The judgment is available at: [2009] EWHC 1796 (Ch)

BML Ltd (the company) was formed in early 1998 for the purpose of acquiring the leisure centre business of BM Ltd (BM). BM was owned and controlled by the defendant director. On 6 August 1998, the company granted C Bank (CB) a debenture to secure its liabilities to it. The principal charged asset within the terms of the debenture was the company's premises at BM (the BM premises). In 1998 and 1999 the company had operated a VAT avoidance scheme on the advice of its accountants. With effect from 1 January 2000, the loophole on the VAT system exploited by that scheme was closed by legislation. The company subsequently became engaged in a complicated new tax avoidance scheme, pursuant to which various transactions were entered into by the company, its associated company, and FD Ltd (FD), a company also owned and controlled by the defendant. Those transactions included, inter alia, a lease dated 3 December 2000, whereby the company leased the BM premises to FD for a period of 51 years at a premium of £900,000 and at a peppercorn rent. The premium of £900,000 under the lease was never paid, and it was clear that the effect of the lease (if valid) was substantially to decrease the value of CB's security. It was also clear that in breach of the terms of the debenture, the consent of CB had not been obtained. On 20 August 2002, CB formally demanded £847,452 from the company, and on 30 August, CB demanded payment of a smaller amount to be paid into the company's current account by 2 September.

The failure by the company to make that payment led, on 6 September, to the appointment by CB of administrative receivers over the company. The defendant took the view that the appointment of the administrative receivers (the receivers) was unlawful on the basis that the lease was invalid. The defendant failed to allow the receivers access to the company's premises until a court order was obtained on 20 September; failed to provide copies of the lease until 19 September; and until 11 November, provided inadequate information to the receivers (the allegations in respect of lack of co-operation). Between 20 March 2003 and 5 April 2003, there was email correspondence between the defendant and an employee of the receivers in relation to the marketing of the company's business and assets. In those emails, the defendant stated that prior to 'the unlawful appointment' of the administrative receivers, offers for the premises at BM were being made at around £2.4m. However, despite repeated requests by the administrative receivers for details of those offers, the defendant failed to provide them (the failure to provide details of the £2.4m offer to purchase the BM premises). In October 2006, the defendant unsuccessfully challenged the validity of the administrative receivers' appointment (see [2006] All ER (D) 376 (Nov)). The Secretary of State applied, pursuant to s 6 of the Company Directors Disqualification Act 1986, for a disqualification order against the defendant in respect of his conduct in relation to the company.

In support of his application, the Secretary of State relied on: (i) the granting of the lease; and (ii) the allegations in respect of lack of co-operation and the failure by the defendant to provide the receivers with the details of the £2.4m offer to purchase the BM premises.

The application would be allowed.

When the court was approaching the question of whether a person was considered to be unfit to be a director of a company, the following propositions had been established by the authorities: (1) the words to be construed were the words of the statute and not judicial paraphrases of them; (2) the court had to decide whether the conduct specified by the Secretary of State, viewed cumulatively and taking into account any extenuating circumstances, had fallen below the standards of probity and competence appropriate for persons fit to be directors of companies; (3) although the standard of proof on the Secretary of State was the civil standard of a balance of probabilities, the more serious the allegation the more the court would require cogent evidence; and (4) the court was entitled to look at individual acts of misconduct and not merely to look at the conduct 'in the round' (see [58] of the judgment).

CB had lent the company in excess of £800,000, the BM premises representing the principal security for the loan. The clauses in the debenture requiring the consent of CB to the granting of leases were perfectly standard clauses and it ought to have been obvious to the defendant that he required CB's consent to the arrangement. It was also obvious that CB would not have consented unless it had appropriate security under the new arrangement. The effect of the leases – if valid – had been to prejudice CB's security. It was common ground that the consent of CB had not been obtained. The defendant asserted that the lease had at all material times been invalid and therefore there had been, in effect, no prejudice to CB's security. Although the defendant had been correct that the lease had not been valid against CB, however, that did not excuse his conduct in entering into the lease without the consent of CB (see [62] of the judgment).

The defendant's conduct in relation to the lease had fallen below the standards of probity and competence appropriate for persons fit to be directors. Although the allegations of non-cooperation were less serious than the allegations relating to the lease, viewing the defendant's conduct cumulatively, his overall conduct in relation to the lease was more than sufficient to merit a disqualification order (see [59], [63],[68] of the judgment).

There would be a disqualification order for five years (see [69] of the judgment).

Sevenoaks Stationers (Retail) Ltd, Re [1991] 3 All ER 578 applied; Grayan Building Services Ltd (in liquidation), Re [1995] 1 BCLC 276 applied; Living Images Ltd, Re [1996] 1 BCLC 348 applied; Secretary of State for Trade and Industry v McTighe (No 2) [1996] 2 BCLC 477 considered