ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION) LEEDS DISTRICT REGISTRY
HHJ SIMON BROWN QC (SITTING AS A HIGH COURT JUDGE
IN THE BIRMINGHAM CIVIL JUSTICE CENTRE)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE AIKENS
LORD JUSTICE PATTEN
| IN THE MATTER OF MUMTAZ PROPERTIES LTD AND IN THE MATTER OF THE INSOLVENCY ACT 1986
EDWARD CHRISTOPHER WETTON
(AS LIQUIDATOR OF MUMTAZ PROPERTIES LIMITED)
|- and -
|(1) SAEED AHMED
(2) SHAFIQ AHMED
(3) MUMTAZ AHMED
(4) MUNIR AHMED
(5) ZAFAR AHMED
Mr Hugh Jory (instructed by Walker Morris Solicitors) for the Respondent
Hearing date : 14 April 2011
Crown Copyright ©
Lady Justice Arden:
i) Did the judge err in holding that Zafar was a de facto director?
ii) Did the judge err in holding that the appellants Saeed and Shafiq were jointly and severally liable for the aggregate amount due in respect of all the directors' loan accounts?
iii) Did the judge err in refusing to allow the appellants to set off the amounts (if any) of the pre-liquidation debts owed to them by the Company?
iv) Did the judge err in finding that the debit balance on Munir's director's loan account included the sum of £75,551.37?
The liquidator's case
"21.1 Saeed Ahmed (Canada Life) £1,357.57
21.2 Saeed Ahmed £12,648.23 (credit)
21.3 Saeed (Personal House Mortgage) £8,891.33
21.4 Munir Ahmed £171,909.87
21.5 Zafar Ahmed £21,599.75
21.6 Shafiq Ahmed £14,036.16
21.7 Mumtaz Ahmed £65.30"
The judge's judgment
"18. Prior to the commencement of the substantive hearing of the application, Counsel for the parties helpfully agreed the sequential factual questions to be answered upon the evidence, both oral and documentary, before the court.
19. I will take each in turn.
20. In doing so, the Court bears well in mind that this is a case where the events in issue are now between 5 and 10 years ago and the contemporaneous documentation is far from complete. However, the witness statements are relatively recent. This judgment will therefore analyse the issues and the evidence in
accordance with the guidance provided in the dissenting speech of Lord Pearce in the House of Lords in Onassis v Vergottis  2 Lloyds Rep 403 at p 431:
"'Credibility' involves wider problems than mere 'demeanour' which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person telling something less than the truth on this issue, or though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by over much discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. [emphasis added] And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.""
"What then is the real effect on the hearing in a Court of Appeal of the fact that the trial judge saw and heard the witnesses? I think it has been somewhat lost sight of. Of course, there is jurisdiction to retry the case on the shorthand note, including in such retrial the appreciation of the relative values of the witnesses, for the appeal is made a rehearing by rules which have the force of statute: Order LXVIII., r.1. It is not, however, a mere matter of discretion to remember and take account of this fact; it is a matter of justice and of judicial obligation. None the less, not to have seen the witnesses puts appellate judges in a permanent position of disadvantage as against the trial judge, and, unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at, merely on the result of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case. The course of the trial and the whole substance of the judgment must be looked at, and the matter does not depend on the question whether a witness has been cross-examined to credit or has been pronounced by the judge in terms to be unworthy of it. If his estimate of the man forms any substantial part of his reasons for his judgment the trial judge's conclusions of fact should, as I understand the decisions, be let alone."
"26. It is accepted by the Applicant [the liquidator] that he can only place this example before the Court. However, as regards this, the explanation is quite simple. The Company's books and records are not within the possession or control of the Applicant despite his enquiries to ascertain the whereabouts of the books and records, and hence the Applicant could only prepare his case on the papers he has in his possession. The Respondents each asserted they did not have the books and records and that these were with either the accountant or Kiran Mistry. Both of these individuals, who were witnesses for the Respondents, confirmed in cross examination that any Company documents they had, had been passed to the Applicant and that they did not have possession of any of the missing books and records and these remained with the Company. Therefore the books and records of the Company must have remained with the Company. The Respondents have chosen not to deliver them up to the Applicant and nor to disclose them within the proceedings. The Court can draw adverse inferences against the Respondents for this but does not need to do so as this single piece of documentary evidence is compelling and, indeed in my judgment, overwhelming."
The judge's findings
"4. The Respondents are also closely interrelated in business. Companies House website registers numerous interlinked company appointments held by the Respondents, including various property companies and [the Company]."
"37. The evidence before the Court showed that the Respondents in general showed scant regard to legal definitions and terminology and that in order to determine the role each person played in the Company regard must be had to the evidence and not simply to title. This was shown in both the evidence of First Respondent who gave evidence as to his directorships of various companies which was not supported by Companies House records; the evidence of the Fifth Respondent that he could not have been a director of the Company due to his age and inexperience at a time when he was registered as a director of various other companies; the confusion in the written evidence of the Second Respondent as to his position in the Company and the evidence regarding the change of position of the Fourth and Fifth Respondents as to their status as an employee or consultant of the Company and the evidence of the Third Defendant that he was only an "honorary" director, whatever that may mean."
"38. It is plain on the evidence of directorships of the Fourth and Fifth Respondents that they played key roles in many of the companies owned or controlled by the family, and of which the First Respondent claimed to be a director, and the status of director or company secretary is seen by the family as a nominal title. Indeed the evidence of the First Respondent appeared to be that company money was not that of a company but of the family given his references to money of this Company and another Company owned by the family, Bellforce, as his money."
"43. The Applicant accepts that there is no evidence that the Fifth Respondent [Zafar] 'held himself out' as a director of the Company, as the Fourth Respondent undoubtedly did.
44. [Nevertheless,] there is compelling evidence that the Fifth Respondent did assume the status and functions of a 'de facto' director of the Company:
1. An employee or agent of the Company either was instructed to establish a director's loan account in the Fifth Respondent's name or had sufficient evidence before them to do so.
2. The Fifth Respondent had dealings with suppliers to the Company and was able to enter into agreements with local authorities regarding the Company.
3. The Fifth Respondent changed his position regarding his status within the Company without credible explanation. His tax return was signed in the same way as the Fourth Respondent and the Fifth Respondent relies on the same, incredible, change of position as to his status with the company as the Fourth Respondent to support such tax return.
4. Finally the excuse given as to why the Fifth Respondent could not be a director of this company, i.e. his age, is plainly wrong given he was already a director of other companies.
45. These factors in the preceding paragraph, in my judgment, demonstrate that the Fifth Respondent did exercise real influence over the corporate governance of the Company. "
"54. The Applicant has assisted the Court in this regard as far as he is able to do so and has produced a "Scott Schedule" setting out the basis of his claim to each item in the ledger. Surprisingly only the Fourth Respondent responded to this.
55. The ledger is on a simple well established accounting software called Sage. The dates listed on the face of the ledger are the date entered as the date of the entry by the user of the Sage system. The date on the ledger therefore does not reflect the date an entry was made. The Applicant has with the assistance of Sage looked at the metadata behind the entries and discovered that all ledger entries in the DU accounts with which these proceedings are concerned were made prior to the
Company entering into administration. Hence, they cannot have been made by the Applicant, as asserted by Mr Carter.
56. Nobody has been called to give evidence that they made the entries in error and logic dictates that all the entries in the ledgers were made by persons authorised by the duly appointed directors of the Company to make entries onto the system. In doing so it is to be assumed that the person, or persons, making the entries (and in particular those entries made on 9 March 2003 being a time at which the directors of the Company knew it was to be placed into administration) had evidence upon which the entries were to be made. That evidence of course is not before the Court.
57. The Applicant was straightforward in his position: he does not have the relevant documentation. The former Administrator of the Company was equally clear: he does not have the relevant documentation. Whilst criticism could be made of parts of the evidence given by the former Administrator and in particular the confusion he has undoubtedly caused by his contradictory statements regarding the books and records of the Company, when giving evidence to the Court he was clear that he did not have the books and records of the Company and that all documentation he had had been delivered up to the Applicant.
58. The simple position therefore is that the Applicant has placed the evidence he has before him before the Court. There is nothing within such which leads one otherwise to question the transactions within the Sage entries and in particular nothing to suggest that the entries within the DU were for the benefit of the Company.
59. In my judgment, these entries are accurate and were made prior to the administration of the Company by persons with knowledge of the Company's affairs and were not for the benefit of the Company."
"Fifth Respondent: There is no documentary evidence that the sum shown in the ledger in the name of the Fifth Respondent is incorrect. None of the items could conceivably be for the benefit of the Company e.g. Sky subscriptions etc."
"61. In my judgment, the DLAs are precisely what the Company directors and bookkeepers meant them to be at the times they were created and subsequently maintained until administration of the Company i.e. "directors loan accounts" detailing accurately personal expenditure by the Company for the personal benefit of each named Respondent. None of these payments were lawful remuneration or for the benefit of the Company.
62. In my judgment, the journal entries made on 9th and 10th March 2003 adding significant sums to the DLAs of the First Respondent, the Fourth Respondent and the Fifth Respondent are explicable only on the basis that they knew, as "directors" of the Company operating their own DLAs that it was about to be placed by them into administration, as it was shortly thereafter on 19th March.
63. I do not accept any of the evidence of the Respondents. It is self serving and exculpatory. If it had been accurate and true, it would have been supported by documentation such as invoices etc. There are none produced by any of the Respondents. In my judgment, in relation to each Respondent the figure due and owing under their loan accounts is that set out at paragraph 16 above."
"9. Guidance upon the definition of a "de facto" director was provided in Gemma Ltd v Davies  BCC 812, at Para 40. In order to show that a party is a de facto director for the purposes of S.212 of the Act:
1. The Applicant must plead and prove that the Fourth Respondent undertook functions in relation to the company which could properly be discharged only by a director (per MiIlett J. in Re Hydrodan (Corby) Ltd (in liq.)  B.C.C. 161, at 163;
2. It is not a necessary characteristic of a de facto director that he is held out as a director; such "holding out" may, however, be important evidence in support of the conclusion that a person acted as a director in fact;
3. Holding out is not a sufficient condition: what matters is not what he called himself but what he did;
4. It is necessary for the person alleged to be a de facto director to have participated in directing the affairs of the company (per Secretary of State for Trade and Industry v Hollier  BCC 11) on an equal footing with the other director(s) and not in a subordinate role;
5. The person in question must be shown to have assumed the status and functions of a company director and to have exercised "real influence" in the corporate governance of the company: Re Kaytech International Plc  B.C.C. 390;
6. If it is unclear whether the acts of the person in question are referable to an assumed directorship or to some other capacity, the person in question is entitled to the benefit of the doubt: Re Richborough Furniture Ltd  BCC 155."
"39 All one can say, as a generality, is that all the relevant factors must be taken into account. But it is possible to obtain some guidance by looking at the purpose of the section. As Millett J said in Re Hydrodam (Corby) Ltd  2 BCLC 180 at 182, the liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. As he put it, those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities of the office. So one must look at what the person actually did to see whether he assumed those responsibilities in relation to the subject company."
" It does not follow that 'de facto director' must be given the same meaning in all of the different contexts in which a 'director' may be liable. It seems to me that in the present context of the fiduciary duty of a director not to dispose wrongfully of the company's assets, the crucial question is whether the person assumed the duties of a director. Both Sir Nicolas Browne-Wilkinson V-C in Re Lo-Line Electric Motors Ltd,  Ch 477 and Millett J in Re Hydrodam (Corby) Ltd  2 BCLC 180, 183 referred to the assumption of office as a mark of a de facto director. In Fayers Legal Services Ltd v Day (11 April 2001, unreported), a case relating to breach of fiduciary duty, Patten J, rejecting a claim that the defendant was a de facto director of the company and had been in breach of fiduciary duty, said that in order to make him liable for misfeasance as a de facto director the person must be part of the corporate governing structure, and the claimants had to prove that he assumed a role in the company sufficient to impose on him a fiduciary duty to the company and to make him responsible for the misuse of its assets. It seems to me that that is the correct formulation in a case of the present kind. See also Primlake Ltd (in liq) v Matthews Associates  EWHC 1227 (Ch) 1227;  1 BCLC 666 at ."
"Mr Saeed Ahmed: I'll manage it, Munir manage it, my son will manage it. All three manages (inaudible)
Miss Jackson: So, so Zafar also assisted in managing the properties?
Mr Saeed Ahmed: He's employed to do that particular job. He's not there just for cup of tea.
Miss Jackson: Zafar would deal with the local authorities, wouldn't he?
Mr Saeed Ahmed: Local authority, yes. Any day to day running, business, concerning the property matters, if the task was given to them and they're employed by me, yes they'll do it.
Miss Jackson: For example, if the local authority had a health requirement, due to health inspectors, Zafar could agree to their demands couldn't he?
Mr Saeed Ahmed: He couldn't, he couldn't agree to their demand if the demand is, is unreasonable they'll serve a notice on to us and I'll take care of it. If a genuine requirement needed to be done, yes they have authority to do that.
Miss Jackson: And Zafar, your son, we've already established was allowed to deal with the local authorities. He also dealt with suppliers to the company didn't he?
Mr Saaed Ahmed: He did.
Miss Jackson: And if he gave instructions as to what was to happen in the running and management of the company, they'd follow, wouldn't they?
Mr Saaed Ahmed: Of course they would. If he give instruction to the company. If I give him the instruction what do, he'll do it.
Miss Jackson: But if he gave the instructions the (inaudible)
Mr Saaed Ahmed: Go on.
Miss Jackson: To the company, to you.
Mr Saaed Ahmed: He does not give me any instructions, he is my son. He listen to me.
Miss Jackson: Both Munir and Zafar will tell you what was happening in the company, they would tell you what was needed to be done and you together with them would ensure it was done.
Mr Saaed Ahmed: I will listen to them, at the end of the day ultimate decision is mine."
"I had no involvement with the Company in its decision-making. My role was to assist wherever in viewings, taking quotations for repairs, inspection of properties. These activities were carried out under the instruction of the Directors of the Company with their approval for actions carried out."
"143] As it was, Mr Millett, by an exercise of shrewd advocacy, was able, even in the absence of any challenge, to address the judge on the basis that Messrs Clifford's and Feld's evidence should be disregarded or discounted on the ground that it was incredible, self-serving and partisan: and in essence he succeeded in those submissions so far as the valuation exercise was concerned, as I have sought to show above. And yet, before this court, Mr Millett expressly accepted that he had no case of bad faith to make against Standard's witnesses. In these circumstances, his submission to us that the judge was simply entitled to make up her own mind as to the value of Standard's evidence did not meet the point. Of course the judge was entitled to make up her own mind about the evidence before her: but she was not entitled, at any rate not without the most explicit warnings and possible need for an adjournment, to find that evidence which had not been challenged by any cross-examination was false evidence, or evidence which spoke to a valuation exercise which was flawed by bad faith, irrationality or negligence. It is simply unfair for Standard's witnesses to be found wanting in such respects, unless the relevant challenges had been put to them and they had been afforded the opportunity (and I mean a proper opportunity, for which the ground had been sufficiently prepared in the pre-trial process) to answer the accusations made against them.
 This is not one of those cases where a minor issue arises as to whether some detailed point had been sufficiently covered in cross-examination. As has often been said, it is not necessary to cover every point. This case, however, is remarkable. There was, quite deliberately, no cross-examination at all of Messrs Clifford and Feld on their relevant evidence, but the forensic submission was nevertheless made in effect that such evidence should be totally rejected on the ground that "They would say that, wouldn't they?""
"(6) Did the duly appointed directors of the company allow the Fourth and Fifth Respondent to apply the money of the Company to their own use?
5l. The evidence provided to the Court in this regard was plain and clear in that the duly appointed directors of the Company did allow the Fourth and Fifth Respondents to apply the money of the Company to their own use. As regards the First Respondent this occurred due to the First Respondent permitting the Fourth and Fifth Respondents to use the company credit cards for their own use. The First Respondent did of course tell the Court that such sums were to be repaid to the Company. It is plain however from the ledgers that such did not occur.
52. The Second and the Third Respondents allowed the Fourth and Fifth Respondents to apply the money of the Company to their own use as they failed to give any attention to the accounts of the Company or to the use of the Company's money. Indeed the weight of the evidence was that save when the Second Respondent was needed to sign a document as a legal requirement the Second and Third Respondents took no role in the Company and left the First and Fourth Respondent to run the Company unchecked and unhindered."
"78. Joint liability arises where directors permit each other to use the money of a Company for their own ends; they are in breach of their fiduciary duties to act for the benefit and for the success of the Company: Selangor United Rubber Estates v Craddock (A Bankrupt) (No.3). Hence to the extent that the Respondents as directors of the Company permitted other directors to have loan accounts which were overdrawn, they are liable to recompense the Company for this as well (Re DKG Contracts Ltd  BCC 903). Therefore the liability of each of the Respondents would be for the total of all the overdrawn accounts and not simply each Respondent's individual account.
79. I find that the elderly Third Respondent was probably not fully aware of the responsibilities of a director or the activities of the other directors and their loan accounts. He was a marginal figure leaving all the running of the Company to his sons and grandson. He was, of course, wrong to abdicate his responsibilities but in my judgment it would be inequitable to hold him jointly responsible for making good £205,211.75 to the Company and its creditors, particularly when he is only personally responsible for restitution of £65.30 and where he alone gave some honest evidence about the running of the Company.
80. Each of the other Respondents took no heed of and paid no regard to the accounts of the Company. They each had a director's loan account for their personal gain not for the benefit of the Company and were aware, or ought to have been aware that their fellow directors, howsoever called, had directors' loan accounts yet they took no time to inform themselves of such or to control this illegal activity.
81. Leaving the Third Defendant aside, each other Respondent stated they did not see the accounts. I simply do not believe that evidence. Even if they had not, then as directors of the Company they wrongly took no effective control over the finances of the Company. Such is flagrant breach of their duties as directors of the Company and in particular the duty to act bonafide in the interest of the Company.
82. The result of such breach of duties was that each of the directors without check and without recourse utilised the Company's money for their own purposes, and hence were permitted by the other Respondents, to convert the Company's property to their own ends. The breach of duty was a continuing breach of duty by each of the Respondents which continued up to the date of the administration of the Company. As such the breach of duty by the Respondents caused the loss of the entire sum claimed in the application and it is just and equitable that the Respondents do jointly pay to the Applicant as liquidator of the Company the entire sum obtained from the Company by the Respondents to enable the Applicant to pay the costs, expenses of the liquidation and a dividend to the creditors of the company. The sum owed to the creditors being in excess of that claimed in the application."
"Second Respondent: Again, no documentary evidence is produced by the Second Respondent to show that the sums noted in his ledger as a loan were in fact payment for goods and services supplied. There are no invoices nor documentation to support such. In contrast the ledger entry is clear. There is again no documentary evidence to support the assertion that the Second Respondent was entitled to credits against the account or that withdrawals for the house mortgage were made against sums to be credited."
"60.4.l The 4th Respondent has no information about the £74,551.37 attributed to this account. However, there is no documentary evidence to support these bare assertions that the ledger entries represent sums incurred for the benefit of the Company. Whilst the Applicant has been unable to inform the Court as to the purpose of the debit to the account of £74,551.37 on 9 March 2003, but dated 10 March 2003, the Court accepts that this was properly made by a person authorised to do so on the basis of evidence before them to support it. The entry to the credit of the DLA of the Fourth Respondent was made at that time just before the Company went into administration on 19th March. In my judgment, this was an unjustified credit made purely for the Fourth Respondent's personal benefit to the Company's detriment at a time when he knew, or must have known the Company was insolvent and about to go into administration."
Disposal of appeal
Lord Justice Aikens:
Lord Justice Patten: