must then have regard to creditors as a class.
3. Application. The gold-bullion scheme was in substance a distribution of company value, not principally a tax-saving transaction. The company’s balance sheet showed net liabilities of approximately £300,000 before relevant liabilities were fully taken into account. The directors failed adequately to consider known or reasonably ascertainable liabilities, the prospects of the new management-services business, and the effect of leaving creditors behind while transferring existing businesses and assets. The company was at least on the brink of insolvency and in a parlous financial position. The distribution was not bona fide in the best interests of creditors and, alternatively, was grossly incompetent.
4. Orders. The principal director who arranged and effected the distribution was unfit. Two other directors were unfit because they failed properly to supervise and monitor him. Two nominal directors were unfit because their complete dereliction of duty contributed to the transaction proceeding. Disqualification periods were fixed at six years, three years, three years, two years and two years respectively.

The proceedings were initially struck out in the County Court. The Secretary of State appealed, and His Honour Judge Raeside QC allowed the appeal on 16 November 2016. The proceedings were transferred to the Leeds District Registry and tried in this judgment.