Director disqualified after failing duty to company's creditors

A director who continued to run a company that did not generate revenue and ran up debts of £7m has been disqualified for seven years for failing in his duty to creditors.

The case involved Arise Networks Ltd, now in liquidation after being wound up in 2016, and its sole director, Mr Obaigbena.

The Official Receiver applied for a disqualification order against him because since December 2014 he had allowed the company to continue trading with no reasonable prospect of it avoiding insolvent liquidation or of creditors being paid.

The company had never generated any revenue. It depended on loans from associated companies based in Nigeria. One had been loss-making during its existence, another was balance-sheet solvent if a book debt owed to it by Arise Networks were taken into account.

The finances of the third were unknown as Obaigbena had failed to respond to requests for information.

Arise Networks failed to meet its debts and was unable to pay staff. Large creditor arrears continued to accrue.

Obaigbena accepted that his company traded while insolvent. His defence was that he had held a reasonable belief that sufficient funds were available in Nigeria but had been unable to ascertain when they would be received. He maintained that his creditors had agreed to wait for payment.

The High Court ruled against him.

It held that his conduct amounted to unfit conduct under the Company Directors Disqualification Act 1986.

There had been a complete lack of certainty and no evidence of there ever having been a reasonable prospect of receiving sufficient funds to discharge the liabilities. It was not appropriate for a director to take such a gamble with sums owed to creditors.

Directors owed a duty to creditors throughout the entire existence of a company. Arise Networks had traded to the detriment of its creditors. Contrary to the Obaigbena 's evidence, it was clear that many creditors had been chasing outstanding sums and he had neither sought to minimise their loss nor pay some of the arrears due. 

Where a company was wholly reliant on external loans to be able to discharge its liabilities, a director needed to be able to justify a decision to cause the company to continue to trade. A belief that, at some stage, future funds would be released, was not valid justification.

Please contact us if you would like more information about the issues raised in this article or any aspect of company law.

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