The Secretary of State for Business Energy and Industrial Stategy v Broadstock & Ors

For the purposes of director disqualification, the court must assess each director’s conduct as a whole, cumulatively and in context. A director may delegate responsibilities, but cannot wholly abrogate responsibility or knowingly remain associated with serious misconduct. Mere failure to resign does not automatically establish unfitness. The court must consider the director’s knowledge, explanation, attempts to remedy the misconduct and the results achieved.

Where directors know, or ought to know, that a company is using client monies or trust monies to meet its own financial needs, continued office without effective investigation or remedial action may fall below the standards of probity and competence required of a fit director. Serious misuse of client funds while the company is insolvent or nearly insolvent justified substantial disqualification periods.

The Secretary of State sought disqualification orders under section 6 of the Company Directors Disqualification Act 1986 against two former directors of Smooth Financial Consultants Limited, an insolvent company providing debt management services. Client monies were held in a separate account for distribution to creditors, but substantial sums were transferred to the company’s ordinary business account and creditor payments were delayed or withheld.

The claim against a third director was discontinued after he gave a ten-year disqualification undertaking. The trial therefore concerned Mrs Broadstock and Mr Jones. The central issues were whether their conduct as directors made them unfit and, if so, the appropriate periods of disqualification.

1. Unfitness. Section 6(1) of the Company Directors Disqualification Act 1986 required the court to determine whether the conduct relied upon, viewed cumulatively and with any extenuating circumstances, fell below the standards of probity and competence appropriate for fit company directors. The court applied the approach in Re Grayan Building Services Limited [1995] Ch 241.
2. Directors’ responsibilities. Individual directors owe duties to inform themselves about the company’s affairs and to supervise and control them. Delegation and division of responsibility are permissible, but total abrogation of responsibility is not. A board must not allow one individual to dominate it. The court applied the principles in Re Westmid Packing Services, Secretary of State for Trade and Industry v Griffiths [1998] 2 BCLC 646 and Re Park House Properties [1997] 2 BCLC 530.
3. Failure to resign. It did not automatically follow that a director who failed to resign was unfit. The court had to assess the whole conduct of the director, including whether the director knew of the inappropriate activity, attempted to bring it to an end, what was achieved or intended, and the explanation for remaining in office. The court relied on Secretary of State v Taylor [1997] 1 WLR 407 and declined to adopt any absolute rule suggested by the passage quoted from Secretary of State for Trade and Industry v Arif [1997] 1 BCLC 34.
4. Application. Mrs Broadstock knew, or ought to have known, that client monies were being misused and that client creditors were not being paid promptly. By remaining a director without investigating, preventing the misuse or exploring available remedies, her conduct fell below the required standards and made her unfit. Mr Jones, appointed as finance director to address the accounting problems, knew or ought to have known of the substantial shortfall. He failed to introduce effective controls or stop transfers from the Client Account, and remained in office while the misuse continued. His conduct likewise made him unfit.
5. Periods. Applying the three-bracket approach in Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164, the misconduct fell within the middle bracket. Mrs Broadstock was disqualified for eight years and Mr Jones for seven years.

Not stated in the judgment.