CHANCERY DIVISION
COMPANIES COURT
Strand, London, WC2A 2LL |
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B e f o r e :
IN THE MATTER OF FINELIST LIMITED
AND
IN THE MATTER OF AEW LIMITED
AND
IN THE MATTER OF THE COMPANY DIRECTORS' DISQUALIFICATION ACT 1986
B E T W E E N :-
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THE SECRETARY OF STATE FOR TRADE AND INDUSTRY |
Claimant |
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- and - |
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CHRISTOPHER PAUL McKINLEY SWAN VUCHURU SADHANA REDDY BRIAN CHRISTOPHER RITCHIE BRIAN SAMUEL NORTH IAN STEWART |
Defendants |
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Mr Stephen Davies QC and Mr Jeremy Bamford (instructed by Gordons Cranswick for the First Defendant Applicant)
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Crown Copyright ©
Mr Justice Laddie:
"… an order that the affirmation of Mark Lawrence Bruce dated 4th October 2002 ("the Affirmation") be struck out and the proceedings be stayed, pending reconsideration of the case against [Mr Swan] by the Claimant and (if so advised) the filing of a replacement affirmation on behalf of the Claimant.Because, the Affirmation (1) contains matters which are scandalous, irrelevant and/or oppressive, (2) contains expert evidence from Messrs. Baker Tilly which fails to comply with CPR 35 and (3) fails to comply with the Claimant's duty of fairness in the presentation of evidence in support of a s 6 application under CDDA 1986."
The nature of disqualification proceedings.
How proceedings are commenced
"3 The case against the [defendant](1) there shall, at the time when the [claim form] is issued, be filed in court evidence in support of the application for a disqualification order; and copies of the evidence shall be served with the [claim form] on the [defendant].
(2) The evidence shall be by one or more affidavits … and shall be prima facie evidence of any matter contained in it.
(3) There shall in the affidavit or affidavits … be included a statement of the matters by reference to which the [defendant] is alleged to be unfit to be concerned in the management of a company."
"But the paramount requirement on this aspect is that the director facing disqualification must know the charge he has to meet: see In re Lo-Line Electric Motors Ltd [1988] Ch 477, 486" (p 177)
"It would be preferable, for the future, if those preparing and swearing affidavits in support of applications under this Act were careful to distinguish between facts which they are able to establish by direct evidence, the inferences which they invite the court to draw from those facts, and the matters which are said to amount to unfitness on the part of the respondent. If those distinctions were observed, it might lead to respondents concentrating more closely on those factual matters to which they actually need to respond by affidavit evidence under r. 6".
"That procedure, and, in particular, the mandatory requirement in r 6, emphasises the importance to the respondent of being able to ascertain with clarity from the evidence filed on behalf of the applicant what are the criticisms laid against him, and upon what evidence the applicant intends to rely. It is on the basis of the applicant's initial affidavit evidence that the respondent is required to decide whether to advance any evidence of his own and, if so, what issues he must address by that evidence. It should not be open to the applicant, by making general allegations of misconduct, to require the respondent to put forward his own account of events, and then to rely upon the respondent's own account to support the case for a disqualification order."
"It is accepted that these are not ordinary adversarial proceedings but have an element of public interest and may entail penal consequences. It follows that there is a duty on the applicant to present the case against each respondent fairly. Many of these applications go by default or are defended by litigants in person, and the practice is for an official in the Department of Trade and Industry to swear a short affidavit referring to the charges, specified in a detailed affidavit sworn by the receiver or liquidator.In my judgment, that second affidavit should not omit significant available evidence in favour of any respondent. It should attempt to deal with any explanation already proffered by any of the respondents. It should endeavour to apportion responsibility as between the respondents and it should avoid sweeping statements for which there is no evidence."
"Where a party asserts his opponent's complicity in … criminal misconduct, the case is pre-eminently one in which not only the RSC (Ord. 18 r.12(1) and Ord. 72 r. 7(2)) but also fair treatment require that, so far as practicable, the matter shall be pleaded with particularity so that the party accused may know what case he has to meet.'But even if the allegations in the present statement of claim fall short of asserting criminal misconduct, they undoubtedly impute conduct of a gravely improper character which call for no less clear particularisation ." (p 1440)
Formulating the allegation against a director
"Frequently disqualification applications are based on a defendant's conduct as a director over many months or even years. There is a measure of practical good sense in a procedure whereby the plaintiff has first to set out his case, with sufficient clarity and identification of the evidence being relied on for the defendant to know where he stands. Then the defendant puts in his evidence. The plaintiff can see what factual issues there are, and he can then take steps and incur expense in adducing where necessary first-hand evidence on these issues, before the hearing. In this way the genuine issues can be resolved properly and fairly in the interests of the defendant and in the public interest. This procedure does not prejudice a fair and just trial of the issues." ([1994] Ch 1, 15)
"I am also mindful that the Secretary of State or the official receiver will not usually have first-hand knowledge of the matters on which the disqualification application is founded but, and this is important, a defendant to a disqualification application inevitably will have such knowledge. Many disqualification applications are not defended. When they are, the facts which are seriously in issue may be very limited. It would be absurd, because it would be pointless, for the affidavit evidence in chief always to consist exclusively of matters within the personal knowledge of the deponent." (p 14 – 15)
"In cases not covered by any approved protocol, the court will expect the parties, in accordance with the overriding objective and the matters referred to in CPR r.1.1.(2)(a), (b) and (c), to act reasonably in exchanging information and documents relevant to the claim and generally in trying to avoid the necessity for the start of proceedings"
"11. Since the submission of a report may lead to proceedings in which he may be called to act as a witness, the practitioner should take care to ensure that the basis of his opinion that a report should be submitted is properly documented. Where a practitioner has formed a preliminary view that the conduct of a director renders him unfit to be concerned in the management of a company he should normally, if he has not already interviewed him in the course of his duties, consider the advisability of seeking a meeting with the director concerned, with a view to confirming his understanding of the facts upon which he based his preliminary view that the submission of a report was appropriate."
"2. The purpose of the meeting [with the director] is to enable the director and/or his representatives to make any representations in connection with the proposed proceedings to the Secretary of State's representatives. It would be helpful if, prior to the meeting, the director could say if there are any specific issues he wishes to raise. …3. The director will usually have been provided with the allegations against him in the s 16 letter and by a copy of a draft affidavit of the Secretary of State. …
5. A date for the meeting will be agreed between the Secretary of State (or the OR) and the director which is mutually convenient to both, but subject to the need on the part of the Secretary of State (or OR) to take account of the two-year deadline within which proceedings under the CDDA 1986 need to be issued. That may mean that a date needs to be fixed for the proposed meeting sufficiently in advance of such a deadline to enable the Secretary of State (OR) to have the opportunity fully to consider all the representations which the director or his representatives make.
6. At the meeting the Secretary of State's representatives (which will always be the Secretary of State's solicitor and possibly representatives from the Disqualification Unit also) will carefully listen to and note any representations the director wishes to make.
7. Frequently, at the stage of a meeting with a director, a decision has already been taken, on a preliminary basis, to bring proceedings against him. However, the Secretary of State (or the OR) will always very carefully consider any further information provided at the meeting by the director and any representations that he makes before reaching a final decision. Invariably, those present at the meeting on behalf of the Secretary of State (or the OR) will need time to take instructions in the light of what has been said at the meeting from the Secretary of State or the OR. …
8. is very much in the interests of a director that he brings with him any documents he may have to support any points he wishes to make at that meeting. It would be helpful if copies of those documents could be supplied in advance of the meeting wherever possible so they can be considered by the Secretary of State's representatives in advance of the meeting. …
9. Depending on the matters raised by the director at the meeting, he may be asked for further particulars and evidence to enable the Secretary of State or the OR further to consider the points he makes after the meeting has concluded. Because of the usual two-year deadline for the bringing of proceedings under section 6 of the CDDA 1986, it may be important that such further information be supplied by the director very quickly. This is to enable the Secretary of State to take account of any such further material before he reaches his final decision as to whether or not to commence proceedings. Where time is critical, the director will be advised of that fact."
10 days notice under s 16(1) of the Act
"A person intending to apply for the making of a disqualification order by the court having jurisdiction to wind up a company shall give not less than 10 days' notice of his intention to the person against whom the order is sought; and on the hearing of the application the last-mentioned person may appear and himself give evidence or call witnesses."
"I wish to repeat what I said in my judgment in [In re T. (A Minor) (Adoption: Validity of Order) [1986] Fam. 160], at p. 178, that nothing which I say in the course of this judgment indicates a view on my part that it is not necessary to comply strictly with the letter of section 16(1) of the Company Directors Disqualification Act 1986. Of course it is. Nevertheless it is still necessary to consider what is the effect of non-compliance with that provision."
"The whole scope and purpose of the enactment must be considered, and one must assess 'the importance of the provision that has been disregarded, and the relation of that provision to the general object intended to be secured by the Act.' In assessing the importance of the provision, particular regard may be had to its significance as a protection of individual rights, the relative value that is normally attached to the rights that may be adversely affected by the decision and the importance of the procedural requirement in the overall administrative scheme established by the statute. Furthermore, much may depend upon the particular circumstances of the case in hand. Although 'nullification is the natural and usual consequence of disobedience,' breach of procedural or formal rules is likely to be treated as a mere irregularity if the departure from the terms of the Act is of a trivial nature, or if no substantial prejudice has been suffered by those for whose benefit the requirements were introduced, or if serious public inconvenience would be caused by holding them to be mandatory, or if the court is for any reason disinclined to interfere with the act or decision that is impugned."
"… doubtless the rules of natural justice will require that the person concerned should be given some notice that the court is contemplating making a disqualification order."
"… again the rules of natural justice will have effect."
"… so that although the intended respondent may ask for those grounds, the intended applicant is under no obligation to give them."
"The notice here fulfils no such function (i.e. to protect the director): its importance in the proceedings is minimal, and no one has been able to point to any real benefit that the director may derive from it." (p 419)
"In those circumstances, and applying the principles to which I have referred above, I would have no hesitation in holding that in this case the failure to serve a proper 10-day notice was a procedural irregularity which did not render the Secretary of State's application for a disqualification order against Mr. Langridge either void or voidable, and that the Secretary of State's originating summons should not be struck out." (p 415 emphasis added)
"I have already set out the facts of the present case, and the circumstances in which the Secretary of State failed to serve a proper 10-day notice. There is no suggestion that Mr. Langridge was in any way prejudiced by the fact that the notice actually served on him was one day short, except in so far as he may now be deprived of the benefit of taking a technical point in his favour. Equally there is no suggestion that the failure by the Secretary of State to serve a proper 10-day notice was occasioned by anything other than a genuine mistake on the part of the officer who was dealing with the case." (p 415)
"I am unwilling to attribute to Parliament so capricious an intention as that the failure to serve a proper section 16(1) notice should have so far-reaching a result, even though no prejudice had been suffered by the person against whom a disqualification order was sought and even though the failure could (in all but section 6 cases) be immediately remedied by re-starting the procedure, with the attendant expense that that would incur. Even in section 6 cases, where there is a limitation period, the court is given a dispensing power, which to me indicates that Parliament cannot have intended that the failure to observe time limits should be conclusive." (p 418)
"Standing back and looking at this problem in perspective, it makes no sense to me that Parliament should have intended to shut out an applicant from applying for a disqualification order (in default of an extension of time), merely because he failed to serve timeously on the director concerned what has accurately been called "an unparticularised letter before action." The notice is intended to inform of intentions rather than to protect rights, and in my judgment it is consequently a benefit of no real importance. Mr. Langridge would have been unlikely to be disadvantaged by failure to comply with this procedural requirement; nor was he in fact. It was an irregularity, since non-compliance cannot have been intended to determine the validity of the proceedings, and the provision itself is accordingly to be regarded as no more than directory." (p 420)
"As to the suggestion that the Department of Trade might refrain altogether from complying with their obligation to give the requisite notice, I note the Secretary of State's acceptance by his counsel that failure to give due notice "will enable the director to apply for, and if the court think fit obtain, an order striking out the proceedings."" (p 420)
The facts in this case.
"Mr A opens accounts with two banks and deposits £10 in each. He draws a cheque on Bank X for £10 and pays it into Bank Y. Whilst the reality is that Mr A is still worth £20, from the bank's point of view, until the cheque is cleared, he is worth £30 (£10 in Bank X and £20 in Bank Y). Mr A could then, before the first cheque is cleared, draw a cheque for £20 on Bank Y and pay this into Bank X with the result that, until both cheques are cleared, he now appears to the banks to be worth £50."
"The directors of [the company] whose names appear on page [] accept responsibility for the information contained in this document. To the best of the knowledge and belief of the directors (who have taken all reasonable care to ensure such is the case) the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information"
90. With regard to the affairs of Finelist, AEW and Edmunds Walker, the following are matters by reference to which the Defendants are, in the opinion of the Secretary of State, unfit to be concerned in the management of a limited company:
91. Cycling of Cheques (Mr Swan and Mr Reddy)
(a) Mr Swan and Mr Reddy caused companies of which they were directors, namely AEW and Edmunds Walker, to engage in a concerted and extremely extensive policy of "cheque kiting" or "cycling of cheques", as described above in paragraphs 55 - 71.
(b) "Cheque kiting" is a process designed to exploit the fact that it takes at least two working days for cheques to clear through the UK banking system.
(c) While the identical or similar cheques between AEW and Edmunds Walker were clearing, those companies' bank statements showed that their cash position was artificially high to the value of the cheques so credited. The overall Group's indebtedness would likewise be artificially reduced.
(d) "Cheque kiting" was therefore designed to mislead as to the true cash or indebtedness position of the Group.
(e) Mr Swan and Mr Reddy were actively involved in the process. The "cheque kiting" was conducted by them on a daily basis from November 1998 by signing identical or similar cheques for millions of pounds on behalf of AEW and Edmunds Walker.
(f) A deliberate policy of "cheque kiting" on such a scale and for such large amounts in respect of companies that were part of a listed Group is unjustifiable and seriously lacking in commercial probity.
92. Misleading Circular (all Defendants)
(a) The Defendants caused or allowed Finelist to issue a Circular to Shareholders dated 16 July 1999 concerning the Class 1 disposal of the Maccess Group which contained materially inaccurate information.
(b) In accordance with the Listing Rules of the Stock Exchange, each of the Defendants accepted individual and collective responsibility for the accuracy of the information contained within the Circular.
(c) The Circular, as was required by the Listing Rules, included a Statement of Indebtedness of the Finelist Group.
(d) Mr Swan and Mr Reddy knew that, because of their policy of "cheque kiting", the Statement of Indebtedness materially understated the Group's outstanding borrowings and materially overstated (by over £10 million) the Group's cash balance as at 14 June 1999.
(e) Mr Ritchie, Mr North and Mr Stewart either knew or ought to have known that the Statement of Indebtedness materially understated the Group' s outstanding borrowings and materially overstated the Group's cash balance as at 14 June 1999.
(f) In the premises, each of the Defendants is responsible for the issue of a materially inaccurate Circular.
93. In all the circumstances, I ask this Honourable Court to make a Disqualification Order as sought in the disqualification claim form."
The inadequacy and unfairness of the evidence
"The company is dormant and has not traded during the financial period, has received no income and incurred no expenditure, and consequently has made neither a profit nor loss".
"The Receivers located several paid cheques amongst the vast quantities of documents and accounting records that came into their possession upon receivership and obtained other paid cheques from the Bank. The cheques are signed by a combination of Mr Swan, Mr Reddy and Mr Clifton. Copies of the cheques relating to the example set out in paragraphs 62 and 63 are contained in exhibit MLB1 and are all signed by Mr Reddy and Mr Clifton. Other examples of paid cheques relating to the cycling of cheques between AEW and Edmunds Walker are contained in the exhibit to demonstrate that Mr Swan also signed such cheques."
Mr Clifton was the Group's treasurer but was not a director.
"70. The incidence of cheque kiting and the huge sums involved result in the artificial cash generation being in excess of the Group's turnover. By its very nature, cheque kiting is designed to mislead as to the true cash or indebtedness position. It would have enabled the Group to operate beyond its agreed banking facilities or in breach of its banking covenants by reducing the extent of the Group's borrowing. If the management accounts recorded the borrowing position directly from bank statements, then it allowed the Group to materially understate its debt position in the management accounts.71. Cheque kiting is unacceptable, particularly in respect of a Group whose shares are quoted on the London Stock Exchange. It is seriously lacking in commercial probity. Artificially suppressing the Group's borrowing has the propensity to mislead anyone dealing with the Group including persons trading in the quoted shares. I refer to a particular example at paragraphs 72 - 89 below."
"92. Misleading Circular (all Defendants)(a) The Defendants caused or allowed Finelist to issue a Circular to Shareholders dated 16 July 1999 concerning the Class 1 disposal of the Maccess Group which contained materially inaccurate information.(b) In accordance with the Listing Rules of the Stock Exchange, each of the Defendants accepted individual and collective responsibility for the accuracy of the information contained within the Circular.(c) The Circular, as was required by the Listing Rules, included a Statement of Indebtedness of the Finelist Group.(d) Mr Swan and Mr Reddy knew that, because of their policy of "cheque kiting", the Statement of Indebtedness materially understated the Group's outstanding borrowings and materially overstated (by over £10 million) the Group's cash balance as at 14 June 1999.(e) Mr Ritchie, Mr North and Mr Stewart either knew or ought to have known that the Statement of Indebtedness materially understated the Group' s outstanding borrowings and materially overstated the Group's cash balance as at 14 June 1999.(f) In the premises, each of the Defendants is responsible for the issue of a materially inaccurate Circular.
Criticisms of the procedure adopted by the SoS
The harm to Mr Swan
The relief sought
"Nothing that I have said detracts, in the least, from the requirement that the applicant must set out his case with sufficient clarity and identification of the evidence relied upon to enable the respondent to know where he stands. If the applicant's evidence does not satisfy that test, the respondent must have some remedy before he can be required to decide whether to file his own evidence.It seems to me that the proper remedy in such a case is to strike out such parts of the applicant's evidence as are embarrassing. That course may lead to the striking out of the application in its entirety; or where a number of different grounds of unfitness are alleged may lead to the striking out of one or more of those individual grounds.
The position may be analysed in this way. A respondent who is faced with evidence which is vague or imprecise may take the view that the application, if based solely on that evidence, will be bound to fail. If the respondent has sufficient confidence in that view it is open to him to refrain from filing any evidence of his own and submit, in effect, that there is no case to answer. On the other hand, a respondent who has less confidence in the insufficiency of the applicant's evidence will be embarrassed, because he will be unable to risk filing no evidence of his own. In such a case he may apply to the court for an order that, unless the matters complained of are made clear, the offending allegations be struck out on the grounds that they embarrass a fair trial of the action. A sensible preliminary step in such a case must be to seek clarification in correspondence before making an application to the court."