Member Article

Secretary of State for Trade and Industry v (i) Christopher McKinley Swan (ii) Vuchuru Sadhana Reddy (iii) Brian Christopher Ritchie (iv) Brian Samuel North (v) Ian Stewart, [2005] EWHC603(CH) In this English decision the High Court held that the directors of the parent company should have known that its subsidiary companies had been involved in cheque kiting (a process designed to generate fictitious funds through the transfer of cheques between the bank account of two groups of companies) and so were unfit to act in accordance with the Company Directors Disqualification Act 1986. These provisions are similar to section 160(2)(d) of the Companies Act 1990 pursuant to which a Court may make a disqualification order against a person if it is satisfied that the conduct of such person as promoter, officer, auditor, receiver, liquidator or examiner of a company makes him unfit to be concerned in the management of a company. Background: X was a director and chief executive of the company and of certain other group companies. Y was a non-executive director of the company and the chairman of the audit and remuneration committees of that company. Y was made aware of allegations of financial and accounting irregularities within the group including that information had been withheld from the auditors. The Secretary of State for Trade and Industry sought disqualification orders against X and Y alleging that: (a) they had actual knowledge of the process of cheque kiting which, it was argued, enabled the group to trade in breach of its banking covenants; (b) X was directly responsible for an inaccurate statement in a circular sent to shareholders which incorrectly stated the group’s cash balances; and (c) Y had failed to investigate the financial irregularity allegations concerning the company. Held: The Court held that X’s lack of competence related to an absence of vigilance as he was held not to have actual knowledge of cheque kiting. As director and CEO, it was held that he should have been aware of such practices. In addition, the Court held that X had failed to make appropriate enquiries into the issue of several large cheques which resulted in a serious dereliction of his duty as director. X was disqualified for 4 years. The Court held that Y’s lack of competence related to his failure to pursue an enquiry into the financial irregularities as vigorously as he should have done and that his conduct was seriously below the conduct expected of someone in his position with his experience. Y was disqualified for 3 years.

 

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