Official Receiver v Obaigbena

For the purposes of Company Directors Disqualification Act 1986, unfitness is determined by evaluating the director’s conduct against proper standards of probity and competence. Ordinary commercial misjudgment alone is insufficient, but continued trading while insolvent may constitute unfitness where there is no reasonable prospect of paying creditors or avoiding insolvent liquidation. A director cannot justify continued trading merely by believing that external funding will eventually become available. The belief must have a rational evidential basis. Agreements extending payment terms do not extinguish liabilities or cure continuing uncertainty. Where continued trading increases creditors’ losses, the court may impose a substantial disqualification even without dishonesty.

The Official Receiver applied under section 6 of the Company Directors Disqualification Act 1986 for the disqualification of Mr Nduka Obaigbena, the former sole director of Arise Networks Ltd. The company had been compulsorily wound up after continuing to trade while insolvent and dependent on uncertain funding from associated Nigerian companies. From December 2014, it incurred increasing liabilities despite having no trading revenue, no reliable indication that currency restrictions would be lifted, and mounting creditor arrears.

The central issue was whether Mr Obaigbena’s decision to continue trading demonstrated unfitness because there was no reasonable prospect of creditors being paid or the company avoiding insolvent liquidation.

1. Unfitness. The application under section 6 of the Company Directors Disqualification Act 1986 succeeded. Unfitness is a mixed question of fact and law, requiring the court to determine the primary facts and then assess whether the conduct amounted to a serious failure to perform the duties attendant on trading with limited liability. No further refinement of the established test was necessary. ([5]-[9])
2. Reasonable prospect. The company was insolvent, generated no revenue, relied entirely on external loans, and incurred increasing liabilities. Mr Obaigbena’s belief that funds would eventually be released from Nigeria was unsupported by evidence as to when funds would become available or in what amount. A firm conviction that funding will arrive is not the same as a reasonable prospect of payment. ([36]-[50])
3. Creditor interests. Continued trading increased liabilities and exposed creditors to further loss. Payments to some creditors, alleged agreements to extend payment terms, and efforts to obtain funding did not provide a defence. Payment extensions did not extinguish liabilities, and uncertainty remained unresolved. The director’s conduct therefore amounted to trading to the detriment of creditors with no reasonable prospect of payment or avoidance of liquidation. ([42]-[51])
4. Disqualification period. Applying the three-bracket guidance in Re Sevenoaks Stationers (Retail) Ltd, and having regard to the seriousness, duration and financial consequences of the conduct, the case fell within the middle bracket. The absence of dishonesty did not materially reduce its seriousness. A seven-year disqualification order was appropriate. ([52]-[57])