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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Johnston
Lord Wheatley
Lord Mackay of Drumadoon
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[2007] CSIH 85
P1630/03
OPINION OF THE COURT
delivered by LORD JOHNSTON
in
RECLAIMING MOTION
In
PETITION
of
HER MAJESTY'S SECRETARY OF
STATE FOR TRADE AND INDUSTRY
Petitioner and Respondent;
against
JAMES GERARD
Respondent and Reclaimer:
_______
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Alt: Stewart; Biggart Baillie (Petitioner and Respondent)
Alt: Mackenzie, solicitor
advocate; Pinsent Masons (Respondent and
Reclaimer)
21 November 2007
[1] In this
petition the petitioner seeks a disqualification order in terms of the Company
Directors Disqualification Act 1986 against the respondent and reclaimer ("the
reclaimer"), arising out of and consequent upon the liquidation of Oakbank
(J & S) Limited ("the company"), of which, at the
material time, the reclaimer was a director.
[2] The company
was incorporated on 23 April 1998 and traded as suppliers of joinery
and stone services. On 18
December 2001
an interim liquidator was appointed to the company on the making of a winding
up order on 18 December 2001 at the instance of a petition by the
Inland Revenue. At the material time the
reclaimer was Managing Director and indeed the sole director of the company.
[3] Section 6 of
the Company Directors Disqualification Act 1986 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".
[4] Section 8 of
the 1986 Act authorises 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. Section 9 and Schedule 1 of the 1986 Act
specify certain matters that are to be taken into account in determining
whether or not a person's conduct as a director makes him unfit to be concerned
the management of the 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)".
[5] 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, ..."
[6] After hearing
a proof the Lord Ordinary in a lengthy and detailed judgment determined that
the petitioner's case was made out, that the conduct of the reclaimer in
certain specified matters rendered him unfit to be concerned in the management
of a company as a director and that a disqualification order should be made for
the minimum period available under the legislation, namely two years. It is against that determination that this
reclaiming motion is taken.
[7] The issues
canvassed before the Lord Ordinary and again before us were substantially questions
of fact relating to the conduct of the reclaimer subsequent to the appointment
of the liquidator and the liquidation of the company. In particular, the allegations against the
reclaimer were based on the proposition that he had failed adequately to
co-operate with the liquidator in the latter's investigation of the company's
affairs.
[8] The Lord
Ordinary heard evidence from four witnesses, the principal of which were Mr.
Lewis Young, an employee of the firm Tenon Recovery, who had been appointed to
manage the liquidation, as insolvency practitioners (the actual liquidator being
a Mr. T.C. McLennan) and the reclaimer himself. The two other witnesses led
at the proof were of lesser importance.
The principal issues in the case were focused by Mr. Young and the reclaimer
respectively. The substance of the Lord Ordinary's determination was that on
any questions of fact where the evidence of Mr. Young and the reclaimer were in
conflict, he, the Lord Ordinary, preferred that of Mr. Young and it was on the basis
of that choice that he determined his decision.
[9] Before us the
general position of Mr. Mackenzie, the solicitor advocate for the reclaimer,
was that the Lord Ordinary had misdirected himself in respect of the reasons
which he offered for his preference in respect of the crucial questions of fact
of the evidence of Mr. Young to that of the reclaimer. Accordingly, the matter should be opened
before us and the submission was that on the evidence led, properly understood,
the issue in the case should be resolved in favour of the reclaimer. That was
because the petitioner had not established the necessary material to warrant a
disqualification order being pronounced against the reclaimer on the basis of
his unfitness as a director.
[10] There was no basic
dispute at the Bar as to the role and duties of an Appeal Court in considering the approach to be
taken to determinations of fact by a Lord Ordinary. It is summarised by Lord Hamilton in Hamilton v Allied Domecq plc 2006 SC 221 where his Lordship says at paragraph
83 et, seq.:
"[83] In
the context of the role of an appellate court in relation to issues of fact,
counsel referred to Thomas v. Thomas, Caledonia North Sea Limited v. London
Bridge Engineering Limited, Thomson v.
Kvaerner Govan Limited 2004 SC (HL) 1 and Simmons v. British Steel plc 2004 SLT 595. An appeal court should bear in mind not only
the advantage which the first instance judge has, on questions of credibility
and of findings of primary fact, in seeing the parties and other witnesses; that advantage applied equally to the judge's
evaluation of those facts (Piglowska v.
Piglowska [1999] 1 WLR 1360, per
Lord Hoffmann at page 1372). Accordingly,
this court required to use extreme caution in its reading and analysis of
Mr. Hamilton's evidence. The
assessment of it, in its context, was pre-eminently a matter for the Lord
Ordinary. He had found that at a meeting
at Blackford on 27 May Mr. Beatty had made to Mr. Hamilton a negligent
misrepresentation of fact as to Allied's then intention in respect of the
strategy for marketing the product. This
court was entitled to interfere with that finding only if it were demonstrated
that the Lord Ordinary had, in his assessment and evaluation and in the context
of the manner in which the proof had been conducted, plainly gone wrong.
[84] In
approaching the task before this court I am acutely conscious of the
constraints to which, on matters of fact, it is, as an appellate court,
subject. These constraints are
well-known and have recently been re-emphasised in a number of judgments of the
House of Lords. But the existence of
these constraints does not absolve this court from its obligation as a court of
appeal on matters of fact to reconsider the evidence led before the Lord
Ordinary and to determine upon such reconsideration whether critical findings
of fact, both primary and secondary, made by the Lord Ordinary were
justified. In undertaking that
reconsideration it is always necessary for the appellate court to bear in mind
the advantages, identified in the authorities, which a judge of first instance
enjoys and which an appellate court does not.
These include the opportunity to form, from the manner in which a
witness gives his or her evidence before that judge, an impression as to the reliability
or otherwise of the evidence given by the witness. That impression is likely also to be informed
by the manner in which other witnesses, whether contradictory or confirmatory,
give their evidence on the same or related matters. The personality of a witness may also have a
bearing on the credibility or reliability of his or her testimony on particular
matters; that cannot be assessed from
the printed page. The way in which the
case is conducted by legal representatives in the court of first instance
(including the absence of challenge to the admission of particular evidence or
to its truth or accuracy) may also legitimately affect the approach adopted by
the court to the assessment of evidence.
Moreover, in so far as concerns the evaluative exercise of drawing, or
declining to draw, factual inferences from primary facts, an appellate court
should exercise due caution before reversing such an evaluation.
[85] On
the other hand, when, on examination by the appellate court of the printed
evidence, it is plain that it could not constitute a proper basis for some
primary finding of fact made by the judge of first instance, the appellate
court has a power and a duty to reverse that finding. If findings of fact are unsupported by the
evidence and are critical to the decision of the case, it may be incumbent on
the appellate court to reverse the decision made at first instance."
[11] Without
quoting directly from the Lord Ordinary's lengthy Opinion his position can be
summarised as regards his reasons for preferring the evidence of Young on
crucial matters. There were three
chapters of evidence upon which the Lord Ordinary concentrated. The first related
to the assets used by the company and in particular the assertions as to who
owned them, as between the company and third parties, including the reclaimer. The second, chapter related to whether or not
the reclaimer had ever been asked to provide a statement of affairs for the
company and, in particular, whether he had been asked to complete a questionnaire
known as a directors' questionnaire. In
the third chapter, the Lord Ordinary identified what he described as seven
"mishaps" that had occurred over the relevant passage of time, which is over the
period of one year following the appointment of the liquidator. This matter he deals with in paragraph 41 of
his Opinion, which is in the following terms:
"[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 22 April 2002.
Sixthly, the respondent claims not have received the liquidator's letter
of 16 May 2002. Seventhly, the
respondent claims that he sent documents to the liquidator in January 2003
using the driver of the firm for which he now works, and that the driver
confirmed that the documents were delivered, but he accepts that the documents
were not received; the evidence is summarized at paragraphs [28] and [33]
above. I find it highly improbable that
all of the foregoing mishaps occurred.
Individually, they are all no doubt possible. Cumulatively, however, I think it highly
unlikely that they could all have happened.
The last of them, the failure of the liquidator to receive the documents
sent in January 2003, is in my opinion particularly significant because
the respondent became aware shortly thereafter that the documents had been not received
and made no effort to put matters right.
I find his explanation for taking no further action unconvincing: see paragraph [33] above."
[12] Against that
background the Lord Ordinary accordingly affirmed his preference of the
evidence of Mr. Young on crucial matters and reached the following conclusions
which he sets out in paragraphs 47 and 50.
They are in the following terms:
"[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 22 April
2002, 16
May 2002 and
6 January 2003 (Nos 6/10-12 of process). It is also supported by Mr Young's
evidence about Tenon Recovery's usual practice, and by the fact that the
information was required for the first meeting of creditors, which was due to
take place on 29 January 2002.
I further conclude, on the basis of Mr Young's evidence, which was
not challenged on this point, that the respondent at no time completed the statement
of affairs and directors' questionnaire.
...
[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 22 April 2002, 16 May 2002 and 6 January
2003 (Nos
6/10-12 of process); despite these the respondent failed to reply. Mr Young stated that he had never fully
resolved the question of ownership of the plant and equipment; in part this was
because a detailed explanation would be required from the respondent to relate
the documents that were ultimately obtained to what was on site: see paragraph [15] above. I accept that evidence. Obtaining information from third parties was
time-consuming and expensive; I accept Mr Young's evidence on that
point. I note, too, that Mrs Wileman
stated that the insolvency was one that took a significant time."
[13] The solicitor
advocate for the reclaimer submitted that the Lord Ordinary's approach to the
questions of credibility and reliability as between the evidence of Mr. Young
and the reclaimer was based on two critical errors.
[14] First of all the
Lord Ordinary had proceeded on the basis that Mr. Young's account in relation
to the statement of affairs and the ownership of the assets was supported by
all the contemporary documents. The
solicitor advocate maintained this was not correct and that the Lord Ordinary
had misunderstood the evidence given by both Mr. Young and the reclaimer. He argued that documents which had been
produced some time after the liquidator's appointment had revealed that
whatever may initially have been understood to have been by the reclaimer, the reclaimer's
position always had been that he owned some of the assets used by the company and
the company owned the remainder.
Equally, the solicitor submitted that there was no satisfactory evidence
that a statement of affairs had been requested.
He submitted that the failure to provide a statement of affairs, which
was obviously the case, was consistent with the liquidator having been given all
the records of the company and there having been various meetings between Mr.
Young and the reclaimer. The solicitor
advocate submitted that, properly understood, the evidence of Mr. Young should
not have been preferred and, at best, the matter had been left unclear.
[15] On the issue
of the question of "mishaps" the simple submission was that the Lord Ordinary
had attached far too much importance to this list, only four of which were
contentious, namely, those relating to the statement of affairs, the directors'
questionnaire and the letters of 22 April and 16 May
2002. There was a separate issue as to the question
of which documents had been sent to the liquidator. Mr. Mackenzie's final submission was
accordingly that, having regard to the test laid down in Hamilton by Lord Hamilton, the Lord Ordinary had abused the
advantage he had of seeing the witnesses by misunderstanding the evidence or
placing improper emphasis upon it. His
findings on credibility and reliability therefore could not stand and the
matter unfit was at large, on the evidence, before this court.
[16] In replying to
this aspect of the case counsel for the petitioner and respondent recognised that there were conflicts of facts
between the evidence of Mr. Young and the reclaimer. However, he maintained
that the Lord Ordinary was not only entitled to reach the conclusion he did, in
preferring the evidence of Mr. Young on the crucial questions, namely, of the identification
of ownership of assets and the statement of affairs and the directors'
questionnaire, but he had given adequate reasons for his conclusions.
Accordingly the reclaimer had not met the test of demonstrating that the Lord
Ordinary had been "plainly wrong".
[17] With regard to
the issue of the assets Mr. Stewart maintained that the Lord Ordinary in paras.
[39] and [40] of his Opinion had plainly looked at the documents to cast light
at what happened at the relevant meetings and he was entitled so to do. Even more important was the interim report of
the liquidator (Appendix No. 6) which indicated that the company did not appear
to have any material assets, which supported the assertion made by Mr. Young
that initially, at least, the reclaimer had maintained that he owned all the
assets of the company, whatever may have been the position subsequently taken
up by him or on his behalf.
[18] With regard to
the issue of statement of affairs and directors' questionnaire, Mr. Stewart,
the counsel for the petitioner, concentrated on the transcript at, respectively,
pages 23, 53 et. seq. 133 and 164,
all of which supported the general proposition that in all cases the firm of Tenon
Recovery requested the completion of a statement of affairs and the filling in
of the directors' questionnaire. Any
reference in the rules as to how such a demand could be made was purely
evidential. The Lord Ordinary was
accordingly entitled to hold that a request had been made of the reclaimer in
this respect, which had never been complied with.
[19] Mr. Stewart
went on to submit that the Lord Ordinary's analysis of the so-called mishaps
was entirely relevant and was critical, on one view, to his approach to the
whole case. The Lord Ordinary's reasoning with respect to these mishaps, to
which we have already made reference, was clearly capable of being
supported. The attack on the Lord
Ordinary's assessment of the evidence, in respect of credibility and
reliability, accordingly failed.
[20] Consideration
of this issue is plainly critical to our assessment of this case and we
consider it appropriate to deal with this question at this stage.
[21] We have no
hesitation in determining that the approach of the Lord Ordinary to the issues
of credibility and reliability as between Mr. Young and the reclaimer fails in
respect of the high test imposed by Hamilton, which has to be the yardstick by which this court
approaches the matter. It cannot
remotely be said that the Lord Ordinary's conclusions on the questions of
credibility and reliability were plainly wrong.
[22] With regard to
the question of ownership of assets, the Lord Ordinary was more than entitled
to conclude that the assertion had at some stage, in an early part of the
process, being made by the reclaimer, that he owned the assets and that is entirely
consistent with the interim report of the liquidator, which we consider to be a
highly relevant and important document.
The statement there about assets or lack of them could not have come
from any other source than the reclaimer at an early time in the process of the
liquidation.
[23] Against the
background it is clear that a statement of affairs was never completed nor was
the directors' questionnaire. We
nevertheless recognise that from the evidence that the Lord Ordinary was
entitled to conclude that requests for both these documents to be completed was
made. In this respect, quite apart from
the rather equivocal answer on one view on page 23 of the transcript, it is
clear from pages 53 onwards what the normal practice of Tenon Recovery was in this
respect and the Lord Ordinary, in our view, was more than entitled to conclude
that it would have been followed in this case.
He was therefore more than entitled to reject the assertion by the reclaimer
that no such requests were ever made.
[24] Perhaps more
importantly, looking at the matter overall against the background of the
so-called mishaps, it is clear to us as obviously it was to the Lord Ordinary
that there was a pattern of behaviour over the year in question redolent of
non-co-operation by the respondent/reclaimer with the liquidators and in this
respect the issue of mishaps is highly important. For example we consider, and agree with the
Lord Ordinary, that it is too much of a coincidence that vital letters on three
separate occasions go missing.
[25] Cases of this
sort where evidential questions are confused and sometimes difficult to
distinguish between the protagonists' positions, the issue of impression by the
presiding judge at the proof is very important and this is emphasised by the approach
of this court in Hamilton.
We consider, and are greatly influenced by the fact, that the Lord
Ordinary plainly concluded that the overall picture was one of non-co-operation
and we consider it would be highly improper for us, at this stage of the
process, as an Appeal Court, to interfere with that
analysis. We cannot therefore fault the
Lord Ordinary's approach to the crucial evidential questions and his
conclusions.
[26] In these
circumstances this reclaiming motion must fail, but there remain two other
questions.
[27] In the first
place, against the background of In re
Grayan Building Services Limited 1995 CH 241 and re Hitco 2000 Limited 1995 BCC 162, can the finding of unfitness
and therefore the order of disqualification be justified?
[28] We are in no
doubt that it can on the basis of the Lord Ordinary's findings which we have
supported and we take that matter no further.
[29] There remains,
finally, what could be described as an esto
question on the basis that this court is wrong in rejecting the attack on the
Lord Ordinary's findings on credibility and reliability and that accordingly
the matter of unfitness and disqualification is at large for this court.
[30] Mr. Mackenzie
sought effectively to re-argue the issue as between Mr. Young and the
reclaimer, suggesting that the account of his client was logical and
consistent, while that of Young was untenable on the vital questions. He maintained that the evidence supported the
view that the respondent/reclaimer had co-operated with the liquidator,
provided company records, had kept in touch with the liquidator primarily by
telephone, while he may have been dilatory in some respects and that he had to
admit that there was no response to the letters of April and May 2002, there
was a final response in January 2003. The
reclaimer, he submitted, had provided financial information as best as he could
and that while certain criticisms could have been made as to the way he had
behaved, particularly when it came to the issue involving the accountants instead
of himself, at the end of the day this court should hold, it was submitted,
that there had been sufficient co-operation on behalf of the respondent
throughout the liquidation process to acquit him of any form of misfeasance or
misconduct.
[31] In reply to
this Mr. Stewart's position was really to support that of Mr. Young, on
the evidence, on relation to the issue of assets and the questionnaire. He was particularly critical of the admitted
facts that various letters were not replied to and submitted that the fact that
they had not been received was simply incredible. On any view, accordingly, the Lord Ordinary
came to the conclusion which should be supported by this court if the matter
was at large before it.
[32] Determination
of this issue is not of course essential, or indeed necessary, for this court
having regard to the conclusion it has reached on the preliminary question and
it is not an easy one to resolve on the assumption that we are proceeding
hypothetically de novo upon the
evidence. If the matter was critical we
incline to the view that the submissions made by Mr. Stewart are to be
preferred in as much as that the position of Mr. Young is inherently more
credible on paper than that of the respondent/reclaimer, whose position was at
times inconsistent, particularly on the issue of assets and the statement of
affairs and more significantly, perhaps, when the issue of mishaps is looked at
in this context.
[33] In these
circumstances, with some hesitation, we conclude that if the issue of whether
or not a basis for disqualification has been made out on the evidence was
before us, that such has been achieved for the reasons submitted by Mr.
Stewart.
[34] For the
reasons given, accordingly, this reclaiming motion must be refused and the
decision of the Lord Ordinary affirmed.
[35] There remains,
however, the question of what order should be pronounced by this court. We were informed that subsequent to the
issuing of the Lord Ordinary's interlocutor a period of 20 days elapsed before
this reclaiming motion was enrolled, during which time the disqualification was
in place. Effectively, therefore, the
reclaimer has already served a 20 day period.
Furthermore, we were informed that it is normal practice to postpone the
effect of a disqualification order for a period of 21 days to allow, if so
advised, the disqualified Director to seek relief from the court under certain
statutory provisions.
[36] In these
circumstances the order to be pronounced by this court will accordingly be one
of two years disqualification to take effect 21 days after the date of this
court's interlocutor, but also reflecting the fact that 20 days of that two
year period has already been served. If
either party is dissatisfied with this approach in relation to the order being
pronounced the case can be put out By Order.
