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Disqualifying unfit directors

A court had to be very careful when disqualifying a director where its finding of unfitness was based on conduct that did not amount to a breach of any contractual, tortious, statutory or equitable duty to anyone and which was not dishonest.

Mr Justice Lewison so held in the Chancery Division on an application by the claimant, the Secretary of State for Trade and Industry, seeking the disqualification as directors under the Company Directors Disqualification Act 1986 of the defendants, Mark Goldberg and James Flannagan McAvoy, for unfitness within section 6 of that Act.

During the hearing, the Secretary of State accepted a disqualification undertaking from the first defendant and the case proceeded against the second defendant alone.

The second defendant submitted, inter alia:

(i) that a person who was competent, disciplined and honest could not be held unfit to be a director;

(ii) that a director could not be held to be incompetent unless he was in breach of some legal duty to the company and that to be disciplined the director had to comply with the duties laid upon him by statute; and

(iii) that where there had been no such breach of duty, proof of dishonesty was essential.

Mr Guy Newey, QC and Mr Andrew Westwood for the secretary of state; Mr Paul Downes and Miss Krista Lee for Mr McAvoy.

MR JUSTICE LEWISON said, that a disqualification application was a mixed question of law and fact, namely the application of the standard laid down by the courts as conduct appropriate to a person fit to be a director, law, to the facts of the case, facts.

The Court of Appeal held in In re Barings plc (No 5) ([2001] 1 BCLC 523) that a finding of breach of duty was neither necessary nor sufficient for a finding of unfitness and since the allegation in that case was based solely on incompetence, it had to follow that unfitness by reason of incompetence could be established even without proof of a breach of duty.

Furthermore, while it was true to say that in order to be fit to be a director a person had to be honest, it was inconsistent with In re Dawson Print Group Ltd ((1987) 3 BCC 322) to hold that, absent a breach of a legal duty, proof of dishonesty was essential.

Accordingly, the second defendant’s three-fold framework, although attractively and persuasively advanced, did not represent the law.

Time and again judges had emphasised that the court was required to take a broad brush approach. Moreover, competence and discipline overlapped to a considerable extent.

The question for the court was therefore a much broader one and was not confined within the tramlines of the three criteria.

However, the identification of the standard of conduct laid down by the law was important for two reasons.

First, because the question of unfitness could be judged only against an expectation of what was required of a person doing that thing.

Second, because fairness to a director required that he should know what the law expected of him while carrying out his duties.

It was an uncomfortable notion that an honest director could be held to be unfit on account of conduct that, many years later, a judge might consider was a breach of some indefinable standard of commercial morality.

Thus, the court had to be very careful before holding that a director was unfit because of conduct that did not amount to a breach of duty, contractual, tortious, statutory or equitable, to anyone, and which was not dishonest.

His Lordship went on to hold that, on the facts of the case, unfitness had been made out against the second defendant.

The Times: December 2003