ES Manufacturing Ltd, Re

For the purposes of director disqualification, unfitness is assessed by applying the statutory words to the director’s actual conduct, role, duties and responsibilities. Ordinary commercial misjudgment is insufficient, but marked incompetence or negligence may establish unfitness even without dishonesty.

Directors must maintain sufficient knowledge of the company’s business and supervise delegated functions. A system which permits goods subject to hire purchase to be sold before the finance is discharged, leaving the company unable to account for or recover them, may amount to gross incompetence and reckless disregard of lenders’ rights. Difficulties obtaining insurance do not by themselves establish reckless conduct where reasonable efforts were made and no uninsured loss was proved.

The Secretary of State for Business and Trade sought orders under section 6 of the Company Directors Disqualification Act 1986 against Helen James, Christopher James and Nigel James, directors of ES Manufacturing Ltd.

The claim alleged failures concerning equipment acquired under hire purchase agreements, including loss of possession and control, inadequate stock-control systems, failure to insure equipment, and the sale and hire purchase back of assets subject to a lender’s debenture. The central issues were whether the conduct made each defendant unfit to be concerned in company management and, if so, the appropriate disqualification periods.

1. Unfitness. The court applied the statutory test in section 6 of the Company Directors Disqualification Act 1986. The relevant conduct had to be assessed in its setting, by reference to the role actually undertaken and the duties and responsibilities attached to it. The standard of competence remained universal, but its application was fact-sensitive.
2. Hire purchase equipment. The Secretary of State proved that, save for the withdrawn robot allegations, the equipment in the remaining categories was missing and that the Company had lost possession and control contrary to the hire purchase agreements. The defendants knew, or ought to have known, the relevant contractual restrictions.
3. The IT issue did not provide an excuse. On the defendants’ own evidence, the Company’s business model generally involved selling goods still owned by finance companies and paying off the finance afterwards. That arrangement operated back-to-front and exposed lenders to contractual and commercial risk. The directors had failed to ensure adequate systems for recording financed assets and tracking their disposal.
4. The conduct of Helen, Christopher and Nigel under this ground amounted to gross incompetence and reckless disregard of lenders’ rights, although it did not involve dishonesty. Christopher’s illness did not affect responsibility because the relevant conduct predated it.
5. Insurance. The failure to maintain insurance breached the hire purchase agreements, but was not proved to be reckless. The evidence showed efforts to obtain insurance and improve site security, and no consequent uninsured loss was alleged.
6. Debenture sales. Helen and Christopher were unfit in respect of the sale and hire purchase back agreements. They dealt with assets subject to BLME’s debenture without specific permission and signed warranties that no third-party interests or encumbrances existed. Their lack of understanding of the debenture’s negative pledge was itself a serious failure by directors dealing in financed equipment.
7. Unfitness was established against all three defendants. Eight-year disqualification periods were indicated for Helen and Christopher, and a four-year period for Nigel, subject to consequential submissions and orders.