Company—Director—Disqualification

Chancery Division
Robin Knowles QC sitting as a deputy judge of the High Court
7 June 2007

Generally speaking, it is hard to see why a court should need expert evidence in directors’ disqualification proceedings that is simply expert opinion evidence, when it comes to determining whether the conduct of a particular director has fallen short of the standard laid down by previous authority.

Guy Newey QC (instructed by the Treasury Solicitor) for the Secretary of State.
Edward Bannister QC (instructed by Edwin Coe LLP) for the defendants.

The company was an independent financial adviser, regulated by the Financial Services Authority (FSA). In December 2003, it went into administration. In respect of the company and the partnership which it had succeeded, compensation of some £11.9m was paid by the financial services compensation scheme, relating to 1862 claims. The FSA commenced an investigation in June 2003. It found regulatory breaches, including some mis-selling of investment products. The Secretary of State for Trade and Industry brought proceedings in December 2005 seeking disqualification orders against the three respondent directors under s 6 of the Company Directors Disqualification Act 1986 (DDA 1986). It was alleged that each had committed breaches of fiduciary duty by failing to avoid, so far as was reasonably practicable, the mis-selling of structured capital risk products (scarps) which led to the company becoming insolvent. According to the Secretary of State, scarps carried significant risks because of the inflexible nature of the underlying investment vehicles; the respondents disputed that contention. The issue arose as to the role of expert evidence in directors’ disqualification proceedings.

ROBIN KNOWLES QC:

His Lordship considered, inter alia, Re Westmid Packing Services Ltd; Secretary of State for Trade and Industry v Griffiths [1998] 2 All ER 124, [1998] 2 BCLC 646 and Re Barings plc (No 5), Secretary of State for Trade and Industry v Baker (No 5) [2000] 1 BCLC 523.

In his Lordship’s view, the authorities supported the following propositions:
(i) Disqualification proceedings were brought in the public interest.
(ii) Disqualification proceedings were concerned with conduct in a particular context, namely that of conduct as a director owing duties under the Companies Acts and the general law.
(iii) “It is wrong to equate disqualification proceedings with a professional negligence claim. The standard of competence to be shown by a person as a director is a different question and is one of law”: Re Barings (No 5) at [39].
(iv) Whether the standard was met was a question of fact.
(v) The proposition at (3) stood even though the business of the company might be in a specialised market, including a specialised financial market.
(vi) The court was concerned solely with the conduct specified by the Secretary of State under r 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987. It had to decide whether or not that conduct, 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.
(vii) It was important to appreciate that regulatory or other proceedings seen at or around the time of corporate failure might well not involve consideration of issues in the same context as that with which disqualification proceedings were concerned.

Independent expert evidence could play a valuable part in achieving the just determination of some disputes. It was however in the interests of all parties that a correct approach was taken to the admission of expert evidence. Although in the instant case it was the Secretary of State who wished to adduce expert evidence, it could as easily be the directors in another case.
 

In the particular context of proceedings for directors disqualification, the authorities emphasised three things: (i) a practical and flexible approach to case management; (ii) the court would be concerned to confine the evidence to that which was probative, and which was sufficient to enable the court to adopt a broad brush approach; and (iii) only exceptionally could evidence of an expert be admissible on the question whether a respondent had failed to achieve the standard of competence to be shown by a person as a director.
Given the nature of directors’ disqualification proceedings, his Lordship could see that the court might at times need expert assistance on fact from an expert or experts. The court might need an enhanced factual understanding of a complex business product, or to understand why a director’s conduct that might have one appearance or consequence in a general context had a very difference appearance or consequence in the context of managing the specialised business in which that conduct occurred. But generally speaking it was hard to see why a court should need expert evidence that was simply expert opinion evidence, when it came to applying the standard laid down by the courts to the facts.

It was to be observed that (i) there was no express provision within the Disqualification Rules dealing with expert evidence; (ii) where a question of expert evidence did arise, the CPR provisions dealing with expert evidence would apply; (iii) it was within the scheme of the Disqualification Rules for a question or questions requiring expert evidence to be identified at the first hearing of the application and for the court at that stage to give directions for the filing and service of such evidence; and (iv) it followed that expert evidence ultimately used by a claimant in support of the application or that a defendant ultimately wished the court to take into consideration might not have been filed and served by the first hearing of the application.

His Lordship turned to the facts and held that permission would be granted to the Secretary of State to rely on the expert evidence, as confined to the issue of the nature of the scarps in question, and the investment risks they posed.