Harris v Secretary of State for Business, Innovation and Skills [2013] EWHC 2514 (Ch)

Richard Harris, disqualified as a director for persistently failing to submit VAT returns at Digital Docs Limited, sought leave under s.17 of the Company Directors Disqualification Act 1986 to act as director of three companies. The court granted conditional leave for one company but refused leave for two others due to insufficient need and public protection concerns.

Facts

Richard Andrew Harris (H) gave an undertaking to the Secretary of State for Business, Innovation and Skills under s.1A of the Company Directors Disqualification Act 1986 for a 4-year disqualification period. The disqualification arose from H’s conduct as director of Digital Docs Limited (DDL), where over 2¼ years he failed to submit VAT returns for 9 quarters despite signed returns showing VAT due of almost £120,000, and accrued VAT liabilities of £211,000 (representing 77% of DDL’s deficiency) before its insolvent liquidation.

H applied under s.17 of the Act for leave to act as director of three companies: Clenaware Systems Limited (CSL), TIVG Limited, and Clenaware Leasing Limited (CLL). CSL was an actively trading company manufacturing commercial dishwashers and glasswashers, which H had been central in managing since 2009. TIVG was a non-trading company holding intellectual property relating to a Remote Monitoring System developed by H. CLL was a newly incorporated consumer credit and hire company that had not yet commenced trading.

Issues

Primary Legal Issue

Whether H should be granted leave to act as director of CSL, TIVG, and CLL, balancing public protection against H’s need to be involved in these companies.

Secondary Issues

What conditions should attach to any leave granted to protect the public from risks associated with H’s proven unfitness as a director.

Judgment

HHJ Simon Barker QC, sitting as a High Court Judge, applied the principles established in Re Tech Textiles [1998] 1 BCLC 259 and Re Dawes & Henderson Agencies Ltd [1999] 2 BCLC 317, emphasising that leave is not to be too freely given and that the purpose of disqualification is protective rather than penal.

The court quoted Arden J in Re Tech Textiles:

“Leave, however, in my view is not to be too freely given. Legislative policy requires the disqualification of unfit directors to minimise the risk of harm to the public, and the courts must not by granting leave prevent the achievement of this policy objective.”

Regarding CSL, the court granted leave subject to stringent conditions including: capitalisation of £393,470 of shareholder loans into preference shares; stock verification by an independent chartered accountant; annual review of current assets and liabilities; and restrictions on dividends to maintain a solvency margin of £50,000.

Regarding TIVG, the court refused leave. The company was virtually insolvent, had never traded profitably, and H could continue developing the Remote Monitoring System without limited liability protection. The court noted as an aggravating factor that TIVG had written off a £46,505 debt owed to DDL (the failed company causing H’s disqualification), thereby reducing funds available to DDL’s creditors.

Regarding CLL, the court refused leave. The company had not commenced trading, H had no track record in credit finance, and no compelling need was demonstrated for H specifically to be a director rather than other appointed directors.

Implications

This case provides detailed guidance on the application of s.17 leave in director disqualification cases. It demonstrates that where an applicant’s misconduct involved sustained disregard of financial obligations (particularly to HMRC), courts will scrutinise carefully the financial controls proposed and may impose detailed conditions addressing solvency verification and monitoring.

The judgment reinforces that convenience and preference do not equate to need, and that where a disqualified director’s activities could be conducted without limited liability, this weighs heavily against granting leave. Courts will also consider conduct since disqualification proceedings began, including how the applicant has treated creditors of the company causing the disqualification.

Verdict: Leave granted for CSL subject to detailed conditions including loan capitalisation and independent stock verification. Leave refused for TIVG and CLL due to insufficient demonstrated need and unacceptable risk to public protection.

Source: Harris v Secretary of State for Business, Innovation and Skills [2013] EWHC 2514 (Ch)