Overview Of How To Obtain Permission To Be A Director When Disqualified
Falodun v Secretary of State for Business, Energy and Industrial Strategy [2023] EWHC 182 (Ch) was a case brought by Francis Falodun (“FF”) under Section 17 of the Company Director Disqualification Act 1986 for permission to be a Director when disqualified. FF was not successful at this stage.
It is a useful case to highlight that a Director who seeks permission to act when disqualified will need to grapple in detail with what went wrong in the past, why it went wrong, why they were in difficulty preventing that position and what changes they intend to make in the new company which will minimise the risk of it arising again.
Applications for permission to act as a Director when subject to a disqualification order or undertaking are likely to be an uphill struggle.
A feature in this case that the Court was seemingly nervous about was a bookkeeper of the new company who had been promoted to the position of Director was put forward in the evidence as part of enhanced financial control and stewardship. However, the Court became alive to the fact that this individual was also the bookkeeper for the previous company that went into Liquidation at a time when compliance issues arose. The Court ventilated its concern notably as follows:
It is a surprise to read of Mr McDonald’s previous role with Switch bearing in mind there has been no mention of it by Mr Falodun despite the obvious importance of Mr McDonald to assure the court that the misconduct will not reoccur if permission if given for Mr Falodun to be a director of V1CE Limited. In addition, the Particulars were not addressed in the second affidavit. At the beginning of the hearing on 19 October 2022, I raised my pre-reading impression that there was insufficient evidence from Mr Falodun concerning the reasons for the record keeping deficiencies identified by the Grounds and Particulars of undertaking. In addition that there was no information to demonstrate that he had taken any or any reasonable steps to resolve the problems incurred by the Official Receiver when carrying out statutory duties.
The Court highlighted this as a non-disclosure issue against the backdrop of an application that necessarily warranted a duty of candour.
The Background
FF gave a Director’s Disqualification Undertaking on 28 March 2022 which was to last for around 5 years. The Undertaking was triggered by a failure to keep adequate accounting records for Switch Leisure Limited (“Switch”) which went into Compulsory Liquidation. In the alternative, had FF kept such records they had not been delivered up. It appears the record’s position hampered the preparation of annual accounts by accountants. Switch had liabilities of £837,487.71 and assets of around £4,000 at the point of Liquidation.
The Court highlighted the serious nature of a breach of the requirement to comply with keeping company records.
FF then became involved in the company V1CE Limited. Initially, he intended to be only an employee but later found that impractical due to his importance.
In relation to the demise of Switch, the Court summarised FF’s position:
Mr Falodun concludes by stating that he has learnt his lesson but he has not sought to explain how the misconduct occurred in the context of what he did or did not do and why he did or did not do it.
Looking at how Insolvency and Companies Court Judge Jones scrutinised the evidence of FF, in particular, you can see that he wanted to see not just a recitals evidencing recognition as to what happened in the case of Switch but what was done to attempt to deal with the problems that arose and or why FF was unable to do so.
Secretary Of State’s Observations
The Secretary of State observed that Mr McDonald was the bookkeeper for Switch during the period in which it did not keep adequate records and had not fully cooperated with requests for information sought by the Secretary of State when it was investigating the affairs of Switch.
Tests For The Court To Grant Permission To Act When Disqualified
Guidance has been provided by the case of Rwamba v Secretary of State for Business, Energy, and Industrial Strategy [2020] EWHC 2778 (Ch), [2021] BCC 184 as to how the Court is likely to look at applications for permission act as a Director when disqualified as follows:
- The Court has discretion.
- The onus is on the applicant to persuade the Court.
- The Court decides if permission is granted; not the Secretary of State.
- The applicant does not have to show the need for them to be a Director.
- The gravity of the historic unfitness is relevant as a consideration.
- The Court should consider matters of public protection and deterrence.
- Permission should not be provided too readily to maintain the integrity of the disqualification regime.
In assessing FF’s evidence it seems the Court did not consider an adequate explanation for the records position of Switch had been provided:
Mr Falodun’s first affidavit was stated to have been produced within a relatively short timescale. Nevertheless, it is surprising that he did not address the causes of the Grounds whether with direct reference to the Particulars or otherwise. At paragraph 19 he merely states, in one sentence, the fact of the undertaking and the grounds for it. The earlier reference to trading difficulties and a high turnover of staff may explain Switch’s insolvency but not the failure to keep adequate accounting records. This causes concern not only because of non-disclosure but also because the court cannot properly assess the risk to the public of his appointment as a director of V1CE Limited, and carry out the balancing exercise without understanding the original misconduct and ensuring he appreciated what was required to avoid its reoccurrence.
Mr Falodun also makes no reference to the fact that Mr McDonald was the bookkeeper of Switch or address (as a result) why that fact does not affect the conclusion that the court can rely upon Mr McDonald’s qualification, experience and involvement as bookkeeper of V1CE Limited. This has the potential for being serious non-disclosure in the context of a request for an interim order of permission to act.
In addition, Mr Falodun did not appear to be apologetic or repentant. His focus was upon the fact that he now had a successful company, and it required him to be involved in its management. Whilst that is obviously of great importance to this application, it is clearly not the “be all and end all”.
Mr Falodun had the opportunity to correct matters in his second affidavit. However, whilst he identifies underlying causes for the failure to keep adequate records (receipt and payments of cash) he does not refer to either what he did to try to address those causes (including any resulting problems) or to the reasons why he did not address (or try to address) the problems when carrying out monitoring and supervision of the business’s operations to ensure compliance with a statutory duty to keep adequate accounting records.
He does not address the absence of information/explanation for: the payments totalling £2,875,461 and £2,875,871 referred to within the undertaking; the payments of £300,240.50 made from the bank account to three associated companies controlled by the same directors or those received from 4 associated companies of £247,265.70; why payments appear to have been made in respect of expenses incurred by associate companies; the true amount due for the directors’ loan accounts and due for VAT and PAYE; or specifically, the substantial deficiency of £833,587.71 (“the Missing Topics”).
He does not address implementation of the conditions offered, whether by linking them to the relevant conduct which gave rise to the disqualification undertaking or by demonstrating through his factual evidence that the conditions will in practice, with reference to the operations of V1CE Limited, extinguish or sufficiently minimise the risk to the public of reoccurrence of the misconduct.
There is also some concern that there is reference to limited board minutes having been kept whilst his brother was the sole director. The concern being the reliability of those around Mr Falodun to ensure he will comply with his duties as a director.
Mr Falodun still makes no reference to the fact that Mr McDonald was also the bookkeeper of Switch despite the observations of the Secretary of State. The same omission continues to apply to his brother’s evidence and, most importantly, to Mr McDonald’s. He does not address his involvement with the record keeping of Switch, he does not seek to explain the extent to which he was or ought to have been aware of the inadequacies (whether generally or with specific reference to the Particulars), and he does not address the current/future record keeping of V1CE Limited in that context. He did not make a supplemental affidavit to cure those deficiencies.
The third affidavit leaves far too many questions. The reference to overseeing Switch’s general operations does not refer to what he in fact did or did not do that prevented him from appreciating and/or dealing with the deficiencies in record keeping. It does not explain why the absence of receipts referred to by reference to entry charges and tills was only appreciated when Switch was in liquidation. Mr Falodun does not explain how or from what information the Weekly Spreadsheet was prepared or how manual calculations of turnover were achieved in board meetings. It is unclear why the last document prepared was not available. The reference to the inter-mingling of personal funds is vague and symptomatic of the general absence of detailed information. An observation that also applies to the reference to needing to register for VAT when Switch was or was soon to become insolvent. This appears to indicate non-compliance with the VAT registration requirements from an early trading date, which, if correct, would also be of considerable concern. The third affidavit still does not specifically address the Missing Topics.
There is also nothing substantive within the third affidavit concerning the Missing Topics when dealing with the information provided to the Official Receiver to help address the difficulties faced by the absence of adequate records. It was, after all, a particular of the Grounds that the absence of information resulting from the failure to maintain or deliver up adequate accounting records prevented fulfilment of the duty to carry out investigations under s.132(1) of the Insolvency Act 1986. It is of importance to state what was done to try to resolve that problem. The Secretary of State referred to what was done through Mr Cockburn’s skeleton argument but Mr Falodun did not do so in his evidence.
…
In all the circumstances I conclude that Mr Falodun has not satisfied the burden upon him to show on the balance of probability that the grant of permission is justified. His application and evidence has not shifted the balance in favour of lifting the restraints of the undertaking to enable his involvement in management with, and as a director of a limited liability company, V1CE Limited. The balance is weighted in favour of refusal to ensure the public remains protected and the policy and objectives of disqualification are not undermined.
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