Date 24 August 2006
This case summary should be of particular interest to directors, their accountants and advisors alike.
The usual course of events leading to the disqualification of a company director, involve issues of breach of company legislation, breach of fiduciary duties, wrongful trading, improper dispositions and/or misuse of company assets and property, receipt of excessive salaries and benefits. Whilst this list is non-exhaustive, disqualification proceedings are instigated for the wrong doing of the director, either for breach of common law or statutory duties.
The recent case of The Official Receiver –v- Jeremy Mitchell saw a director disqualified for breaches of consumer protection legislation. Whilst the case also highlighted other issues (de facto and shadow directorships, adjournment of director disqualification proceedings and the correct period of disqualification under the Company Directors Disqualification Act 1986 Section 2 (“the CDDA”)), the underlying reason cited for disqualification was the 'protection of the public' from a person unfit to act as a director of a limited company. The case is summarised below.
Background
Mr Mitchell was a sole director of a home improvements company ("RHIL"). The allegations against him were that he allowed RHIL in the course of its business and dealings to engage in:-
- The harassment of existing customers and non-customers in their homes.
- Aggressive sales techniques, particularly targeted at and intimidating vulnerable individuals.
- Persistent breach of the rules relating to telephone marketing and doorstep sales practice, (notwithstanding numerous warnings from the Trading Standards Office, following customer complaints), including aggressive telephone marketing and sales techniques.
- Improper retention of monies due to customers (caused by failure to pay refunds due to customers who were exercising their right of cancellation of contracts during the statutory cooling-off period under The Consumer Credit Act 1974 ("the Act") and further failure to pay refunds due as a result of either misrepresentation or non-existence of any contractual relationship with the customer).
Mr Mitchell held a Consumer Credit Licence under the Act for three separate businesses (sole trader, partnership, RHIL). Upon various complaints by the public and customers to the Office of Fair Trading ("the OFT"), and upon the subsequent liquidation of RHIL, its Consumer Credit Licence was surrendered to the OFT by the Liquidator.
Mr Mitchell had (prior to liquidation of RHIL) been made fully aware of his duties and responsibilities to his customers under Consumer Protection legislation. Furthermore, after service by the OFT of several revocation notices in respect of the two remaining consumer credit licences held by Mr Mitchell (in his capacity as sole trader and that of the partnership) and Mr Mitchell’s continuing failure to respond to such notices, the OFT also revoked Mr Mitchell’s licence held in his capacity of a sole trader.
Some ten months prior to the liquidation of RHIL Mr Mitchell had relocated to the USA, leaving employing a manager to conduct the day to day affairs of RHIL. However, Mr Mitchell was appraised on a weekly basis of the business. Furthermore, decisions as to payment of creditors were made jointly by Mr Mitchell and his manager.
Held
It was decided that it would not be in the public interest to take proceedings against the manager. The Official Receiver raised the argument of public protection (citing Re: Westmid Packing Services Limited, The Secretary of State for Trade and Industry -v- Griffiths [1998] 2 All ER124) and the three purposes of disqualification and public protection thereunder as:-
- To keep unfit directors “off the road”.
- To deter the unfit director from repeating the misconduct (individual deterrents).
- To deter other directors (general deterrents).
Refusal to refund customer deposits was held to be tantamount to a company accepting payment for goods and services the company was not in a position to deliver. However, in the present circumstances RHIL had the financial resources to refund the deposits. Refusal to do so was due to Mr Mitchell’s blatant disregard for consumer protection legislation. This was upheld to be a matter of “unfitness” within paragraph 7 Part 2 of Schedule 1 to the CDDA. It was further held to be dishonest conduct lacking in “commercial morality”.
Mr Mitchell was also held to be responsible for the further acts of his employees (abusive, offensive, threatening behaviour whilst targeting vulnerable and elderly members of the public in their own homes).
Re: Seagull was cited on the issue of conduct, rendering Mr Mitchell unfit to act as a director, notwithstanding his absence from the UK. Residence out of the jurisdiction was held to be no mitigation for his responsibilities as a director of RHIL. Mr Mitchell was therefore held unfit to be a director of a Limited Company and disqualified for 8 years.
Conclusion
This case appears to be the first of its kind, resulting in the disqualification of a director for breach of consumer protection legislation. As aforementioned, disqualification proceedings are usually instigated against directors of limited companies for conduct falling below the required standards of both statute and common law. However, this case highlights the fact that 'unfitness' does not always mean breach of statutory or common law duties, or dishonesty. The District Judge on handing down judgment reiterated the need to 'protect vulnerable consumers from predatory sales techniques' thereby demonstrating that the prime purpose of the CDDA is protection of the public.
This is a new development within disqualification of directors and given the introduction of the new code governing 'doorstep selling' it would be prudent for company directors and those advising them to seek specific advice on any queries arising.
Please contact Guy Thomas or Sharon Stone with any queries on this or any other Corporate Recovery matters. Tel: 01727798092, Email: guy.thomas@salaw.com or sharon.stone@salaw.com.
© SA LAW 2006
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.