Determining the period of director disqualification (Secretary of State for Business, Innovation and Skills v Rahman)

31/10/2017

Restructuring and Insolvency analysis: Discussing the judgment in Secretary of State for Business, Innovation and Skills v Rahman, Omar Ensaff, a barrister at No 5 Chambers in Birmingham, points out that the issue of the period of disqualification is very fact-specific.

Original news

Secretary of State for Business, Innovation and Skills v Rahman [2017] EWHC 2468 (Ch), [2017] All ER (D) 83 (Oct)

The appellant Secretary of State (SoS) had alleged that the sole director of a company had failed to ensure the company had complied with the Immigration, Asylum and Nationality Act 2006, with the result that it had been fined £30,000 for employing two illegal workers, resulting in its liquidation. The Companies Court held that the deputy district judge (DDJ) had not erred in making a disqualification order for three years under section 6 of the Company Directors Disqualification Act 1986 (CDDA 1986)—he had been entitled to regard the case as falling in the lower bracket of seriousness. Further, the court, in considering preliminary issues, held, among other things, that appeal decisions, which gave guidance on which bracket of disqualification was appropriate, ought to be followed by an inferior court, and that there should be no difference between the principles applicable to determining the appropriate period for disqualification under CDDA 1986, s 2, and those applicable under CDDA 1986, s 6.

What was the background to the case?

This was an appeal by the SoS from a decision of a DDJ regarding the period of disqualification that the DDJ had ordered pursuant to CDDA 1986, s 6. In short, the DDJ had ordered that Mr Rahman should be disqualified for a period of three years, ie his period of disqualification was in the lower bracket as set out Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, [1991] 3 All ER 578. The SoS thought that period of disqualification was too short and should have been eight years, ie in the middle bracket of disqualification. Accordingly, the appeal was concerned with the period of disqualification.

It should be noted that Mr Rahman took no part in the action, whether before the DDJ or on appeal. However, as is apparent from the appeal judgment, both the DDJ and the High Court dealt with matters in some detail, notwithstanding Mr Rahman’s non-involvement. The other notable feature of the case (in terms of background) is that the conduct which was said to be (and indeed found to be) conduct that made him unfit to be a director was that he had caused the relevant company to employ two illegal workers in breach of immigration legislation. This led to the company being fined £30,000, which was not paid, and the company eventually entering liquidation, with the deficiency as regards creditors being around £48,000.

What were the issues the court had to decide on appeal?

On the face of it, the appeal was concerned with whether the DDJ’s ordered period of disqualification was incorrect. However, the judgment deals at length with four main issues relevant to this, which are touched upon further below.

What did the court decide and why?

In short, the appeal was dismissed and accordingly, the three-year period of disqualification was upheld. There were five grounds of appeal, and all five were rejected as follows:

Ground 1

The period of disqualification did not reflect the seriousness of Mr Rahman’s conduct. This was rejected as the DDJ was entitled, given the factors, to consider that it was a ‘lower bracket’ case, eg it was a single occurrence case. Although the conduct was blameworthy, there was not serious dishonesty, the deficiency as regards creditors was much less than in other more serious cases and there were no aggravating features such as exploitation of vulnerable individuals.

Ground 2

The judge was wrong in holding that where there is no evidence of dishonesty or deliberate misconduct a lower bracket disqualification is appropriate. This was rejected as, when properly read, the DDJ did not actually conclude this— although if he had it would have been a misdirection.

Ground 3

The DDJ erred in considering whether Mr Rahman had taken part in other issues of misconduct, eg trading to the detriment of creditors. This was rejected—the DDJ was entitled to compare the particular misconduct in this case with other examples of misconduct to be able to assess the seriousness of the misconduct in the case.

Ground 4

The DDJ had erred in treating the absence of certain matters (eg breach of fiduciary duty) as mitigating factors. Again, this was rejected, as, when properly read, the DDJ was not really treating them as mitigating factors, but rather factors that went to Mr Rahman’s culpability which is perfectly proper.

Ground 5

The DDJ was wrong in finding that there had been no previous history of irresponsible employment. This was rejected as counsel for the SoS accepted at the appeal there was no evidence of previous irresponsible employment.

To what extent is the judgment helpful in clarifying the law in this area? Are there any remaining grey areas or unresolved issues?

There are four points to take away:

determining the appropriate period of disqualification is (a) a matter of discretion and (b) very fact specific

the principles in Sevenoaks, and Re Westmid Packing Services Ltd (No 3) [1998] 2 All ER 124, [1997] All ER (D) 117, are still good and are to be followed

the Court of Appeal, Criminal Division cases on disqualification under CDDA 1986, s 2, are relevant, eg R v Cadman [2012] EWCA Crim 611 and R v Chandler [2016] EWCA Crim 621—both of which treated the Sevenoaks principles as directly applicable in determining the length of disqualification under CDDA 1986, s 2—though note the final point made further below

the same approach is appropriate for CDDA 1986, ss 2 and 6, and the Sevenoaks principles ought to be applied under CDDA 1986, s 2 as much as under CDDA 1986, s 6—though note the point made immediately below

In respect of the third and fourth points above, reference is made to a point that needs to be noted. The point is this: CDDA 1986, s 12C directs courts (including civil courts exercising the power to disqualify under CDDA 1986, s 2) to the factors determining unfitness in CDDA 1986, Sch 1. However, CDDA 1986, s 12C excludes criminal courts from considering the CDDA 1986, Sch 1 factors. So, possibly, it is only if a civil court is invited to make an order under CDDA 1986, s 2 that CDDA 1986, Sch 1 factors have to be considered in the exercise of its discretion.

CDDA 1986, s 12C was introduced in respect of conduct after 1 October 2015 and so was not relevant to the present appeal (as the conduct pre-dated 1 October 2015). However, the point remains, and this was left open by the court, ie that for conduct after 1 October 2015, the fact that CDDA 1986, Sch 1 applies to orders under CDDA 1986, s 6 and to orders made by civil courts under CDDA 1986, s 2, but not to orders made by a criminal court under CDDA 1986, s 2, this could lead to a difference in approach between the civil and the criminal courts in relation to CDDA 1986, s 2 disqualification periods.

What practical lessons can R&I practitioners take away from this judgment?

Quite simply, and unsurprisingly, the issue of the period of disqualification is very fact-specific and the guidance given in

Sevenoaks and Westmid are still to be followed.

Omar Ensaff has extensive experience in acting for directors in director disqualification proceedings. Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor. This article was first published on Lexis®PSL Restructuring and Insolvency on 31 October 2017.