Secretary of State for Trade and Industry v Aviss [2006] EWHC 1846 (Ch)

Directors' disqualification proceedings against two individuals who controlled three insolvent companies. They diverted company funds to other businesses in which one had interests, causing substantial creditor losses. Both were found unfit as directors for failing to respect corporate personality principles and were disqualified for seven and eleven years respectively.

Facts

Mea Corporation Ltd, Mea Projects Ltd and Brightchance Ltd (CJB) were three companies that went into insolvency in 2001 with a combined deficiency of nearly £19.5 million. The Secretary of State sought disqualification orders against John Aviss and William Berry under section 6 of the Company Directors Disqualification Act 1986.

Mr Aviss was the sole shareholder of Mea and was formally appointed as a director in November 1999, though he claimed to be unaware of this appointment. Mr Berry had previously been disqualified for five years following criminal convictions for trading with intent to defraud creditors and managing a company while an undischarged bankrupt.

Following Mea’s acquisition of Projects and CJB as part of a strategy towards flotation on AIM, a central treasury system was introduced. Cash from all three companies was paid into this central fund, controlled by Mr Aviss and Mr Berry. Significantly, funds were then diverted from the Mea group to other companies in which Mr Aviss had interests, including Woodpecker/Zoa, Holcot Press and others, totalling over £3.2 million by July 2001.

The Central Treasury System

The directors of the subsidiary companies lost control over their funds. When CJB’s directors protested about being unable to pay creditors, Mr Walker informed them that the funds were Mea Corporation funds forming part of the Group treasury function. Mr Berry told directors that money would go where he and Mr Aviss decided it was most needed.

Issues

The key issues were:

• Whether Mr Aviss was aware of his formal appointment as director of Mea
• Whether Mr Aviss and Mr Berry were de facto directors or shadow directors of all three companies
• Whether their conduct made them unfit to be concerned in the management of a company
• What period of disqualification was appropriate

Judgment

Director Status

Lewison J found that Mr Aviss knew he was a duly appointed director of Mea. The contemporaneous documentation, including Form 288a signed by Mr Aviss, public documents listing him as Chairman, and letters he signed as director, all confirmed this.

Regarding shadow directorship, the court applied the test from Secretary of State for Trade and Industry v Deverell [2001] Ch 340. Lewison J held that both Mr Aviss and Mr Berry were shadow directors of all three companies:

“In an area of corporate affairs as critical as the application of trading income and the payment of trade creditors, the policy of all three companies was dictated by Mr Aviss and Mr Berry.”

The evidence from multiple directors was consistent. As Mr Simon Bartley stated:

“I basically saw John Aviss and Bill Berry as one; they had both said, on separate occasions, words to the effect that ‘you couldn’t get a fag paper’ between them, that they spoke with one voice and that what one said should be taken as what the other one wanted.”

Unfitness

The court found that the diversion of funds from the three companies to other businesses outside the Mea group, while those companies were unable to pay their debts, was not a reasonable decision for a responsible director to take. Lewison J stated:

“Central to the concept of limited liability is the concept that a company has a separate legal personality… Respect for the separate legal personality of each company, and recognition of a director’s duty to exercise his powers in the best interests of the particular company of which he is a director are essential attributes of fitness to be concerned in the management of a company.”

Both defendants failed to respect this fundamental principle, causing substantial increases in the deficiency of each company to the detriment of creditors.

Implications

This case reinforces several important principles:

• Shadow directors can be held accountable under the Company Directors Disqualification Act 1986 even if not formally appointed
• Control over critical areas such as treasury and creditor payments can establish shadow director status
• Directors must respect the separate legal personality of each company in a group and cannot simply divert funds between companies to the detriment of creditors
• Acting in breach of an existing disqualification order is a serious aggravating factor

Mr Aviss was disqualified for seven years. Mr Berry was disqualified for eleven years, the additional period reflecting his breach of the existing disqualification order, which demonstrated disregard for the system of regulation of directors’ conduct.

Verdict: Both Mr Aviss and Mr Berry were found unfit to be concerned in the management of a company. Mr Aviss was disqualified for seven years. Mr Berry was disqualified for eleven years.

Source: Secretary of State for Trade and Industry v Aviss [2006] EWHC 1846 (Ch)