England and Wales Court of Appeal (Civil Division) Decisions

Secretary of State for Trade and Industry v Reynard [2002] EWCA Civ 497 (18th April, 2002)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
THE HON MR JUSTICE BLACKBURNE

		Royal Courts of Justice Strand, London, WC2A 2LL
		18th April 2002

Lord Justice Mummery :

1. This is an appeal from the decision of Blackburne J on 22 June 2001. He allowed an appeal by Mr Christopher Reynard against the order of Mr Registrar Simmonds on 24 July 2000 disqualifying him as a director for a period of 10 years. He reduced it to a period of 5½ years. The Secretary of State appeals with the permission of this court. It is a second tier appeal raising a point of principle and practice under the Company Directors Disqualification Act 1986 (the 1986 Act). Permission to appeal was limited to grounds 1 and 4 in the Appellant’s Notice:

“ 1. The Learned Judge erred in law in concluding that dishonest conduct by the defendant in the giving of his oral evidence at trial was not a matter that could be taken into account in determining

1.1 the question of a director’s fitness under s 6 of the Company Directors Disqualification Act 1986 or

1.2 the period of disqualification imposed under the Act…

4. The learned Judge erred in the exercise of his discretion in fixing the period of disqualification to be five and a half years.”

Background

2. Serious allegations were made against Mr Reynard in respect of his conduct as sole director of Howglen Limited (Howglen), which carried on business in relation to activity type holidays primarily for schoolchildren at three sites in Dorset and Devon. On 18 January 1996 the Midland Bank appointed joint administrative receivers under a debenture dated 6 February 1991. Howglen later went into insolvent liquidation.
3. Mr Reynard faced allegations of misconduct in the proceedings instituted against him by the Secretary of State under the 1986 Act on 14 January 1998: trading from April 1995 whilst insolvent at the risk of creditors; failing to provide holidays paid for in advance; misusing the company’s money in payment of personal expenses and personal tax liabilities; misappropriating a company car (a Citroen); acting in breach of fiduciary duty to Howglen in paying salary to his estranged wife, in arranging for the company to make an interest free unsecured loan to a charitable company (Adventures for Life Limited) of which he was sole director and to another associated company (Multi-Activity Training Unit Limited) and in agreeing for the company to pay 15 % interest on a secured loan of £300,000 by him to the company; drawing excessive remuneration before the administrative receivership; failing to make deductions for PAYE and NIC; failing to keep adequate accounting records; breaching the trading standards legislation regarding the contents of the holiday brochure; breaching health and safety requirements regarding fire precautions; failing to co-operate with the administrative receivers with respect to the statement of affairs and the recovery of the Citroen car; and late filing of accounts and returns of two other companies.

Decision of Registrar

4. The Registrar heard Mr Reynard give evidence over a period of 2 ½ days. He found all the allegations of unfitness proved. He also found that he was

“ a most unsatisfactory witness in that he was disingenuous, equivocal and on some occasions untruthful.”

5. Later in his judgment he said

“At the beginning of my judgment I criticised the defendant as a witness. Throughout his evidence in the witness box he sought to defend or justify acts or omissions by saying he relied upon his accountants, as they had not advised him against something he took to be right. Not dissimilar excuses are put forward that the bank did not condemn something, so he took it to be right. I find this approach wholly disingenuous, the more so that when the defendant was alerted by the bank in October 1995 of the possible insolvency of the company and its consequences, the defendant chose to ignore it or did not have the necessary business acumen to realise what was being said.

Another disturbing feature of the defendant’s evidence was the number of times he challenged contemporaneous documents, such as letters from the bank which he said did not represent the meetings preceding them or that circumstances had changed later. There is no contemporaneous evidence to support the defendant…I have great difficulty in accepting anything the defendant says.”

6. The Registrar concluded:

“The Defendant is in my judgment wholly unfit in a marked degree to be a director of a limited company or to be otherwise involved in its management by reason of the matters I have found proved.

The deficiency in this company is high, with no dividends to unsecured creditors. The defendant has run companies with little or no regard for creditors or to his obligations in law.

The defendant appears to lack any commercial probity. For these reasons I regard the levels of unfitness as serious.

As I have said, this in my view is a serious case. The defendant in my view lacked frankness in the witness box and I can understand Mr Banner’s submission on behalf of the Secretary of State that this is an upper bracket case and I tend to lean to that view. However, I take into account those matters which have been put to me, although I do not think that they are persuasive. I will give the defendant the benefit of those matters. This is, as I have said, a serious case. I will put the matter into the middle band according to Re Sevenoaks and the appropriate period for ban is 10 years and I so order.”

Decision of Blackburne J

7. On the appeal from the decision of the Registrar Blackburne J held that the Registrar was correct to find that unfitness was established, saying that there were ample grounds for that conclusion. He held, however, that the Registrar’s exercise of discretion in fixing the period of disqualification at ten years was open to review, as he had taken into account as misconduct matters which should either have not been considered at all or which did not amount to misconduct. He was therefore entitled to exercise the discretion afresh and, in doing so, he stated that he had no doubt that the period of ten years was altogether excessive. He substituted the period of 5 ½ years as the appropriate period. In fixing that period he did not take into account the Registrar’s finding that Mr Reynard was “a most unsatisfactory witness.” He said that he did not agree with the proposition advanced on behalf the Secretary of State that

“ … a director’s deceitful performance in the witness box can serve as a separate allegation of misconduct and can be taken into account on the question of unfitness or provide the basis for imposing a longer period of disqualification than would otherwise have been appropriate. The manner in which a director acquits himself in the witness box may of course be highly relevant to whether an allegation of misconduct already relied upon is or is not established. Equally, it may serve as mitigation in the director’s favour in fixing the period of disqualification. But I respectfully dissent from the notion that a director’s performance in the witness box can provide a discrete head of misconduct or justify a longer period of disqualification than would otherwise have been imposed. What the court is concerned with is the director’s conduct as a director, not with his conduct as a defendant in court proceedings. Moreover the notion is contrary to the observations of Dillon LJ in Sevenoaks at 177E-F….”

8. As appears from the limited permission to appeal, this is the point of principle and practice on which the Secretary of State seeks a ruling from this court.

The Legislation

9. The proceedings against Mr Reynard were taken under section 6 of the 1986 Act, which provides that the court shall make a disqualification order

“(1) …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.

(2) For the purposes of this section… [provisions as to when a company is insolvent]….references to a person’s conduct as a director of any company or companies include, where that company or any of those companies has become insolvent, that person’s conduct in relation to any matter connected with or arising out of the insolvency of that company.”

10. I accept the submission of Mr Crow on behalf of the Secretary of State that section 6(2) is wide enough to include in the expression “conduct of a person as a director” making him unfit his conduct in the proceedings taken against him for a disqualification order. The disqualification proceedings are a “matter connected with or arising out of the insolvency” of the company. There is no good reason for cutting down the width of those words so as to exclude the conduct of the director at the hearing of the disqualification proceedings. Indeed, it would be surprising if a court had to exclude from consideration of unfitness or length of disqualification serious misconduct by a director defendant in the proceedings; for example, shredding or fabricating documents in the course of the proceedings. The defendant should be allowed, where necessary, a proper opportunity to deal with and to respond to charges of misconduct based on conduct occurring after the proceeding have commenced. As long as the charges of misconduct in the proceedings are dealt with in a procedurally fair manner I see nothing in the legislation or in principle to exclude misconduct in the proceedings from consideration on the issue of unfitness or in fixing the period of disqualification
11. Section 9 of the 1986 Act does not affect my view of section 6. It provides that:

“(1) Where it falls to a court to determine whether a person’s conduct as a director…of any particular company or companies makes him unfit to be concerned in the management of a company, the court shall, as respects his conduct as a director of that company or, as the case may be, each of those companies, have regard in particular –

(a) to the matters mentioned in Part I of Schedule 1 to this Act, and

(b) where the company has become insolvent, to the matters mentioned in Part II of that Schedule;

and references in that Schedule to the director and the company are to be read accordingly.”

12. Neither Part I, setting out matters applicable in all cases, nor Part II, setting out matters applicable where the company has become insolvent, expressly deal with the conduct of the director in the proceedings to disqualify him. The scheduled items are not, however, an exhaustive list of matters to which regard may be had in determining unfitness. They are specific matters to which the court must have particular regard. Other relevant matters are not excluded from consideration. I note that paragraph 10 of Part II refers to the failure of the director to comply with any post-insolvency obligation imposed on him by or under various specified provisions of the Insolvency Act, such as the preparation of the statement of affairs, attendance at meetings, delivery up of company property and co-operation with the liquidator.

Discussion of Authorities

13. Blackburne J discussed two authorities. First, Re Godwin Warren Control Systems Plc (1993) BCLC 80 in which Chadwick J said at p. 92d:

“ It was also urged upon me that I could not take into account Mr Simpson’s conduct in relation to these proceedings; in particular, that I ought not to take into account the fact that he has persisted in his attempts to conceal what actually occurred in the evidence which he has given in his affidavit and in this court. It was said that these proceedings having commenced after Mr Simpson ceased to be a director as a result of the liquidation, his conduct in these proceedings could not be conduct as a director of Systems. That contention, if correct, would lead to the strange result that the court would be prevented from considering under section 6 (1), whether the director concerned did properly appreciate what was the vice which had brought him before the court. I think that the contention is misconceived.

Section 6(2) requires that reference to a person’s conduct as a director of any company or companies are to include, where that company or any of those companies has become insolvent, that person’s conduct in relation to any matter connected with or arising out of the insolvency of that company. It appears to me that proceedings under the Company Directors Disqualification Act 1986 are matters connected with or arising out of the insolvency of the company in respect of which they are brought; and that a person’s conduct in relation to those proceedings is therefore to be treated as part of his conduct as a director of the company by virtue of section 6 (2) of the Act.”

14. I am in full agreement with Chadwick J’s analysis of the effect of section 6(2) of the 1986 Act. His reasoning has been followed by Warner J in Re Moorgate Metals Ltd [1995] 1 BCLC 503 at 516 e-517f and by Laddie J in Re Living Images Ltd [1996] 1 BCLC 349 at 377d-f. In Godwin Chadwick J correctly took into account, on the issue of unfitness, his finding that the defendant’s attempt to deceive the court in his evidence was an indication that he did not appreciate his duties as a director.
15. In this case the Registrar was entitled to base his finding of Mr Reynard’s unfitness on, among other things, the unsatisfactory nature of Mr Reynard’s evidence (and his rejection of it) on matters relevant to his fitness to be concerned in the management of a company. In doing so the Registrar did not simply consider what was put to Blackburne J as Mr Reynard’s “deceitful performance in the witness box.” As the Registrar explained in his judgment, he took account of the fact that Mr Reynard gave unsatisfactory evidence when seeking to defend himself by blaming others, such as the accountants and the bank. He also considered that his disingenuous approach in his evidence indicated that he ignored warnings as to the financial state of the company or that he lacked the necessary business acumen to realise what was being said to him.
16. Blackburne J accepted that the manner in which a director acquits himself in the witness box may be highly relevant to whether an allegation of misconduct already relied is or is not established. He rejected any other potential relevance of the defendant’s conduct in giving evidence by the dictum that the court is concerned with the director’s conduct as a director, not with his conduct as a defendant in court proceedings. In my judgment the distinction drawn in the dictum is not an accurate reflection of the effect of section 6 (2). As explained above, “conduct as a director” is extended to the director’s conduct as a defendant in disqualification proceedings, being a matter “connected with or arising out of the insolvency” of the company. His conduct as a defendant in the proceedings, including the giving of evidence, is a matter which is capable of being taken into account in determining his fitness to be concerned in the management of a company. The expression “performance in the witness box” does not convey the substance of the essential point, which is that, in his evidence on issues relating to his involvement in the management of the company, the defendant may provide the court with additional evidence of his unfitness for office. The finding of the court on his conduct as a witness on such points is capable of amounting to an additional ground of his unfitness and is a factor capable of being taken into account in fixing the period of disqualification.
17. I am unable to agree that this approach is contrary to the observations of Dillon LJ in the second case cited by Blackburne J, Re Sevenoaks Stationers (Retail) Limited [1991] Ch 166 at 177E-F. The context of the passage quoted by him was the general point that, as a matter of good practice and in compliance with the procedural requirements of the rules, a director should know the substance of the charges that he has to meet. The charges may be altered or added to, provided that it can be done without injustice to the defendant. This might involve the giving of prior notice, in the absence of which an adjournment may be necessary. In this particular passage Dillon LJ gave reasons for rejecting the submission that, at the stage of sentencing (i.e. fixing the length of disqualification), it is permissible for the court to take into account charges of misconduct which were never made against him and on which he has not been convicted. I do not read the judgment as excluding from consideration on sentencing light which is thrown upon his unfitness as a director by the evidence he has given on the charges against him, of which he has been given prior notice.

Conclusion

18. For these reasons I would find in favour of the Secretary of State on the point of principle or practice. It does not follow, however, that this appeal should be allowed or that the length of the period of disqualification should be restored to the level set by the Registrar or increased from 5½ years to an intermediate period. The “unsatisfactory witness” point was not the only one on which Blackburne J had found that the Registrar had taken into account as misconduct matters which should not have been considered at all or did not amount to misconduct. After a careful and detailed consideration of all the findings against Mr Reynard, Blackburne J held that there was no dishonesty in relation to payments of sums properly due to the Crown and that the loans to associated companies and allegations of breaches of trading and health and safety standards did not amount to misconduct.
19. The skeleton argument for the Secretary of State contains detailed submissions as to why it is open to this court to exercise the discretion afresh and as to the grounds on which it should impose a longer period of disqualification than 5½ years. It is contended that this case falls squarely within the middle bracket of 6 to 10 years in Sevenoaks. This court has also had detailed written and oral argument from Mr Reynard in person. He had been refused permission to cross appeal. There is, however, an issue between Mr Reynard and the Secretary of State on the Secretary of State’s appeal as to the extent to which the findings of dishonesty made by the Registrar in his judgment were reversed by Blackburne J. Mr Reynard also pointed to the effect of the period of disqualification on his livelihood .
20. In the context of the limited permission to proceed to a second tier of appeal to test a point of principle relevant both to the issue of unfitness and to the period of disqualification, I do not consider that it would be appropriate for the court in the circumstances of this case to embark on the exercise of a detailed second review of the length of the period of disqualification. I would decline to interfere with the order for disqualification for the substantial period of 5 ½ years, which was set by Blackburne J in the exercise of his discretion, and is not far below the middle bracket proposed on behalf of the Secretary of State.

Result

21. I would dismiss the appeal.

Lord Justice Latham

22. I agree

Lord Justice Pill:

23. I also agree. The point of principle or practice on which the Secretary of State seeks the ruling of the Court has arisen because of the submission made to Blackburne J by counsel then appearing for the Secretary of State, as understood by Blackburne J, in relation to Mr Reynard’s “performance” in the witness box. Blackburne J stated (paragraph 119):

“But the fact that the Registrar considered Mr Reynard when giving evidence as ‘disingenuous, equivocal and on some occasions untruthful’ led Mr Banner to submit, on the authority of Re Godwin Warren Control Systems Limited [1993] BCLC 80, that the Registrar was entitled to take into account Mr Reynard’s ‘performance’ as a witness as a separate, albeit unpleaded, allegation of unfitness and to add a period of the length of disqualification he would otherwise have imposed to reflect this finding. In his closing submissions, he contended that the pleaded and proved allegations, if they had stood unopposed, would have justified an eight year period of disqualification and that Mr Reynard’s unsatisfactory performance as a witness in seeking to resist these allegations justified the addition of a further one or two years in the period.”

24. That submission, if it was made, was in my judgment correctly rejected by Blackburne J. The task of the judge is not to judge the “performance” of the director in the witness box but to assess his conduct as a director within the parameters set out in section 6 of the Company Director Disqualification Act 1986. As I read the judgment of Mr Registrar Simmonds, he did not fall into the error which Blackburne J understood he was being asked to uphold. In those passages of his judgment cited by Mummery LJ, the Registrar was doing no more than applying the principle stated by Chadwick J in Re Godwin Warren Control Systems Plc [1993] BCLC 80 and correctly identified by Blackburne J at paragraphs 120 and 121 of his judgment:

“120. It is true that in Godwin Warren Control Systems Chadwick J considered (at 92h) that a person’s conduct in relation to disqualification proceedings falls to be treated as part of his conduct as a director of the relevant company or companies. He therefore felt able to take the view that the attempt by one of the respondent directors before him to deceive the court as to his actions and beliefs in the matter of certain misrepresentations and non-disclosures (to the company’s advisers, auditors and board members) in connection with a particular transaction was an indication that the director still did not appreciate the need for the disclosures in question was a serious requirement and not something to be brushed aside as a technicality. He concluded that the particular vice in the director’s conduct which had led to past misconduct would be likely to recur if no disqualification was made. He therefore took the view that the particular respondent’s conduct as a director made him unfit so as to require his disqualification.

121. I do not consider that the facts of that case justified the interpretation which Mr Banner sought to put upon it. Chadwick J was saying no more, I think than that the director’s performance in the witness box illuminated and was relevant therefore to the misconduct charges against him.”

I see no sign in the Registrar’s judgment that he took a period of eight years as the appropriate period for disqualification and added a year or two for “unsatisfactory performance as a witness”, an approach to sentencing Blackburne J believed to have been suggested on behalf of the Secretary of State.

25. The correct approach in disqualification proceedings is to consider the conduct of the defendant, as a director and as a whole, in relation to his fitness to be concerned in the management of a company. Evidence given to the Registrar upon an examination of his conduct may well throw light on his fitness to be a director and, if unfit, the period of disqualification to be imposed. That is very different from deciding what, on the evidence as a whole, is the appropriate period of disqualification and then adding a year or two for unsatisfactory performance in the witness box. The Court is not judging a performance but assessing fitness or unfitness as a director. If, which I doubt, Blackburne J was intending to say more than that in paragraph 122 of his judgment, cited by Mummery LJ, I respectfully disagree.
26. I agree with the approach stated by Mummery LJ in paragraph 10 and the last two sentences of paragraph 16 of his judgment. I agree with Mummery LJ’s analysis of the observations of Dillon LJ in Re Sevenoaks Stationers (Retail) Limited [1991] Ch 166, 177E-F. I also agree with Mummery LJ’s conclusions on the facts of the present case.
Order: Appeal dismissed with costs to be subject to detailed assessment if not agreed. Application by the respondent for permission to appeal to the House of Lords refused for want of jurisdiction. (Order does not form part of the approved judgment)