Asset-stripping to connected companies when insolvency is “bordering” triggers creditor-duty breach and director unfitness under CDDA 1986 s6

Court: Scottish Court of Session, Outer House
Judge: Lord Lake
Citation: [2026] CSOH 77
Date: 20 August 2026
Proceedings: Petition by the Secretary of State for Business and Trade for a disqualification order under section 6(1) of the Company Directors Disqualification Act 1986

1. Introduction

This petition concerned whether a director of a waste-management company that later entered compulsory liquidation was “unfit to be concerned in the management of a company” for the purposes of section 6(1) of the Company Directors Disqualification Act 1986 (“CDDA”). Insolvency was admitted: the company’s liabilities exceeded its assets by over £15m at the winding up date.

The dispute focused on the second limb of section 6(1): unfitness. The Secretary of State’s case was built around a sequence of October–December 2018 connected-party transactions (dividend declaration, share transfers, directors’ loan manoeuvres and asset transfers) said to have denuded the company of essential operating assets and placed them beyond creditors’ reach at a time when the company faced severe regulatory and contractual jeopardy.

The respondent (a party litigant) argued the company remained solvent (cashflow and balance sheet) and that the transactions merely matched assets transferred with liabilities reduced, without intent to prejudice creditors.

2. Summary of the Judgment

• The court held the respondent caused the company to enter transactions whose purpose was to “protect” assets—properly inferred as protection from creditors, liquidation or administration.
• At the time of the transactions, the company was at least “bordering on insolvency”, and—given the effect of the transactions—an insolvent liquidation or administration was probable.
• Applying the creditor-duty principles articulated in BTI 2014 LLC v Sequana SA [2024] AC 211, the director was obliged to have regard to creditors’ interests; instead, he acted with intent to prejudice them, amounting to an egregious breach of fiduciary duty.
• The court also treated sustained breaches of environmental permitting conditions, and the director’s stance toward enforcement, as relevant to unfitness.
• A disqualification order for 9 years was imposed, placed in the middle bracket of seriousness but at its top end, following Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164.

3. Analysis

3.1 The statutory framework applied

Under CDDA 1986 s6(1), where an insolvent company’s director is shown to be unfit, the court must make a disqualification order. Fitness is assessed using the mandatory considerations in CDDA 1986 s12C and Schedule 1, including:

• responsibility for material contraventions of legislative or other requirements (Sch 1, para 1);
• where applicable, responsibility for insolvency (para 2);
• loss or harm (actual or potential) caused by the conduct (para 4);
• misfeasance or breach of fiduciary duty (para 5);
• material breach of director-specific legal obligations (para 6).

3.2 Precedents cited and how they shaped the decision

(a) BTI 2014 LLC v Sequana SA [2024] AC 211

The court treated Sequana as the governing authority on when directors must consider creditors’ interests (often called the “creditor duty” or “creditor-interest duty”). Lord Lake extracted and applied Lord Reed’s synthesis that the duty arises:

Two moves in the reasoning are notable:

• Rejecting a narrow “inevitable liquidation” trigger: while Sequana discusses when creditors’ interests become paramount, Lord Lake focused on the earlier question—when creditors’ interests must be considered at all—because the court found the transactions were designed to prejudice creditors. Once the duty exists, intentional prejudice is intrinsically grave.
• Including the transaction’s effect in the trigger analysis: consistent with Sequana, the court assessed not only the company’s pre-transaction condition (regulatory crisis and looming contract disruption), but also how the transactions themselves pushed the company toward insolvency by stripping essential operating assets.

(b) West Mercia Safetywear Limited v Dodd [1988] BCLC 250

This case featured as part of the historical lineage recognised in Sequana, representing early Court of Appeal authority that directors may be obliged to consider creditors as the company’s financial position worsens. Lord Lake used it indirectly: not as a separate test, but as support for the idea (endorsed in Sequana) that creditors have a distinct economic stake once insolvency threatens.

(c) Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164

Lord Lake applied the well-known Sevenoaks bracket approach to period-setting:

• Top bracket: most serious cases (often fraud, dishonesty, repeat offending);
• Middle bracket: serious cases not reaching the top bracket (5–10 years);
• Bottom bracket: less serious (typically 2–5 years).

The case was placed in the middle bracket but at its upper end, primarily due to the “flagrant” nature of creditor prejudice, persistent denial of breach, and additional litigation misconduct (contempt findings in the earlier sheriff court proceedings).

3.3 Legal reasoning: why unfitness was established

(a) The court’s fact-finding on purpose and context: “protecting assets” meant protecting them from creditors

A central factual conclusion was that the connected-company transactions were executed urgently to “protect” assets in anticipation of regulatory escalation. The court preferred contemporaneous professional notes and banker evidence over ex post explanations. The court rejected an alternative narrative that the arrangements were motivated by marital separation/divorce settlement considerations, noting the absence of any such rationale in contemporaneous records and the structural ill-fit of the transactions to that aim.

From that, the court inferred an intention to place assets beyond the reach of: creditors, liquidators or administrators. That inference then drove the legal analysis: if any creditor-interest duty existed, it was breached in an especially serious manner.

(b) Why the creditor-interest duty applied on these facts

Lord Lake carefully limited the inquiry. The respondent sought to litigate alleged external causes of failure (including accusations of unfair treatment and conspiracy by regulators and public bodies). The court held those matters were irrelevant because the Secretary of State was not alleging general mismanagement causing insolvency, but rather unfitness arising from late-stage asset transactions in a context of impending distress.

The court found that by early October 2018:

• the company faced escalating and sustained permit non-compliance and enforcement pressure;
• a partial suspension notice for a key English site had already been served and was about to take effect;
• it was foreseeable that operational disruption would drive contract loss/claims, materially worsening finances;
• the transactions removed ownership of a large portion of operational assets without any evidence of arrangements guaranteeing continued access for the trading company.

Against that background, and considering the transactions’ effects, the company was at least “bordering on insolvency” and insolvent liquidation/administration was “probable” within the meaning adopted from Sequana. That triggered the obligation to consider creditors’ interests.

(c) Breach of fiduciary duty as a Schedule 1 unfitness factor

Having found the duty was engaged, the court treated the breach as stark: the director not only failed to balance creditor interests but acted to harm them. This made Schedule 1, para 5 (misfeasance/breach of fiduciary duty) a dominant route to unfitness.

(d) Environmental compliance as an additional unfitness strand

The court also considered sustained non-compliance with environmental permitting conditions (storage limits, time limits, and related issues across sites) relevant under Schedule 1, para 1 (contravention of legislative requirements). The judgment distinguished between short-lived remediated breach and the prolonged, multi-site pattern here, accompanied by resistance to corrective measures on cost grounds.

(e) Secured lender consent and the floating charge point

The bank held fixed and floating security. The director proceeded without prior notice or consent, contrary to advice and with acknowledged “high risk”. The bank’s later pragmatic decision not to litigate did not legitimise the conduct; the court accepted evidence that court challenge would be slow and the bank preferred to attempt a sale process. This episode reinforced the court’s assessment of the director’s willingness to disregard creditor-related constraints to advance a protective strategy for assets.

3.4 Impact

The decision is likely to be cited in Scottish CDDA practice for three connected propositions:

• Sequana’s “bordering on insolvency / probable insolvent liquidation” test can be operationalised through contemporaneous regulatory and contractual crisis indicators, not merely formal accounting metrics.
• Connected-party asset transfers presented as internal restructurings can evidence unfitness where their purpose and effect is creditor prejudice, particularly if they strip operational capacity and render breach of customer contracts foreseeable.
• Regulatory non-compliance (especially involving public health/environmental risk) can compound unfitness, even where the petition is not framed as “causing insolvency”, because it evidences disregard for legal obligations and responsible stewardship.

On period-setting, the judgment illustrates that misconduct outside the core insolvency facts (here, contempt in earlier proceedings) may influence where within a bracket the period falls, without necessarily pushing the case into the top bracket absent fraud/repeat behaviour.

4. Complex concepts simplified

• Section 6(1) CDDA 1986: If a director of an insolvent company is shown to be “unfit”, the court must disqualify them for a set period.
• “Bordering on insolvency” (Sequana): A stage before formal insolvency where the company is close enough to insolvency that creditors’ interests must be considered in directors’ decision-making.
• “Creditor duty”: Not a free-standing duty owed directly to creditors in all circumstances; it is a modification of directors’ duties to the company, requiring directors to take creditor interests into account when insolvency threatens.
• Floating charge: A security interest over a shifting class of assets (e.g., stock, receivables, equipment), allowing ordinary dealing until a triggering event (e.g., default) causes restrictions/crystallisation.
• Environmental Enforcement Notice vs Suspension Notice: An Enforcement Notice requires steps to remedy breaches by a deadline; a Suspension Notice can stop the permitted activity where contraventions create pollution risk.
• Sevenoaks brackets: A structured approach to choosing a disqualification period by seriousness bands, ensuring consistency and proportionality.

5. Conclusion

Lord Lake’s decision in [2026] CSOH 77 underscores that when a company is at least “bordering on insolvency”—especially amid foreseeable regulatory shutdown and contract fallout—directors must have regard to creditors’ interests as explained in BTI 2014 LLC v Sequana SA [2024] AC 211. Asset transfers to connected companies designed to “protect” assets from creditors, and which strip the trading company of operational capacity, constitute a serious fiduciary breach and strongly support a finding of unfitness under CDDA 1986 s6. Combined with sustained environmental permitting breaches, the conduct justified a substantial disqualification period of 9 years within the Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164 middle bracket.