Scottish Court of Session Decisions

Petitioner: D Thomson; Burness Paull & Williamsons LLP

Respondent: Logan; Campbell Smith WS LLP

31 May 2013

[1] Her Majesty's Secretary of State for Business, Innovation and Skills (the petitioner) seeks a disqualification order in terms of section 6 of the Company Directors Disqualification Act 1986 in respect of Ferdousi Reza (the respondent). The respondent was a director of Leamington House Ltd (the company), which had its registered office at c/o Begbies Traynor, Third Floor, Finlay House, 10-14 West Nile Street, Glasgow. The company is insolvent and in administration. The company's other directors included Humayan Reza (the respondent's husband). The directors demitted office in August 2009. The petitioner raised proceedings against Mr Reza and another director for disqualification orders under the Act. Mr Reza gave an undertaking in terms of section 7(2A) of the Act for a period of three years. The other director did not oppose the application and Lord Hodge imposed a disqualification order for two years - [2012] CSOH 85.

[2] The principal business of the company was the operation of a nursing home. The day to day financial affairs of the company were controlled by Mr Reza. For the tax years 2008/2009 and 2009/2010 the company failed to remit any payments to HMRC in respect of PAYE and NIC. Its liabilities in that respect amounted to £137,750 or thereby. The respondent knew in principle that the company had an obligation to make payment of PAYE and NIC, however she was unaware as to whether the company had in fact complied with its obligations. The respondent had a series of health problems in the period from 2007 to 2010. Her current state of health is such that she is able to act as a company director.

[3] On behalf of the petitioner, Mr Thomson explained that the disqualification order is sought on the basis that the respondent allowed the company to trade without paying tax. As a director, she was responsible for all aspects of the company's business. She was obliged to acquire and maintain sufficient knowledge of the business to enable her to discharge her duties. However, she failed in those duties. She took no involvement in the company, and left its affairs to her husband.

[4] The evidence given by the respondent and her husband clearly demonstrated that the above criticisms are justified. She was appointed a director when the company was formed in 1991. She described her husband as the driving force behind the company and its principal investor. She "never took an active interest in the running of it." She did not attend company meetings. It was her husband and another director who met and made the business decisions. The company's solicitors recommended that she should be a director since it would allow a more tax efficient way of sharing the profits.

"It was never intended that I should be actively involved in the company's affairs. It was considered helpful that I should be a director, however, as if a document required to be signed, then I was always available to deal with this...However, I do not recollect ever having to sign anything for the company."

[5] Throughout 2007, the respondent was unwell. The problems continued into 2008. She forwarded a letter to Dr Khan dated 3 March 2008. It stated:

"Dear Dr Khan, due to my poor health condition I will not be able to fulfil my obligation to continue my directorship of Leamington House Ltd until further notice."

She also mentioned that she would require to spend time with a relative in India. In the result, because of her ill health she did not travel to India. The company accountant gave advice that it would be better if the respondent did not resign. In addition the Care Commission wanted someone in authority who was regularly available at the care home. The respondent remained in office until 7 August 2009. She explained that after the letter of 3 March 2008, "Nothing really changed and I was not making any business decisions with regard to the company."

[6] Throughout the marriage, the respondent's role has been as a housewife and mother. Mr Reza looked after the business side of things. She was aware that the nursing home was experiencing difficulties and that her husband was stressed. She concentrated on domestic and family duties. The respondent had no knowledge that the company was not paying tax. The home was closed by the Care Commission. Her husband attempted to open a restaurant to provide employment for the catering staff. The restaurant business was unsuccessful. The respondent received no income from the company and did not benefit in any way from being a director.

[7] Mr Reza gave evidence explaining the nature of, and the reasons for the difficulties faced by the company. For present purposes it is unnecessary to recount the detail of this. He confirmed that his wife played no active role in the company. He was the one running the care home on a day to day basis. In 2008 the respondent wished to resign because of ill health, but given that Mr Reza required to travel abroad on a regular basis, it was decided that there was benefit in her being a director in case documents required to be signed. Furthermore, if the Care Commission were to decide to put in emergency staff, they needed to speak to one of the directors more or less immediately. In all her time as a director, Mr Reza could recollect only one document signed by his wife relating to the company. He and another director had accepted responsibility regarding the unfulfilled obligations to HMRC.

[8] In her cross examination the respondent was asked whether at any stage from 1991 onwards she asked the question- have I got any responsibilities as a director? She replied, "No, it was never in my mind- I never thought about all of that." She accepted that her ill health did not bring about any material change in her role in respect of the company. She never asked her husband about tax liabilities or the financial affairs of the company. She allowed her husband to take the decisions.

The submissions for the petitioner

[9] Mr Thomson asked the court to make a disqualification order for a period of two years. The essential conduct giving rise to the petition was not in dispute. The respondent allowed the company to trade without paying the aforesaid tax liabilities. As a director, she was under an obligation to acquire and maintain sufficient knowledge of the business to allow her to discharge her duties. As it was, from 1991 onwards she never had any involvement in the business and asked no questions about its affairs. It never occurred to her that she had any duties as a director. She left everything to her fellow directors, even when difficulties and problems emerged.

[10] Neither her illness, nor the letter of 3 March 2008, would justify the court in refusing to make a disqualification order. Her ill health made no difference to her non-participation in the affairs of the company. It played no causative role in what happened. It neither justifies nor excuses her failures. The "resignation" letter had no material effect. She did not resign until August 2009. In any event no one advised her that she had managed to cast off her responsibilities and duties as a director. The straightforward position is that since 1991 the respondent has done nothing to fulfil her duties as a director. Mr Thomson submitted that the respondent's conduct falls at the lowest end of the scale, hence the invitation to the court to impose a disqualification order limited to a period of two years.

The submissions for the respondent

[11] Mr Logan submitted that the circumstances of the case were not sufficiently serious to justify the court in reaching the conclusion that it was in the public interest that the respondent be disqualified from holding the office of director. There was no apprehension on the part of the directors as a whole that the company was ultimately going to be insolvent until the very end when, after the nursing home had closed, it proved impossible to sell the subjects for what they were genuinely believed to be worth. It was suggested that the test is a high one where incompetence rather than dishonesty is alleged. The respondent was not guilty of any dishonesty. She had no cause to believe that the creditors were not being paid as they fell due, nor that the company was unable to pay its debts in full.

[12] There may be situations where neglect and a failure to act is demonstrably and seriously culpable, for example where the affairs of the company are not being attended to by anyone and assets, which might have been used to pay creditors, are being lost. This is not such a case. The respondent knew that her husband was responsible for the day to day running of the company. She had no reason to believe that he was not attending to its affairs. After 3 March 2008 it was, in effect, agreed that the respondent was required only if and when an additional signatory for the company was needed. The petitioner had not shown the high degree of culpability required to make the respondent a threat to the public.

[13] There is no evidence that the directors took any steps to further their own advantage during the period of the company's difficulties. If there had been a preference given to some creditors ahead of HMRC, the respondent's husband had explained how and why this came about. The company had a responsibility for the care of vulnerable adults. Mr Reza gave priority to that concern. This was the responsibility of Mr Reza, not his wife. She did not direct that some creditors were to be paid in preference to others. If that was unjustifiable, it was her husband's fault. He had already consented to a disqualification order for a period of three years.

[14] In summary, Mr Logan submitted that no public danger would arise from the respondent acting as a director in the future. Her conduct had not made her unfit to be a director. If the company had remained solvent, no harm would have come from the respondent remaining a director in name only. She suffered from ill health in 2008. When the duty to provide protection arose, her health problems came into play. Counsel suggested that it would have been a different matter if the respondent had been acting on her own behalf. For many years, her conduct had posed no threat to anyone. Difficulties arose only latterly. The respondent had no real warning of what was coming until the closure of the home. She thought that the company was being looked after by her fellow directors. It was her husband, not the respondent who decided that the company should not pay tax. In all the circumstances the court should refuse the prayer of the petition. (Various cases were referred to by both counsel, some of which will be mentioned below.)

Decision

[15] Over the whole of her 18 years in office as a director, the respondent failed to carry out even the most basic of her duties. This neglect continued when the company was in difficulties and defaults occurred in respect of tax liabilities. Throughout she abdicated all interest in and responsibility for the company's affairs, leaving them to her husband. To be fair to her, Mr Reza was the driving force, and she was only made a director because of perceived tax advantages, and in case it might be helpful to have a director in the care home and available to sign documents.

[16] Section 6 of the 1986 Act deals with the duty of the court to disqualify unfit directors of insolvent companies. It provides that the court shall make a disqualification order if satisfied that a respondent's conduct as a director of an insolvent company makes that person "unfit to be concerned in the management of a company." I can understand the proposition that, if properly informed as to her duties and responsibilities, there is every prospect that the respondent would be capable of being a director of a company, and of posing little risk to the public. However, that is not how the legislation has been operated in practice. The court must decide whether the director's past conduct "viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence for persons fit to be directors of companies": In re Grayan Ltd [1995] Ch 241, Hoffmann LJ at 253. It was made clear that the court should not shrink from its duty to disqualify a director who has fallen below the required standard.

[17] If someone accepts a directorship and then abdicates all responsibility for the affairs of the company, on any common sense view they have demonstrated unfitness for the office to a high degree.

"A person who knowingly is a director of a company and takes no part whatever in the management of the company, no steps whatever to keep him or herself informed of the affairs of the company and leaves everything to another director who makes the sort of errors Mr Carter made is, in my judgement, unfit in the absence of special circumstances." - In re Park House Properties Ltd [1997] 2 BCLC 530 at 556/7 per Neuberger J.

Mr Logan submitted that there are special circumstances in the present case which suggest that a finding of unfitness should not be made - but I can find none. Counsel placed weight on the respondent's period of ill health, which coincided with the onset of problems for the company. However, it was not the respondent's illness which prevented her from executing her duties as a director. The reality is that she never considered that she had any such duties. This had been the position since she became a director in 1991. For present purposes the respondent's ill health played no causative role. If she had remained healthy, nothing would have changed. Furthermore, there is nothing to suggest that, if she had been mindful of and active in her duties, her illness would have rendered her incapable of maintaining an appropriate level of interest in the business.

[18] It is true that the respondent attempted to resign in March 2008, and Mr Logan placed weight on this. However the respondent was persuaded to remain in office. She was not told that her duties had changed in any respect. If a disqualification order is otherwise appropriate, I see no reason for refusing it because of this episode.

[19] The public interest demands that directors of companies take an active interest in the affairs of the company, and are mindful of their personal responsibilities for the proper running of the business. Part of the court's task is to reflect that public interest and deter others from mistakes such as those made by the respondent. Her case is not one of delegation, but of abdication of responsibility. The current regime relies upon the vigilance and competence of directors, and the case law is clear that incompetence can include inactivity: for example, see In re Barings Plc (No 5) [1999] 1 BCLC 433 at 489 (affirmed [2000] 1 BCLC 523 (CA)). In that decision Jonathan Parker J stressed the duty of directors to acquire sufficient knowledge and understanding of the company's business, and to exercise appropriate supervision of the activities of the company and those responsible for them. These are inescapable personal responsibilities: In re Westmid Packing Services Ltd [1998] 2 All ER 124.

[20] Echoing the conclusion of Neuberger J in In re Park House Ltd, I have decided that, by virtue of sheer inactivity in office as a director of the company, the respondent has been guilty of conduct which makes her unfit to be concerned in the management of a company. That said, there are substantial mitigatory circumstances to be taken into account. Bearing in mind that the respondent was not aware of the defaults of the company, I agree with the petitioner's view that the appropriate period of disqualification is at the bottom of the available range.

[21] At the end of the hearing, Mr Logan indicated that the respondent has no intention of becoming a director of any other company, and that she is prepared to give an undertaking not to accept such office for two years, albeit without any admission of wrongdoing on her part. However, the petitioner insisted in the prayer of the petition. There is a general interest in the public enforcement of the provisions in the Act, not least as an example and a deterrent to others. In all the circumstances I shall impose a disqualification order for a period of two years.