Scottish Court of Session Decisions

Petitioner: Harris, Solicitor Advocate; Burness LLP

Respondent: No appearance

18 May 2012

[1] This is an unopposed application by the Secretary of State for Business, Innovation and Skills ("the Secretary of State") under section 6 of the Company Directors Disqualification Act 1986 ("the 1986 Act") for a disqualification order in respect of Dr Neelufar Khan ("the Respondent").

[2] Between 12 January 1995 and 7 August 2009 the Respondent was a director of Leamington House Limited ("the Company"), which traded as a nursing home between 1995 and 1 July 2009 when the home was closed at the request of the Care Commission. On 1 August 2009 the Company recommenced trading as a Hungarian restaurant. Clydesdale Bank plc, which held a floating charge over the assets of the Company, appointed administrators to the Company on 25 March 2010. The Company is insolvent for the purposes of section 6 of the 1986 Act.

[3] The Respondent is one of three directors of the Company, the others are Humayun Reza and Ferdousi Reza, against both of whom the Secretary of State has raised similar applications, which are defended. The Respondent has chosen not to defend the application for her disqualification. Accordingly, Ms Harris on behalf of the Secretary of State invited me to make a disqualification order based on the averments in the petition and the documents which have been lodged as productions.

The conduct founded upon
[4] The Secretary of State founded on the directors' failure to pay on behalf of the Company any of the monthly PAYE and National Insurance contributions to HM Revenue and Customs ("HMRC") in the tax years 2008/2009 and 2009/2010. In the tax year 2008/2009 unpaid PAYE and NIC amounted to £94,758.31 and in first three months of the tax year 2009/2010, before the Respondent resigned as a director, the equivalent figure was £27,757.46.

[5] The gravamen of the Secretary of State's criticism is that the Company favoured its other creditors over HMRC and, by not accounting for the sums due as PAYE and NIC, in effect used sums due to HMRC to fund its trading, to the specific detriment of HMRC. The Company was overdrawn in its accounts with Clydesdale Bank plc throughout the relevant period. It had an aggregate overdraft limit of £750,000 and its debit balance fluctuated between £763,317.87 and £464,146.82 between May 2008 and July 2009. In that period the Company withdrew £989,406.29 from its accounts with Clydesdale Bank plc to pay, among others, wages (£412,376.45), employee expenses (£7,798), trade creditors (£390,848.82) and for a share buy-back (£113,000). In that period the Company paid only £4,384.34 to HMRC, none of which related to PAYE and NIC in those tax years.

[6] The claims of ordinary creditors in the administration that accrued in the period from 19 May 2008 to 19 July 2009 amounted to £143,015, of which £122,515.77 was due to HMRC for the PAYE and NIC liabilities which I have mentioned and only £20,500 remained due to other creditors. HMRC has been significantly disadvantaged by the conduct of the directors and has submitted a claim for £140,083.07 in the Company's administration for unpaid PAYE and NIC.

[7] The Secretary of State made no other allegations of relevant conduct against the Respondent.

The submission on behalf of the Secretary of State
[8] Ms Harris submitted that the conduct of the Respondent and her fellow directors had been recognised in case law as a relevant ground for disqualification (Secretary of State for Trade and Industry v Brown 1995 SLT 550 and Re Structural Concrete Ltd [2001] BCC 578). She submitted that as all directors were responsible for the affairs of a company it was not relevant to consider what was the specific role or involvement of a particular director. In this case the three directors of the Company should be treated equally as the Secretary of State had no information to distinguish between them. The only relevant variable was the period of time during which the misconduct had occurred while the particular person held a directorship. She submitted that the circumstances fell within the lowest bracket (2 to 5 years) identified by the Court of Appeal in Re Sevenoaks Stationers (Retail) Ltd [1997] BCC 224 and suggested that a period of disqualification of three years and six months might be appropriate. She compared the circumstances with those in Secretary of State for Trade and Industry v Brown and Re Structural Concrete Ltd.

Discussion
[9] I agree with the Secretary of State's submission that the circumstances averred are a relevant case for the making of a disqualification order. The test is whether the director's conduct has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies (Re Grayan Building Services Ltd [1995] Ch 241, Hoffmann LJ at 253F-G). The cases to which Ms Harris referred vouch the proposition that the adoption and carrying out of a policy of non-payment of HMRC debts for a prolonged period support a finding of unfitness other than in very exceptional circumstances. Where a company has insufficient reserves to enable it to trade except at the risk of such creditors, the adoption and carrying out of such a policy without their consent will almost always amount to misconduct. I also accept that the appropriate period of disqualification in this case lies within the lower range set out in Re Sevenoaks Stationers (Retail) Ltd.

[10] But I am not persuaded that it is correct that the specific role and involvement of a particular director are irrelevant to the court's consideration of the circumstances when it decides on the appropriate length of a disqualification order. That submission on behalf of the Secretary of State was both surprising and misconceived.

[11] Ms Harris cited passages from Mithani, "Directors Disqualification" which vouched the proposition that a director has certain inescapable personal responsibilities. But those passages did not support her central submission that the role played by a particular director was irrelevant. Indeed her submission was contradicted by the decision of Blackburne J in Re Structural Concrete Ltd, to which she referred for other purposes. In that case the court disqualified one director, Mr Barnes, for four years because he had day-to-day control of the company's affairs and imposed a two-year period of disqualification on two other directors for allowing the offending practice to occur. So too is it contrary to the judgment of the Court of Appeal in Secretary of State for Trade and Industry v McTighe [1997] BCC 224 in which Morritt LJ, giving the judgment of the court, distinguished between the conduct of two directors, disqualifying one for twelve years and the other for eight. Part of that differential appears to be explained by the role of one of the directors in devising a scheme which affected adversely the creditors of one of the relevant companies. It is also contrary to the approach of the Court of Appeal in Re Westmid Packing Services Ltd [1998] 1 All ER 124 and to the judgment of Neuberger J in Re Park House Properties Ltd [1997] 2 BCLC 530. The judgment of Mervyn Davies J in Re Majestic Recording Studios Ltd [1988] 4 BCC 519, to which Ms Harris also referred, gives no support to her submission.

[12] There are cases in which two directors who were equally involved in the day-to-day affairs of the company have received identical periods of disqualification, notwithstanding that one had a primary role in running the company's financial affairs (for example, Secretary of State for Trade and Industry v Brown 1995 SLT 550). But that fact does not begin to support the Secretary of State's contention in this case, which seems to me to be contrary to principle.

[13] It is not in doubt that a director is responsible for all aspects of the business of the company and that directors collectively and individually have a continuing duty to acquire and maintain sufficient knowledge of the company's business to enable them to discharge their duties as directors (Re Barings plc (No 5) [1999] 1 BCLC 433, Jonathan Parker LJ at 489; Re Westmid Packing Services Ltd (above), Lord Woolf MR at 842-843). But that does not prevent the court, when deciding on an appropriate period of disqualification, from taking into account the facts of the particular case, including the individual director's role in the management of the company. Where, as in this case, the application is undefended, the court must consider those circumstances as revealed in the petition and documents and obtain such further clarification as the representative of the Secretary of State is able and willing to provide.

Conclusion
[14] In this case the petition and documents reveal that the Company failed to make payments of PAYE and NIC to HMRC over the last fifteen months of the Respondent's period as a director and that a debt to HMRC of £122,515.77 accumulated in that period while almost all other creditors were being paid. That sum was part of the debt which the Company owed to HMRC on its insolvency. This appears to be the result of a deliberate policy on the part of the directors for which the Respondent must share some responsibility, whether or not she had a primary responsibility among the directors for the Company's financial affairs. In the absence of further information I can make no assumptions as to which director had such responsibility or as to the distribution of roles between the directors.

[15] The application for disqualification proceeds on the basis of misconduct comprising the adoption and carrying out of the policy to the detriment of HMRC. There are no suggestions of bad faith or a motivation of personal gain, such as by giving preference to a creditor who had the benefit of personal guarantees. The Secretary of State has provided no information as to the executive role, if any, that the Respondent undertook in the Company. The documents lodged in support of the application suggest that Mr Humayun Reza, who was both a director and company secretary, signed the Company's annual accounts and communicated with HMRC when it sought to recover overdue PAYE and NIC, may have had a primary executive role in relation to its finances. In the absence of further information, I must assume that the misconduct of the Respondent was principally a failure to maintain sufficient supervision and control; she did not have sufficient knowledge of the company's affairs and, in any event, failed to challenge an unacceptable practice. On that basis I consider that an appropriate period of disqualification is two years and I so order.