Directors of companies who accepted and used customers’ cash deposits to keep trading while pursuing a sale or refinancing of the business and who reasonably believed that the companies would avoid formal insolvency were found not to be unfit under the Company Directors Disqualification Act 1986 s.6.
The secretary of state sought disqualification orders against five former directors of a company (U) and its wholly owned subsidiary (W) under the Company Directors Disqualification Act 1986 s.6. The two companies were retailers of upholstered furniture, trading from nearly 60 stores. The companies were placed in administration in March 2000 with substantial deficiencies as regards creditors such that ordinary unsecured creditors would receive nothing. The secretary of state’s case of unfitness related to the decision of the directors to continue trading after November 1999 and in particular to continue taking customer deposits for furniture which the companies were able to use as working capital. In the period from November 1999 to March 2000 the cash deposits from customers held by the companies increased from approximately £2.1 million to £2.4 million. The secretary of state alleged that the directors traded at the risk of those deposits and wrongly failed to take steps to ensure that customers would receive the goods ordered or a refund in the event that the companies failed to find a buyer or obtain re-financing and ceased to trade. The directors accepted towards the end of 1999 that the group would not trade out of its difficulties and that substantial outside investment or a sale of some or all of the business was necessary at the latest by mid-2000. The directors had taken advice from insolvency practitioners, accountants, lawyers and the groups’ auditors and none of them had advised that the directors were wrong in failing to segregate the deposits or in continuing to trade while there remained the likelihood of an outcome which would see creditors paid in full. Various offers for the business were proposed but subsequently withdrawn because financing was not forthcoming. The companies then went into administration. The overall estimated deficiencies of the two companies were substantially the same at the date they went into administration in March 2000 as they had been in November 1999.
HELD: In the circumstances the defendants had made great efforts to find a corporate solution. The search for that solution was only made possible by continued use of the cash deposits but during that four-month period there was a reasonable prospect of the group avoiding an insolvent liquidation. Ordinarily a director would not be at risk of a finding of unfitness merely because he knowingly allowed the company to trade while insolvent (Secretary of State for Trade & Industry v Taylor & Ors sub nom In Re a Company No. 004803 OF 1996 (1997) 1 WLR 407 applied). Usually the additional ingredient required to show unfitness was that the director knew or ought to have known that there was no reasonable prospect of avoiding insolvency (Secretary of State for Trade and Industry v Creegan & Ors (2001) EWCA Civ 1742, (2001) EWCA Civ 1742 considered). It was not the case that directors could escape a finding of unfitness merely because they had a reasonable belief at the relevant time that the company would escape insolvency but in this case the directors had acted in good faith and there was no marked incompetence or lack of commercial probity. In continuing to trade and accept and use customer deposits the defendants had not rendered themselves unfit. Ceasing to trade in November 1999 would have meant the loss of customer deposits at a time when there was a reasonable prospect of a solution to the group’s difficulties. The defendants sought and received professional advice and all concerned were conscious of the risk to cash-paying customers if no solution was found. The directors were aware of the judgment for defendants.
In the matter of Uno Plc & World of Leather Plc sub nom Secretary of State for Trade & Industry v (1) Michael Gill (2) Elvin Isaacs (3) Michael Douglas Jennings (4) Egon Von Greyerz (4) Alastair Stewart Walmsley (2004).
Ch D (Manchester) (Blackburne J) 30.4.2004