England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIS HON. JUDGE HOWARTH
LIVERPOOL COUNTY COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		27th November 2001

Sir Martin Nourse.

1. On 4^th July, 2000, in the Liverpool County Court, District Judge Sykes, pursuant to section 6 of the Company Directors' Disqualification Act 1986, made a disqualification order against Brian Anthony Burgess for the minimum period of 2 years. On 8^th December 2000 His Honour Judge Howarth, sitting as a judge of the Chancery Division in Manchester, allowed an appeal by Mr Burgess against the district judge's order and dismissed the proceedings against him. With the permission of Lord Justice Mummery, the Secretary of State for Trade and Industry appeals against Judge Howarth's order and seeks the reinstatement of the order of the district judge.
2. Shortly stated, what happened in the courts below was this. The Secretary of State alleged that the conduct of Mr Burgess and Graham Bernard Stringer, as former directors of an insolvent company called Delta Distribution Limited ("Delta"), made them unfit to be concerned in the management of a company. The basis of the allegation was incompetence. A lack of probity was not alleged. The incompetence alleged was fourfold. Three of the four grounds were rejected by the district judge. But she held that the fourth had been made out. Describing it as the most serious of the four grounds, she stated it as being:

"that the defendants caused the company to trade whilst it was insolvent without a reasonable prospect of meeting creditors' claims."

Mr Stringer did not appeal against her order. In allowing Mr Burgess's appeal, Judge Howarth held that the district judge had applied an incorrect test and that her decision could not be supported on the evidence.

3. The essence of Judge Howarth's decision was expressed as follows:

"At the end of the day I look in vain in the District Judge's judgment for any finding that there has been trading during the period that Mr Burgess was a director which has been trading both with knowledge of insolvency and in circumstances which Mr Burgess either knew or ought to have realised that there was no reasonable prospect of the creditors being paid...... "

It is well established on the authorities that causing a company to trade, first, while it is insolvent and, secondly, without a reasonable prospect of meeting creditors' claims is likely to constitute incompetence of sufficient seriousness to ground a disqualification order. But it is important to emphasise that it will usually be necessary for both elements of that test to be satisfied. In general, it is not enough for the company to have been insolvent and for the director to have known it. It must also be shown that he knew or ought to have known that there was no reasonable prospect of meeting creditors' claims.

4. Being of the opinion that Judge Howarth's reasoning and conclusion were correct, I will deal with the matter as briefly as I can. From the end of June 1996 Mr Burgess was employed as a warehousing manager by a company called BC Home Delivery Limited ("BCH"), which was owned and controlled by Mr and Mrs Peter Creegan. On 28^th March 1997 BCH ceased trading and on 22^nd April 1997 it went into creditors' voluntary liquidation with an estimated deficiency of £1,073.147. Meanwhile, at the end of March or the beginning of April, Delta had been acquired by the Creegans as a £2 company owned and controlled by them and on 3^rd April it started to carry on the same business as had been carried on by BCH. On 11^th April Mr Burgess was appointed to be a director of Delta, taking responsibility for administration, payroll and accounts. On 22^nd September 1997, less than six months later, Mr Burgess was removed by the Creegans from his directorship of Delta. Some ten months after that, on 15^th July 1998, Delta went into creditors' voluntary liquidation with an estimated deficiency of £247,738. Disqualification proceedings were also brought against three other directors of Delta, including Mr and Mrs Creegan. In each of those cases the proceedings were disposed of by way of the Care Craft procedure.
5. It will be apparent from the foregoing that Mr Burgess was a director of Delta for less than six months and that it did not go into liquidation until ten months after he had ceased to be a director. Moreover, it became clear during the argument in this court that it was not until the end of July, when he received from Delta's accountants draft management accounts for the period ending 31^st July 1997, that it can be said that Mr Burgess knew or ought to have known that it was insolvent. Those accounts revealed a net loss between 3^rd April and 31^st July of some £50,000 and a deficit on the balance sheet of a like sum. However, the primary cause of the loss was the payment of some £120,000 in discharging debts of BCH. Mr. Burgess's case was that he had caused those debts to be paid in order to ensure continuity of supply by those who had supplied BCH. He stopped paying them when, in June 1997, he was told by the liquidator of BCH not to pay them. As a matter of simple arithmetic, if the £120,000 had not been paid out, the accounts would have shown a profit of £70,000 in place of the loss of £50,000.
6. The district judge made the following principal findings: first, that Mr Burgess was aware of the acceptance by Delta of some of BCH's indebtedness; second, that Mr. Burgess was aware, or ought to have been aware, that Delta was seriously under-capitalised; third, that it was clear to Mr Burgess by the end of July 1997 that Delta was insolvent on paper. Having stated that there was no suggestion of any want of probity and that the question was whether or not the incompetence of Mr Burgess and Mr Stringer was such that they should be considered unfit to manage a company as a director, she continued:

"I look in mitigation at what they did. Mr Burgess had draft accounts drawn. He contacted the bank and DTI. He prepared to but did not actually invest his own capital. Mr Stringer concerned himself with trying to get in as much money as he could for the business and make it work. Both men had, in my judgment, an honest belief that they could turn the company around and were working hard to do so, but in my judgment, given Mr. Burgess' severe reservations about the nature of previous management and the involvement of the same characters in Delta, and bearing in mind that both directors accepted the previous company's indebtedness, both failed to inject capital into the business and both knew, or ought to have known, that the company was insolvent by July, 1997, is evidence of unfitness to act as directors...... I am satisfied that the claimant has established that both directors caused the company to trade whilst insolvent and that that ground is established and shows that they were unfit to act as directors. "

7. It is to be noted that whereas she had, earlier in her judgment, correctly stated the two elements of the material test, in that decisive passage the district judge makes no reference to the requirement that there should be no reasonable prospect of meeting creditors' claims. Her decision was based only on Delta's insolvency, and the directors knowledge of it, by July 1997. However, it does not at all follow that because a company is insolvent, especially when the insolvency appears only on the face of the balance sheet and does not reside in an inability to pay debts as they fall due, there is no reasonable prospect of meeting creditors' claims. The two things are quite different. I therefore agree with Judge Howarth that the district judge applied an incorrect test.
8. That, however, is not an end of the matter. It is still necessary to ask whether the evidence established that there was no reasonable prospect of meeting creditors' claims. In conducting that inquiry Judge Howarth considered the evidence in greater detail than did the district judge. He agreed that Delta was hopelessly under-capitalised, though he pointed out that that in itself was not a decisive factor. He examined the draft management accounts and referred to the payment of £120,000 worth of BCH's debts and to the £70,000 profit which would have been shown if they had not been paid. He also examined the aged debtors analysis and concluded that that in itself did not demonstrate that there was no reasonable prospect of creditors' claims being paid. He then considered a number of other matters, observing on the way that the creditor pressure was of a very gentle sort and that there was precious little evidence of prejudice to anybody. He read from a letter dated 18^th September 1997 from Delta's accountants to its bank, with which copies of the draft management accounts and the aged debtors and creditors analyses were enclosed and in which reference was made to the debts of £120,000 taken over from BCH. The letter said: "This would imply that the real profitability of the business is approximately £70,000". The judge thought that that letter could be relied on far more heavily by Mr Burgess than by anybody else.
9. It was after that review of the evidence that the judge expressed himself in the terms I have already read. He added that it seemed to him wholly impossible, in the light of the evidence, to conclude that Mr Burgess's conduct as a director of Delta was such as to make him unfit to be concerned in the management of a company. I entirely agree. Reduced to its essentials, the argument of Mr Halliwell, for the Secretary of State, necessarily supposes that, after considering the draft management accounts at the end of July 1997, Mr Burgess ought either to have seen to it that further capital was injected, whether by the Creegans or by himself, or to have resigned as a director. I cannot accept that as a sensible view of the position. In the light of the considerations stated by Judge Howarth, it cannot reasonably be said that either at the end of July or at any other time before his dismissal on 22^nd September Mr Burgess knew or ought to have known that there was no reasonable prospect of meeting creditors' claims.
10. For these reasons I would dismiss this appeal.

Lord Justice Potter:

11. I agree.

Lord Justice Ward:

12. I also agree.

Order: Appeal dismissed with costs agreed in the sum of £7,612.24.

(Order does not form part of approved judgment)