Company Disqualification Orders: An Individual’s Conduct
When is a director’s conduct sufficient to mean they are unfit to be concerned in the management of a company? In some cases, the evidence is overwhelming – while in other cases, it can be more challenging to prove a case against an individual.
Under 6 of the Company Directors Disqualification Act 1986, a disqualification order can be made where the court is satisfied that the individual
· Is or has been a director of a company which has at any time become insolvent; and
· Their conduct as a director of that company (either taken alone or taken together with one or more other companies or overseas companies) makes them unfit to be concerned in the management of a company.
In a recent case1, the evidence so clearly supported the disqualification of an individual that it’s surprising he defended the application against him.
What’s the background?
Andrew Kelly was sole director and shareholder of a company involved in the wholesale of mobiles phones and camera, which was wound up in 2017.
The Official Receiver sought a disqualification order against Kelly under s6, arguing that he was effectively involved in conduct relating to the fraudulent evasion of VAT via a MTIC fraud, to the tune of almost £1,749,000. The High Court made an order disqualifying Kelly for a 12-year period.
Relevant conduct
The judge pointed out that in considering whether a director's conduct makes them unfit to be concerned in the management of a company, the court is entitled to have regard to the fact that a director cannot simply fail to involve themselves in company affairs and/or fail to monitor, supervise or keep informed of its affairs.
Here, HMRC had previously warned Kelly, as early as January 2003, of the high level of risks associated with his trading activities.
Also, many features of the transactions in which he and the company were involved demonstrated that Kelly was aware that those transactions were connected with fraudulent VAT evasion, or at the very least, he turned a blind eye to it.
The judge found without any doubts that, far from being the target of a vendetta or witch-hunt by HMRC (as Kelly claimed), the evidence was clear. At all the relevant times, he knew of the MTIC fraud, how it operated, what its hallmarks were, and what HMRC suggested was required by way of due diligence in order to minimise the risks of involvement in MTIC fraud.
What does this mean?
In this case, the evidence against Kelly was overwhelmingly, as reflected in the length of the disqualification period. An aggravating factor was the fact Kelly defended the proceedings “without recognising in any way the error of his ways”.
In cases where the evidence may not be so overwhelming (remember, these are civil rather than criminal proceedings) the court must be satisfied on balance that the individual’s conduct is such that they are unfit to act as a company director.
A company or director involved in a s6 case should take specialist legal advice as early as possible.
Official Receiver v Kelly (Re Walmley Ash Ltd and Company Directors Disqualification Act 1986) [2023] EWHC 1181
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