Company Director Pays High Price for Gambling With Creditors' Money

Directors who cause insolvent companies to trade when there is no reasonable prospect of creditors being paid put not just their livelihoods but their careers on the line. That was certainly so in the case of a media company director who was disqualified from taking a managerial role in any company for seven years.

The company depended entirely on working capital being provided by members of the same group in Nigeria. Financial difficulties arose when the Nigerian Central Bank imposed restrictions on foreign currency exchange in response to a collapse in oil prices. Starved of funds, the company ran up seven-figure debts in its final months of trading before it entered insolvent liquidation and was wound up.

The company's demise prompted the Official Receiver to launch proceedings against its director under the Company Directors Disqualification Act 1986. In imposing the disqualification, a judge found that he had not acted dishonestly and that he genuinely believed that funds would at some point become available to meet the company's increasing debts. However, she went on to find that his belief was irrational and unjustified and that he had gambled with sums owing to creditors without regard for or compliance with proper standards.

Dismissing his challenge to that outcome, the High Court noted that the judge rightly directed herself that ordinary commercial misjudgment is, by itself, not enough to demonstrate that a person is unfit to act as a director. She made no error of law in criticising the cavalier manner in which he treated the company's creditors or in finding that he took unwarranted risks with their money.

In the absence of a finding of dishonesty, or that he knew or should have known that there was no reasonable prospect of the company avoiding insolvent liquidation, the Court acknowledged that the length of the disqualification was at the upper limit of what was reasonable. It was a serious case, however, and the judge made no error of principle in fixing a term that was not grossly disproportionate.