England and Wales High Court (Chancery Division) Decisions

IN THEHIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		9 August 2013

HH JUDGE SIMON BARKER QC :

The present proceedings

1. On 5.6.13, Mr Richard Andrew Harris (H) offered an undertaking to the Secretary of State for Business Innovation and Skills (SoS), in accordance with s.1A of the Company Directors Disqualification Act 1986 (the Act), that he would not for a period of 4 years (a) be a director of a company, act as a receiver of a company's property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he had the leave of the court, nor (b) act as an insolvency practitioner. The undertaking was accepted on behalf of the SoS on 11.6.13 and the commencement date was 2.7.13.
2. On 11.6.13, H gave notice to the SoS of his intention to apply to the court, pursuant to s.17 of the Act, for leave to act as a director of 3 companies : Clenaware Systems Limited (CSL), TIVG Limited (TIVG), and Clenaware Leasing Limited (CLL). Proceedings were issued on 24.6.13 and an urgent hearing was sought, at least for interim relief, before 2.7.13. In the event there was an interim hearing on 26.6.13 and a substantive hearing on 18.7.13.
3. H's evidence in support of his application is contained in his witness statement dated 24.6.13 (which exhibits witness statements also relied upon), as supplemented by (1) an affidavit sworn on 12.7.13, largely responding to enquiries raised in a letter dated 5.7.13 from Wragge & Co written on behalf of the SoS, and (2) a 2^nd witness statement dated 19.7.13 addressing a point raised during the hearing on 18.7.13.
4. On an interim basis, H has been permitted to continue as a director of CSL but not of TIVG or CLL. H resigned as a director of these companies on 26.6.13.

Reason for H's undertaking

5. H set up Digital Docs Limited (DDL) in 2003. The original directors were H's wife and another person. H was a director of DDL from 4.8.09 until it went into insolvent liquidation on 25.11.11. DDL's business was design and development of bespoke data management systems. In the disqualification proceedings, H accepted that over the entire 2¼ year period of his directorship DDL traded to the detriment of HMRC in respect of VAT by (1) failing to submit VAT returns for any of the 9 relevant quarters notwithstanding that signed returns were prepared showing VAT due of almost £120k (of which £1k was paid) and (2) accruing VAT liabilities totalling £211k by the date of its liquidation (representing 77% of DDL's deficiency). Over the same period, DDL received almost £1million into its bank account and made payments in excess of £152k to the benefit of directors. DDL was dissolved on 11.12.12.
6. In a narrow sense, the grounds of H's unfitness are trading to the detriment of HMRC. More generally, such a sustained course of conduct demonstrates a deliberate and persistent disregard of a continuing obligation and increasing liability and an indifference to trading whilst insolvent.

H's other business interests

7. In 2003, H also established another company, Crushed Ice Limited (CIL). H was a director of CIL from incorporation (28.8.03) until 5.6.13, on which day he resigned, as he put it, "in readiness for [his] disqualification as a director". CIL's business is designing and building websites and online marketing. H says that by 2009 CIL had a settled team of people capable of running the business and that at that point he ceased to be actively involved in the management of CIL. H does not indicate that he has relinquished whatever interest he took in CIL when he established the company.
8. H established TIVG on 11.3.02, became involved in CSL from its incorporation on 24.9.09, and established CLL on 28.1.13. These are the companies the subject of H's application.
9. It appears from the Companies House record of CLL's directors that at 28.1.13 H held 11 appointments. No reference is made in the evidence to H having any other subsisting appointments; if there are any and they have been overlooked, H must immediately resign such appointments and that will necessarily be a condition of any leave that may be granted.

Statute and relevant principles

10. S.1A of the Act provides that the SoS may accept a disqualification undertaking where the circumstances specified in s.7 of the Act (disqualification of unfit director of insolvent company appearing expedient in the public interest) or s.8 of the Act (disqualification appearing from investigative material expedient in the public interest) apply. Whether by undertaking or court order, the range of disqualification periods for unfitness in the context of an insolvent company is 2 to 15 years. A disqualification period of 4 years is significant but at the lower end of the scale.
11. S.17(3) of the Act provides that a person subject to such a disqualification undertaking may apply for leave to be a director of a company and/or be concerned or take part in the management of a company. S.17(5) of the Act imposes on the SoS a duty to appear on any such application and call attention to any relevant matters, which may be by giving or calling evidence.
12. On an application for leave to be a director or to be concerned or take part in the management of a company, the court must have regard to the objective of the disqualification (or undertaking) namely to protect the public, in particular creditors, from abuse of the privilege of trading with the benefit of limited liability; the court must also have regard to the interests of the director and the company which (s)he seeks permission to direct or manage.
13. Guidance as to the approach which a court should take on an application for leave has been given by Arden J (as she then was) in Re Tech Textiles [1998] 1 BCLC 259 at 267-9 and Sir Richard Scott V-C (as he then was) in Re Dawes & Henderson Agencies Ltd [1999] 2 BCLC 317 at 325 and Re Barings plc (No. 3) [2000] 1 WLR 634 at 637F-H and 641D-E.
14. In Re Tech Textiles a disqualified director sought s.17 leave to act as a director or be concerned or take part in the management of 3 companies and was successful in respect of 1 company. Addressing the statutory framework, Arden J observed that the purpose of the unfitness disqualification is protective rather than penal and addressed the circumstances to which the court should have regard when considering an application for leave by an unfit director :

"As respects the exercise of the discretion to grant leave there is no express guidance in the statute. It is clearly relevant to the exercise of this discretion to consider the end which disqualification seeks to achieve and the reasons why that end is thought desirable. It is clear, however, from the leading authority of Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 that the purpose of s 6 of the 1986 Act is protective rather than penal, and this is the starting point. In practice the section also has a deterrent function since honest directors will not wish their conduct to result in disqualification proceedings. …

Leave, however, in my view is not to be too freely given. Legislative policy requires the disqualification of unfit directors to minimise the risk of harm to the public, and the courts must not by granting leave prevent the achievement of this policy objective. Nor would the court wish anyone dealing with the director to be misled as to the gravity with which it views the order that has been made. …

To what factors should the court have regard when it is considering the grant of leave? The courts have on many occasions made it clear that they will have regard to two factors in particular : the protection of the public; and the need for the applicant to be a director".

On the question of protection of the public Arden J continued :

"The public for this purpose includes all relevant interest groups, such as shareholders, employees, lenders, customers and other creditors. The process of considering whether the public is adequately protected if leave is given involves considering a number of factors. The court must look at the grounds on which unfitness was found, and in particular whether the applicant had misappropriated any assets or acted knowingly in breach of duty. The court must also have regard to the view that the court took as to the character of the applicant, in particular his honesty, reliability and willingness to accept advice. The previous career of the applicant may also be relevant. Obviously it would also be relevant if he had had a previous disqualification order made against him but that has not been suggested in this case.

As regards the company of which the applicant is to become a director, the court must consider the nature of the company's business, the size of the company, its financial position, the number of directors, the number of its employees and creditors and so on, and the risks involved in the company's particular business so far as it can make any assessment of this. It must also look to see whether there is potential for the matters which were held to constitute unfitness to recur".

Arden J then reviewed cases in which safeguarding measures, such as appointment of solicitors or accountants as directors and the imposition of specific controls in order to protect the public and avoid recurrence were considered, and continued :

"There are also other matters to which the court should in my view have regard. However, this is not in any way a comprehensive list. For instance the court should take into account the director's conduct since the matters which gave rise to the established grounds occurred, in particular since the proceedings for disqualification were begun. Thus, if he has acted as a director while the proceedings were pending it will be relevant to see whether the companies have carried on business satisfactorily, for instance whether they are trading profitably, have complied with their obligations under the Companies Act or other relevant legislation (such as fiscal legislation) and have paid liabilities as they fall due".

Turning to the need for the applicant to be a director, Arden J observed :

"In this context, 'need' has to be interpreted as practical need. There will be companies where the involvement of the applicant in the capacity sought is vital to customer or investor confidence, or for some other sufficient reason".

15. These extracts from Arden J's decision make clear that the court should make its decision having regard to all relevant circumstances. This will involve reviewing the available relevant evidence and not overlooking omissions from that evidence or the absence of relevant evidence.
16. In Re Dawes & Henderson Agencies Ltd, Sir Richard Scott V-C considered the effect of the relative strength of the case as to need on the degree of risk to the public that might be acceptable, and concluded that in a strong case of need some slight risk might be acceptable :

"In a case where no need has been demonstrated on the company's part to have the applicant as its director or, from a business point of view, on the applicant's part to be a director, there would need, I think, to be only a very small risk to the public which the granting of leave might produce to justify the refusal of the application. Per contra, if a substantial and pressing need on the part of the company, or on the part of the individual in order to be able to earn his living, could be shown in favour of the grant of leave then it might be right to accept some slight risk to the public if the leave sought were granted".

17. In Re Barings plc (No. 3) Sir Richard Scott V-C, without detracting from the need to consider all the circumstances, drew attention to the need to balance the nature of the conduct which led to and justified the disqualification against the risk of recurrence :

"… [s.17] leave should not be granted in circumstances in which the effect of its grant would be to undermine the purpose of the disqualification order … The improprieties which have led to and required the making of a disqualification order must be kept clearly in mind when considering whether a grant of section 17 leave should be granted.

…

If the conduct of a director has been tainted by any dishonesty, if the company in question has been allowed to continue trading while obviously hopelessly insolvent, if a director has been withdrawing from a struggling company excessive amounts of remuneration in anticipation of the company's collapse and, in effect, living off the company's creditors, and if a disqualification order were then made, these circumstances would loom very large on any section 17 application. The court would, I am sure, have in mind the need to protect the public from any repetition of the conduct in question.

…

…

It seems to me that the importance of protecting the public from the conduct that led to the disqualification order and the need that the applicant should be able to act as a director of a particular company must be kept in balance with one another. The Court when considering whether or not to grant leave should, in particular, pay attention to the nature of the defects in company management that led to the disqualification order and ask itself whether, if leave were granted, a situation might arise in which there would be a risk of recurrence of those defects. In a case like the present there seems to me to be virtually no risk at all of such a recurrence."

18. In the particular circumstances of Re Barings plc (No. 3), the disqualified director sought leave to act as a director in circumstances which did not involve him assuming any executive responsibilities, other than of a trivial nature, and left him free to contract as a consultant.
19. With these principles in mind I turn to the circumstances of the application before me. In so doing, I keep in mind as the improprieties which led to the disqualification and the risk of harm from which the public is to be protected the reasons for H's undertaking summarised at paragraph 6 above.

Mr Harris

20. H is now in his early 40s. As to earning a living, in his affidavit sworn on 12.7.13, H states that his salary from CSL for the year to 30.9.12 was some £14k and, during the hearing on 18.7.13, H volunteered that this was adequate for his needs because he is in the fortunate position of having a partner who is able to provide for them both. I do not take this to mean more than that he has no current need to earn more than this modest sum and that he is looking to greater rewards as and when CSL becomes profitable.
21. H left school aged 16 years with 8 'O' levels. According to his CV, H has been employed since then, save for a 4 – 5 month gap between February and June 2001. Between 1987 and March 1993, H worked for a national menswear retailer transferring between a number of branches and being promoted over time to store manager. H then moved to a sports retail chain where he was employed until August 1997, being promoted over time to regional manager. Next, H worked for 16 months as area manager of a toy retail chain with responsibility for 21 stores in London, and then for 2 years, until February 2001, as retail director of a then new but expanding food retail chain.
22. In June 2001, H's career path moved from retail to IT. Between June 2001 and August 2003 he was sales director of a recruitment and document scanning company which business also included software design. This employment appears to have been followed by the establishment of DDL and CIL. It also appears from the evidence that in 2002 H formed TIVG.
23. Over the course of these various employments, H has undertaken a variety of employment based skills and management courses and development programmes including time management, team building, budget cost control, and basic food hygiene to cite 4 of the 16 courses and programmes listed.
24. In 2009, H ceased being actively involved in CIL, became a director of DDL, from which point it abandoned VAT returns. Later in that year, H became involved in CSL as a director when the underlying business was bought out of administration by or with funding from a Mr Charles Garavan (CG), who is said to be a wealthy Irish national, resident in Ireland and Portugal, who has funded and continues to fund CSL.
25. CG is in his early 70s. CG and H have known each other since 2007 and their business relationship, with CG as the funder and H as the business manager, has developed through TIVG and CSL. CG became a director of TIVG in 2008 and, like H, is a founding director of CSL and CLL. H attributes the idea to set up CLL to CG. However, CG is said not to be involved in the day to day management of any of these companies and his appointments as director are intended to enable him to protect his investments. It is not evident that CG takes any active part at all in any of the companies beyond receiving reports from H.
26. H's full time occupation was, until 26.6.13, CSL, CLL and TIVG and has been, since 26.6.13, CSL. By reference to H's evidence, it appears that (1) he is very actively involved in every aspect of CSL's business and that everyone at CSL reports to H; (2) other than formally being a limited liability company and funded by CG, TIVG has no existence independent of H; and, (3) although recently formed and only licensed for consumer credit and consumer hire business by the OFT with effect from 26.6.13, and therefore not yet trading, H wishes to be at the centre of CLL's activities.
27. To give one example of H's involvement in all aspects of business, it seems that at all times (24 – 7 – 365) he holds the mobile phone by which CSL's customer support services are provided. This burden is eased by computer programmes enabling customers to be supported, and their service problems with CSL products to be fixed, remotely. This is an illustration of the fact that H is the hub of CSL's business wheel and all the spokes are routed through and controlled and adjusted by him.
28. In the concluding paragraph of his most recent evidence H makes the following statement :

" … [TIVG, CSL and CLL] are all interlinked. For example I have evidenced at some length my dealings with TIVG and the importance of the RMS^[1] in [CSL]. If I am not granted permission to act as a director of the Companies^[2] this will have the effect that [CSL] will not be able to continue to trade and will enter a formal insolvency procedure with the consequential loss of jobs for the current 11 employees and substantial financial losses to the Companies (sic) stakeholders".

If I understand it correctly, the underlying rationale of this evidence is that CSL's business model is dependent on H being a director both of TIVG and CLL. In my judgment, whilst it will be necessary to bear in mind the evidence as to the inter-relationship between TIVG, CSL and CLL, it will also be necessary to consider each of these companies and H's involvement in each company individually.

29. Having regard to H's description of his role at CSL, it would be fair to characterise the relationship between CSL and H as being one of structured dependence. On any basis, H's role at CSL and his intended role at TIVG and CLL is a far cry from that of the applicant in Re Barings plc (No. 3) seeking leave to be a non-executive director with only trivial executive responsibilities
30. Finally at this point, I should record my views as to H's qualities and abilities as they appear from the written evidence and from H's oral contributions, through his counsel, during the proceedings. It is readily apparent that H is intelligent, articulate, quick minded, highly motivated and persuasive, and that he has well developed presentational and marketing skills. From his CV and written evidence it also appears that H has skills as a software developer and an active interest in developing IT based products (specifically the Remote Monitoring System (RMS) for TIVG).
31. H has put forward ample evidence to justify a finding that he is skilled and experienced at marketing and sales and would be valuable to any company in that role at a managerial level. As to what the evidence does not show, it does not demonstrate that H has a track record, experience, skills or training in successful or competent financial management of a company or business; it also does not demonstrate that H has any background or training in licensed credit finance, whether for hire or sale.

Other witness evidence and other individuals

32. There are 4 short witness statements exhibited by H to his written evidence. I shall refer to them in the order in which they appear in the hearing bundle. Each is very short.
33. Ms Joanne Stoneman (JS) is a partner in S R Lynn & Co (SRL & Co), which firm acts as accountants to TIVG and CSL. JS acts as CSL's accountant. JS confirms that, as at June 2013, CSL was up to date with its obligations to HMRC; that is common ground. On 1.6.13 JS was appointed a non-executive director of TIVG and of CLL. Separately in respect of each of TIVG and CLL she states that she obtains the information for SRL & Co to report to HRMC (sic ~ the same error appears twice because the relevant paragraph is copied and pasted in different sections of JS's witness statement). As a very recently appointed non-executive director of TIVG and CLL, JS formally states that she approves of H's application for leave to be reinstated as a director of these companies.
34. H suggests that when fulfilling her accounting role at CSL, JS is independent of SRL & Co and points out that CSL is not required to have an auditor, and further that SRL & Co is not authorised to audit companies; I gather from this that SRL & Co specialises in work such as providing the accounting and payroll function to small and medium sized businesses. Although there may not be a professional bar to JS being a non-executive director because none of these companies are required to be audited, the reality is that JS has been appointed a non-executive finance director of TIVG and CLL because SRL & Co are accountants to these companies and to CSL.
35. Ms Janine Bevan (JB) is the accounts manager of CSL and is responsible for its day to day accounts function. She prepares CSL's VAT returns, which are overseen by SRL & Co, and she provides support to SRL & Co in relation to CSL's PAYE accounting. She was appointed a director of TIVG on 1.6.13.
36. As JB says nothing of her background in accounting, the SoS asked for further details and H responded in his affidavit stating that JB has been responsible for CSL's accounts and systems for 3 years and he exhibits a CV for JB covering 8 years of work for 3 different employers. The various tasks specified include some accountancy related work (eg credit control and chasing for payments, and stock recording and control), but the CV evidences general office work rather than accounting or finance work. There is no evidence as to JB's age and nothing to indicate that she could hold her own with H in a boardroom. The reality is that as an employee of CSL, JB is dependent for her livelihood on retaining H's confidence.
37. Mr Stephen Lynn (SL) was appointed a non-executive director of CSL on 24.9.09 and is a minority (5%) shareholder. On H's evidence, SL oversees CSL's accounting function. SL is a chartered accountant and a partner in SRL & Co. H says that together they review monthly management accounts, cash flows and investment requirements of CSL. SL confirms that he is aware of and supports H's application in respect of CSL.
38. Mr Dominic Williams (DW) was appointed a director of CLL on 1.6.13. He says that once CLL has registered for VAT he will be responsible for VAT returns and payment of VAT in conjunction with CLL's accountants. As DW said nothing about himself, the SoS asked H to provide further information. It seems that DW is 47 years old and is CSL's sales manager with responsibility for individual rather than corporate (multi-site) customers, and that he has 25 plus years experience in sales and marketing. Apart from a brief spell in the UK (April to October 2000), between August 1998 and February 2012 DW has been based abroad, principally in Prague, and working mainly in the call centre industry. DW is a relative newcomer to CSL and H.
39. In response to the SoS's question : "Please provide more information in relation to the experience of [DW] for the role of Sales director in [CLL]" H states that as sales manager of CSL DW "fully understands the product" and that it is "a natural fit" that DW should be involved in CLL due to the nature of the role he performs in CSL. CLL is a finance company licensed to offer consumer credit and credit hire facilities, activities strikingly absent from DW's career history.
40. One of the other persons referred to in the evidence but not providing a witness statement is Mr Victor Carpenter (VC) who is R&D director of CSL. VC is an engineer and has 30 years experience in the business of CSL; in other words, he came with the assets when they were purchased from administrators in 2009. His area of responsibility is confined to the research, development and technical side of CSL's business.
41. Passing reference is made to other individuals, for example Clare Guy at SRL & Co who is also involved in CSL's accounting function.
42. Apart from VC, DW and JB, CSL has 8 employees of whom 5 are employed as service engineers working in the field and 3 (in addition to VC and JB) are involved in other aspects of the business, they are employed as production manager, stock manager, and customer services manager. CSL's products are glass washers, dishwashers, thermal disinfection dishwashers and 'airack' glass dryers which are sold to the catering industry (including pubs) and to the health service.

Proposed safeguards

43. Before turning to each of the companies the subject of H's application, I should summarise and keep in mind the safeguards which H proposes should be imposed as conditions for the grant and continuation over the disqualification period of leave to act as a director and be involved in the management of TIVG, CSL and CLL. As is usual, H proposes that if any condition ceases to be satisfied, his leave should be revoked and remain revoked unless reinstated by the court.
44. In summary, the conditions are that (1) H shall not (a) act as a director or in the management of any other company without the court's permission, (b) borrow money from TIVG, CSL or CLL, (c) be granted or accept security over the assets of TIVG, CSL or CLL, (d) receive emoluments exceeding sums approved by the respective boards of TIVG, CSL and CLL, or (e) receive a dividend or interim dividend from TIVG, CSL or CLL; (2) TIVG, CSL and CLL shall not, without the permission of the court (a) act as a director of any other company, (b) enter into any material contract or arrangement outside the ordinary course of their business, or (c) repay capital to investors unless all creditors have been repaid in full or by way of dividend in a members voluntary winding up; (3) TIVG, CSL and CLL shall (a) prepare monthly management accounts by the 21^st of the following month and submit the same to SRL & Co (or any replacement accountant) and act upon any concerns reported by the accountant following a review of the monthly accounts, (b) file all returns (annual, VAT and tax) and pay all taxes on or before their due dates, (c) hold monthly minuted board meetings, and (d) if so recommended by SRL & Co (or any replacement accountant) obtain and implement the advice of a licensed insolvency practitioner; (4) SL (or a suitable replacement) shall remain non-executive finance director of CSL and JS (or a suitable replacement) shall remain non-executive finance director of TIVG and CLL; and, (5) by 22.8.13 H shall inform the OFT of his disqualification undertaking and shall serve a copy of the final order made by the court on his application.
45. The proposed conditions are, in the main, standard conditions and they do provide a measure of protection for the benefit of the public. However, their efficacy is to be tested by their application to the particular circumstances of TIVG, CSL and CLL, which are unusual.
46. During the course of the hearing on 18.7.13, H was asked whether he and CG would accept a condition that over the disqualification period there be a quarterly rolling solvency review and that CG would, on a quarterly rolling basis over the disqualification period, confirm his continued support for 12 months. H was anxious for a decision from the court on 19.7.13 (which proved unachievable) and so he contacted CG overnight and produced his 2^nd witness statement to relay CG's response. CG, entirely understandably, would not make such a commitment without first taking legal and financial advice. H reported in his statement that CG would agree to the capitalisation of £393,470 of his £493,470 existing loan to CSL by conversion of the loan into preference shares and with the status of the remaining £100k being reviewed at the current year end (30.9.13). I shall return to this proposal when considering the position of H as a director and participant in the management of CSL.

CSL

47. CSL was incorporated as Harris and Garavan Enterprises Ltd on 24.9.09 and changed its name to CSL on 1.11.09. It was formed to acquire assets of the former Clenaware company from its administrators. CSL has an issued share capital of £375k comprising 100 £1 ordinary shares and 375,000 £1 preference shares. The ordinary shares are held as follows : CG 45, H 45, VC 5, and SL 5. CG holds all the preference shares.
48. Unlike TIVG and CLL, CSL is actively trading. Indeed, CSL, as revived under H and CG's control, has been trading for almost 4 years. It has yet to make a profit. In his affidavit, H referred several times to a 5 year business plan of 2009 by which it was expected that CSL would achieve a break-even point in the 5^th year. The plan was not exhibited. On enquiry, it transpired that the reference to a business plan was to a discussion between H and CG in 2009 about the length of time it would be likely to take before CSL became profitable. It is this sort of presentation which, while not misleading, is carefully chosen to create a particular impression (thorough preparation and stability in this example) and inclines me to the view that some care is needed when considering H's application and evidence.
49. As to CSL's trading, as at 30.9.12, the date of the last annual accounts, CSL had accumulated losses of £437k and net liabilities of almost £63k. CSL's liabilities include a loan from CG stated in the balance sheet at £393,470 and shown as a deferred liability. However, Ms Meager acknowledged that CG's loan is in fact repayable on demand. If CG was to demand repayment, CSL would be unable to meet its obligations to creditors. Indeed, by reference to the 30.9.12 balance sheet, CSL's ability to meet its trade creditors and liabilities to HMRC as at 30.9.12 also depended upon debtors being good for their balance sheet value, £72,470, and stock, valued at £338,877, being both correctly valued and readily realisable.
50. On this last point, it appears from the trading account for the year to 30.9.12 that the value of stock exceeds expenditure on purchases for the entire year by almost £65k. H says in his evidence that spare parts are held for all Clenaware machines, including all models sold by the company which traded for some 30 years before going into administration in 2009. There is plainly cause for concern that stock at the level and value stated in the 2012 balance sheet might be overvalued. This in turn would enhance the risk of CSL being unable to meet its obligations as they fall due; it might also affect CG's commitment to CSL.
51. As already noted, H has reported that CG is amenable to the capitalisation of the entirety of his loan as at 30.9.12 (£393,470) and will review his further loan, said to be £100k, after 30.9.13. On the assumption that such capitalisation is implemented, CSL's balance sheet restated as at 30.9.12 would show CSL to have net assets of £330,659. Provided the debtors are accurately stated and readily collectible and the stock is accurately recorded and valued on the correct basis (lower of cost and net realisable value on an item by item basis), the capitalisation of CG's loan would transform CSL into a plainly solvent entity as at 30.9.12. The reliability of CSL's accounts for the year to 30.9.12, which are unaudited and were signed off by H as a director on 7.11.12 is therefore very important.
52. The management profit and loss account for the period 1.10.12 to 30.6.13 shows that CSL has continued to trade at a loss, incurring a further aggregate net loss for the 9 month period to 30.6.13 of £64k. There is no management balance sheet as at 30.6.13.
53. Thus, the key elements to alleviating public protection concern are that (1) CG's loan be capitalised, (2) CSL's accounts for the year to 30.9.12 are reliable and, in particular, that the stock value as at 30.9.12 be is materially accurate, and (3) an adequate monitoring system is in place to identify the risk of insolvency at an early stage.
54. In the circumstances of this case, all three elements must be addressed by conditions attached to any leave given on H's application in relation to CSL. The primary reason is that the evidence is that H takes responsibility for and controls all aspects of CSL's business. In his written evidence H has identified 10 key aspects of CSL's business and his role in the management of CSL is central to each key aspect, including finance and accounts.
55. As to (1), it will be a condition of leave in relation to CSL that £393,470 of CG's outstanding loan to CSL be converted into preference shares. This is volunteered by CG and should be capable of achievement by the next year end date (30.9.13). As to dividends, in addition to those proposed by H, it will also be a condition that, during the disqualification period, no dividend on CSL's share capital shall be declared or paid if and to the extent that it would have the effect of reducing CSL's distributable profit to less than £50k. The purpose of this is to ensure that, if and when profitable, CSL retains a solvency margin.
56. As to (2), it is necessary to ensure that the accounts for the period to 30.9.12 are reliable and, in particular, that the stock value in the 30.9.12 balance sheet is materially accurate. This may be achieved by undertaking a stock take and valuation at 30.9.13 and reconciling the result of that exercise back to the stock records supporting the valuation for the 30.9.12 balance sheet. This exercise should be carried out by an experienced auditor. It would not be appropriate for SL or JS to undertake this task, not least because SRL & Co is not authorised to audit companies. CSL should engage a chartered accountant of not less than 15 years experience who is also a partner or director of a firm or entity having at least 10 partners or directors. I recognise that this will not be a straightforward exercise; but, it is important that a company which, after 4 years trading and being based on the assets of a previous business which had operated for 30 years, is still loss making should be shown to be solvent and able to withstand further trading at a loss from the point at which a disqualified director is given leave to be involved in its management and – in this case – to be its controlling director. This exercise should be completed by 31.12.13. In the event that the stock value as at 30.9.12 is found to have been overstated by £50k (approximately 15%) or more, the accounts, which were signed by H as a director, will be shown to have been unreliable and materially inaccurate and the condition will not have been satisfied.
57. As to (3), the monthly board monitoring by SL in conjunction with the other directors should be supplemented during the disqualification period by an annual review and verification of current assets and current liabilities as at the year end date by an independent firm of auditors with the person responsible for the review and verification having the same qualification and standing as required for (2) above. In the event that the current liabilities equal or exceed the current assets, CSL's solvency will be in question and this condition will not have been satisfied.
58. By way of comment, I observe that conditions (2) and (3) would not have been necessary had H been less central to CSL's management and had CG been willing to guarantee CSL's solvency on a rolling basis over the disqualification period; that being noted, I entirely accept CG's caution in requiring to be advised by his lawyer and his accountant before making such a commitment.
59. As should be clear from my judgment, I consider these additional conditions to be necessary because (1) CSL has yet to trade profitably, (2) every aspect of CSL is effectively managed and controlled by H, and (3) CSL's solvency depends upon the reliability of the value attributed to stock at 30.9.12 and upon it continuing to at least match current liabilities by current assets in real value terms.
60. These additional conditions should have the necessary effect of minimising the risk of harm to the public to a level at which H's role as executive director of CSL and his central and controlling role in the management of CSL should not be a matter of concern and leave may be given in respect of CSL.
61. H maintains that the relationship between CSL and the other companies is such that they are inter-dependent. Whether or not that is so, as it is H's case, these conditions should apply to leave, if given, in relation to TIVG and CLL. I also bear these conditions in mind in the context of H's application for leave in respect of each of TIVG and CLL.

TIVG

62. TIVG was formed more than a decade ago. H and a Mr Robert Smylie (RS) were the original directors. RS resigned on 16.6.08 and CG became a director on 7.7.08. Until 30.6.08, TIVG was – or at least it filed accounts as – a dormant company. H says that during 2007-8 he developed an idea for a remote monitoring system (RMS) for commercial catering equipment. H has exhibited a document to his affidavit explaining in lay terms what the RMS is and how it works. Version 1 was released in 2009 and was available as an extra fitted to thermal disinfection dishwashers sold to the healthcare sector. Version 2 was released in 2011 and is available to be fitted in various glasswashers produced by CSL as well as disinfection dishwashers. Work on Version 3 started in 2013 but that is now on hold following H's resignation as a director on 26.6.13, which followed the court's refusal to grant interim relief on his application in respect of TIVG.
63. TIVG does not sell RMS units. It does however supply them to CSL on a gratuitous basis. It is not clear how many RMS units have been supplied to CSL and fitted in washers sold by CSL. H refers to ongoing work with the Food Standards Agency and to an order (at least under negotiation) for 60 glasswashers by a Russian cinema chain. H also says that 4 'customers' are testing the RMS on their equipment; this is presumably a reference to existing or prospective customers of CSL.
64. H also refers in his evidence to a contract made in July 2009 for the supply of RMS units pre-fitted into disinfection dishwashers sold to hospitals in the UK and Ireland. Given that TIVG does not trade, the only logical explanation for this evidence is that the contract was with the previous (pre-administration) Clenaware company and that such sales as have been made post-administration have been made by CSL on the basis that the RMS units have been fitted and supplied without payment or benefit to TIVG.
65. TIVG's accounts to 30.6.12 and its draft accounts to 30.6.13 disclose paid up share capital of £200,100 and accumulated losses (ie the aggregate of administrative expenses) of £200,045 at 30.6.13, leaving, as stated, a remaining net surplus on the balance sheet of £55.
66. TIVG's share capital comprises 100 £1 ordinary shares owned equally by H and CG and 75,000 £1 preference shares, presumably issued at a premium (total value £200k), all owned by CG.
67. In answer to a request from the SoS to explain why H is required to carry out a role within TIVG for it to prosper, H points to his role as the designer and developer of the RMS, with assistance from 'key suppliers' and his involvement in specifying and supporting servers and websites.
68. The status (subsistence and ownership) of any intellectual property rights in the RMS is unclear. In his affidavit, H said that TIVG has spent money taking steps to patent parts of the RMS. However, in the course of submissions on 18.7.13, Ms Meager said that there are no patents or pending applications and that unspecified due diligence work is being done by an entity called IP Prospect.
69. During the course of the hearing on 18.7.13, Mr Weaver, counsel then appearing for the SoS, submitted that there is no apparent reason why H could not carry on the operations currently carried on under the umbrella of a limited liability company as a sole trader or, if he was willing, in partnership with CG. Ms Meager rejected this submission on H's behalf, but did not put forward any cogent reasons to support her rejection of the proposition.
70. According to its accounts, TIVG has all but exhausted its capital. It does not trade on its own account. It supplies the current version of the RMS to CSL gratuitously, which may mean that it permits CSL to commission the manufacture and installation of the RMS as and when an order for a washer with such a system is received.
71. Viewed in isolation, there is no sufficient justification for H to be reappointed a director of TIVG. Indeed, given TIVG's precarious financial position and status as a non-trading company more than a decade after its incorporation and some 5 years after development of the RMS began, it may also be to H's advantage not to be exposed to the risk of be a director or involved in the management of another failed or failing company.
72. Even when viewing TIVG collectively with CSL or with CSL and CLL, it is still necessary to consider the position of present and future creditors and others potentially having claims against TIVG (eg on a product liability basis) because, as a limited liability company, TIVG is a separate legal entity and both CSL and TIVG's shareholders (H and CG) are shielded from exposure to these actual and potential liabilities.
73. As to the likely effect on CSL (H said in his most recent statement that CSL will cease trading and enter into a formal insolvency proceeding), I recognise that it is undesirable that 11 employees should lose their jobs, that CG should sustain a substantial capital loss, and also that H should lose his livelihood. On the other hand, without continual funding TIVG will itself be insolvent, and it is simply unrealistic to expect the public to be exposed to such a consequence with H at the helm.
74. Finally, but importantly as it goes to relevant conduct, I note from TIVG's accounts that, during or in respect of the year to 30.6.12, TIVG re-credited to its profit and loss account a sum of £52,499. A substantial element of this re-credit arose from TIVG treating as no longer due a current liability, some £46,505, owed to DDL for developer, designer and professional services provided by DDL before it went into liquidation. Given the relative size of TIVG's liability to DDL as a proportion of its total expenditure at the time (almost 20%), I infer that DDL was one of the 'key suppliers' referred to by H as providing design and development services in relation to the RMS. TIVG's disregard of its liability to DDL pre-dated the dissolution of DDL. It is difficult not to see this as an aggravating factor; it sheds light on H's attitude to an acknowledged liability of a company under his control which, if honoured, would, as he also knew, have served to reduce the shortfall to creditors (principally HMRC) of DDL (the cause of H's disqualification). It is no answer to say that TIVG had only £145 in cash and £100 due from non-trade debtors (presumably due from CG and H for their ordinary shares) because, instead of supplying the RMS to CSL gratuitously, H could have caused TIVG to levy a charge and thereby have raised funds to enable TIVG to meet its commercial obligations.
75. I regard this last factor as a serious matter and, although not referred to in terms by Mr Weaver, to be a substantial reason in favour of accepting Mr Weaver's submission that H should, if he wishes to continue TIVG's activities, do so without the benefit and protection of limited liability.
76. A further consequence of re-crediting the sum of £52,499 (the remainder of which appears to relate to a debt to CIL also treated as not payable and re-credited to TIVG's profit and loss account) is that the balance sheet as at 30.9.12 was presented a nominal surplus of assets (£55) as opposed to a deficiency (more than £50k). I do not regard this as particularly significant because the reality is that TIVG's survival, as presently structured, in fact depends on funding from CG.
77. However, it is necessary to have regard to all relevant circumstances, including in the 'needs' scale the possible demise of CSL, and also noting that there has been no proposal to guarantee TIVG's solvency over the disqualification period. I do not attach much weight to the appointment of JS and JB as non-executive directors. The evidence does not indicate that they are likely to be able to control or restrain H, even in the area of financial management. For example, if they had been directors and if H had decided that DDL was not to be paid, I think it improbable that their contrary view would have prevailed. Most importantly, there is no cogent answer to Mr Weaver's submission that H could continue his work with the RMS without the umbrella of limited liability.
78. Having regard to all the circumstances, I reach the conclusion that the 'need' for H to be reappointed a director of TIVG is outweighed by the risks accompanying such a course. I, therefore, dismiss this aspect of H's claim and application.

CLL

79. CLL is a newly formed company which has not yet commenced trading. It was incorporated on 28.1.03. It has an authorised and issued share capital of £100 of which CG holds 51 shares and H holds 49 shares. On 1.6.13, JS was appointed non-executive finance director and DW was appointed sales director.
80. On 26.6.13, the OFT granted a consumer credit and consumer hire licence. On the same day, and following the initial hearing of this application at which H was not given leave on an interim basis to be a director or involved in the management of CLL, H resigned his directorship of this company.
81. H's evidence is that CLL will purchase machines from CSL at an agreed commercial rate and hire or sell them to CSL's customers on contracts ranging from 3 months to 3 years charging an increased sum for spread payments.
82. H says that an investment of £350k will be made into CLL to fund the initial sale of products by CSL to CLL. The source of this investment is identified as CG who is said by H to have agreed to advance an initial £100k when CLL commences trading and a further £250k when required all of which is to be raised by the issue of preference shares. Of course, if these products were to be sold directly to customers, CG would still be the source of funding for the product cost (albeit directly into CSL rather than routed via CLL), and there is no evidence that customers would not be able to obtain their financing requirements from other sources.
83. H refers to his involvement in CLL as having carried out all the research and having set up the requirements for CLL to commence trading. The intention is that H would be the day to day contact with customers wishing to spread payments over time. In this way, involvement in CLL will be an adjunct to H's existing role at CSL. He says that if he is not a director of CLL it will never begin trading.
84. H has expanded upon this basic information in response to questions from the SoS. He says that there is a demand from corporate customers (ie multi-site operators such as pub and restaurant chains) and from individual pubs and restaurants for machines supplied on hire purchase. At the hearing on 18.7.13, H further stated, through Ms Meager, that at CSL he deals with all corporate customers and DW deals with non-corporate customers (individual pubs and restaurants) and that this division of responsibility is intended to be carried through to CLL.
85. H says that in addition to his sales and general management roles, it is intended that he would be managing the other aspects of the business, including all legal requirements (such as hire purchase terms and conditions, consumer credit licence and data protection), preparing monthly management accounts, and addressing CG's investment requirements. Thus in substance, even if not in title, H's role as an executive director of CLL will be that of managing director.
86. By his statement of 19.7.13, H said that he had to inform the OFT of his current status by 26.7.13 which might jeopardise the licence staying in place. Whether or not H did that is not clear, although I note from the conditions proposed by H that he proposes so to do by 22.8.13.
87. H also referred to potential contracts on behalf of CLL being on hold and possibly being lost. H referred expressly to 'Everards', a midlands brewer with a multi-site pub estate, and he estimated that income of £500k over 2 years might be lost. No explanation is given as to why the contract needs to be on hold or why it need be lost if H is not a director of CLL.
88. There is no evidence that anyone intended to be involved in CLL, including JS, has any experience in the field of credit finance.
89. By disregarding DDL's VAT obligations for the entire period he was a director of that company H displayed an attitude to financial management, not only in relation to specific debts to HMRC but also more widely in relation to honouring financial commitments over a prolonged period of time, which weighs heavily against granting leave on his application in relation to CLL. This attitude is further reflected in H's management of TIVG relating to its debt to DDL.
90. It is not for the court to tell CLL how it should structure itself or how it should manage its affairs, but it is for the court to refuse to sanction a course which might put the public (as that term was explained by Arden J in Tech Textiles) at risk of harm particularly where, as here, no compelling existing or future need for H's services as a director or as a person taking part in the management of a credit finance company has been demonstrated.
91. For example, in relation to the sales function, the fact that H has dealt with all corporate customers for CSL is not a weighty reason why DW, who is already CLL's sales director, cannot or should not fulfil that role for CLL.
92. It is also important to bear in mind that (1) H personally has no track record, experience or proven skills in this field, and (2) apart possibly from CIL, every company in respect of which he has assumed financial responsibility has been loss making while under his stewardship.
93. H may be correct when he says that if he is not a director CLL will not trade; that is a matter CG, who owns the majority of CLL's shares and H. I note that there is no evidence from CG and so his views are not known. I readily infer that he would prefer that H is executive director of CLL but it does not follow that he regards CLL as doomed without H, or, if he does, why that is so.
94. I do not accept that CLL is critical to the survival or future success of CSL because, on H's evidence which he wishes me to accept, in 2009 he and CG devised a 5 year plan to bring CSL to the brink of sustainable profitability; if credit finance been a part of that plan, either CLL would have been formed years ago or some reason would have existed and could have been given for delaying its establishment. Moreover, there is no evidence as to the terms on which CLL will extend credit for hire or sale, nor is there any evidence, as distinct from assertion, that customers, whether corporate or single-site, either cannot or will not obtain finance, if and as necessary, from other established sources.
95. I accept Ms Meager's points, relaying instructions from H, that festivals are an expanding market where short term hire would be attractive to caterers, and also that 'one-stop shops' have a competitive edge. However, it does not follow that H, rather than DW or some other person employed for the purpose and already experienced in credit finance, is needed to secure this business. Convenience and wish are not the same thing as need.
96. On the material before me, no sufficiently cogent reason has been given to justify the grant of leave for H to be a director of or to take part in the management of a credit hire and credit sale business. I also dismiss this aspect of H's claim and application.

Note 1   Remote Monitoring System    [Back]

Note 2   Ie TIVG, CSL and CLL    [Back]