The Secretary of State for Business, Energy And Industrial Strategy v Lummis & Anor

Disqualification under section 6 of the Company Directors Disqualification Act 1986 is mandatory where a director of an insolvent company is unfit to participate in company management. The court assesses the identified conduct cumulatively, taking account of extenuating circumstances. Once directors know, or ought to know, that a company is insolvent or likely to become insolvent, they must have proper regard to creditors’ interests as a whole. This includes contingent creditors. Directors who knowingly strip an insolvent company of assets for their own benefit, without making provision for contingent liabilities, may fall below the standards of probity and competence required of fit directors, even where they are themselves creditors and ordinary creditors are paid in full.

The Secretary of State sought disqualification orders against Lee Edward Lummis and Craig Stanley Lummis, directors of Avacade Limited, under section 6 of the Company Directors Disqualification Act 1986. The company entered liquidation with substantial asserted HMRC liabilities arising from tax schemes whose validity had not been judicially determined.

The alleged unfitness concerned the transfer of the company’s customer database to an associated company and payments of £647,000 to each defendant from pipeline income after the company had ceased trading. The central issues were the defendants’ knowledge of the risk of HMRC liability, the company’s insolvency, the application of the creditor-interest duty, and whether the transactions demonstrated unfitness.

1. Disqualification orders. The defendants’ conduct made them unfit to be concerned in the management of a company. Disqualification was therefore mandatory under section 6(1) of the Company Directors Disqualification Act 1986. The length of the orders was reserved for further submissions.
2. Factual scope. The case was confined to the risk arising from the EDF Scheme. The Qubic Scheme was relevant only as factual context. The company ceased trading on 1 August 2014. From then, the defendants caused the company to transfer its database to an associated company and to pay £647,000 to each of them from pipeline income.
3. Creditor-interest duty. Applying Jetivia SA v Bilta [2016] AC 1 and BTI 2014 LLC v Sequana SA [2019] BCC 631, the defendants owed a duty to have proper regard to the interests of the company’s creditors once they knew or ought to have known that the company was insolvent or likely to become insolvent. The company was insolvent on a balance-sheet basis by 1 August 2014, or at least likely to become insolvent.
4. Contingent creditors. HMRC fell within the relevant class of creditors. Its potential liabilities were provable or deemed provable under Rules 12.3(1) and 13.12(1) of the Insolvency Rules 1986, notwithstanding that the tax schemes’ effectiveness remained unresolved.
5. Assessment of conduct. The defendants knew there was a significant risk that the EDF Scheme would be challenged and produce substantial tax liabilities. They nevertheless diverted company assets and funds for their own benefit, without reserving assets, insuring against the risk, or otherwise making provision for HMRC. Paying ordinary trading creditors in full did not justify preferring themselves over contingent creditors. Their conduct fell below the standards of probity and competence required of fit directors.
6. The Brazil land transaction added little to the case. The court also refused permission to withdraw the defendants’ admission concerning the representative sampling arrangement, applying CPR 14.1(5) and Practice Direction 14, paragraph 7.2.