England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		24 March 1999

This is an application by the Secretary of State for Trade and Industry for an order under section 6 of the Company Directors Disqualification Act 1986 ("the Act") that Owen Parsons ("Mr Parsons"), Pierre Maurice Bhuglah ("Mr Bhuglah") and Agnes Henriette Marie Bhuglah ("Mrs Bhuglah") shall not, without the 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.

The Originating Application was issued on 2 May 1997 and the subject company for the purposes of Section 6 was Galeforce Pleating Company Limited ("Pleating"), which was placed in creditors' voluntary liquidation on 3 May 1995 when Panos Eliades ("Mr Eliades") was appointed liquidator. The Respondents, Mr Bhuglah, Mrs Bhuglah and Mr Parsons were all directors of Pleating. In addition Mr and Mrs Bhuglah were directors of Galeforce Limited ("Gale") which went into creditors voluntary liquidation on 19 July 1991 and Mr Bhuglah was also a director of Earlglobe Agency Limited ("EAL") which went into creditors' voluntary liquidation on 17 February 1993. The Secretary of State contends that, in addition to their conduct as directors of Pleating, Mr and Mrs Bhuglah's conduct as directors of Gale, and Mr Bhuglah's conduct as a director of EAL, should be taken into account under Section 6(1)(b) and that such conduct makes them unfit to be concerned in the management of a company.

The Secretary of State contends that, in relation to Mr Parsons, his conduct as a director of Pleating makes him unfit to be concerned in the management of a company.

Neither Mr Bhuglah nor Mrs Bhuglah contest the Secretary of State's case that their conduct of the relevant companies is such as to make them unfit to be concerned in the management of a company and that accordingly disqualification orders should be made against them. There are two sworn affidavits before me from Mr Bhuglah and one draft unsworn affidavit by Mrs Bhuglah exhibited to one of Mr Bhuglah's affidavits dated 6 October 1997. He has deposed that, to the best of his knowledge, information and belief, her affidavit is true in all respects. Although Mr Bhuglah knows that the Secretary of State seeks a period of 10 years disqualification against him he has not filed evidence to dispute the period nor has he attended these hearings or been represented before me. Likewise although in the draft unsworn affidavit Mrs Bhuglah asks the Court not to impose on her a disqualification order for more than the minimum of two years prescribed by the Act, she has not appeared before me either in person or represented by Counsel to argue against the 6 year period of disqualification sought by the Secretary of State. However, Mr and Mrs Bhuglah's business consultant, Mr S Klibansky, was present in Court throughout most of the proceedings.

GALE

Gale was incorporated on 17 August 1981 and commenced trading on 20 September 1982 as textile processors. It traded from premises at 1 Estate Way, Leyton, London E10 and ceased trading on 17 June 1991. As I have already stated it went into creditors voluntary liquidation a month later on 19 July 1991. Mr and Mrs Bhuglah were directors from shortly after incorporation until the company went into liquidation. Mrs Bhuglah was in addition the Company Secretary. Mr and Mrs Julian Gross, who were the parents of Mrs Bhuglah, were also directors but they ceased to be such some time prior to 31 March 1985. Accordingly, Mr and Mrs Bhuglah were the sole directors of Gale for the principal period of trading. Mr Parsons was the auditor for Gale. Mr and Mrs Bhuglah separated prior to June 1990. The auditors' accounts show that directors' remuneration paid to Mr and Mrs Bhuglah in the period 31 March 1985 to 31 March 1989 rose from £14,025 for Mr Bhuglah in the year ended 31 March 1985 and £9,976 for Mrs Bhuglah to £24,083 and £20,660 respectively in the following year. Remuneration was maintained at a similar level up until the year ended 31 March 1989, the last year for which audited accounts are available, in which year Mr Bhuglah received £25,845 and Mrs Bhuglah received £28,122. The audited accounts for Gale also show that Mr and Mrs Bhuglah were the owners of Gablepost Limited ("Gablepost") which owned the head lease of the premises at 1 Estate Way which was sub-leased to Gale at a rental ranging between £16,250 for the year ending 31 March 1986 to £35,000 for the year ending 31 March 1989. In additional Gablepost leased plant and machinery and motor vehicles to Gale for which payments were made ranging from £15,801 for the year ending 31 March 1986 to £28,625 for the year ending 31 March 1989. Gale's issued share capital comprised £7,500 ordinary shares of £1 each which were issued and paid up and a further £2,500 £1 shares which were allotted but not called, held equally by Mr and Mrs Bhuglah. The statement of affairs for Gale as at 19 July 1991, sworn by Mr Bhuglah and lodged in the liquidation proceedings showed an estimated total deficiency subject to costs of £207,236. Preferential creditors included £85,400 owed to the Inland Revenue in respect of PAYE and DHSS and graduated contributions and £27,704 owed to HM Customs and Excise in respect of VAT. In addition the statement of affairs showed trade and expense creditors of £18,399 and a further £67,296 owed to HM Customs and Excise in respect of VAT. Gale was dissolved on 14 September 1996 and at that time the evidence shows that the estimated deficiency was in fact £329,399. HM Customs and Excise claims in fact totalled £136,475.61 as opposed to the total of £95,000 shown in the statement of affairs. Similarly Inland Revenue and DSS claims total £166,087 compared with the £85,400 contained in the statement of affairs. Mr Eliades deposes that no monies were obtained from debtors, despite the fact that the statement of affairs contained an estimated realisation figure of £80,000 for debtors.

Gale's Trading History

Gale traded throughout its life from leasehold premises at 1 Estate Way as textile processors concentrating on fancy stitching and embroidery. Gale leased the premises and plant and machinery from Gablepost. Gale held an account with Midland Bank plc and the overdraft on the account was secured by a fixed charge on the book debts of Gale and a floating charge on all other assets of the company and by the personal guarantees of the directors. The overdraft as at 31 March 1989 was £93,478. However no overdraft balance was shown on the statement of affairs for Gale at the time of its liquidation. As Mr Eliades points out in his affidavit, the fact that the guaranteed overdraft appears to have been reduced from £93,478 shown in the accounts to 31 March 1989 to nil at 19 July 1991 (being the date of liquidation), and that, during that period, there was no introduction of capital, but a substantial increase in Crown debts, clearly indicates that the financing of Gale over the later period of trading was heavily reliant on creditors and in particular the Crown. The evidence shows that the substantial sums in respect of VAT, PAYE and NIC amounting to some 93% of the total figure for creditors, were not paid on the due dates in accordance with the company's statutory obligations. It is evident that substantial liabilities to the Crown were deliberately allowed to accumulate and that there was a policy of late payment or retention of monies due and owing to the Crown, notwithstanding that at the same time substantial sums were being paid to Mr and Mrs Bhuglah in respect of remuneration and, via their interest in Gablepost, in respect of rent and leasing charges. These allegations are not disputed by Mr and Mrs Bhuglah. In the circumstances Mr Eliades contends, and this evidence is relied upon by the Secretary of State, that Mr and Mrs Bhuglah caused Gale to trade to the detriment of creditors and in particular the Crown. In my judgment this allegation is made out on the evidence before the Court.

EAL

EAL was incorporated on 28 February 1990 and began trading in June 1991 as textile processors from 4 Estate Way Leyton, London E10. It ceased trading on 30 September 1992 and went into creditors' voluntary liquidation on 17 February 1993. Mr Bhuglah was joint director of EAL with another man until 5 June 1992 when that other man resigned. From that time Mr Bhuglah was sole director of EAL and was thus responsible for its administration and management. Mr Parsons was the company accountant for EAL. EAL had an authorised share capital of 2 £1 issued shares which were held by Mr Jubb and Mr Bhuglah as to 1 each.

The statement of affairs for EAL as at 17 February 1993 sworn by Mr Bhuglah showed an estimated total deficiency, subject to costs, of £292,082. Of this figure, the Inland Revenue were shown as owed £70,000 in respect of PAYE and DHSS contributions, and HM Customs and Excise were shown as creditors for £123,845 in respect of VAT. Mr Eliades' evidence was that the final deficiency for EAL could not be determined as the final claim from the Inland Revenue had not yet been received, but that the deficiency would be higher than that shown in the statement of affairs; the claim actually received from HM Customs and Excise amounted to £262,051 and the Inland Revenue had indicated at the creditors meeting that the arrears outstanding for 1991/92 alone amounted to £70,000 which was the figure allowed in the Statement of Claim for the total Inland Revenue debt; on the assumption that the Inland Revenue debt remained at £70,000, current claims in EAL's liquidation would total £332,051. On that basis he estimates the deficiency for EAL as £430,288, as opposed to the £292,082 shown in the statement of affairs; this includes total liabilities of approximately £518,000, of which approximately 60% represent Crown debts. There is no prospect of any dividend payment to any unsecured creditors in the liquidation of EAL.

History of EAL's Trading

EAL began trading in 1991 after taking over the business of Gale. The business continued to be centred on fancy stitching and embroidery. EAL did not own its own fabric as it always used its customers' fabric. EAL paid rent to Gablepost of £20,000 p.a. by standing order for its premises at 4 Estate Way, Leyton. As I have already stated, Mr and Mrs Bhuglah were 50/50 shareholders of Gablepost. The same premises were occupied by Pleating over the entire period that EAL traded and Pleating paid an additional £35,000 p.a. in equal thirds to Gablepost making a total annual rental paid for the premises of £55,000. No formal overdraft facilities were given to EAL, which banked with Midland Bank, but EAL was permitted to draw against unclear effects up to £20,000. EAL was stated by Mr Parsons at the creditors' meeting to have traded profitably from June 1991 until March 1992 when the company apparently became strapped for cash. Mr Parsons stated that EAL was adversely affected by a series of claims concerning late deliveries and faulty merchandise. EAL ceased to trade at the end of September 1992, when bank finance was not forthcoming. Mr Eliades' evidence, which I accept, is that it is evident that EAL's VAT liabilities were allowed to accumulate unpaid from September 1991. In addition there appears to have been substantial non-preferential PAYE claims outstanding. Mr Eliades contends, and I accept, that the level of non-preferential debts indicates that Mr Bhuglah was aware, or ought to have been aware, of accumulating Crown liabilities and indicates that EAL pursued a policy of late payment or retention of monies due and owing to the Crown. This was borne out by the evidence given by Mr Parsons in relation to EAL.

The specific charges by the Secretary of State in relation to EAL are that Mr Bhuglah caused EAL to trade to the detriment of creditors and, in particular, the Crown. In my judgment, on the evidence before me that charge is made out. It is clear that EAL was insolvent from November 1991 onwards and that, by July 1992, Mr Bhuglah must have been aware, or at the least should have been aware, that EAL had accumulated unpaid VAT of over £77,000. Of the total liabilities of at least £430,000, Crown debts appear to be at least £342,051.

Pleating

Pleating was incorporated on 25 August 1988. It started trading on 25 August 1988 as garment pleaters with an issued share capital of £999 comprising 999 ordinary £1 shares, held equally as between Mr Bhuglah, Mrs Bhuglah and Mr Parsons. The Respondents were directors throughout the company's trading history save that Mrs Bhuglah resigned on 19 October 1994. The company ceased trading on 17 March 1995 and went into creditors' voluntary liquidation on 3 May 1995. Mr Parsons was the company secretary of Pleating from 31 October 1988 to the date of its voluntary liquidation. Each of the Respondents were signatories to the company's bank account and, in addition to his role as director, Mr Parsons had the responsibility of ensuring that proper records were kept by the company. The statement of affairs for Pleating as at 3 May 1995, sworn by Mr Parsons and lodged in the liquidation, shows an estimated total deficiency as regards unsecured creditors of £365,418. Although, according to the statement of affairs, Crown claims total approximately £333,691 actual claims received by the Inland Revenue and the Customs and Excise post-liquidation totalled some £405,819. According to Mr Eliades, the estimated final deficit will be in the region of £438,000, with no prospect of any payment whatsoever to unsecured creditors. The statement of affairs sworn by Mr Parsons included a figure for stock in the sum of £40,000, but with an estimated realisable value of only £4,000. Likewise the statement of affairs included a figure for goodwill of £60,000 but with an estimated realisable value of only £2,000.

Mr Eliades prepared a deficiency account taken forward from the balance as shown in the profit and loss account in the audited accounts as at 31 March 1994. At that stage the loss was £27,710. Mr Eliades' deficiency account demonstrates that the assets written off for the purposes of the statement of affairs account for an increase in that loss to £155,000, that employee claims arising from the liquidation account for a further £24,000, and that the balance of £186,588, which goes to make up the deficiency of £366,417 as shown in the statement of affairs represents unexplained losses for the period 1 April 1994 to 3 May 1995.

Pleating traded as pleaters from the premises at 4 Estate Way which were rented for the sum of £35,000 per annum. Mr Eliades deposed that Mr Parsons had told him that the premises were owned one-third by Gablepost, one-third by Mr Bhuglah and one-third by Mrs Bhuglah. It appears that Pleating traded simultaneously with Gale until the cesser of that company's trading and from June 1991 to September 1992 Pleating trading simultaneously with EAL from the same premises. Mr Parsons told the Court in his evidence that, after EAL ceased trading some time in late 1992, Pleating purchased its stock which consisted of cottons, reels, elastic, paper, needles and spare parts for machinery and that thereafter, from 1993 onwards, Pleating, in addition to its own business of pleating, also carried on EAL's former business of embroidery and fancy work.

The audited accounts of Pleating showed it to be insolvent on a balance sheet basis from the inception of its trading. In the year to 31 March 1990, Pleating made a loss of £30,529, on a turnover of £197,758 and had a surplus of liabilities over assets of £29,530. In the year to 31 March 1991, it made a loss of £33,572 on a turnover of £102,634, and had a surplus of liabilities over assets of £63,102. In the year to 31 March 1992, it made a loss of £22,238 on a turnover of £97,459, and had a surplus of liabilities over assets in the sum £85,340. In the year to 31 March 1993 the company made a profit for the first time of £58,845, on a turnover of £353,156 but despite this liabilities still exceeded assets in the sum of £26,495. In the year to 31 March 1994, on a substantially increased turnover of £705,700, a net loss of £216 was incurred and liabilities exceed assets in the sum of £26,711. The accounts for the 3 years 31 March 1992 to 31 March 1994 were all signed off on approximately 23 November 1994. It would have been clear to the directors of Pleating that the company was balance sheet insolvent from the commencement of trading on 25 August 1988. All three Respondents would have been aware of this no later than 31 January 1991, which was the date when the accounts for the period 25 August 1988 to 31 March 1990 were signed.

The evidence shows that Pleating was not able to meet its liabilities in respect of VAT, PAYE and NIC as and when they fell due from November 1993 at the latest. Winding up petitions were presented in respect of unpaid VAT and, although compromise agreements were reached with the Customs and Excise, Pleating was clearly not able to comply with the revised payment terms under the compromise agreements. Similar difficulties arose in relation to non-payment of PAYE and NIC and although the Inland Revenue did not issue a winding up petition it is clear that frequent demands for payment were made by the Inland Revenue and that on frequent occasions payments that were promised were either not made, or were made by cheques which were subsequently dishonoured. The Secretary of State contends, and in my judgment this contention is made out on the evidence, that the documentation available indicates that Pleating was not able to meet Crown debts as and when they fell due, from November 1993. The company's defaults in payment, despite demands being made, show that Pleating was reliant upon the Crown as an unwilling creditor to finance its trading whilst insolvent.

Mr Parsons has accepted in his evidence before this court that from early 1994, if not in late 1993, NIC and PAYE was not being paid and that likewise substantial cashflow difficulties within the company meant that VAT was not being paid.

In my judgment Pleating was clearly under-capitalised. Although until approximately July 1992 the company did have an overdraft with Midland Bank, which was secured by the deposit of monies or other assets by Mr Parsons in the region of £30,000, those assets were returned to him in July 1992, when the overdraft was repaid. It appears that subsequently he made these sums available to the company by way of loan and at the date of Pleatings liquidation approximately £30,000 was still owing to him which he has lost.

Inadequate accounting records

The Secretary of State contends that inadequate accounting records were maintained by the company in breach of Section 221 of the Companies Act 1985. The liquidator contends that the deficiencies in the accounting records and books of Pleatings have hampered his enquiries into the liquidation of Pleatings. No application was made by Mr Parsons or by Mr and Mrs Bhuglah to cross-examine Mr Eliades in this or any other respect. Although Mr Parsons in his evidence contended that full accounting records were maintained, he made no effort whether by subpoena or other application to produce such books to the liquidator despite being specifically put on notice to do so in Mr Eliades' second affidavit dated 19 May 1998. In this affidavit Mr Eliades specifically said that if Mr Parsons knew of the existence of other books and records of the company which enabled it to satisfy the statutory requirement, then Mr Parsons was invited to produce them for Mr Eliades' inspection either from his own possession, custody or control or by subpoena from a third party.

In this connection it is relevant to note that in a letter dated 9 October 1997 from Mr Parsons to Mr and Mrs Bhuglah's business consultant, Mr Klibansky, Mr Parsons stated as follows:

"as you are aware I stated at the hearing we all attended [an earlier hearing of the present originating application] that I propose to resist and am now required to provide the grounds on which my opposition is based by means of an affidavit which has to be filed on 13 October 1997.

I have made a rough draft of the grounds I am obliged to use if I am to stand any chance of success. Basically it consists of a down right condemnation of the way the liquidation was carried out in that had the liquidators made a thorough investigation of the company's affairs rather than co-operate with the Phoenix company they would have uncovered large sums of money which were owed to the company by some of it's [sic] directors and associated companies both in respect of assets purchased which were not taken into account and personal expenditure and investments which should have been recovered. All the necessary information and details are in the books and records held by the liquidators; most of which are duplicated on my computer.

I have a problem however in that having worked with Maurice [Mr Bhuglah] and to a lesser extent Ann [Mrs Bhuglah] for almost 20 years I am loath to turn 'Queen's evidence' and thereby increase the burden. I was nominally a director of the company and as such had a responsibility to curb Maurice's excesses. This I failed to do."

It is clear from this that not only did Mr Parsons himself have parallel records relating to Pleating's affairs but that also he had information in relation to apparently improper transactions carried out by the directors for their own personal benefit or account which were not proper expenditure of the company. It is clear from the evidence which Mr Parsons gave to me in cross-examination that he did not consider it appropriate for him, as a director of the company, voluntarily to have co-operated with the liquidator by providing this information to him, unless the liquidator specifically asked for such information, which, according to Mr Parsons, he had not. I consider that such was not an appropriate stance for Mr Parsons to have adopted as a director in the circumstances and I take a dim view of it. In my judgment it was incumbent upon him, as a director, to volunteer such information that he had relating to the records of Pleating, and in particular to provide such information as he had that suggested that Mr and Mrs Bhuglah, or their associated companies, owed "large sums of money" to Pleating. It was certainly incumbent upon him to do so once the liquidator was complaining that the books and records were inadequate and had specifically invited Mr Parsons to produce the relevant records.

In my judgment, in the absence of any cross-examination of Mr Eliades and in the absence of the production by Mr Parsons of the records which he contends were maintained, the allegation that Pleating's books and records were inadequate is made out by the Secretary of State.

It is clear from the liquidator's evidence that there were substantial transfers to and from Mr and Mrs Bhuglah and Gablepost, in addition to the rental payments due, which were not explicable by reference to the descriptions given in Pleating's books and records. Mr Eliades deposes that the cash books and other records available were insufficient for him to determine whether the transfers constituted overpayment of rent, possible preferential payments or an unauthorised withdrawal of funds to the detriment of Pleating and its creditors. In the light of Mr Parsons' letter to which I have already referred, and the explanation or attempted explanation given by him in the witness box in relation to this letter, it appears to me to be highly likely that certain of these unexplained payments were personal payments to Mr and Mrs Bhuglah or their associated companies, or were credit card payments and other items of personal expenditure which were not justified at the time in the interests of the company.

Mr Eliades also complains that the stock records were deficient as none were provided to him to enable him to confirm the levels of or disposals of stock so as to reconcile the figure of £63,000, as shown in the audited accounts as at March 1994, with the figure as shown in the statement of affairs. Again Mr Eliades was not challenged in cross-examination on this point. In his first affidavit Mr Parsons suggested that the liquidator did not call for the stock records, nor did he visit the factory and inspect the stock. Mr Parsons also said that because he told Mr Bhuglah that he would not have nothing to with any further companies operated by him, he (Mr Parsons) was not involved in any negotiations with the liquidator for the disposal of the stock to Mr Bhuglah's new company. In his second affidavit Mr Parsons reiterated his criticism of the liquidator for failing to visit the factory to establish the assets of the company or the values of the stock from work in progress and contended that the ultimate stock-take showed stocks and work in progress to the value of approximately £80,000, whilst stock as shown in the statement of affairs was estimated to realise only £4,000. This assertion sits uncomfortably with Mr Parsons' earlier contention that he was not involved with Mr Bhuglah's acquisition of stock from the liquidators and also with the fact that Mr Parsons was responsible for swearing the statement of affairs, although he attempted to avoid responsibility for this by relying on the fact that he had only seen it some 15 minutes before the start of the creditors' meeting on 3 May 1995 and that he had had to sign it only because of Mr Bhuglah's absence on grounds of alleged ill-health. In any event Mr Parsons' assertion was not put to Mr Eliades in cross-examination nor was any documentary evidence produced by Mr Parsons to support it. Moreover the allegation that there was substantial stock belong to the company at the date of its liquidation, does not meet the critical allegation made by the liquidator, namely that the stock records were inadequate or non-existent as a means of identifying what stock belonged to the company. Nor does Mr Parsons' description of the stock book in his first affidavit explain why the value of the company's stock plunged from £63,000 in March 1994 to £4,000 in May 1995 as at the date of the liquidation.

Goodwill

A further criticism made by the liquidator is that the books and records of Pleating were insufficient for him to establish the details of the quantification in 1993 of a goodwill item at £75,000. This figure apparently represented the purchase by Pleating of goodwill from Mr Gross who ran the pleating business at the premises prior to Pleating. Although the pleating business was purchased in 1988, goodwill appears to have only been quantified in 1993 at £75,000. However, regular payments were made from 1990 and shown as payments in advance in the balance sheet. Mr Eliades legitimately complains that the books of Pleating were insufficient for him to establish whether a reduction in debtors as shown in the accounts to 31 March 1994 represented a payment to Mr Gross for goodwill. Moreover Mr Eliades was not able to ascertain the basis of the quantification of the goodwill in 1993 at £75,000, particularly as Pleating had made consistent losses to that date. Again, in this regard, Mr Parsons complains that the liquidator made no request of him to explain the goodwill payments. When cross-examined about these payments, Mr Parsons made it clear that the reason for the delay in the production of the 1992, 1993 and 1994 audited accounts was that no agreement had been reached as to how the payments to Mr Gross were to be treated. It seemed unclear whether the payment was theoretically a consultancy fee or a purchase price for goodwill. Mr Eliades was also correct in his statement that Mr Parsons' description at paragraph 18 of his first affidavit of the goodwill agreement between Mr Gross and Pleating did not explain the sudden inclusion in the year ended 31 March 1994 of a figure for goodwill of £75,000, reduced by depreciation, nor did it explain why apparently (according to the notes to the accounts) the figure for goodwill related to the acquisition of a business in 1994 since the pleating business was clearly acquired from Mr and Mrs Gross at an earlier stage. If the reference to the acquisition of a business was meant to be a reference to the acquisition of EAL's embroidery and fancy work processing business, that immediately raised the question as to why the goodwill payment was made to Mr Gross, rather than to the company concerned. Moreover the note in the accounts was not consistent with the evidence that Mr Parsons gave that the 3¹/₂ year delay in filing he 1991 - 1993 audited accounts was due to the debate as to how the payment for goodwill should be accounted for. All this points to the need for the books and records adequately to have reflected the agreement between the company and Mr Gross in relation to the purchase of goodwill, or with the acquisition of the business in 1994.

Further the liquidator complains that the books and records were insufficiently detailed to enable him to verify the VAT and PAYE/NIC liabilities set out in the statement of affairs and to reconcile those liabilities to the sums subsequently claimed from government departments. Likewise complaint is made that the books and records of Pleating were not sufficient to enable the liquidator to establish the reasons for the deficiency as at the date of the liquidation of £366,417. In my judgment, on the evidence which I have heard these allegations are made out.

Charges against the Respondents in relation to Pleating

I turn now to consider in detail the charges made against the respective Respondents in relation to their identified conduct in respect of Pleating.

The first allegation is that the Respondents caused or permitted Pleating to continue to trade to the detriment of creditors and in particular the Crown at a time when they knew or ought to have known Pleating was insolvent, in respect of Mr Bhuglah and Mr Parsons from 31 January 1991 to 17 March 1995, and in respect of Mrs Bhuglah from 31 January 1991 to 19 October 1994. There is no dispute whether as regards Mr and Mrs Bhuglah or as regards Mr Parsons that the Respondents knew that the company was insolvent on a balance sheet basis from 31 January 1991. However, Mr Parsons in his affidavit evidence and in his oral evidence before this Court, emphasised that up until February 1994 Pleating was in a position to pay all of its debts as they fell due and that the commercial view of the business that was reasonably taken by the Respondents was that the pleating business was cyclical and that, despite the unsuccessful trading in 1991 and 1992, there was expected to be a substantial upturn in profitable trading. Mr Parsons emphasised that he and his co-directors appreciated from the management accounts that were available at periodic intervals that such had indeed proved to be the case and indeed a substantial profit was made in the year ended 31 March 1993. That, Mr Parsons said, was the first year of the upturn and one could reasonably have expected a further 2-3 years of upturn. He contended that a modest profit in the region of £7,300, for the year ended 31 March 1994, had been made before being reducing by 10% by way of depreciation of the £75,000 goodwill figure. He said that, commercially, the success of the pleating business had been adversely affected by the introduction of the non-profitable fancy and embroidery processing work which had been acquired from EAL. It was Mr Parsons' view, in retrospect, that if Pleating had continued to concentrate on its traditional pleating business alone, and had not ventured into the embroidery and fancy processing business, it would not have made a loss. His evidence was that he could not reasonably have known that such might be the case.

In my judgment, on the basis of the evidence which I have heard, it must have been clear to Mr Bhuglah and Mr Parsons from as early as February 1994, and should likewise have been clear to Mrs Bhuglah, if she was properly discharging her responsibilities as a director of the company, not only that the company was insolvent in balance sheet terms but also that, in the absence of further capital, there was a serious risk that, if the company continued to trade, it would do so to the detriment of its creditors and in particular the Crown. Mr Bhuglah, by reason of his position as a director of Gale and EAL, was well aware of the unprofitable trading history of those companies and the risks involved. Likewise, although Mr Parsons was not a director of those companies (and I do not, in assessing his conduct, pay any regard to his conduct as an accountant or auditor in relation to those companies), he nonetheless knew from his involvement, as auditor or accountant, that those companies had incurred substantial losses through unprofitable trading in the fancy processing line of business.

Accordingly, in relation to all three Respondents, I find the first charge in relation to Pleating proved as from early February 1994. In my judgment it was incumbent upon the Respondents, in circumstances where they must have known from past history that there was a real risk that the embroidery and fancy processing work could well prove not to be profitable, to take proper steps to ensure that, if trading continued, creditors were not prejudiced.

Likewise I find the second, and related, charge in relation to Pleating proved as against all three Respondents. This second charge alleges that the Respondents caused or permitted Pleating to rely on the retention of Crown monies in order to finance Pleating's continued trading, whilst insolvent. In respect of Mr Bhuglah and Mr Parsons, the charge relates to the period from no later than February 1994 to 17 March 1995, and in respect of Mrs Bhuglah, from no later than February 1994 to 19 October 1994. Both Mr Bhuglah and Mr Parsons were clearly aware that Crown monies were being retained in order to finance Pleading's continued trading.

So far as Mrs Bhuglah is concerned, her unsworn draft evidence is to the effect that she had no knowledge of the affairs of the company until the service on her of the notice of these proceedings and its accompanying documentation. She contents that she "had virtually a most negligible actual involvement in the running of the company". In my judgment that was not a sufficient discharge of her responsibilities as a director of the company. So long as she continued to hold office as a director, and in particular to receive remuneration from it (as she did) whether in the form of actual salary, or other payments to her, it was incumbent upon her to inform herself as to the financial affairs of the company and to play an appropriate role in the management of its business. If she was not prepared to do so, the appropriate course for her was to resign. It is no excuse for a wife (or husband for that matter) to say that the running of a company was left to his or her spouse. A director cannot shrug off his responsibilities by claiming that he is no more than a nominee director, and was not expected to perform any actual duties; see e.g. Re Westmid Packing Services [1998] 2 All ER 124 at 130 (CA); Potier v Secretary of State for Trade and Industry, Court of Appeal, unreported, 30 November 1998, per Robert Walker LJ at page 13 of the New Online transcript.

To do so amounts to a total abdication of a person's responsibilities as director of a company. Accordingly in my judgment, had she been discharging her responsibilities as a director properly, Mrs Bhuglah would, and should, have known that the company was continuing to trade at a time when it was insolvent to the detriment of creditors and in particular the Crown and was retaining Crown monies in order to finance Pleating's continued trading whilst insolvent.

As I have already held above, I also find the allegation that the Respondents failed to keep adequate accounting records in contravention of Section 221 of The Companies Act 1985 proved.

I turn next to consider whether the conduct which I have found proved as against the Respondents is sufficiently serious to make them unfit to be concerned in the management of a company.

Mr Bhuglah

In my judgment, the conduct of Mr Bhuglah as a director of Pleating, both taken alone and taken together with his conduct as a director of Gale and EAL, is of such seriousness as to make him unfit to be concerned in the management of a company. In the period 1991 to 1995 3 companies, of which he was a director, and which conducted similar, although not identical, businesses, went into creditors' voluntary liquidation with deficiencies totalling in the region of £1.2million. In each case the percentage of the deficiency attributable to Crown debts was substantial; thus in the case of Gale, 93% approximately of a deficiency of £329,000 was attributable to Crown debts; in EAL approximately 75% of a deficiency of £430,000 was attributable to Crown debts and in Pleating some 83% of a deficiency of £438,000 was attributable to Crown debts. In each case Mr Bhuglah was, or should have been aware, over a year or so before the company became insolvent, that the company was trading whilst insolvent to the detriment of its creditors and in particular the Crown. In Pleating, as I have already mentioned substantial payments were made to Mr and Mrs Bhuglah, and their associated companies, at a time when creditors were not being paid and in circumstances where the books and records of the company were not adequate to explain why some of those payments had been made. In relation to Pleating the books do not explain the basis for the inclusion of £75,000 goodwill in respect of the business apparently acquired in 1994. Nor were the books or records adequate to explain why approximately £187,000 was lost in the last few months of trading. It is also clear that Mr Bhuglah drew substantial benefits from the companies by way of cash transfers and rents, at a time when creditors were not being paid, or there was a severe risk that they would not be paid. In my judgment Mr Bhuglah has over 5 years traded with the wilful disregard for creditors in particular the Crown.

In my judgment, given the seriousness of his conduct, and the amount of the deficiency involved in all 3 companies, the appropriate period of disqualification for Mr Bhuglah is 9 years. I do not make an order for 10 years, as requested by the Secretary of State, as I have found that it was only as from February 1994 that Mr Bhuglah was, or should have been aware, that the company was trading whilst insolvent to the detriment of creditors and that, without the introduction of further capital, there was a very serious risk that creditors would not be paid. In addition, although the evidence is strongly suggestive of misappropriation by Mr Bhuglah, in relation to certain of the unidentified cash payments and Mr Parsons' evidence, as set out in his letter, would support such a characterisation of certain of Mr Bhuglah's expenditure, there is no specific charge of misappropriation that might in another case justify a longer period of disqualification.

Mrs Bhuglah

As I have already stated, the fact that Mrs Bhuglah denies any actually involvement in relation to Pleating is not an answer to the Secretary of State's allegations. In my judgment, her conduct as a director of Gale, and a director of Pleating, was sufficiently serious to render her unfit to be a director. She clearly participated in the management of Gale since she signed the yearly accounts and received substantial amounts of money from it both on her own account and through the rents paid to Gablepost. There is no suggestion that she was not responsible as a director of Gale. So far as Pleating is concerned, although from 1990 she apparently ceased to be involved in the business of the company, she only resigned 1994 some 7 months before the liquidation. She received substantial payments from Pleating in the 7 years from 1988 to 1995 at a time when Pleating was clearly having difficulties in paying its creditors. Her excuse that she paid no or little part as a director, and relied upon her husband and Mr Parsons, is no excuse for her failure to discharge her obligations as a director. In my judgment the appropriate period for her to be disqualified from acting as a director or otherwise as provided by section 1 of the Act, is 5 years.

PRIVATE Mr ParsonsMr ParsonsMr ParsonsMr Parsonstc \l 1 "Mr Parsons"

The Secretary of State's case as against Mr Parsons relies solely upon his conduct as a director of Pleating. I pay no regard to his conduct as an accountant or auditor in relation to the earlier companies Gale and EAL. Nonetheless, it was clear from the evidence which he gave to this Court that his position in relation to Gale and EAL meant that he was aware of Mr and Mrs Bhuglah's practice in relation to those two companies of not paying amounts due to the Inland Revenue and Customs and Excise. He was also well aware that, despite his advice, Mr Bhuglah and Mrs Bhuglah did not take steps to pay monies when demanded by the Crown, notwithstanding that Mr Parsons had brought the seriousness of such failure to Mr Bhuglah and Mrs Bhuglah's attention. Indeed Mr Parsons told me that he was aware that, when the first two companies went into liquidation, a substantial proportion of Crown debts had not been paid. Therefore, when Mr Parsons became a director of Pleating he did so against a background where he was clearly well aware of Mr and Mrs Bhuglah's trading practices. In such circumstances it was incumbent upon him as a director to ensure that the pattern of previous trading was not repeated.

Mr Parsons said in evidence that, although he was a director of Pleating from 1988, it was in effect a part time position and that he had no influence or dealings with the trading of the company. He accepted that he knew from the audited accounts, and from the management accounts, that the company was at all times balance sheet insolvent but he contended that it was only much later that he appreciated that the company might not be able to trade out of its difficulties and that was obvious that creditors were not going to be paid. He relied in particular on the upturn in 1992/93 and the year end profit shown of £58,800 in the year ending 31 March 1993. He said that until 31 October 1994 he thought the position might improve and that it was only in October 1994 that he and Mr Bhuglah really knew that the position was hopeless in the absence of the introduction of further capital. He said that it was obvious in October 1994 that the company had run out of time with the Inland Revenue and that the only reason at this date that he did not insist that the company cease trading was because Mr Parsons was informed by Mr Bhuglah of negotiations with a local authority in France, whereby Mr Bhuglah proposed to transfer the business to France. Mr Parsons says that he was informed that the local authority in France were able to make substantial grants to attract new business, both in relation to the number of jobs created and for the purchase of machinery. Mr Parsons said he was informed by Mr Bhuglah that sufficient funds would be generated by the transfer of the business to France to pay all creditors in full. Mr Parsons was not himself involved in any negotiations but was aware that Mr Bhuglah and a Mr Marciano, who was to be Mr Bhuglah's partner in the French venture, had meetings with the local authority in France in December 1994. Accordingly, Mr Parsons went along with the proposal that the company should continue to trade pending the outcome of negotiations. In support of this belief, all that Mr Parsons could point to was a letter written by Mr Bhuglah to the Mayor of Valencay dated 25 November 1994, which set out the company's intention of establishing a business in Valencay. It was in my judgment a very flimsy basis upon which to permit the company to continue to trade in the period up until February 1995, at a time when it was clearly insolvent and reliant upon extended credit from its creditors to enable it to do so. Given the desperate position of the company in October/November 1994, and the continued demands that were being made by the Customs and Excise and the Inland Revenue, Mr Parsons, in my judgment, had no justification for allowing matters to drag on for so long in the absence of any realistic assurances from Mr Bhuglah's French partner or the Valencay local authority that hard funds would indeed be forthcoming to pay off the company's outstanding liabilities to its creditors. In my judgment it was wholly unrealistic of Mr Parsons to rely on either what the letter said or what Mr Bhuglah had told him.

He clearly was closely involved with the company as can be inferred from his guarantee to the bank, his 33% shareholding and the fact that his accountancy practice received approximately £17,000 per year from the company. Mr Parsons should have been particularly alert because he knew of the nature of Mr Bhuglah's trading practices. He must have been aware, as a former chartered accountant (he had been a member of the Institute of Chartered Accountants of England and Wales but in 1989 had allowed his membership to lapse) that the company could not survive without either a substantial injection of capital or trading at the risk of the company's creditors, either by incurring credit and not paying its trade creditors' debts, or by retaining monies due to the Crown. He must have been aware from the internal management accounts and from the audited accounts that in March 1990 the company's liabilities were £170,000 and that these were increasing substantially to approximately £475,000 on the company's liquidation. Even if one accepts his evidence that, at the end of the 1993 financial year, i.e. 31 March 1993, there was a reasonable basis for cautious optimism because of the profit of £58,800 in that year, Mr Parsons was well aware that from February 1994 the company was unable to pay its VAT and Inland Revenue debts as and when they fell due and that substantial payments in respect of this period remained outstanding. Indeed Mr Parsons accepted that between March 1994 and the liquidation the company was in effect financed by its creditors and the Crown. He also accepted that he was aware that trading was being continued at the expense of the Crown but says that he advised Mr Bhuglah that this was not appropriate but Mr Bhuglah ignored his advice. In my judgment his decision to continue to trade in November 1994, based as it was, apparently, on a set of management accounts indicating that the company had traded profitably to 31 March 1994, and on flimsy assurances by Mr Bhuglah as to the French proposal, was an unreasonable one.

I accept the Secretary of State's contention that Mr Parsons' failure in allowing the company to continue to trade was aggravated by the inadequate books and records, the keeping of which were Mr Parsons' responsibility. There has been no real explanation by Mr Parsons as to why the company's books and records did not adequately explain substantial cash transfers amounting to some £160,000 in the last 18 months of the company's trading nor to explain the decrease in the value of the stock from March 1994 to the liquidation of Pleating. If, as he alleges, Mr Parsons knew there were adequate stock records then it was incumbent upon him in my judgment to obtain the production of these to the liquidator. As I have already said, I gained the clear impression that Mr Parsons had decided that he would not assist or co-operate with the liquidator in any way, unless he was asked a specific question by the latter. In my judgment the evidence also reveals that the books and records of the company were wholly deficient to explain the basis for the payment of goodwill of £75,000 and its inclusion in the accounts at that figure.

Accordingly, in my judgment the allegations of the Secretary of State in relation to Mr Parsons' conduct as a director of Pleating are well founded and are sufficiently serious to make him unfit to be concerned in the management of the company. In my judgment it is highly likely that the position was exactly as described by Mr Parsons in his letter dated 9 October 1997 to Mr Klibansky, namely that large sums of monies which were owed to Pleating by Mr and Mrs Bhuglah, and their associated companies, in respect of assets and personal expenditure were not properly recorded in the books and have remained unrecovered. Mr Parsons recognised in that letter that, as a director, he had a responsibility to curb Mr Bhuglah's excesses and that he had failed to do so. In my judgment the appropriate period of disqualification which I should impose, having found Mr Parsons' conduct sufficiently serious to make him unfit to be concerned in the management of a company, is 5 years. I take into account that he was only involved in relation to one of the companies concerned and that he is a man of approximately 61 years old. I also take into account the fact that he personally did not substantially benefit in financial terms from the company's continued trading and that he has apparently lost some £30,000 of his own funds.

I will hear argument, if necessary, on the form of the order and as to costs.

Elizabeth Gloster QC

24 March 1999.