England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 97/0777/B

(MR JUSTICE CHADWICK )

Royal Courts of Justice

Strand

London WC2

Tuesday 16 December 1997

B e f o r e:

THE MASTER OF THE ROLLS

LORD JUSTICE WALLER

LORD JUSTICE ROBERT WALKER

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SECRETARY OF STATE FOR TRADE AND INDUSTRY

Respondent

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1. SIDNEY GRIFFITHS

2. ROY CONWAY

3. JOHN WASSELL

Respondents/Appellants

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(Transcript of the handed-down judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR M BRIGGS QC and MR A MITHANI (Solicitor Advocate) (Instructed by Messrs Lee Crowder, Birmingham, B3 3DY) appeared on behalf of the Second and Third Respondents/Appellants.

MR N DAVIS QC and MISS M MAHER (Instructed by Messrs Osborne Clarke, Bristol, BS1 4HE) appeared on behalf of the Respondents.

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

JUDGMENT

LORD WOOLF, MR: This is a judgment of the court.

On 25 March 1997 Chadwick J. made a disqualification order under s.6 of the Company Directors Disqualification Act 1986 (“the Act”) in respect of three former directors of Westmid Packing Services Ltd (“the company”). They were Mr Sidney Griffiths, Mr Roy Conway and Mr John Wassell.

S.1(1) of the Act is in the following terms:-

In the circumstances specified below in this Act a court may, and under section 6 shall, make against a person a disqualification order, that is to say an order that he shall not, without leave of the court -

(a) be a director of a company, or

(b) be a liquidator or administrator of a company, or

(c) be a receiver or manager of a company’s property, or

(d) in any way whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company,

for a specified period beginning with the date of the order.

S.6(1) and (4) are in the following terms :-

6(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied-

(a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and

(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.

6(4) Under this section the minimum period of disqualification is 2 years, and the maximum period is 15 years.

The matters to which the court is to have regard in determining unfitness are set out in s.9 of and Schedule 1 to the Act.

It is to be noted that a disqualification order prohibits various activities without leave of the court . Section 17 provides as follows in relation to leave :-

(1) As regards the court to which application must be made for leave under a disqualification order, the following applies -

(a) where the application is for leave to promote or form a company, it is any court with jurisdiction to wind up companies, and

(b) where the application is for leave to be a liquidator, administrator or director of, or otherwise to take part in the management of a company, or to be a receiver or manager of a company’s property, it is any court having jurisdiction to wind up that company.

(2) On the hearing of an application for leave made by a person against whom a disqualification order has been made on the application of the Secretary of State, the official receiver or the liquidator, the Secretary of State, official receiver or liquidator shall appear and call the attention of the court to any matters which seem to him to be relevant, and may himself give evidence or call witnesses.

At the hearing before Chadwick J. Mr Griffiths did not appear to contest the application for a disqualification order made against him. He had filed a great deal of evidence but it was not read because he was not there to be cross-examined. Mr Griffiths was at all times the controlling influence behind the business of the company, which was incorporated in 1976 and went into administrative receivership in 1991. It traded in the West Midlands in the business of industrial packing. Although Mr Griffiths was formally appointed as a director only in 1986, the Judge was satisfied that he acted as a director from the start of trading in 1977. Mr Griffiths was disqualified for nine years.

Mr Conway and Mr Wassell did contest the application. They disputed the grounds on which the Secretary of State contended that they were unfit to be concerned in the management of a company. The Judge found one (and only one) of the grounds made out. It is that set out in paragraph 44(b) of the affidavit of Mr Alistair Jones (a partner in KPMG Peat Marwick, Birmingham, and one of the joint administrative receivers). It alleged that they failed to keep themselves properly informed of the true financial position of Westmid. The Judge was not satisfied that any of the allegations in paragraph 44(a),(c),(d) and (e) had been made good. The Judge did not make any express finding on the allegations in paragraph 44(f)(i) and (iii),(g) and (h). That in paragraph 44(f)(ii) was not pursued.

In consequence of his finding on paragraph 44(b) the Judge concluded that Mr Conway and Mr Wassell were unfit to be concerned in the management of a company. The Judge was therefore required by s.6 of the Act to make a disqualification order for a minimum period of two years. The Judge disqualified each of them for the minimum period. He also, at the same hearing, and on an undertaking as to the furnishing copies of accounts, made an order under s.17 of the Act authorising Mr Conway and Mr Wassell to be directors of and to be concerned in the management of a company called Conway Packing Services Ltd (“CPS”). CPS is a company controlled by Mr Conway and Mr Wassell. It acquired Westmid’s tangible assets and goodwill from the receivers in December 1991. No criticism has been made of the appellants’ conduct as directors of CPS. There is on the contrary evidence that they have run it properly and successfully.

The effect of the Judge’s order was therefore to permit Mr Conway and Mr Wassell, through CPS, to continue to run the company’s business in much the same way as before the receivership. Despite that, they both gave notice of appeal against the disqualification orders. The first ground of appeal (there were three principal grounds, elaborated in the notice of appeal) was that the Judge had been wrong not to take account of the appellants’ conduct as directors of CPS. The Secretary of State cross-appealed by a respondent’s notice to increase the period of disqualification. The Secretary of State did not however appeal against the leave granted in respect of the appellants’ directorships in CPS.

The appellants have now decided not to pursue their appeal. That was because of the decision of this court in Re Country Farm Inns Ltd, Secretary of State for Trade and Industry v Ivens 1997 2 BCLC 334, 1997 BCC 801. That case was concerned, essentially, with the correct construction of the words “any other company” in s.6(1)(b) of the Act. The judgment of Morritt LJ (with which Leggatt LJ and Brooke LJ agreed) goes fully into the authorities on that point and it is not necessary to go into them again on this occasion. But the Secretary of State pursues the cross-appeal.

No challenge is made by either side to the primary facts as found by the Judge. He saw the appellants and heard them cross-examined on their affidavits but their cross-examination was relatively short. Mr Jones was also cross-examined, but the cross-examination was not directed to his principal affidavit. Mr Nigel Davis QC (appearing with Ms Martha Maher for the Secretary of State) submits, rightly, that below as in this court the real issue has been, not as to the facts, but as to what view shall be taken of them, and what conclusion drawn. As Sir Donald Nicholls V-C said in Re Swift 736 Ltd, Secretary of State for Trade and Industry v Ettinger 1993 BCLC 896, 897, the challenge is as to the seriousness, or lack of seriousness, which the Judge attached to the shortcomings in the appellants’ conduct as directors of the company.

The appellants were directors of the company throughout its trading life. But their evidence, which was accepted by the Judge, was that they were throughout treated more like employees than directors. Mr Griffiths (the controlling shareholder in a holding company which controlled the company and other associated companies) was the driving force. Mr Griffiths was, they say, a much-respected businessman and a pillar of the community. He had expensive possessions and pastimes. They were impressed by him and they trusted him. Now that it appears that he was thoroughly irresponsible and lacking in commercial morality (in Mr Conway’s expression, though not the Judge’s, a fraudster) the appellants’ position is that they have reason to be aggrieved and to feel themselves deceived. That may well be so, but it is by no means an adequate answer to the charges of unfitness made against them.

Against Mr Griffiths the Judge made findings of serious misconduct both in relation to the affairs of the company and in relation to the affairs of other associated companies which Mr Griffiths controlled. The Judge’s serious view of his conduct was reflected in the order disqualifying Mr Griffiths for a period of nine years, almost at the top of the middle bracket mentioned by this court in Re Sevenoaks Stationers (Retail)Ltd 1991 Ch 164, 174.

The Judge found that Mr Griffiths consistently treated the company’s assets as if they were his own. In particular, he used the company’s money for the liabilities and purposes both of other companies in his group and of his unincorporated business (S.Griffiths & Sons) so giving rise to substantial indebtedness to the company which was interest-free, unsecured and in the event largely irrecoverable. Indebtedness in respect of Mr Griffith’s own business exceeds £500,000. Mr Griffiths caused the company to enter in 1978 into a cross-guarantee of associated companies’ liabilities so as to produce a liability in excess of £430,000 with no countervailing advantage to the company. He allowed the company to continue trading at a time, from about 1988, when he must have known that the company was insolvent, and that its continued trading created losses for its creditors and brought benefits only for Mr Griffiths. The Judge made comparable findings in respect of Mr Griffith’s conduct towards two other group companies.

The Judge then went on to consider the appellants. He said that

“the real criticism, in their case, is that they did not appreciate what Mr Griffiths was doing. In particular, they did not appreciate the extent to which the company’s moneys were being used for the benefit of his own business or the businesses of his associated companies. They did not know about the cross-guarantee given by the company to the bank”.

The allegations designated (a) - (e) in paragraph 44 of the affidavit of Mr Jones (and others on which the Judge made no express finding in respect of the appellants) were against all three directors. Mr Griffiths also had two sons who were directors for some years but no disqualification order was sought against them. The principal allegations against the appellants were

(a) persistent breaches of ss.227, 241 and 242 of the Companies Act 1985 (in the case of the appellants the first section should, it seems, have been s.226);

(b) failure to keep themselves properly informed of the company’s financial position;

(c) causing the company to trade when they knew or should have known that it was insolvent;

(d) continued insolvent trading; and

(e) retention of crown monies (the specified figure of over £335,000 may be excessive because the tax figure is not stated to be all in respect of PAYE and NIS, and it includes interest, while the figure for VAT includes surcharges).

As already noted the Judge found only one of these established against the appellants, that is the failure to keep themselves properly informed about the company’s financial position.

The Judge’s explicit or implicit conclusion that the other allegations were not made out against the appellants is challenged in the notice of appeal but Mr Davis has realistically concentrated on the submission that two years was an insufficient period of disqualification even for the single allegation which was established against the appellants. Mr Davis has subjected the Judge’s decision to disqualify for the minimum period to some trenchant and well-argued criticism. He has described it (respectfully but forthrightly) as plainly wrong.

Mr Davis started from the proposition that (as the Vice-Chancellor said in Re Swift 736 Ltd, Secretary of State for Trade and Industry v Ettinger 1993 BCLC 896, 899), Parliament’s purpose in enacting the Act (and its predecessors starting with s.28 of the Companies Act 1976) was to raise standards in the conduct and responsibility expected of those who manage companies incorporated with the privilege of limited liability. That parliamentary purpose, and its importance, are further emphasised by the mandatory minimum period introduced by s.6 of the present Act. Mr Davis also submitted, correctly, that the collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.

A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but not total abrogation of responsibility. A board of directors must not permit one individual to dominate them and use them, as Mr Griffiths plainly did in this case. Mr Davis commented that the appellants’ contention ( in their affidavits) that Mr Griffiths was the person who must carry the whole blame was itself a depressing failure, even then, to acknowledge the nature of a director’s responsibility. There is a good deal of force in that point.

Mr Davis developed this argument by pointing to five matters in particular :-

(1) the length of time for which the appellants were directors - that is 13 years;

(2) that for the whole of that period the appellants never studied the company’s annual financial statements or its accounting records;

(3) that they signed at least some pages of the 1985 accounts (but did not ask to see the pages with notes as to the cross-guarantee);

(4) that they knew of the need to file accounts (both were from 1979 directors of another company, Roy Conway Industrial Services Ltd); and

(5) that had they insisted (as they should have done) on seeing annual financial statements they would have been on notice that the company was heavily dependent on the other companies in the group controlled by Mr Griffiths.

Mr Davis also emphasised the grave financial consequences following from Mr Griffiths’ misconduct and the appellants’ neglect in monitoring it. It produced irrecoverable debts owed to the company and liabilities under the cross-guarantee given by the company to a total (in 1991) of the order of £1.5m, which brought the company to ruin.

It is common ground that the role of this court in reviewing on appeal the length of a period of disqualification was correctly stated in Re Copecrest Ltd, Secretary of State for Trade and Industry v McTighe 1997 BCC 224 by Morritt LJ who said (at page 230)

“The period for disqualification is a matter for the discretion of the judge hearing the application to be exercised in accordance with the relevant principles. One such principle is the recognition of the categories of case indicated by this court in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164. At p. 174, accepting the submissions made on behalf of the official receiver, Dillon LJ said:

‘(1) The top brackets of disqualification for periods over ten year should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.

(2) The minimum bracket of two to five years disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.

(3) The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket.’

Unless the Judge can be showed to have erred in principle the length of the period of disqualification is essentially a matter for his discretion with which the Court of Appeal will not interfere. But if such an error is shown then this court is entitled and bound to intervene and substitute its own view for that of the judge; Re Swift 736 Ltd [1993] BCC 312 and Re Grayan Building Services Ltd [1995] BCC 554 at pp. 574-576; [1995] Ch 241 at pp. 254-256.”

We do not accept that the Judge erred in principle in imposing the minimum period of disqualification, or that he was plainly wrong to do so. This court - without having seen the appellants giving evidence or heard submissions from counsel on his behalf as to the facts - is of the view that a longer period of disqualification, in the middle of the lower range, would have been more appropriate. But that is not enough to lead the court to interfere with the Judge’s exercise of his discretion. We cannot say that the way that the Judge exercised his discretion was wrong in principle and it is significant that the Secretary of State does not challenge the judge's decision that the case falls within the minimum bracket.

That is sufficient to dispose of this appeal. But we wish to ensure that our dismissal of the Secretary of State’s respondent’s notice does not convey the wrong message. We also wish to give some general guidance as to what is relevant and admissible evidence for the purpose of determining the length of the disqualification period, and for the purposes of any application under s.17 of the Act.

1. It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities. The appellants may have been dazzled, manipulated and deceived by Mr Griffiths but they were in breach of their own duties in allowing this to happen. They can count themselves fortunate to have received the minimum period of disqualification and to have had the benefit of immediate orders under s.17 of the Act.

2. Where the court knows or expects that an application under s. 17 will be made immediately after, or soon after the making of a disqualification order, and the court is minded to grant leave under s. 17, that is no reason for deciding to impose the minimum period of disqualification. An order under s. 17 gives leave only in respect of one or more specified companies, and may be subject to quite stringent conditions. The power to grant leave under s. 17 is irrelevant to determining the proper period of disqualification.

3. In Re Lo-Line Electric Motors Ltd [1988] Ch 477 Sir Nicolas Browne Wilkinson V.C. said that the primary purpose of s. 300 of the Companies Act 1985 was to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others. That statement has often been approved by this court. But there is often a considerable time lag between the conduct complained of, its discovery and the disqualification proceedings actually coming to court. We return below (paragraph 9) to what can be done to avoid delay. One result of delay when it does occur is that there are occasions when disqualification must be ordered even though, by reason of the director’s recognition of his previous failings and the way he has conducted himself since the conduct complained of, he is in fact no longer a danger to the public at all. In such cases it is no longer necessary for the director to be kept “off the road” for the protection of the public, but other factors come into play in the wider interests of protecting the public, i.e. a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned. Despite the fact that the courts have said disqualification is not a “punishment”, in truth the exercise that is being engaged in is little different from any sentencing exercise. The period of disqualification must reflect the gravity of the offence. It must contain deterrent elements. That is what sentencing is all about, and that is what fixing the appropriate period of the disqualification is all about. What Vinelott J. (in Re Pamstock Ltd 1994 1 BCLC 716, 737) called “tunnel vision”, i.e. concentration on the facts of the offence, is necessary when considering whether a director is unfit. In relation to the period of disqualification the facts of the offence are still obviously important but many other factors ought (and in reality do) come into play (see further paragraphs 5 to 7 below).

4. As will appear hereafter there is much in the judgment of Sir Richard Scott V.C. in Secretary of State for Trade and Industry v Baker Transcript 29 July 1997 with which we agree, but the following observation may in our view need qualification. The Vice-Chancellor said,

“There is in my view no real place for discounts to be allowed to a director who has assisted the court in its disposal of court business by not disputing that which is indisputable. Plea bargains have no place in this jurisdiction.”

In the criminal sentencing context (which is clearly what the Vice-Chancellor had in mind) there is no room for plea bargaining if by that it is meant some form of agreement as to the sentence if a plea is entered. But there can be negotiation as to the acceptability of an admission on a certain basis of fact, and that would seem to be as sensible in this context as in the criminal context. That is indeed already recognised in the Carecraft procedure (see Re Carecraft Construction Ltd [1994] 1 WLR 172). Furthermore in the criminal context very little discount is given if there is an admission of what is “indisputable”, but an admission of what might otherwise have taken a great deal of time and expense to prove surely merits some recognition, provided of course that the starting point correctly reflects the gravity of the conduct. We do not consider that it would send out a wrong message to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for the mitigating factors, in much the same way as a sentencing court would do. It would not however be right to allow the question whether a discretion is likely to be exercised under s. 17 to come into the calculation at all. That question should be considered separately after a period of disqualification has been fixed.

5. That leads on to the question of what categories of evidence should be admitted on the three (logically and procedurally) distinct issues : (i) is a director unfit within the meaning of the Act? (ii) if so, how long should be his period of disqualification? and (iii) at what stage (if any) of his disqualification, in respect of what company or companies and on what conditions, should leave be granted under s. 17? Here we wish to discourage the belief that there is a complicated, arcane and inflexible code of evidential rules applicable in these cases. In most cases the essential thing will be for the court, with the assistance of the parties, to use common sense and to adopt a practical and flexible approach to case management, so as to confine the evidence to that which is probative (see Re Dawes and Henderson Agencies Ltd, Secretary of State for Trade and Industry v Dawes 1997 BCC 121). While the director’s general reputation may be relevant on questions of the appropriate period of disqualification and leave under s.17 detailed or repetitive evidence should not be allowed.

6. What matters are relevant to the length of the period of disqualification has been considered (at least in passing) by this court in Re Grayan Building Services Ltd 1995 Ch 241 and at first instance in Dawes and in Re Barings plc, Secretary of State for Trade and Industry v Baker (29 July 1997). In Grayan Hoffmann LJ, after citing Re Swift 736 Ltd , said at p.254

“it must be remembered that a disqualified director can always apply for leave under section 17 and the question of whether he has shown himself unlikely to offend again will obviously be highly material to whether he is granted leave or not. It may be relevant by way of mitigation on the length of disqualification, although I note that the guidelines in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch. 164 are solely by reference to the seriousness of the conduct in question.”

Henry LJ and Neill LJ agreed. But it is clear from the report in the Sevenoaks case that Dillon LJ (with whom Butler-Sloss LJ and Staughton LJ agreed) was distinguishing between matters which (if admissible) would tend to increase the period of disqualification, and matters of mitigation. Dillon LJ’s interlocutory question (reported at page 170) must be read in the light of counsel’s argument. That is clear from a passage in Dillon LJ’s judgment at p. 177. When it comes to mitigation (and to applications under s. 17) the court is not restricted to the facts of the offence.

7. In Dawes Blackburne J said (at p.130),

“ ‘Matters of mitigation’ [the phrase used by Dillon LJ in Sevenoaks at p.177 ] refers to matters relevant to the conduct that has been established”.

That is no doubt so, but does not provide anything like a precise or exhaustive test. In Baker Sir Richard Scott V-C put it like this,

“But once that conclusion has, on the evidence, been arrived at, and the question is what period of disqualification should be imposed, then the issue, subject to the minimum and maximum limits set by Parliament, is one for the discretion of the court. I do not for my part see how it can be said that the evidence relating to the general ability and conduct as a director of the individual in question is necessarily irrelevant to the exercise of this discretion. I do not believe that discretion can be put into a closet from which general evidence of the sort I have described is excluded. Of course, not all evidence of character would be relevant. It would not be relevant in the least whether the director was a good family man or whether he was kind to animals. But evidence of his general conduct in the discharge of the office of director goes to the question of extent to which the public needs protection against his acting in that office. It seems to me that evidence of that character is relevant to be taken into account by the court in exercising its discretion and cannot be excluded as being inadmissible”.

So far as there is any substantial difference between Dawes and Baker ( and it is probably little more than a difference in emphasis), it is the views expressed by the Vice-Chancellor in Baker which should be followed. A wide variety of matters - including the former director’s age and state of health, the length of time he has been in jeopardy , whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may have been ordered by other courts - may be relevant and admissible in determining the appropriate period of disqualification. We disagree with the view (that any period of de facto disqualification is irrelevant) expressed by Chadwick J. in Re Thorncliffe Finance Ltd, Secretary of State for Trade and Industry v Arif 1997 1 BCLC 34, 45. The same matters may be relevant to an application under s. 17, together with particulars of the responsibilities which the disqualified director wishes to be allowed to assume.

8. This court was referred to the decision of Nourse J. in Re Civica Investments Ltd 1983 BCLC 456, in which he said at pp 457-8,

“It might be thought that [the appropriate period of disqualification] is something which, like the passing of sentence in a criminal case, ought to be dealt with comparatively briefly and without elaborate reasoning. In general I think that that must be the correct approach. More important, as more of these cases come before the court, it is obviously undesirable for the judge to be taken through the facts of previous cases in order to guide him as to the course he should take in the particular case before him. No doubt in this, as in other areas, it is possible that there will emerge a broad and undefined system of tariffs for defaults of varying degrees of blame, but there must come a point when it is no longer either necessary or desirable to go through the facts of previous cases. For my part I think that that point has now been reached”.

That was one of the earliest cases under s. 28 of the Companies Act 1976, under which disqualification was not mandatory and there was no minimum period. However Nourse J.’s approach should be adopted in all cases involving disqualification. Nourse J.’s expectation about “a broad and undefined system of tariffs” has been fulfilled by the decision of this court in Sevenoaks. Nourse J. may not have foreseen how (with the advent of new and specialised law reports) large numbers of disqualification cases would continue to be the subject of detailed reports but their existence makes his remarks all the more important. The principles applicable to the court’s jurisdiction under the Act are now reasonably clear. The application of those principles to the facts of the particular case is a matter for the trial judge. The citation of cases as to the period of disqualification will, in the great majority of cases, be unnecessary and inappropriate.

9. We are concerned at the delay in the hearing of these cases. Sometimes delay is unavoidable because of pending criminal proceedings. Sometimes respondents obtain over-indulgent extensions of time for putting in their evidence. All such delays are deplorable, especially as there is no power to suspend a director on an interim basis, even in proceedings alleging serious misconduct. We feel that over-elaboration in the preparation and hearing of these cases and a technical approach as to what evidence is and is not admissible is contributing to delay. What is required and what the court should confine the parties to, is sufficient evidence to enable the court to adopt a broad brush approach. This should be regarded, especially in relation to the period of disqualification, as a jurisdiction which the court should exercise in a summary manner and the court should confine the parties to placing before it the material which is needed to enable it to exercise the jurisdiction in that way.

We would dismiss the appeal and the cross-appeal by consent.

Order: Appeal dismissed with costs. Cross appeal dismissed with costs.