The Secretary of State for Business, Energy & Industrial Strategy v Zannetou (Re: Ixoyc Anesis (2014) Ltd)

Under section 6 of the Company Directors Disqualification Act 1986, persistent unfair discrimination between creditors may establish unfitness even without dishonesty, fraud or a fixed intention never to pay the disadvantaged creditor.

The court must assess the director’s conduct cumulatively, taking account of extenuating circumstances and the standards of probity and competence expected of company directors. Mere non-payment of VAT or PAYE, or the use of those funds in trading, is not by itself sufficient. A prolonged policy of paying pressing trade creditors while allowing HMRC liabilities to accumulate will normally justify disqualification, although genuinely exceptional circumstances may prevent that conclusion.

The Secretary of State applied under section 6 of the Company Directors Disqualification Act 1986 for an order against Damien Lee Andre Zannetou, the sole director of Ixoyc Anesis (2014) Ltd.

The company became insolvent and entered voluntary liquidation with substantial unpaid VAT and PAYE liabilities. It had continued paying other creditors while HMRC liabilities accumulated. Mr Zannetou relied on personal and family difficulties, professional reliance, attempts to negotiate time to pay, and his belief that the company might trade out of insolvency.

The court had to decide whether his conduct made him unfit to be concerned in the management of a company and, if so, the appropriate period of disqualification.

1. Unfitness. The court held that the company had, throughout its 17-month trading life, operated a policy of paying creditors who pressed for payment or whose payment was needed to keep the business trading, while HMRC was treated less favourably. The policy was conscious in the relevant sense, even though it was not pre-planned and arose from financial difficulties.
2. The court applied the approach in Re Grayan Building Services Ltd (in liq.) and Cathie v Secretary of State for Business, Innovation and Skills (No 2). Conduct must be viewed cumulatively, with all extenuating circumstances considered, and assessed against the standards of probity and competence appropriate for fit company directors. The use of the phrase exceptional circumstances is best avoided, although circumstances capable of preventing a finding of unfitness will be rare in a prolonged unfair-discrimination case.
3. Dishonesty is not required. Mere use of VAT and PAYE money to finance trading is insufficient by itself, because the law must leave room for legitimate business enterprise. However, prolonged unfair discrimination between creditors, coupled with marked incompetence or negligence and trading at the expense and jeopardy of HMRC, may satisfy the statutory test.
4. Mr Zannetou’s bereavements, family difficulties, reliance on others, partial engagement with HMRC, payments under the time to pay agreement and intention ultimately to pay were relevant mitigating matters. They did not excuse the continuing policy, particularly before and after the period of acute personal disruption.
5. The statutory conditions were satisfied and a disqualification order was mandatory. Determination of the period was adjourned. The case fell within the lowest bracket identified in Re Sevenoaks Stationers (Retail) Ltd, namely two to five years. Costs and the form of order were left for later determination.