OUTER
HOUSE, COURT OF SESSION [2006] CSOH 153 |
|
P1630/03 |
OPINION OF LORD DRUMMOND YOUNG in the petition of HER MAJESTY'S SECRETARY OF STATE FOR TRADE
AND INDUSTRY Petitioner; for a Disqualification Order in terms of the
Company Directors Disqualification Act 1986 in respect of JAMES GERARD Respondent: ________________ |
Petitioner: Ross;
Biggart Baillie
Respondent: Mackenzie, Solicitor; Pinsent Masons
[1] The
petitioner has raised proceedings against the respondent for a disqualification
order under section 6 of the Company Directors Disqualification Act 1986. The events that gave rise to the petition
arose out of the affairs of a company known as Oakbank (J&S) Limited. It is a matter of agreement that the
respondent was and remains a director of that company. It is further agreed that an order for the
winding up of the company was made in the Court of Session on
[2] Certain
matters of fact are agreed or not in dispute.
These are as follows. The
company, Oakbank (J&S) Limited, was incorporated on
The relevant
legislation
[3] Section
1 of the Company Directors Disqualification Act 1986 provides that, in the
circumstances specified later in the Act, a court may make a disqualification
order against a person. The effect of
such an order is that the person should not be a director of a company or,
whether directly or indirectly, be concerned or take part in the management of
a company without leave of the court. In
the circumstances specified in section 6 of the Act, the court is obliged to
make such an order. The present
application is made under section 6. So
far as relevant, section 6 is in the following terms:
"(1) The
court shall make a disqualification order against a person in any case where,
on an application under this section, it is satisfied --
(a) that he is or has been a director of a
company which has at any time become insolvent (whether while he was a director
or subsequently), and
(b)
that
his conduct as a director of that company ... makes him unfit to be concerned
in the management of a company.
(2) For the purposes of this section ..., a
company becomes insolvent if --
(a) the company goes into liquidation at
the time when its assets are insufficient for the payment of its debts and
other liabilities and the expenses of the winding up,
...
and
references to a person's conduct as a director of any company ... include,
where that company ... has become insolvent, that person's conduct in relation
to any matters connected with or arising out of the insolvency of that company".
Section 7 of the 1986 Act authorizes
the Secretary of State for Trade and Industry to make an application for a
disqualification order against any person if he considers it expedient in the
public interest that such an order should be made. That procedure has been followed in the
present case. Section 9 and
Schedule 1 specify certain matters that are to be taken into account in
determining whether a person's conduct as a director makes him unfit to be
concerned in the management of a company.
In particular, the court is directed, by paragraph 10 of Schedule 1, to
have regard to
"Any failure
by the director to comply with any obligation imposed on him by or under any of
the following provisions of the Insolvency Act --
...
(e) section 131 (statement of affairs in winding
up by the court);
...
(b) section
235 (duty to co-operate with liquidator, etc)".
[4] The
provisions of the Insolvency Act 1986 referred to in paragraph 210 of Schedule
1 are as follows. Section 131 imposes a
duty on inter alios directors to provide a liquidator or provisional liquidator
with a statement of affairs. In relation
to a Scottish winding up, the relevant parts are in the following terms:
"(1) Where the court has made a winding-up order ...
the [liquidator or provisional liquidator] may require some or all of the
persons mentioned in subsection (3) below to make out and submit to him a
statement in the prescribed form as to the affairs of the company.
(2) The statement shall be verified by affidavit
by the persons required to submit it and shall show --
(a) particulars of the company's assets and
liabilities;
(b) the names and addresses of the company's
creditors;
(c)
the securities held by them respectively;
(d) the dates when the securities were
respectively given; and
(e) such further or other information as may be prescribed or as the
[liquidator or interim liquidator] may require.
(3) The persons referred to in subsection (1) are
--
(a) those who are or have been officers of
the company;
....
(4) Where any persons are required under this
section to submit a statement of affairs to the [liquidator or interim
liquidator], they shall do so ... before the end of the period of 21 days
beginning with the day after that on which the prescribed notice of the
requirement is given to them by the official receiver".
Section 235 imposes a general duty on
inter alios directors to co-operate with any liquidator or interim
liquidator. In terms of subsection (1),
together with section 234(1), the section applies where a company goes into
liquidation. In relation to a Scottish
winding up, the relevant parts are as follows:
"(2) Each of the persons mentioned
in the next subsection shall --
(a) give to
the office-holder such information concerning the company and its promotion, formation,
business, dealings, affairs or property as the office-holder may at any time
after the effective date reasonably require, and
(b) attend on
the office-holder at such times as the latter may reasonably require.
(3) The persons referred to
above are --
(a) those who are or have at any time been officers of the company,
..."
"The effective date" is defined by
subsection (4) as, in the present case, the date on which the company went into
liquidation.
The parties'
contentions
[5] The
petitioner alleges that the respondent has failed to co-operate with the
liquidator of the company, and that the effect of that was to hamper the
liquidator in the discharge of his duties to identify and ingather the company's
assets and to adjudicate on and pay the company's creditors. More particularly, the petitioner contends
that the respondent failed to prepare and submit a statement of affairs, in
breach of section 131 of the Insolvency Act 1986, and failed to submit a
directors' questionnaire, despite being requested to submit those documents by
the liquidator. The petitioner further
alleges that the respondent has failed to account for the company's assets or
to answer questions posed by the liquidator to assist him in identifying and ingathering
those assets. The particular questions
related to rights of set-off in respect of one of the company's debtors, D
Bathgate Construction Limited, the clarification of the position of a Citroën
Relay van held on hire purchase from a company known as PSA Finance, and the ownership
of the company's plant and equipment. As
the proof progressed, however, it became clear that the major complaint related
to the alleged failure of the respondent to assist in identifying which of the
assets situated in the company's premises were the company's and which belonged
to the respondent.
[6] The
respondent denies those allegations. He
asserts that he was never asked to submit a statement of affairs or a directors'
questionnaire. He further claims that he
provided the liquidator with all the information that was necessary for the
purposes of the winding up, either directly or through the company's auditor.
Evidence
[7] Evidence
was led from four witnesses. Mr Lewis
Young, an insolvency manager with Tenon Recovery and Mrs Frances Wileman,
an officer with the Disqualification Unit of the Insolvency Service of the
Department of Trade and Industry, gave evidence on behalf of the
petitioner. The respondent gave evidence
on his own behalf, as did Mr David Cheetham, the chartered accountant who
was the company's auditor. In the course
of the evidence, a sharp conflict emerged between Mr Young and the
respondent. I propose first to summarize
the evidence of each witness and then, in the following sections of this
opinion, to consider the differences that arose in that evidence.
[8] Mr Young
gave evidence that he was the insolvency manager responsible for the day-to-day
work in respect of Oakbank (J&S) Limited.
In that capacity, he consulted with Mr Thomas MacLennan, the
director of Tenon Recovery who had been appointed liquidator of the
company. Mr Young had been
responsible for preparing the official report (Form D1 (Scot)) on the
respondent as director of the company.
In section 5 of that report Mr Young had summarized the case
against the respondent, in terms that are similar to paragraph [5] above. Mr Young explained that the result of
the respondent's failure to provide a statement of affairs and to provide
information about certain of the company's assets was that further cost was incurred,
both in ascertaining the further information that the respondent ought to have
provided and as a result of the consequential prolongation of the winding up.
[9] Mr Young
stated that he had spoken to the respondent at the company's premises immediately
after the date of winding up. The
respondent had informed him that the premises and plant used by the company
were not owned by it. Mr Young had
not instructed a valuation of the assets on the company's premises, but
referred matters back to the company's creditors. The respondent had informed Mr Young
that he had documentation supporting these statements. The foregoing information was recorded in the
interim liquidator's report to creditors dated
[10] Mr Young
then spoke in greater detail about the visit that he made to the company's
premises immediately after the liquidation, on 19 or
[11] In
relation to the statement of affairs and directors' questionnaire, Mr Young
stated that there was no note in the file of the time when these were sent to
the respondent. Nevertheless, Tenon
Recovery had procedures in place to ensure that the documents were issued. Their practice was to send out three forms,
namely the directors' questionnaire, Form 4.4, which was the statement of
affairs to be provided by a director, and Form 4.3, which was a request for the
director to supply a completed statement of affairs. Forms 4.4 and 4.3 were taken from the
Insolvency Regulations. Mr Young
would have expected the forms to be sent out on about 8 January 2002; the information in question was required
quickly, for the first meeting of creditors; that meeting was due to take place
on 29 January 2002. Consequently
the form would have been sent out in about the first week in January. Neither the directors' questionnaire nor the
statement of affairs had been returned.
So far as the ownership of the assets was concerned, Mr Young
stated that his request for the relevant information was followed up
subsequently. He was advised by the
respondent that the relevant documentation would be produced. Despite that no proper answer has ever been received.
[12] Subsequently
a number of letters were sent to the respondent by the liquidator. The first of these (No 6/8 of process) was an
undated request to contact the liquidator.
The reference to the "liquidator" indicated that the letter was sent on
or after 29 January, when Mr MacLennan had ceased to be interim
liquidator. The second was dated
"I refer to
the above matter and should be obliged if you would supply the following
information.
1. D Bathgate Construction
Limited (Bathgate) had forwarded a list of work which was to be off set against
the invoice raised by Oakbank (J&S) Limited (Oakbank) on
2. Would you please confirm if
you have contacted Mr Wardlaw re the vehicle from PSA Finance.
3. Please supply the completed
directors questionnaire which was sent to you previously.
4. David Cheetham & Co
[the company's auditors] have not supplied me with information relating to the
fixed assets and associated finance or ownership information. Please compile a list of the fixed assets of
the company at the date of liquidation together with any finance associated and
ownership clarification. I require you
to supply this information urgently.
5. Would you please advise
whether any contact has been made with you by Jack Ness or James McGovern
regarding the remaining stone at Oakbank.
Please
contact Lewis Young on 0131 550 4020 or 07747 621083 as soon as possible to
discuss these matters. This information
is required to be in my hands by
It is plain that that letter made
specific reference both to the directors' questionnaire and to the company's
fixed assets, including clarification of ownership.
[13] A
further letter was sent on
"I refer to
the above matter and previous correspondence to which I have received no response. The undernoted information was requested for
There followed the same list of
matters as in the letter of 22 April.
Some months passed thereafter, and a further letter was sent to the
respondent on
"I refer to
the above matter and previous written and verbal requests for information which
have not been complied with. In respect
of your conversation with Lewis Young earlier today when you agreed to provide
the information by
The same five matters were listed as
in the two previous letters. In relation
to this letter, Mr Young explained that by this time he was considering
making a report to the Department of Trade and Industry regarding the
respondent's conduct. In addition, he
had still not got to the bottom of the asset situation. A further letter was sent on
"I refer to
the above matter and previous written and verbal requests for information which
have not been complied with. Your lack
of co-operation has been outlined to the Department of Trade and Industry and
further investigations may be undertaken.
The main
issue which you have to clarify is in respect of the fixed assets. David Cheetham & Co have not supplied me
with information relating to the fixed assets and associated finance or
ownership information. You are required
to compile a list of the fixed assets of the company at the date of liquidation
together with any finance associated and ownership clarification".
The letter went on to state that the
liquidator had given contact information regarding the respondent to a firm of
valuers, who would make arrangements with him to visit the premises to inspect
the machinery on site; it was indicated
that the respondent should co-operate fully with that request. Mr Young further stated that he had made
contact with David Cheetham & Company, and had received a response; nevertheless this did not help to confirm the
position in relation to the fixed assets.
[14] Before
the letter of
[15] Mr Young
then referred to three specific matters where information had been requested
from the respondent. The first of those,
which is referred to in the liquidator's letters of 28 March, 22 April and
16 May 2002 and 6 January 2003, was the question of set off in respect of
work carried out by D Bathgate Construction Limited. Mr Young stated that he had received no
response to those queries, and that the question of set off remained
unresolved. The second matter was the
question of the Citroen van leased from PSA Finance; this was referred to in the same letters. In this case the liability for the vehicle
had been taken on by the respondent at some stage during 2002; thus resolution
had been reached. The third matter was
the ownership of the fixed assets. In
this case, some information had been received from Baker Tilley in January
or February 2003. This indicated certain
items of plant which the respondent and his wife had purchased in 1998 in the
liquidation of an earlier company, William Gerard Limited. In this case Mr Young had spoken to
Baker Tilley directly, and that had resulted in the receipt of written
documentation. Despite the information
received from them, however, it was not clear which of the plant and machinery
on the company's premises belonged to the respondent and his wife and which had
been purchased by the company; the
documentation had to be related to what was on site. In addition, certain of the plant that had
existed in 1998 might have been lost to natural wastage.
[16] The
respondent had suggested that he had asked Cheetham & Co to deal with the
liquidator, and in particular to prepare the statement of affairs. Mr Young stated that he was not aware of
that, and had never been told that they were.
In the conclusion of his examination in chief, Mr Young stated that
he would have expected the information requested from the respondent to be
within his knowledge as a director of the company. The liquidator's view was that the respondent
was unfit to be a director because of his conduct during the liquidation.
[17] In
cross examination Mr Young stated that he remained uncertain as to the
ownership of the assets on site. He was
no longer supervising the site, and the assets had not been taken away by the
respondent. Mr Young further
accepted that the respondent had personally guaranteed a large part of the
company's unsecured debt, in particular its overdraft to Lloyds TSB, which
amounted to £40,000. That had been paid
by the respondent. Mr Young was
then questioned in detail about the initial meeting that he had had with the
respondent at the company's premises. It
was suggested that the respondent had said that some of the assets were owned
by him and some by the company. Mr Young
did not accept that. He did accept,
however, that the respondent had spent £250,000 of his own money on purchasing
assets, that assets worth £57,000 appeared in the company's accounts, and that
the respondent must therefore have kept his assets separate. Mr Young further accepted that the
respondent had not claimed that items such as tables and chairs and the
computer were his; he only claimed to own the plant and machinery.
[18] Mr Young
further stated in cross examination that establishing ownership of the company's
assets was essential to allow the liquidator to intromit. It was put to him that he had said to the
respondent at the initial meeting that the costs of selling the company's
assets were likely to exceed the sale proceeds.
Mr Young stated that he was certain that he would not have said
that; it would not have made sense. He was questioned at some length about the
statement of affairs and directors' questionnaire. He accepted that the latter document was more
important; failure to submit the former on its own would not be sufficient for
a form D1 report. The critical failure
in Mr Young's opinion was the failure on the respondent's part to give
information to establish the company's financial position at the outset of the
liquidation. At that stage Mr Young
had been told that the information existed, but he had not received it.
[19] Mr Young
was referred at length to two documents issued by the Insolvency Service; these were the Guidance Notes for the
Completion of Statutory Reports and Returns and chapters 9 and 10 of the
Technical Manual. It is sufficient in
respect of this part of his evidence to record that Mr Young reiterated
the fundamental basis of his complaint, namely that the respondent had failed
to provide essential information in relation to certain of the company's assets
and rights, and that that had made it impossible for the liquidator to conduct
the liquidation properly. Thereafter Mr Young
was asked about the correspondence that had passed between the liquidator on
one hand and the respondent and Cheetham & Co on the other. The liquidator had written to the respondent
as early as
[20] Mr Young
stated that during the period between the liquidator's letter of
[21] In
re-examination Mr Young stated that the respondent had said that he had
the relevant documents to prove ownership, and that he would make them
available. Documentary evidence of
ownership was essential; verbal evidence
by itself would not be sufficient. It
followed that telephone calls from the respondent would never be enough. The letters sent to the respondent in 2002
and 2003 (nos 6/10-6/12 of process) had stressed the urgency of the need for
information. Furthermore, the respondent
had never said that he did not understand the references in those letters to a
statement of affairs and directors' questionnaires. Nor did he ever state that he had not
received a directors' questionnaire.
Furthermore, if the respondent was correct in his contention that he
owned at least a significant part of the assets used by the company, it was the
respondent rather than the company that should have held the evidence relating
to ownership. In the present case, a
report had been submitted to the effect that the respondent was unfit to be a
director because throughout the case there had been a lack of information. In conclusion, Mr Young stated that he
did not consider that he was being pedantic in recommending proceedings against
the respondent. Each case must be looked
at as a whole, and if information is available from other sources the lack of,
for example, a completed directors' questionnaire by itself might not be
critical. If, however, there was a lack
of information throughout, that was much more serious.
[22] Mrs Frances
Wileman gave evidence about the involvement of the Insolvency Service in the
respondent's case. That involvement
obviously came at a relatively late stage, and consequently her evidence was of
less importance than that of Mr Young and the respondent. Mrs Wileman had attended a meeting with
the respondent and others on
[23] The
respondent described the history of William Gerard Limited, the company from
which he and his wife had purchased assets, and of Oakbank (J & S)
Limited. He had personally guaranteed
the overdraft of the latter company to Lloyds TSB. The company had ultimately fallen into
financial difficulty because of a PAYE debt owed to the Inland Revenue. The respondent had discovered that the
company had been the subject of a winding up order through a notice in the
Scotsman on 19 or
[24] The
respondent further gave evidence that Mr Young had discovered that the bulk
of the joinery plant was subject to two hire purchase agreements. He took the view that it was not worth
retaining those contracts; if the hire purchase creditors had been paid so that
the plant could be resold, it would be necessary to dismantle it, and that
would not be profitable. A further
problem was that the main building on the site had a 40 foot container built on
to it to take sawdust from the dust extraction equipment. If the building were to be resold, that would
have to be taken out. Once again,
according to the respondent, Mr Young thought that that would be an
unprofitable exercise for the liquidation.
A further problem was that the computer had gone missing. The respondent stated that he thought that Mr Young
had taken it, but in fact he had not.
The respondent had, however, shown him the files. Mr Young had stated that the respondent
would have to be available if he had further questions, and the respondent had
said that he would be. At the meeting Mr Young
had not given anything to the respondent or asked him to fill in any forms.
[25] The
respondent was then referred to the lease agreement regarding the Citroën van
(No 7/4 of process). He stated that he
had explained to Mr Young that the van was leased. Thereafter Mr Young had been in contact
with the owners, PSA Finance; the
respondent had given him their representative's mobile telephone number. The representative sent by that company had
understood that his role was to collect their van, because he had not realized
that the respondent had guaranteed payments under the hire purchase
agreement. Thereafter PSA had enforced
the hire purchase agreement against the respondent, and the debt had been paid
off by him.
[26] The
respondent was referred to the interim liquidator's report dated
[27] On
[28] The
respondent was then referred to the liquidator's letter of
[29] Thereafter
the liquidator returned the Form D1 to the Insolvency Service. The respondent had not been aware that the
recommendation in the form had been made; if he had been, matters would have received
his attention. In relation to the
matters referred to in the form which were said to constitute unfit conduct, he
denied having received a request for a statement of affairs; in relation to the plant and machinery
situated in the company's premises, he stated that apparently the liquidator
wanted him to prove that he owned the assets of the company, but he could not; he could only give proof of ownership of the
stone plant and machinery. The report
was also in error in stating that there were no personal guarantees; the respondent had given such guarantees. I observe that that is correct; this was a
plain error in the report.
[30] On
[31] In
cross-examination, the respondent was questioned at length about Mr Young's
account of his conversations with the respondent in December 2001 and January
2002. The respondent maintained that he
had not told Mr Young that none of the plant belonged to the company. He was unable to explain the statement to
that effect in the interim liquidator's report of
[32] The
respondent was asked whether he had promised to send Mr Young
documentation vouching his ownership of the assets at the company's
premises. The respondent's replies to
this and the following questions were I think significant. The respondent stated that Mr Young had
wanted him to provide documentation that he owned Oakbank's assets. The respondent could not do that; such
documentation did not exist. The only
undertaking that he had given was to supply a copy of the stone machinery and
plant listing, which distinguished his plant and company's. He had supplied that. It was then put that that document had not
been delivered by the respondent but had been obtained from Baker Tilley in
February 2003. The respondent replied
that Mr Young had a copy of that document months before he had asked the
respondent for it. I observe that this
suggestion was not put to Mr Young in cross-examination. Counsel for the petitioner then suggested
that Mr Young had looked for information regarding ownership from the
outset; in particular in about January 2002 the respondent had promised Mr Young
that he would deliver documentation vouching his ownership of the assets at the
company's premises. At this point the
respondent's answers appeared to me to become very combative, drawing unduly
nice distinctions. In summary, he
asserted that Mr Young had wanted confirmation that the respondent owned
not only the assets that truly belonged to him but assets that truly belonged
to Oakbank, and the respondent was unable to do that. At this point I must observe that it would
have been manifestly unreasonable for Mr Young to take such an attitude,
and I do not believe that it is the position that he did take; on the basis of Mr Young's evidence I am
of opinion that Mr Young made perfectly clear that he was looking for
proof of ownership of such of the assets at the company's premises as were
owned by the respondent.
[33] The
respondent was asked about the liquidator's letter of
[34] The
respondent was also questioned about his dealings with David Cheetham & Co
during the liquidation. It was suggested
that he did not contact them until after the Department of Trade and Industry
had been involved and he had met Mr Kidd.
The respondent replied that he thought the evidence was to the contrary,
and that earlier letters, such as Mr Cheetham's letter to the liquidator
of
[35] Mr David
Cheetham described his involvement with the company. He recalled receiving the letter of
Discussion
[36] As
will be clear from the foregoing summary, the evidence disclosed a sharp
conflict on certain critical issues of fact between Mr Young and the
respondent. These related principally to
two matters: the information given by the respondent to Mr Young in relation
to the assets at the company's premises, and whether the respondent was given
and failed to complete a statement of affairs and directors' questionnaire. Of these issues, I consider that the former
is the more important. In any insolvency
it is plainly of vital importance for the liquidator or other insolvency
practitioner to establish what assets the company owns, and to realize these
for the benefit of the company's creditors.
That is elementary, and it is a point that should in my opinion be
obvious to any person who is a director of a trading company. If the liquidator is to perform this task,
however, it is clearly essential that he should obtain full information about
the assets. In cases where assets do not
belong to the insolvent company because, for example, they are held on lease or
hire purchase or subject to retention of title arrangements, the liquidator
must determine which assets belong to the company and which do not, and must
obtain the necessary information at an early stage; without such information it
is very difficult for the liquidation to progress. Because of the importance of
title to the assets, it is also necessary for the liquidator to obtain proper
documentary evidence as to ownership; vague verbal assurances are not
sufficient. Once again, I regard these
matters as elementary.
[37] Completing
a statement of affairs and directors' questionnaire, by comparison, is of critical
importance only in cases where essential information is not available from
other sources. In relation to a matter
such as ownership of assets, if full documentary evidence is available, either
from the company's own files or because it has been supplied by a director, the
statement of affairs and directors' questionnaire assume much lesser
importance. In a case of the latter sort
I would not regard failure to complete such documents as a serious breach of a
director's duties. Where, however,
critical information is not readily available from other sources, the duty to
complete those documents assumes much greater importance. In my opinion the present is such a case.
[38] On
the critical issues of fact, I prefer the evidence of Mr Young. In particular, I accept his evidence that, at
the meetings held at the company's premises on 19 or
[39] In
the first place, Mr Young's account was supported by all of the
contemporary documents. It was supported
in particular by the letters that were sent by the liquidator (but written by Mr Young;
they bore his reference) on
[40] Mr Young's
evidence was further supported by the terms of the interim liquidator's report
of
[41] In
the second place, I find that the respondent's account of events is undermined
by the series of mishaps that he claims have occurred. These are as follows. First, before the winding up, the company did
not receive a copy of the petition at the instance of the Inland Revenue. Secondly, the company's computer, which might
be expected to hold critical information, crashed and then went missing in the
period between Mr Young's two meetings with the respondent. Thirdly, the respondent claims not to have
received the pro forma statement of affairs for completion. Fourthly, the respondent claims not to have
received a directors' questionnaire.
Fifthly, the respondent claims not to have received the liquidator's
letter of
[42] When
the alleged mishaps are taken as a whole, I find that they seriously undermine
the respondent's evidence. For that
reason I have little hesitation in preferring the evidence of Mr Young
that the respondent was given a statement of affairs and directors'
questionnaire and asked to complete them in about the first week of January
2002 (see paragraph [11] above). In this
connection, Mr Young is supported by his evidence that it was his firm's
usual practice to issue such documents. He also indicated that the information
provided in the statement of affairs and directors' questionnaire would be
required for the first meeting of creditors, which was due to take place on
[43] I
also draw the inference that the respondent received at least one of the
letters of 22 April and
[44] In
the third place, in the whole circumstances of the insolvency, I find that Mr Young's
explanation of events at the meetings of the respondent held in December 2001
and January 2002 is itself inherently probable.
Mr Young was clearly an experienced insolvency practitioner. The solicitor for the respondent suggested
that the overriding impression that he made was of a junior member of staff who
was a "case worker", and submitted that Mr Young's evidence was of little
assistance. He was in fact a Chartered
Accountant who worked as an insolvency manager with a firm of accountants that
specializes in insolvency and associated work; I thought it clear that he had very
substantial experience in that field. In
any insolvency, it is obvious that the ownership of the assets is a matter of
fundamental importance. I have no reason
to doubt that Mr Young understood that fact, and that he would accordingly
pay close attention to whatever the respondent said to him about ownership of
the assets on site. Moreover, the
competing accounts of what the respondent said are simple. Mr Young gave evidence that the
respondent told him that none of the plant and equipment on site was owned by
the company. The respondent gave
evidence that he had told Mr Young that he owned the stoneworking
equipment, but that the company owned the joinery equipment. It is difficult to believe that Mr Young
would have had any difficulty in grasping that explanation if it had been made
to him at the initial meetings with the respondent. Indeed, when the point was put to Mr Young
in court, he had no difficulty in understanding it. I accordingly conclude that Mr Young was
told that the company did not own any of the plant and equipment on site. In reaching this conclusion I have had regard
both to the matters discussed in this paragraph and to the terms of the interim
liquidator's report of
[45] For
the respondent it was submitted that Mr Young must have realized from the
company's accounts that it owned substantial assets; in the balance sheet as at
[46] The
solicitor for the respondent submitted that Mr Young was an unsatisfactory
witness, who had limited ability to recollect matters. He had clearly been responsible for a large
number of cases, and he had to reconstruct matters from his files. It is true that Mr Young's direct
recollection of matters was at times vague; that is perhaps hardly surprising in view of
the number of cases that he no doubt dealt with. Nevertheless, Mr Young's account was
backed up by contemporaneous documents, and for the reasons discussed above I
regard that as a matter of great importance.
Consequently I consider that Mr Young's evidence, although at times
vague on points of detail, is correct in its essentials.
Conclusions
[47] As
indicated above, I conclude that the respondent was provided with a pro forma
statement of affairs and directors' questionnaire in about the first week or
thereby of January 2002. That is
based on Mr Young's evidence summarized at paragraph [11] above, and by
the liquidator's letters of
[48] In
relation to the question of set off with D Bathgate, counsel for the petitioner
accepted that the respondent met Mr Young in March 2002 and explained that
the right of set off claimed by that company was not well founded. Mr Young had accepted in evidence that
such a meeting had taken place, and that it was concerned primarily with set
off. Consequently that complaint was
withdrawn.
[49] In
relation to the finance agreement with PSA, counsel for the petitioner accepted
that the matter appeared eventually to have been resolved. The respondent was a guarantor under that
agreement. Consequently the only issue
was whether the respondent had told the liquidator about the whereabouts of the
van at an appropriate stage in the liquidation.
In fact the matter was still outstanding in January 2003; the liquidator's
letter of 6 January (No 6/12 of process) made that clear. Counsel conceded that this was a small item,
but pointed out that a minimal effort would have been enough to resolve
matters. I agree with that
approach. Nevertheless, I think it clear
that this matter is of minor importance.
[50] The
most important matter is the information provided by the respondent about the
ownership of the assets within the company's premises. For the reasons stated at paragraphs [39],
[40], [44] and [45] I have concluded that the respondent provided inaccurate
verbal information at his initial meetings with Mr Young, in that he stated
that the company did not own any of the plant and machinery on site. I further conclude, on the basis of Mr Young's
evidence, that the respondent undertook to provide documentary evidence about
the ownership of the assets but failed to do so. This seriously held up the progress of the
insolvency, because it made it impossible for the liquidator to realize the
fixed assets. No written information was
provided about the fixed assets until well into 2003, and that information came
from third parties. The matter is made
worse by the fact that reminders relating to a list of fixed assets were given
in the liquidator's letters of
Application of Company Directors Disqualification Act 1986
[51] The foregoing conclusions lead on to the
essential question: whether the conduct of the respondent justifies
disqualification under the Act of 1986.
In my opinion it does. I have
regard in particular to the failure of the respondent to provide adequate
information regarding the ownership of the assets in the company's premises, as
summarized in paragraph [50]. In this
connection, I have regard to the importance to any company of having proper
information available about the ownership of its assets. In general, I consider that any company
director should be aware of the need for proper information about company
assets. The matter is particularly
important where, as frequently happens, the company is permitted to use assets
belonging to a director. In such a case
it is vital that full information should be given to indicate what is the company's
and what is the director's. Normally,
the director should keep proper records of what is his, and the basis on which
the company is allowed to use the assets should normally be properly
documented. In the present case the
information about the assets owned by the respondent was ultimately
obtained from third parties, namely
Baker Tilley and Cheetham & Co; neither the company nor the respondent appears
to have had the relevant documentation.
The documentation in question was not sufficient by itself to indicate what
assets were the respondent's and what assets were the company's; further
detailed explanations were required to separate the two. I have found that the respondent failed to
provide either documentation or the necessary explanations, and to the extent
that he provided an explanation during the initial meetings it was
inaccurate. In view of the foregoing
matters, I conclude that the failure to provide adequate information regarding
the assets amounted to a failure to give the liquidator information concerning
the company that the liquidator reasonably required; as such it amounted to a
breach of the duty contained in section 235 of the Insolvency Act 1986. Such conduct accordingly fell within
paragraph 10(g) of Schedule 1 to the Company Directors Disqualification Act
1986. The failure to provide information
regarding the finance agreement with PSA also amounted in my opinion to such a
breach of duty; nevertheless, as
indicated at paragraph [49], I regard this aspect of the case as of minor
importance.
[52] I
have also found, as indicated at paragraph [42] above, that the respondent
received copies of a directors' questionnaire and pro forma statement of
affairs. It was not suggested that he
had completed any such documents. The
failure to complete the statement of affairs amounts in my opinion to a clear
breach of section 131 of the Insolvency Act 1986. Such conduct accordingly fell within
paragraph 10(e) of Schedule 1 to the Company Directors Disqualification Act
1986. I further find that the failure to
complete and return the directors' questionnaire amounted to a breach of
section 235 of the Insolvency Act 1986, and that such conduct accordingly fell
within paragraph 10(g) of Schedule 1 to the Company Directors Disqualification
Act 1986.
[53] The
next question is the application of section 6 of the Company Directors
Disqualification Act 1986. The first
requirement for the application of that section is that a person is or has been
a director of a company which has become insolvent; it was not in dispute that that requirement
was satisfied. The second requirement is
that the person's conduct as a director makes him unfit to be concerned in the
management of a company. Under section 9
of the Act, in determining whether a person's conduct as a director makes him
unfit to be concerned in the management of a company, in cases where the
company has become insolvent the court is to have regard in particular to the
matters mentioned in Part II of Schedule 1 to the Act. Those matters include breaches of section 131
and section 235 of the Insolvency Act 1986.
For the reasons discussed above I am of opinion that the respondent was
in breach of those two sections. That by
itself, however, is not sufficient to justify a disqualification order. In my opinion section 9 and Schedule 1
contemplate that the matters referred to in the Schedule should be weighed and
assessed by the court, to determine how serious they are and whether, in
particular, they are sufficiently serious to merit disqualification. In performing that exercise, two matters seem
to be of importance. The first is the
degree of blameworthiness of the director's conduct; that must be of primary
importance. The second is the
consequences, or more strictly the foreseeable consequences, of that
conduct. The consequences seem to me to
be relevant, to the extent that they were or ought to have been foreseen by the
director, because a director can be expected to pay greater attention and
exhibit greater diligence in relation to matters that are likely to have a
significant effect on the financial position of the company or the financial
outcome of its insolvency.
[54] In
the present case, I am of opinion that the respondent's conduct, in particular
his failure to provide adequate information about the assets within the company's
premises, was sufficiently serious to merit disqualification. On the facts that I have found established, I
consider that the respondent's conduct was clearly blameworthy to a significant
degree. In the first place, information
on the ownership of assets is nearly always essential in an insolvency, and in
cases where it is claimed that a significant part of the apparent assets is not
the property of the company adequate information about ownership is plainly of
critical importance. That ought to have
been apparent to any director of a company.
In the second place, the respondent asserted during his initial meetings
with Mr Young that a substantial part of the assets on the company's
premises did not belong to it, and was told that he would have to provide
documentary evidence to establish the true position. In the third place, the respondent was
reminded of the need to provide such information by, for example, the
liquidator's letters of
[55] So
far as the foreseeable consequences of the respondent's conduct are concerned,
it ought in my opinion to have been obvious to a director that information
about the ownership of assets was of critical importance to the conduct of the
insolvency; without such information it
was very obvious that the liquidator could not proceed to realize the company's
assets and thus to obtain funds to pay its creditors. Moreover, as Mr Young made clear in his
evidence, the failure to obtain information about the assets of the company was
liable to cause serious delay to the liquidation and to add substantially to
the liquidator's expenses. These are
matters that I think ought to have been apparent to a director of the
company. The general importance of
information about the assets of the company is such that the courts must in my
opinion ensure that directors' responsibility to provide that information is
taken seriously in all cases; a general standard of conduct must be
maintained. That can only be done by
treating the failure to give such information as a serious matter.
[56] On
the basis of the various considerations discussed in the last two paragraphs, I
have come to the conclusion that the respondent's conduct merits
disqualification. That conclusion
proceeds upon the more serious of the two breaches of section 235 of the
Insolvency Act. It is also supported by
the respondent's failure to complete a directors' questionnaire, also in breach
of section 235, and by his failure to provide a statement of affairs when
requested, in breach of section 131 of the Insolvency Act. I would not have regarded the latter breaches
by themselves as sufficiently serious to merit disqualification; nevertheless,
they compound the more serious breach, and add to the impression of unfitness
to be concerned in the management of a company.
[57] The
solicitor for the respondent invited me to dismiss the petition. He referred me to certain English cases where
judges had attempted to set out the criteria for disqualification: Re
Sevenoaks Stationers Ltd, [1991] Ch 164, at 176C-G; Secretary of State for Trade and Industry v Gill, [2004] EWHC 993. In
the latter case Blackburne J. stated (at paragraph 153) that the conduct
complained of must ordinarily be either dishonest or otherwise lacking in
commercial probity or display incompetence to a marked degree. At the same time, he pointed out that the
test in section 6 is laid down in terms involving ordinary English words which
should be simple to apply in most cases; the question was ultimately one of
fact. That approach seems to me to be
clearly appropriate. The present case
does not involve allegations of dishonesty or a lack of commercial
probity. Nevertheless, it appears to me
that the attitude of the respondent towards providing information about the
company's fixed assets displays incompetence to a marked degree. That is especially so in view of two factors:
first, the very obvious importance of information about the assets, and
secondly, the failure to respond to the reminders which, as a matter of fact, I
have found were issued by the liquidator.
On the application of the plain wording of section 6, I have concluded
for the reasons stated above that the respondent's conduct was such that he is
unfit to be concerned in the management of a company.
[59] The
same is true of the Technical Manual; once again I consider the document of
limited assistance so far as the court's task is concerned. In this case, the solicitor
for the respondent drew my attention
to paragraph 12.20, where it is pointed out that a statement of affairs might
not be required in every case, paragraph 12.24, where is pointed out that the
company's accountant or auditor may be required to submit a statement of
affairs, and paragraph 12.26, where it is stated that when a notice requiring a
statement of affairs is submitted a receipt should be obtained in writing. In the present case the liquidator did not
obtain a written receipt as suggested in that paragraph. Nevertheless, I am satisfied for the reasons
stated above that a notice requiring a statement of affairs was issued to the
respondent, and I do not think that the failure to obtain a written
acknowledgement is fatal. In any event,
I do not regard the failure to complete the statement of affairs as the most
seriously culpable part of the respondent's behaviour. My attention was also drawn to Chapter 13 of
the Technical Manual, which deals with the duty to co-operate with an
insolvency practitioner. In paragraph
13.3 it is stated that an insolvency practitioner should take all reasonable
steps to secure the co-operation of the relevant company officer; he should include a formal written warning
advising the officer of the legal position as regards co-operation. Such a course of action may often be
necessary. In the present case, however,
I consider that the failure to provide information about the company's assets
was so obviously fundamental that the need for warnings was less. Moreover, I have found that a number of
letters were sent reminding the respondent of the need to provide information,
and the matter was ultimately taken up by the Insolvency Service. In all the circumstances, I consider that he
should not have been under any reasonable doubt as to the need to provide much
greater information that he had in fact provided. Paragraph 13.6 of the Technical Manual states
that enforcement action should be proportionate to the seriousness of the
consequences of non co-operation. In my
opinion that test is satisfied in the present case. Finally, paragraph 13.9 states that it is
only in exceptional cases that a disqualification report should be submitted
where the failure to co-operate is the sole matter of unfitness. In the present case it was not the sole such
matter; the respondent had also failed to submit a statement of affairs. Even if the failure to provide information
about the assets had been the sole basis, however, I am of opinion that test of
exceptional circumstances would be made out; the liquidator's need to establish
ownership of the assets was so fundamental that any failure to provide full
information, including the relevant documentation, must be taken very
seriously.
[60] The
solicitor for the respondent made detailed submissions about the evidence
led. I have attempted to deal with these
in my consideration of the evidence at paragraphs [7]-[35] above. He summarized the respondent's position as
follows. First, the respondent
co-operated with the liquidator and provided the records sought. For the reasons discussed above I do not
accept this contention; there was a failure of co-operation, and records were
only provided at a very late stage.
Secondly, it was said that no criticism was made of the financial
records kept by the company. That is
correct, but it does not avoid the need for information about the ownership of
the plant and equipment on the company's premises. Thirdly, it was said that the respondent kept
in contact with the liquidator, primarily by telephone, and responded to
letters. Mr Young accepted that
there was contact by telephone.
Nevertheless, the fundamental problem was a failure to provide full
information about the assets on site, and in particular to provide documentary
information about that. I consider that
documentary information was essential, for the reason stated at paragraph [45]
above; without documentary evidence, it would be very easy for directors of
companies to commit fraud by asserting that the company's assets were theirs. That point should have been obvious to any
director of a company. In relation to
the response to letters, for the reasons discussed above I do not accept that
the respondent did reply properly to letters.
Fourthly, it was said that the respondent provided financial information
as best he could, referred financial matters to Cheetham & Co, and did not
restrain that firm in the information that they provided. For the reasons discussed at length above, I
do not accept that the respondent did his best to provide financial
information. He did refer matters to Cheetham & Co; nevertheless the formal referral to that firm
only came at a very late stage, after the Insolvency Service was involved. At the early stages of the liquidation, as
indicated in paragraph [34] above, I do not accept that the respondent had
anything more than an informal conversation with the accountants; there was certainly no attempt to pass
responsibility to them for supplying financial information. In any event, since part of the fixed assets
on site were said to belong to the respondent himself, it is not obvious how
Cheetham & Co would have had the relevant documentation.
[61] The
solicitor for the respondent also made detailed submissions that bore on the
degree of the respondent's culpability.
I have taken these into account in the decision recorded in the next
paragraph.
Length of
disqualification
[62] Although
I take a serious view of failure to provide information about the assets of a
company, I consider that the present case is at the lowest end of the scale
of culpability. Indeed, counsel for
the petitioner accepted that the case was towards the lower end. It does not involve any allegation of
dishonesty, or a failure to keep proper accounts. The minimum period of disqualification that
is available is two
years, in accordance with section
6(4). In all the circumstances of the
present case, I consider that a period of two years' disqualification is
appropriate. I will make an order
accordingly.