SHERIFFDOM OF GRAMPIAN HIGHLAND AND ISLANDS at ABERDEEN

 

 

 

Case Ref: B690/08		INTERLOCUTOR
		in causa
		HER MAJESTY'S SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLS, Department of Business, Innovation and Skills, Argyle House, 3 Lady Lawson Street, Edinburgh
		Pursuer
		against
		PETER JAMES ATKINSON CAMPBELL, Colliestown, Torphins, Aberdeenshire,AB31 4JN
		Defender

 

 

 

Act: S Wolffe, QC

 

Alt: C Sandison, QC

 

 

 

ABERDEEN, 14 JUNE, 2010.

 

 

The Sheriff, having resumed consideration of the cause, finds the following facts as proved or admitted,

 

1)                  The pursuer is Her Majesty's Secretary of State for Business, Innovation and Skills, Department of Business, Innovation and Skills, Argyle House, 3 Lady Lawson Street, Edinburgh.

 

2)                  The defender is Peter James Atkinson Campbell, Chartered Accountant, who resides at Colliestown, Torphins, Aberdeenshire, AB31 4JN.

 

3)                  The defender was from 1 September 1999 the principal director of Inverglen Consulting Limited (hereinafter referred to as "the company") a company incorporated under the Companies Acts and having its registered office at 22 Carden Place, Aberdeen, AB10 1UQ and remained so until the liquidation of the company. The company's last trading address was 6 Albyn Terrace, Aberdeen.

 

4)                  On 3 October 2006, an interlocutor was pronounced by this court winding up the company in respect of a petition presented by the Advocate General for Scotland on behalf of H M Revenue and Customs and in respect of unpaid Value Added Tax. The company is insolvent. The nominal share capital of the company was £10,000 of which 9,999 £1 shares were issued for cash and fully paid up.

 

5)                  The company's registered office as at the date of liquidation and for the six months immediately proceeding that date was within the Sheriffdom of Grampian, Highland and Islands and the court district of Aberdeen. The Sheriff Court at Aberdeen accordingly has jurisdiction.

 

6)                  The company commenced trading in or about 1999. At that point the business of the company was principally the provision of insolvency services which the defender, as a Chartered Accountant and Insolvency Practitioner, supervised and to facilitate the defender's business consultancy work, undertaken principally in Africa, on a speculative commission basis. The company also purchased heritable property at 6 Albyn Terrace, Aberdeen, comprising office accommodation, part of which it occupied and the remainder of which it leased to third parties.

 

7)                  Witness, Scott McLeish Taylor is a self employed accountant and business consultant. He is a former colleague of the defender. He was requested by the defender to assist the company in its accounting aspects. He was not an employee of the company. His time commitment to the company varied but was always on a part-time basis. He was appointed a director of the company on 1 September 2002. He held no shares in the company. From around March 2004 he undertook most of the administrative tasks required to run the company. At no point was he fully in charge of the operation of the company. In particular he had no control in respect of the business undertaken by Mr Campbell and its treatment in the accounts. He had no control over the finances of the company. He required to refer to Mr Campbell on major matters such as the company's worsening cash position and the final format and content of the company's management and annual accounts. He had no authority to negotiate finance with the company's bankers.

 

8)                  The operating mandate between the company and the company's bank restricted the authority of Mr Taylor to payments up to £5000. This was not increased at any point.

 

9)                  Throughout the entire period of the company's operation from 1 September 1999 the defender was the Managing Director and was the controlling director.

 

10)              In March 2004 the defender was diagnosed with malignant melanoma cancer. The defender underwent operations for that condition on four occasions between then and September 2004. During that period and for a substantial period thereafter the defender found it difficult to concentrate on his business activities and lost focus thereon. This was due to the illness, the treatments which he was receiving and a reasonable fear that his condition might be terminal. The defender was, as a result, unable to pursue to any conclusion the projects on which he was working. His involvement with the company reduced. However, he remained the principal decision maker and Mr Taylor continued to refer matters to him, particularly those relating to policy or banking issues. He continued to instruct and sign the final version of the company's annual accounts.

 

11)              With the exception of year to March 2002, the company generated a trading loss in each year of its existence. In particular in respect of the years to March 2003, March 2004, March 2005 and March 2006 the company generated trading losses in the respective sums of £1,899; £31,284; £27,311 and £75,179.

 

12)              It was the defenders intention that, in the event of his receiving commission payments from the speculative consultancy deals, he would pay part of that income to the company calculated on the level of time and expense spent by him on such deal. He would retain the balance. Each year he instructed Scott Taylor to include in the company's accounts an asset figure for work in progress on these deals. This figure was his estimate of what was involved. No other person had input into the calculation of the sum to be so included.

 

 

13)              In 2003 the company required an increase in its overdraft facilities from its banker, Bank of Scotland, to combat its cash flow difficulties. The defender negotiated an agreement that its overdraft limit be increased from £40,000 to £75,000. The company regularly exceeded that overdraft limit to the point that at the end of April 2004 it was owing, on overdraft, the sum of £90,000 to its bankers. Further increases in overdraft were agreed again by the defender. The difficulties resulted in certain cheques issued by the company being dishonoured by their bankers including payments for Rates and two cheques issued to H M Revenue and Customs.

 

14)              From October 2003 the company failed to discharge in full its obligations to account to H M Revenue and Customs in respect of Value Added Tax. The outstanding sum at the end of 2003 was £8,843.96. In 2004 the company agreed with H M Revenue and Customs to make stage payments and made an initial payment of £3,500. Thereafter the company made two further payments, one of £1,500 and one of £1,000. As at the end of 2004 the company was due a total of £16,745 to H M Revenue and Customs in respect of outstanding Value Added Tax liability.

 

15)              The defender was fully aware of the sums due to H M Revenue and Customs. In particular, in October 2003 he was aware that legal proceedings were threatened. In February 2004 the first payment made from his personal joint bank account was sent to them and was accompanied by a letter signed by him offering stage payments to settle the debt. A second such payment was made in April 2004. In March 2004 he exchanged a number of e mail messages with H M Revenue and Customs. In September 2004, following upon the defender's release from hospital, he spoke to Steven Palmer of the Debts Management department of H M Revenue and Customs. He advised Mr Palmer of the difficulties caused by his illness and of his intention to wind down the business of the company. He advised Mr Palmer that he intended that the company's premises be sold. He anticipated that would enable all creditors to be paid.

 

16)              No payments were made to H M Revenue and Customs in 2005. As a result of further accruals the company was, at January 2006, due the sum of £34,061.13 to H M Revenue and Customs in respect of V.A.T. liabilities.

 

17)              Throughout 2004 and 2005 the defender and Mr Taylor were in regular contact, including e-mail contact, concerning the company and in particular the sums due to H M Revenue and Customs.

 

18)              In early 2004, as a result of the company's cash flow and banking difficulties, the defender reached an agreement with his wife, witness Janet Campbell, that the company could be supported by payments made from what they regarded as her share of their joint bank accounts. A series of such payments were then made from Mr and Mrs Campbell's joint bank accounts, principally with Bank of Scotland and Clydesdale Bank. Document production 6/1/2 is a schedule of said payments. There are certain errors in the schedule which includes payments made other than on behalf of the company. The total sum shown due in respect of the schedule is £58,789.24. Mr Taylor was aware of, but not party to, this arrangement. It was he who passed invoices to the defender for settlement when he was unable to pay them from company resources.

 

19)              In around September 2004 the defender decided to sell the property to pay off creditors. He specifically decided not to liquidate the company as that would result in a substantial portion of the company's assets being lost in the costs of liquidation. Following upon his decision to sell the company's heritable property, Mr Campbell agreed with his wife that these sums would be repaid as a priority from the proceeds of sale. This approach was agreed with Mr Taylor. By this point approximately £29,000 had been paid, on behalf of the company, from this source.

 

20)              Based on his own views and informal soundings, the defender believed that the company's property would sell for a price in the region of £800,000. He believed that such a sale would provide sufficient funds for all creditors to be paid. The balance sheet value of the property was £600,000.

 

21)              The defender was unable to negotiate a sale at the price he anticipated. He agreed a sale at a price of £725,000.

 

22)              On 30 November 2005 the defender signed the annual accounts to March 2005, which accounts showed, inter alia, a sum due in respect of taxation of £32,823. The sum due to Mrs Campbell was not shown but was included within the defender's own director's loan account. These accounts showed as an asset, work in progress in the sum of £165,000. By the date of signature, and of sale of the property, the defender was fully aware that no sums would be recovered in respect of this work in progress.

 

23)              In early December 2005 the defender instructed Scott Taylor to write off from the company's accounts all elements of work in progress, then included in the accounts in the sum of £165,000, as irrecoverable. This had first been discussed between them in October 2005.

 

24)              In 2004 the defender became involved, on a speculative basis, in a project seeking to provide telecommunications to areas in Africa and in particular broadband links. He did not initially include in the company's accounts any element of work in progress in respect of this project.

 

25)              In mid December 2005 the defender instructed Scott Taylor to include in the company's management accounts a work in progress figure of £100,000 in respect of his estimate of what might be recovered for the company from the African broadband project. This followed from a meeting in Bangkok, attended by the defender and a letter of commitment to fund the project dated 19 December 2005. He anticipated payment within 60 days from that date.

 

26)              No such payment was received. The defender discovered that the funding company, TYK International Investment had ceased trading in November 2004, one year prior to the signature of the letter of commitment. He instructed Scott Taylor to write off from the company's accounts to March 2006, the work in progress figure inserted in December 2005.

 

27)              From 2003 onward H M Revenue and Customs continually pressed the company for payment of the outstanding sums. They did so by a variety of means, including threats to raise legal proceedings and to wind up the company. On 15 September 2005 witness David Fyfe, a representative of H M Revenue and Customs, attended at the company's premises to carry out an audit. At that audit a discrepancy in the company's records was detected which, when corrected, resulted in an increase in the sums due in respect of outstanding V.A.T. The records of the company were otherwise satisfactory. The company continued to receive various notices from H M Revenue and Customs requiring payment of the sums due in respect of V.A.T. liability inclusive of interest and surcharges. Said notices were passed by Mr Taylor to the defender. In this regard, the defender signed letters to H M Revenue and Customs and had direct contact with witness, Mr Palmer, an official thereof.

 

28)              In December 2005 the company received payment of approximately £730,000 in respect of the sale of the property. Said payment was made to the company's bankers who properly deducted the sum due in respect of the secured property loan leaving a balance of £214,179. They further deducted the sum due in respect of the company's overdraft, also secured by standard security in the sum of £107,759. The remaining balance was approximately £106,420.

 

29)              Contrary to the defender's initial estimation the sum received from the sale of the property was not sufficient to pay off the creditors of the company.

 

30)              On or about 28 December 2005 the defender, from the funds available, instructed a payment of £40,000 to the joint account of his wife and himself in part repayment of the sums advanced under the arrangement with his wife. On or about 3 February 2006 he instructed a further payment of £17,000 to his joint account with his wife.

 

31)              Witness Scott Taylor, with the knowledge and consent of the defender, instructed payments from the company to cover fee claims by him for his services to the company. Said payments totalled approximately £30,000.

 

32)              On 10 and 26 January 2006 two further payments, each of £5,000, were transferred from the company to an account in the name of the defender and his wife. These transfers were instigated by the company's bankers pursuant to a general arrangement made with the defender.

 

33)              As a result of these transfers and other minor payments, no further sums were available and no payments were made to H M Revenue and Customs.

 

34)              The defender was fully aware of the financial position of the company at the point of these transfers. He was fully aware of the level of funds available to the company. He was fully aware of the transfers which were made. He was fully aware of the outstanding debt to H M Revenue and Customs. He took no steps to direct any payment to H M Revenue and Customs.

 

35)              In the knowledge that the property sale had achieved a lower price than was necessary to clear the company's debts, the defender, as principal director, took no steps to direct payments from the company with a view to acting fairly and appropriately between the various unsecured creditors, including H M Revenue and Customs.

 

36)              On 18 September 2006 the defender spoke with solicitors acting for H M Revenue and Customs. He made an offer to pay the sum of £5,000 in return for proceedings to wind up the company being dropped. On the same day the defender spoke to an officer of H M Revenue and Customs, Lindsey Wright, and again offered the sum of £5,000 in return for liquidation proceedings being stopped. He did not offer this as an instalment towards payment in full. The offer was rejected on both occasions. The defender did not seek to follow up that offer nor to improve upon it.

 

Finds in fact and law

 

1)     The defender was a director of the company which company became insolvent

 

2)     The defender's conduct as a director of the company makes him unfit to be concerned in the management of a company.

3)     The relevant actings of the defender demonstrate a lack of probity and a misfeasance on his part.

 

4)     The relevant actings of the defender comprise conduct falling below the appropriate standard of conduct required of a company director.

 

5)     The defender was responsible for the company giving a preference to his wife, being a preference challengeable under the law of Scotland.

 

6)     It is required that a disqualification order be made against the defender in terms of the Company Directors Disqualification Act 1986.

 

7)     The conduct of the defender was such to require an order within the lowest band range for such orders.

 

8)     A disqualification order for a three year period is appropriate.

 

 

Accordingly,

 

Sustains the second plea in law for the Pursuer; Repels the second and third pleas in law for the Defender;

 

And therefore,

 

(1) Grants a Disqualification Order in terms of the Company Directors Disqualification Act 1986, ordering that Peter James Aitkinson Campbell, Colliestown, Torphins, Aberdeenshire, AB31 4JN shall not, without the leave of the court, be a director of a company, or in any way, either directly or indirectly be concerned or take part in the promotion, formation or management of a company for a period of three years, beginning 21 days after the date of this order:

 

(2) Directs that the making of this order be registered by The Secretary of State for Business, Innovation and Skills:

 

(3) Appoints intimation of this order to be made once in the Edinburgh Gazette:

 

Reserves the issue of expenses and fixes a hearing thereon for 28^th July 2010 at 9.45 am.

 

 

 

 

 

NOTE:-

 

Evidence

 

The pursuer led evidence from Scott McLeish Taylor, the defender's co-director in the company. He spoke to his time with the company, his responsibilities, his relationship with the defender and to many of the specific points relating to the company's business and organisation. Thereafter, they called Gordon Ian Bennett, a Chartered Accountant who was appointed liquidator of the company. He spoke to the liquidation of the company, his meeting with the defender and commented upon a number of aspects of the company's organisation and the situation which had arisen. The pursuer' third witness was Steven Palmer, a debt manager with H M Revenue and Customs who spoke to his involvement with the company, its VAT record, the steps which he and H M Revenue and Customs took with regard to the company's arrears position and in particular his conversation with the defender. The fourth witness was Miss Lindsey Wright, an employee of H M Revenue and Customs who gave evidence about procedures within that organisation with specific reference to the company and in particular to her conversation with the defender. The defender's fifth witness was David James Fyfe, a further employee of H M Customs & Excise who spoke principally to his contact with the company which involved his carrying out a routine visit to examine the company's VAT records and who had, during that visit, identified an error in the company's approach to its returns which had resulted in an under declaration of VAT due. The pursuer' sixth and final witness was Douglas Albert Bodie, a relationship director within the Bank of Scotland/Lloyds Banking Group and who was, at the material time, a director of corporate banking with Bank of Scotland. He was the supervising manager dealing with the company's bank accounts. He spoke to a number of matters concerning management of those accounts including evidence relating to specific transactions, the banking mandate between the bank and the company and its approach to that mandate.

 

The defender then led evidence firstly from Mrs Janet Campbell, his wife, and after that evidence from himself. Mrs Campbell spoke to her limited knowledge of the operation of the company, the defender's illness, the effect that had on the defender and her discussions with him regarding the use of monies, regarded by both of them as her money, to support the company. Mr Campbell gave detailed evidence about the company, his activities and the level of his involvement with regard to the company and in particular with regard to H M Revenue and Customs.

 

I do not propose to summarise the evidence given by each of these witnesses. There is a full transcript of their evidence.

 

Pursuer's submissions

Pursuer's counsel submitted firstly with reference to the Company Directors Disqualification Act 1986 that the effect of the provisions therein were that where a company has become insolvent the court must make a Disqualification Order of between two and fifteen years against a director if it is satisfied that his conduct as director makes him unfit to be concerned in the management of a company. There are a number of factors which can be taken into account when making this appropriate assessment. The court required to make an order if satisfied that the criteria were met. Re. Grayan Building Services Limited [1995]B.C.C. 554.

 

It was the pursuer' position that the length of disqualification sought was six years. With reference to the guidelines set out in Re. Sevenoaks Stationers (Retail) Limited [1990] B.C.C. 765 it was submitted that the conduct in this case fell within the middle bracket dealing with serious cases which do not merit the top bracket. It was conceded that this case fell towards the lower end of that middle bracket and a six year period was therefore recommended. The defender's expertise as a chartered accountant and insolvency practitioner was a relevant factor in raising the standard of breach into the middle category. Section 17 of the Company Directors Disqualification Act 1996 provided a mechanism for application by an individual, so disqualified, for leave to resume acting as a director. She referred further to Schedule 1 to the Act which set out relevant matters for determining unfitness of directors and made particular reference to paragraph 8 thereof dealing with the extent of responsibility for preferential transactions challengeable at law. The criteria set out were not exhaustive and the court required to look at the matter in broad terms.

 

The procedure was introduced to raise standards and require directors to have due regard to the ordinary standards of commercial morality Re. Swift 736 Limited [1993] BCLC 312. In the present case, one line of defence deployed by the defender was his claim that all relevant matters were delegated to his co-director, Mr Taylor. Such an approach was not permissible. A proper degree of delegation and division of responsibilities is permissible but a director could not engage in total abrogation of responsibility Re. Westmid Packing Services Limited (No.3) [1998] B.C.C. 836. The case of Grayan provided a good summary of the requirements for appropriate assessment and the legal principles to be applied. There did not require to be a course of conduct as individual instances might suffice. Secretary of State for Trade and Industry v McTighe and Another (No. 2) [1996] BCLC 477. The standard of conduct to be applied is an objective standard, however, account ought to be taken of professional qualifications and expertise of the individual when applying the standard to them Re. Landhust Leasing [1999] 1 BCLC 286. Here the defender was a chartered accountant and insolvency practitioner. That was a material issue. It was accepted that the length of the disqualification period was a matter for the court's discretion subject to application of the principles set out in the case of Westmid.

 

Account could be taken of the status of the Crown as an involuntary creditor when assessing the director's conduct Re Stanford Services Limited [1987] BCLC 607. One of the matters which the court required to take into account in determining fitness was responsibility for a statutory preference which was liable to be set aside. Were that to be established that required to be taken into account. It was, however, not necessary to establish that any preference fell within the statutory framework for recovery. It was not necessary that there be a statutory breach Re. Sykes (Butchers) Limited [1998] B.C.C. 484. The pursuer did not seek to establish that there had been a statutory unfair preference as the payments in this case fell outwith the statutory time-limit. That did not prevent the court taking them into account. The evidence showed that the defender or an associate had gained personal advantage from these payments. It showed that he lacked probity.

 

In the present case, there was an issue over abrocation. It was the defender's evidence that he had done nothing wrong and had left all these matters to his co-director, Mr Taylor. That was not an acceptable approach. An inactive director who took no steps to properly carry out his duties could not evade responsibility by saying that he knew nothing about what was going on. Re. Park House Properties Limited [1997] 2 BCLC 530. The defender could not legitimately rely on another director. His overall functions were not delegable. In any event he remained informed on the management situation and accordingly could not avoid liability. In Secretary of State for Trade and Industry v Thornbury [2008] B.C.C. 768 this principle was confirmed. Failure on the part of a director to familiarise himself with the company's financial position provided no defence. Even were Mr Campbell's position to be accepted this did not provide him with a defence.

 

Counsel for the pursuer then addressed me in detail on the evidence with reference to her proposed findings in fact. I do not propose to narrate these points in any detail. She submitted that a number of matters could be found in the pleadings to be admitted or not in dispute. A number of further matters had not been admitted but had been proved on the evidence and she set these out. She identified certain points raised by the defender in his evidence which had not specifically been put to Crown witnesses. In particular, she drew attention to the fact that elements of the defender's evidence concerning his instruction to insert a £100,000 work in progress figure in respect of the African Broadband project had not been put to Mr Taylor nor to the liquidator and that his evidence on that should be discounted. She submitted that the evidence showed that Mr Campbell had made two substantial payments to his wife in the full knowledge that there was a deficiency of funds to pay all creditors. He had made no effort to satisfy all creditors on a pari passu basis. The payments were made in knowledge that they were insufficient funds. There was no credible basis for the defence based on the defender's assertion that he believed that H M Revenue and Customs either had or could be paid. He had made no attempt to seek information from Mr Taylor nor had he received any information which would have entitled him to have that impression. At best, for the defender, his position could be stated that he had taken no steps to properly inform himself which amounted to unacceptable abrocation of his responsibilities. The evidence showed that the defender's conduct fell within the category of the statutory definition and accordingly disqualification was mandatory.

 

She submitted that so far as the objections which had been made by the defence, and reserved, were concerned, the evidence on each of these passages could be regarded as of proper relevance in assessing the whole situation. Given the lines of defence being raised it was necessary to establish the level of knowledge which could reasonably be attributed to the defender. These areas of evidence were also necessary when considering issues of the credibility of the defender's position.

 

With reference to the case of Keenan v Scottish Wholesale Co-operative Society 1914 S.C. 959, a criminal case, and Dawson v Dawson 1956 SLT (N) 58, she submitted that failure to cross-examine on critical matters should be treated as a breach of the principal of fairness, in that other witnesses were not given a chance to explain or deny the propositions. She highlighted a number of matters falling within that category.

 

This approach, along with other factors, raised the issue of the credibility of the defender. His evidence was inconsistent with the answers given in earlier documents, in particular the questionnaire sent by the liquidator and certain correspondence. He had insisted that Mr Riddell of H M Revenue and Customs had cancelled a meeting with him when no meeting had been fixed. He had in so doing been trying to create a more favourable impression of his reaction to the situation than was appropriate. He had insisted that he was correct in stating that the £5,000 offer to stop the liquidation was intimated as a first payment and that the Crown witnesses speaking to that matter were incorrect. He had, however, appeared to retreat somewhat from that position having heard the evidence of the witnesses. There had been changes in the lines of defence which pointed to a lack of credibility on his part. Initially, he had accepted that he had made both of the payments to his wife as recorded in the questionnaire correspondence and liquidator's minute. He was honouring the agreement with his wife. In evidence he departed from that and indicated that he had not made the second of these payments. Mr Bodie had been unable to be definitive on who had instructed the payment and the defender may have seen that as an opening to alter his position.

 

There had been no previous comment about the emergence of £100,000 of work in progress nor in earlier documents had he sought to pursue the line that all matters had been delegated to Mr Taylor. These lines were emerging only during his evidence.

 

She submitted that in assessing credibility and reliability where there was a conflict between the pursuer's and the defender's evidence, the pursuer's should be preferred. The evidence of the defender was not credible and certain of his points had not been put to the pursuer's witnesses. She accepted that Crown witnesses, Taylor, Bennett and Bodie had lacked some recall of detail but submitted that they were generally reliable and credible. She submitted that Crown witnesses, Palmer, Fyfe and Wright were wholly reliable and credible. She submitted that the defender was not credible.

 

The conduct of the defender fell below the levels of probity and competence expected, particularly of an individual with his qualification and experience. There was a clear breach of probity. He had made payments to the benefit of his wife and to the detriment of H M Revenue and Customs. He had made such payments in the belief that the company was insolvent. That in itself was sufficient for the purposes of the action. The issue of knowledge was not relevant. It was not necessary for the pursuer to prove all of the elements of a statutory unfair preference. She referred to Section 243(1) of the Insolvency Act 1986 relating to unfair preferences in Scotland. The statutory timescale set was 6 months before commencement of the winding up of the company which placed the present payments outwith that framework. There was no need to prove insolvency.

 

The common law position was not altered by this statute. She referred to Bells Commentaries Volume 1 Section II at page 226, setting out the common law position.

She further referred to St. Clair & Drummond Young, the Law of Corporate Insolvency, Chapter 10, at paragraph 10.02 dealing with gratuitous alienation at common law and paragraph 20.13 dealing with unfair preferences at common law and setting out the proposition that it need not be established that the debtor knew of the insolvency, it being capable of inference from the circumstances that he was aware of his insolvency. Here there had been a breach of probity. The beneficiary had been the defender and his wife and the payments had been to the detriment of H M Revenue and Customs. It had been established that the defender believed that the company was insolvent at the relevant point. The issue of whether he knew that or not was not required for the test. Common law did require that knowledge but it could be implied. For the purposes of this action it was not necessary to establish that there had been either statutory or common law unfair preference. Further, even if that approach was not correct and the defender did not know the full circumstances he was not excusably ignorant. At the time he made or permitted the payments to be made he was aware of the long term situation regarding the arrears, he knew or ought to have know that they had not been paid, and could not be paid and he took no steps whatsoever to instruct settlement of this liability.

 

It was not possible for him to claim delegation when the person involved did not have the means to discharge the obligation. He could not say that Scott Taylor was dealing with the matter when he knew that he could not make the necessary level of payments. It was a complete abrogation of his duties to adopt the position that had there been a problem Scott Taylor would have informed him. As a director he had responsibility to have regard to the build up of the arrears. His awareness of the difficulties, as at the very least shown by the terms of his conversation with Mr Palmer in September 2004, and his knowledge of the decline in the finances of the company and diminishing income in the period running up to the end of 2005 had been established. He could not take comfort from any silence on the part of Scott Taylor about these specific issues. It was his duty to keep informed on critical matters particularly where, as here, the company's only asset was being sold and the proceeds disbursed.

 

She submitted that the case had been established on the evidence and the court should accordingly make a finding under Section 6(1) of the Company Directors Disqualification Act 1986, uphold the pursuer's second plea in law and grant decree in respect of craves 2, 3, 4 and 5 of the application.

 

Defender's Submissions

 

Counsel for the defender submitted that the pursuer's approach to the case lacked proportionality. Whilst the issues could not be looked at in isolation there were few propositions in law and few facts to be applied. He accepted that the court should apply a broad brush approach to its decision in the matter. The core point in law was that misconduct on the part of a director was not the same as unfitness. In this case there must be unfitness. Misconduct is an element of that but was not by itself sufficient to constitute unfitness. He stressed that the approach was not a box ticking exercise. The court, if it found misconduct established, had to go further and find that it rendered the director an improper or unfit person to direct a company. In essence, and on the evidence which had been presented, the issue was whether, as a matter of public protection, the defender could not be allowed to continue to manage limited companies. In presenting his defence the defender had not had public funding and due to that and the length of the pursuer's presentation of the case there had been certain constraints on presentation of the defender's position. Relevant and contemporary extenuating circumstances could be taken into account when assessing whether the director's conduct made him unfit Re. Landhurst Leasing. Such circumstances might make a lapse from the required standard cease to be such. This demonstrated the flexibility of the present proceedings. In the present case there were extenuating circumstances which could negate any finding of a lapse in standards. The court required to look at the overall position and exercise broad judgment. The director's conduct required to be looked at in the context of the surrounding circumstances at the time. Re. Secretary of State for Trade and Industry v. Mitchell 2001 SLT 658. Unlike that case it was not suggested here that the defender had been mentally incapable. The illness from which he had suffered had however had a relevant effect.

 

It was the pursuer's primary case, not that the defender had blundered into this situation, but that he had deliberately made payments to benefit his wife whilst knowing that the company was insolvent. It was not an allegation of incompetence but one of dishonesty. Given the defender's good character and the nature of the allegations against him more cogent evidence was required to establish the relevant wrongdoing than might be in other circumstances. Re. Bunting Electric Manufacturing Limited 2006 1 [BCLC] 550. The inherent probability of the event is a factor which should be taken into account when the court weighs the overall probability and makes its decision on balance. In the present case it was highly unlikely that the defender would have created this situation. He was fully aware that any defrauding of H M Revenue and Customs would place him at great risk given his profession and status. He had indicated that he believed that would make him a target and this made it less likely that he would deliberately create such a situation. There had not been cogent evidence on this point. What the court had heard amounted largely to innuendo.

 

The court should guard against the danger of hindsight. The pursuer used as part of his argument documents and statements attributed to the defender but in circumstances where he would not have expected there to be a detailed analysis applied to them. These documents required to be looked at in the context in which they had arisen and it would be inappropriate to place too much weight on these documents. Re. Living Images Limited [1996] B.C.C. 112.

 

It was necessary to bear in mind that notwithstanding the level of evidence in this case the allegations which were on Record, and which the pursuer confirmed defined their case, were very limited in scope. Only those allegations set out on Record should be taken into account. Throughout the proceedings certain objections had been taken on behalf of the defence and the pursuer had undertaken that only those allegations set out in Article 12 formed the basis of the case against the defender. Other evidence had been allowed within that context but that evidence could not support a finding against the defender. Re. Sevenoaks Stationers (Retail) Limited at 177. Accordingly any decision required to be taken with regard to the pleadings set out in Articles 11 to 13 of condescendence. Evidence falling outwith this scope may well have been led in an attempt to prejudice the outcome but was immaterial.

 

Notwithstanding this situation, the pursuer did continue to endeavour to raise additional matters. One example was the inclusion in their written submissions about the impropriety of trading whilst Crown debts are left unpaid. This did not form any part of the allegations on record. He questioned the inclusion in the submission.

 

A second example was the submission on the outcome of the V.A.T. inspector's meeting with the company in respect of which there had been evidence that certain matters had not been treated properly thus resulting in inflated inputs in the V.A.T. register. There was no notice that this was to be founded on in any way, in the pleadings in the case. Counsel submitted that this appeared to have been included to influence an assessment of the defender's evidence on the basis that it showed that the defender was "up to no good". There was a later suggestion that this situation had resulted in an under declaration of Value Added Tax. This again was inappropriate as it was not a matter raised and as there had been no evidence that it was he who was responsible for any such under declaration.

 

Further it was not alleged on Record that the defender had or was responsible for gratuitous alienations. The pursuer had not offered on record to prove that any of the items of payment were not debts of the company. The defender no longer had access to the company's books which were with the liquidator. It had not been suggested to Mr. Taylor when he gave evidence that any payments had not been debts of the company. If there had been such an allegation on Record they could have been dealt with. These payments would either be an unfair payment of a debt or gratuitous alienation. These two positions were mutually exclusive. The court should not take account of such allegations.

 

It had also been suggested that Mr. Campbell had delayed the liquidation to prevent the liquidator engaging the statutory route to recovery of payments. It was, however, a matter for the creditors to decide on timing of their application. H M Revenue and Customs had threatened such proceedings two years before they finally took action. As set out in the pursuer's own submissions there remained a common law challenge which could have been made and would not have been time barred. Again this was an example of an attempt to influence the court against Mr. Campbell.

 

Article 11 of condescendence set out the sale of the property but did not contain any criticism of the defender. Article 12 contained the main allegations. It was to be noted that it was not alleged that the defender instructed payments but that he caused or permitted payments to be made. The defender accepted that he knew about and agreed to certain payments. Who instructed them was not an issue which was set out on Record. It was accepted that Mr. Taylor had not been pressed on who had instructed the payments that was because it did not matter. The defender accepted that he instructed the first payment of £40,000 but denied instructing the second payment although he admitted having permitted it. There was no doubt that his wife, who is a person connected to him, undoubtedly benefited from those payments. Although they were made as a result of her contributing to keep the company operating. A broad approach required to be taken. Mrs. Campbell had contributed to the company. The defender himself was left as an unpaid creditor as was H M Revenue and Customs. The point for the court was whether this situation amounted to misconduct and if so whether it made him unfit to continue as a director.

 

The defender accepted that it was a matter of fact that the company was insolvent at the time of the payments being made. At no time had he sought to move away from that admission. It was necessary to consider, however, whether the defender knew that fact at that time although it was accepted that there was also the issue of whether he should have known. The allegation is one of a lack of probity, not of carelessness. Knowledge could make his actings more blameworthy. The liquidator had expressed astonishment that payments had not been made pari passu. That would only be appropriate were the defender to be conscious of the insolvency of the business at that time. The liquidator was unable to point to any evidence in his minute suggesting that the defender believed that all creditors could not be paid. Production 5/3/41, the defender's letter to Shepherd & Wedderburn, was cited as indicating his knowledge but, when read properly, that did no more than set out as a statement of fact that it had ultimately transpired that the recovered monies were not sufficient to pay the creditors in full. These two documents, the minute and letter, could not be read properly to imply knowledge by the defender at the material time.

 

The defender's position was that he thought that H M Revenue and Customs had been paid. That position was put to Mr. Taylor in cross-examination. He also thought that the Broadband for Africa deal would come through and supply funds to pay off any remaining creditors. The liquidator had been asked about the company's approach to work in progress figures and had accepted that rapid changes in such figures do happen frequently. The pursuer suggested that the defender's evidence regarding the work in progress from the Broadband to Africa scheme should not be believed. The defender did set out his position on that in the pleadings and that was supported by his evidence and certain productions. The pursuer did not appear to have investigated the position. They did not provide evidence to negate his view and there was no reason why he should not be believed. If that approach were adopted there was no evidence suggesting that his judgment was unreasonable. Up until the correspondence in May 2006 he had believed that H M Revenue and Customs had been paid. It was suggested that as he was aware of the difficulties in 2004 and 2005, a fact which he did not deny, he must have known that the creditor H M Revenue and Customs could not be paid. His evidence, however, was clear that at the date of payment he was not aware that there were insufficient assets from the sale to pay the external creditor. There had been no evidence to establish that he did know that fact.

 

In his evidence Mr. Taylor had supported this position and had confirmed that it was also his view that all of the creditors would be paid in full and that he did not think of the company as being insolvent. He confirmed that there had been no decision made not to pay H M Revenue and Customs. He stated that both he and the defender intended to pay the sum due. He was presented to the court by the pursuer as a credible and reliable witness. His view therefore should be followed.

 

While it was accepted that there had been no cross-examination of Mr. Bodie about the mandate position his evidence had been that he had no idea who had instructed payments. Although there was a theoretical limit of £5,000 on Mr. Taylor's authority to pay out company monies, that did not appear to apply to direct bank (BACS) payments. It was not clear but, from the evidence of Mr. Bodie, it did seem that the theoretical limit on Mr. Taylor's authority would not necessarily apply. The court could not take that as being a definitive limit. Had Mr. Campbell wished to extract money from the company for his personal benefit, he could have reduced the assets by paying himself a salary or a dividend. Similarly he did not require to carry on with the company, supporting it from his wife's resources. He had done so for the benefit of the employees. It was clearly not his intention to defraud.

 

Further the defender's general credibility on the issue of his intention not to favour himself or his wife at the expense of H M Revenue and Customs was supported by the facts that the company kept appropriate books and records. The company made all V.A.T. returns properly. The company and the defender responded to all communications sent to them by H M Revenue and Customs quickly. The defender never sought to tell any untruth to H M Revenue and Customs. The defender made such payments to H M Revenue and Customs as was requested by Mr. Taylor. The defender co-operated fully and freely with the liquidator and his staff. The defender was left as a creditor of the company in the sum of approximately £23,000.

 

It was the defender's position that he had offered to make an interim payment of £5,000 to prevent liquidation proceedings, on the basis that this was as much as he could afford. The defender's offer to stop the liquidation did not mean that he was seeking to extinguish the debt by that payment, merely to put a stop to the liquidation process. The matter had not progressed further and both Shepherd & Wedderburn and the tax official had refused the offer. He submitted that the defender had acted in good faith and that his position on that matter should be accepted.

 

With reference to the issue of knowledge of H M Revenue and Customs in respect of the proposal to pay from the sale of the property he submitted that the evidence did establish that H M Revenue and Customs knew of the proposal but that even if it did not that was not the essential point. With reference to the case of Secretary of State for Trade and Industry v. Creegan and Others [2004] BCC 835 he submitted that continuing to trade against a circumstance where there was balance sheet insolvency was not in itself sufficient to found a disqualification order. The insolvency of the company and the knowledge of the director was only sufficient if it were shown that the director knew or ought to have known that there was no reasonable prospect of meeting creditors' claims.

 

He submitted that on a proper analysis it could be seen that the situation had gone wrong firstly through Mr. Taylor taking approximately £30,000 of fees from the company and secondly due to the two payments totalling £10,000 paid to the defender's account but without his knowledge. It appeared from the evidence of Mr. Taylor that his payments were processed without the knowledge of the defender. But for these payments there would have been sufficient funds to meet the debts to H M Revenue and Customs. Accordingly, he submitted that in paying his wife as creditor, he genuinely believed that all other external creditors had been paid. His approach did not disclose a situation of commercial immorality, total incompetence or gross negligence.

 

It further was his reasonable belief that there would be money available to the company from the Broadband in Africa project. That reasonable belief entitled him to continue to trade. A great number of companies would be unable to trade if they required to cease when their balance sheet became insolvent. Banks lent money to support such operations. He re-emphasised that the position ought not to be looked at with the benefit of hindsight. At worse this was a situation of commercial misjudgement based on the defender's belief that further monies would be forthcoming. It was not negligence and it was not dishonesty. He had operated successfully for a period in excess of 40 years and whilst possible it was highly unlikely that he had suddenly decided to act in an improper or dishonest manner.

 

The second broad allegation was that the payments amounted to unfair preferences. Such a position required to be established by a desire to improve the creditor's position in the event of an insolvent liquidation and a decision when making the alleged preference influenced by that desire Re. Living Images Limited. It is clear therefore that insolvency has to be in the mind of the individual making the preference. There can, accordingly, be situations where a preference in fact arises but there must also be evidence supporting the mental element. Intention was required. Re. Sykes (Butchers) Limited. The motivation for the payment in this case was simply that it had been agreed with Mrs. Campbell that the monies be repaid to her. At the point of the payment neither the defender nor Mr Taylor believed that the company was to go into insolvent liquidation. There could be no intention to improve her position in such an event.

 

Even were it to be the case that a fraudulent preference had been made that did not necessarily lead to a conclusion that the defender was unfit to be concerned in the management of a company. Re. Keypack Home Care Limited (No. 2) [1990] B.C.C. 117, where it was established that there had been a technical fraudulent preference and that the payment should not have been made but that the making of the payment was one which did not involve a want of probity. The circumstances of that case were not dissimilar to the present case.

 

He submitted that the present situation was not one which amounted to a preference relevant to the Act as it was not made in contemplation of insolvency or intended to benefit Mrs. Campbell in any insolvency and even if that were the case there was no want of probity, it simply being repayment of sums advanced in good faith and without obligation in order to assist the running of the company.

 

The third area related to the allegation that the defender had abrogated his responsibilities due to his lack of active involvement in the company in 2005. The principal that a director had overall responsibility for the conduct of the company's business and could not delegate it was accepted. It was, however, acceptable to delegate particular functions and the extent of the residual duty of supervising any such delegated functions depended on the circumstances of the case. The pursuer's point here was really in the alternative and based on the proposition that the defender either knew or ought to have known the true position. If it was reasonable to trust the person to whom responsibility was delegated then that removed the level of personal responsibility which might be founded on when claiming a lack of probity or gross incompetence. Re. Cladrose Limited [1990] B.C.C. 11. He submitted that Scott Taylor was someone whom the defender had worked with for a 21 year period, whom he regarded as responsible and who had managed the finances of the company for some years prior to 2005. He kept the accounting records, dealt with banking, creditors, debtors and H M Revenue and Customs. He submitted that the evidence showed that Mr. Taylor was running the company on a day to day basis after the defender's illness in early 2004. The defender then attended only to matters referred to him by Mr. Taylor. The defender had left it to Mr. Taylor to deal with the payments and he thought that Mr. Taylor had done so. He was relying on Mr. Taylor. The cases referred to by the pursuer in their submission could be distinguished from the present circumstances. It was immaterial that Mr. Taylor was not able to raise finance for the company. It was appropriate to concentrate on the particular allegations which were made against the defender. It was accepted that Mr. Taylor was not the owner of the company and that Mr. Campbell had dealt with the sale of the building. Mr. Taylor was, however, dealing with the day to day affairs of the company. There was little or nothing to do with the company's affairs which was not dealt with by Mr. Taylor. Any such matters were passed by him to the defender. Mr. Taylor had satisfied Mr. Campbell that he was able to deal with this function.

 

There was the particular circumstance in this case surrounding the defender's illness. It was claimed by the pursuer that this was over by 2005. The peculiar circumstances of this case, however, made it all the more reasonable that the defender delegate the financial affairs of the company to Mr. Taylor. He referred to the cases cited by the pursuer on this point. Application of the tests set out in those cases to the present situation ought to result in the conclusion that there had been no inappropriate abrogation. It might be that the defender had not been as careful as he could or should have been but that was not enough. It was reasonable for him to rely on and to trust Mr. Taylor. The psychological effect of his illness required to be taken into account. Re. Park House set out the general principle. The defender's ignorance must be borne of culpable failure and if so of sufficiently culpable to make him unfit to act as a director. This should properly be applied as a two stage process. No one had during the course of the proof suggested that Mr. Campbell was exaggerating the extent and effect of his illness. The likely effect of such a diagnosis, four operations and his belief that he was not far form death would clearly render business decisions as less important. That did not appear to be acknowledged by the pursuer. The defender had come to rely on Mr. Taylor and that was reasonable in the circumstances. His reliance on Mr. Taylor could not in this context be regarded as culpable failure. In Re. Park House the directors had done nothing and that was held not to provide an adequate defence. The position here was different. He had trusted Mr. Taylor for good reason. That might have been different had it not been for the intervention of his health difficulties. When considering the context of his health difficulties, culpability was not established or at the very least not established to a sufficient extent.

 

With regard to the case of Thornbury the finding was based on a decision that the director did not rely on his fellow directors but simply left matters to them and washed his hands of the whole situation. That did not apply here. The defender did rely on Mr. Taylor to do the job properly. The delegation which he undertook was reasonable. In context the pursuer had failed to establish this line of their case against the defender.

 

He turned to the question of objections made during the course of the proof. He renewed those objections to a limited extent confirming that what he sought to do was confine the pursuer to the specific allegations which were set out in Article 12 of the condescendence. Notwithstanding some of the evidence led, the pursuer had accepted that they should be kept to those allegations.

 

So far as the period of disqualification was concerned he noted that a period of 6 years was sought. It was really a matter for the court to decide based on its findings. He did accept that the fact that the defender was a Chartered Accountant and Insolvency Practitioner was a factor which could be brought to bear in the court's consideration. The court should follow the guidance set out in Re. Sevenoaks. There was no authority for the proposition that the defender's personal circumstances could result in moving his conduct from one band to another but he accepted that it might be seen as an aggravation. In any event so far as the defender was concerned disqualification was the issue and not the length of disqualification. Any such disqualification would have a dramatic effect on the defender's ability to progress in the future.

 

He asked that on expenses the issue be reserved as, in the event of a finding against the defender, there were issues of proportionality and the appropriateness of the length of the proceedings.

 

Pursuer's response

 

In response the pursuer's counsel indicated that many of the cases cited by the defender's counsel were common to her own or approached the issues similarly. She submitted that the defender's approach fell into the trap of categorising conduct. That was not appropriate. The fundamental allegation was a preferential payment made to the prejudice of other creditors. The payment was made against a background of accrual of VAT arrears. Consideration of the documents should be based on their terms and the contrast of those terms with the defender's own evidence. The pursuer did found purely on the allegations set out on record. There was no allegation of wrongful trading. The principal allegation was that creditors had been left unpaid when the defender's wife had been paid. The evidence of Mr Fyfe and Mr Taylor in respect of the defender's responsibilities had not been challenged. There was no record for an approach based on gratuitous alienation and that was not part of the pursuer's case.

 

She submitted that the phrase "caused or committed" was appropriate in respect of the payments made. The defender had not disputed that these payments were made other than with his knowledge or consent. He had conceded making the first payment but on record had only admitted that the payment was made. He now accepted that the company had been insolvent at that time.

 

With regard to the offer to pay £5,000, not even the defender had said in his evidence that he had stated this to be an interim payment.

 

She submitted that on the question of insolvency, the balance sheet was the relevant factor. Looking at the balance sheets the company was unable to pay its debts as they fell due from 2003 onwards. The defender acknowledged that position. He knew of the balance sheet position. His duties arose therefrom. The issue in the present case was not one of an allegation of a director continuing to trade in the knowledge of the insolvency of the company. That was not the allegation in this case and was a distraction from the correct approach.

 

The two £5,000 payments made by the bank may not have been directly instructed by the defender but that was not the point. There was no suggestion that they had been made outwith the terms of any arrangement or authority granted to the bank by the defender. Re Living Images referred to by the defender is a case peculiar to England. Applicable Scots Law is different. Here it was necessary to prove a personal interest and that the payment was made to improve the position of the payee. In the text book, The Law of Corporate Insolvency, St. Clair & Young they discussed the issues of motivation and desire with reference to the case of Re. M C Bacon Ltd [1990] B.C.C. 78, but that was not relevant here. As per Re. Sykes, the conduct should be examined and a view formed. It was not necessary to place the conduct within a particular pigeonhole. The motivation point was misconceived. Intention was not required. All cases should be looked at on their own facts. The case of Re. Keypak could be disregarded as having been a case very much considered on its own peculiar facts.

 

So far as the issue of abrogation of responsibility was concerned, the defender claimed that he relied on Mr Taylor. The extent of that reliance was far from clear. He did not rely on him with regard to the payments received from his wife. He was aware of the position regarding payments outstanding to H M Revenue and Customs and did not rely on Mr Taylor for that. He decided on what to do with the free proceeds. There was nothing to show that he relied on Mr Taylor to make any of the payments.

 

It was not clear the level or extent to which Mr Campbell relied in respect of his illness. His illness had not been one which made him incapable of appreciating his responsibilities. His illness had not caused or necessitated a reliance on Mr Taylor nor could it excuse his own actings. The cases of Re. Parkhouse and Thornbury illustrate that abrogation could be seen in many forms. The Thornbury case was the closest to the present action. Abrogation of responsibility in itself could be a basis for a finding in a case such as this. Accordingly, the pursuer's position was that there was no relevant reliance on Mr Taylor as a result of the illness of the defender. In any event the duties which he had breached were non delegable. If they were not discharged that amounted to abrogation.

 

Defender's further response

Mr Sandison accepted that the test referred to in the St Clair/Drummond book was an English one, but how the approach in Scotland may be defined it remained a requirement to show that the party was blameworthy. The court should focus on the general authorities. There required to be knowledge and an intention to benefit. The question remained was the payment intended to benefit the recipient.

 

My decision

This is a summary application brought by the relevant government department against an individual seeking a Disqualification Order under the Company Directors Disqualification Act 1986. A very substantial amount of evidence and submission was led over a total period of eight days. A substantial part of that evidence related to background and contextual matters. I do not think it necessary to make detailed findings on the pursuer's submission that certain matters were not subjected to cross examination, nor on the defender's objections to certain passages of evidence on the grounds of relevancy. Neither of these points have a material bearing on the outcome hereof. In a case such as this it is very difficult to exclude evidence where there is, at least on one view, a requirement to set the defender's actings in their proper context. In assessing this Application it is appropriate and necessary, as accepted by the pursuer, to focus on the specific allegations on which the pursuer founds his case. Those allegations are set out in Articles 11, 12 and 13 of condescendence.

 

It is the defender's position that he has been targeted in these proceedings due firstly to his status as a Chartered Accountant and Insolvency Practitioner and also because it was H M Revenue and Customs whose debt remained unpaid. This may well be the case but it does not affect the way in which the court should approach its decision.

 

In assessing the witnesses who gave evidence in this case I formed the view that the Crown witnesses were largely credible and reliable. I felt that the evidence of Mr Taylor, whilst on certain occasions slightly guarded in respect of his own role in the running of the company, was generally truthful and could be relied upon. The evidence of Mr Bennett, Mr Palmer, Mr Fyfe and Miss Wright was also credible and reliable. All of these witnesses were hampered to a degree by the difficulties arising from the time scale involved. Their recollections were far from perfect but their evidence was satisfactory. Mr Bodie's evidence was less helpful. He was somewhat vague and his memory was clearly most affected by the passage of time.

 

By contrast, I did not find the defender's evidence to be entirely satisfactory. Much of his evidence was guarded and there were certain elements of his evidence which I simply did not accept. I also felt that, notwithstanding his counsel's submission that hindsight should not be applied to the facts, the defender himself had done so and at times presented his evidence in a disingenuous manner. He adopted a somewhat shifting position between the corporate and personal positions. The evidence of Mrs Campbell, whilst generally credible, was affected by her wish to support her husband and her recollection and interpretation of certain facts was affected in this way.

 

It is not part of the pursuer's case that the defender should be blamed for continuing to trade whilst supporting his company with monies recovered and due to be paid over to H M Revenue and Customs. There was significant adverse comment about this but it cannot be a factor in the final decision. The case requires to be considered, as pleaded, on the basis that H M Revenue & Custom's debt was no different from the debt of any other trade creditor.

 

Bearing that in mind and the focussed allegations in this application, there is no directly relevant criticism of the operation of the company up to the point of sale of the company's property. The company kept proper records, made appropriate returns and co-operated, when asked, with the authorities. When Mr Campbell decided, for whatever reason, that the company should cease trading he appears initially to have adopted a sensible and acceptable approach on the view, which perhaps with hindsight was unduly optimistic, that the sale of the company's principal asset, the office building, would provide sufficient funds to clear all company debts. His suggestion that he was carrying on the business for the benefit of the employees was not particularly convincing but his decision to avoid the substantial costs of voluntary winding-up did seem sensible and appropriate. This approach or "game plan" was derailed when the sale which was effected achieved a significantly lower price than he had anticipated. It was at this point that his actings became open to direct criticism exhibiting, at best for him, a reckless indifference and when his decisions demonstrated a clear lack of probity.

 

Mr Campbell deserves immense sympathy for the illness which he has encountered. I fully accept that it is quite impossible for those of us who have not encountered such illness to understand the nature and effect that such diagnosis and treatment might have on any other individual. I have no difficulty in accepting the evidence of Mr Campbell and his wife that this illness had a dramatic effect on him and resulted in his losing focus on, and perhaps enthusiasm for, his business ventures. I fully accept that the operation of this company and his other companies and interests would have become a matter of low priority. It is not possible, on the evidence which I heard, to come to a view as to the overall effects of Mr Campbell's illness on his business operations. It may well be that the illness was the principal reason for the failure of this company and, in particular, the failure of the speculative ventures which the company was created to support. It certainly seems to have prevented his pursuing these projects to a conclusion. At the point when the directly relevant decisions were made the defender had returned to working as evidenced by his attendance at meetings abroad in December 2005.

 

I am entirely satisfied that at no point did Mr Campbell relinquish control of the company. He undoubtedly showed less interest in the company and spent less time dealing with its affairs. He took steps to reduce his level of involvement with day-to-day matters, both in his approach to Mr Taylor and to the bank. In my view his general instruction to the bank, regarding transfers between accounts was of a more personal and wider nature relating to his multiplicity of accounts rather than treatment of this company's particular accounts. It is clear that Mr Taylor was never in control of the company. He was a director and as such had certain authority. Even during the most critical times of the defender's illness, Mr Taylor still deferred to the defender for decisions on major matters. It was the defender who, without any reference to Mr Taylor, dealt with banking issues. It was the defender who, without any prior reference to Mr Taylor, came to a private arrangement with his wife to use funds from her part of their joint account to support the company, although he did discuss with him the agreement to repay Mrs Campbell from the proceeds of sale. It was the defender who used this arrangement to settle company debts which were referred to him by Mr Taylor. It was the defender who, without reference to Mr Taylor, decided to wind-up the company and sell the company's asset, the office building. It was the defender who negotiated and agreed the final sale price again without reference to Mr Taylor. It was the defender who dealt with the issue of work in progress assessing throughout the history of the company the figures to be inserted in the accounts in that regard. It was the defender who decided that certain of these sums were irrecoverable and who instructed Mr Taylor to remove them from the balance sheet. It was the defender's decision to seek to support the balance sheet thereafter with a further work in progress figure in respect of his African broadband project. By contrast, Mr Taylor appeared to have no significant input into the company's major decisions but was tasked with the daily management and running of the company. He was effectively, as he had been during their previous periods of association, the defender's manager.

 

I do not propose to try to analysis the defender's motivation in his actings. It appears to me that he adopted a fairly cavalier approach to the company's difficulties. This approach might, of course, have been influenced by his illness. I did not find the evidence of Mr Campbell and his wife concerning their banking arrangements to be entirely satisfactory. I accept, because it was not challenged by the pursuer, that notwithstanding that the monies used to support the company came from a joint account which in law would be the property of both parties, they regarded that money as being owned by Mrs Campbell. It was also never properly explained why, given that situation, the loans resulting from this arrangement were shown in the company's accounts as being a director's loan by Mr Campbell. In any event, for the present purposes, the issue of ownership of the loan is immaterial. I suspect that the defender believed at the time of his commencement of this arrangement that there would be no problem with repayment as he then anticipated a higher recovery from the planned sale of the building.

 

I do not think there is any doubt that the defender was fully aware of the level of debt due to H M Revenue and Customs. There was substantial evidence to that effect. He had personal dealings with officials from H M Revenue and Customs and had, at least on one occasion, assured them that he planned to meet their debt from the free proceeds of the sale of the property. I do not think that there is any doubt that he was fully aware of the company's financial position at the end of 2005. In November of that year he signed the accounts for the year to March. Those accounts included a figure of £165,000 in respect of work in progress which at about the same time he instructed Mr Taylor to write out of the accounts. It is inconceivable that in these circumstances he was not aware that the company would be insolvent unless he obtained a sale price for the building which would meet all of its creditors' claims. It is also inconceivable that the defender did not know that the sale price which he had negotiated was insufficient to meet the company's creditors.

 

I found the defender's evidence regarding the treatment of the accounting approach to the potential recovery from his African broadband project to be unsatisfactory. The defender had just decided that there was no prospect of recovering monies from his other speculative projects and had instructed their value be written off from the accounts. It would seem that notwithstanding that he had been involved with that project for a period in excess of one year he had not at any stage thought it appropriate to include in the company's accounts any element of value, by work in progress, in respect of that project. He then, in December 2005, at a point when the company was insolvent, chose to include a work in progress figure of £100,000 in respect of this project, which to that point had not been deemed of any value. There was an explanation for this approach namely the outcome of a commitment meeting in mid December. He was able to produce a letter confirming the outcome of that commitment meeting. He later found that commitment letter to be falsified and that the purported backers of the project had ceased trading one year earlier. At that point the work in progress figure was removed from the accounts. There was no attempt by the defender to justify the figure of £100,000. It was simply an estimate. It was, at best for the defender, an act of recklessness to seek to balance the company's accounts with this speculative figure, particularly in light of the failure of the earlier speculative ventures, in circumstances where the inclusion of such a figure would provide a paper balance and would compensate for the lower sale price achieved on the property. This is particularly so where the defender's investigation of the project was such that he was unaware that a major contracting party did not exist. It is important to stress that his actings in this regard are not part of the pursuer's case and do not fall to be taken into account when assessing his conduct as director. Any suggestion that the inclusion of this work in progress figure gave the defender legitimate comfort in making payment to his wife does not sit well with his evidence that he thought the account had been paid. The defender cannot properly rely on this element to support a position that he believed that there would ultimately have been sufficient funds to meet all creditors.

 

His evidence on this episode does support the position that by this point in time he was again actively involved with his business dealings.

 

On receipt of the free proceeds of the sale of the building into the company's bank account the defender, who had agreed with his wife that she would be repaid at that point, but who had also agreed with H M Revenue and Customs that they would be repaid at that point, chose to make payments to his wife but not to H M Revenue and Customs. In evidence he sought to justify the payments on the basis of this agreement without acknowledging that he had a similar agreement with H M Revenue and Customs. I am satisfied on the balance of the evidence that it was the defender who instructed both payments to his wife. The defender made no attempt to make or instruct payments to H M Revenue and Customs. His position was that he assumed that Mr Taylor would have made these payments and would have told him had there been a problem. At best for the defender he was indifferent to whether H M Revenue and Customs were paid whilst, by contrast, acting to ensure that his wife was paid. He did not seek nor receive any confirmation from Mr Taylor to the effect that H M Revenue and Customs had been paid. He was fully aware that they were significant creditors, and that he had advised them that they would be paid from the proceeds of sale. He was aware that the sale price had been significantly less than he had anticipated. He was also aware that, although there was some ambiguity about the situation, Scott Taylor did not have sufficient authority to make payments at the required level.

 

There was some doubt about the defender's knowledge of the payments taken by Scott Taylor in respect of outstanding fees. At no stage did the defender seek to dispute that Taylor was due such fees but he did not accept that he knew they were being recovered. Taylor was not entirely positive on the point but did state that the defender knew that he was recovering his fees. In the whole circumstances of this case, I am satisfied that while the defender may not have taken the trouble to check all of the detail he was aware firstly that Mr Taylor was due money from the company and secondly, that he was taking that money from the available funds.

 

I found the defender's evidence concerning the two bank payments, made in January to one of his personal accounts, to be incredible. The defender manages a joint current account to the extent of knowing which funds therein are his and which are his wife's but claims not to have spotted two payments made into another account, notwithstanding receipt of bank statements to that effect. He further gave evidence that at the point when he made an offer to H M Revenue and Customs he could only afford to pay them £5,000. Whilst I found that piece of evidence to be a little difficult to follow, given the large sums of money paid into the joint account only months before, it is indicative of someone who, if being truthful, had considered his overall banking position with sufficient care to ascertain how much he could afford to pay. That exercise would surely have resulted in his discovering, if he did not already know, the two payments which had been made into one of his personal accounts thus enabling him to increase his offer. I further note that on Record he states that he believed that these two payments had been made to H M Revenue and Customs which contrasts with his evidence that he assumed H M Revenue and Customs had been paid in full as Mr Taylor had not told him otherwise.

 

I have no difficulty in preferring the pursuer's evidence that the defender's offer of £5,000 to stop the liquidation was not presented as some form of first instalment payment. There would perhaps be some room for the view that there had been a misunderstanding but that would involve two different persons both having the same misunderstanding of the defender's position. It would also require me to take the view that the defender, who is clearly an articulate and skilled negotiator, had failed on two separate occasions to communicate the real basis of his offer. He appears to have made no attempt to follow this up with clarification or more detail on any further instalments he intended to offer. I am entirely satisfied that this offer was intended as a one off payment to resolve the matter. It was properly treated as such by the solicitor and officer of H M Revenue and Customs.

 

I am accordingly satisfied that the pursuer has established his critical averments. I do not think the defender can take any great comfort from a phrase "caused or permitted" as it seems to me to be a reasonable averment in a situation where payments were made and the defender refused to admit that he was the instigator of such payments. Even if the defender did believe that further funds would become available from the African project, a fact of which I am not satisfied, a director in his position was still under an obligation to use the available funds to pay the company's creditors pari passu rather than preferring one creditor, his wife against another HM Revenue & Customs.

 

In assessing the defender's credibility I have also taken into account his versions of events included in the liquidator's questionnaire and at the liquidator's meeting. These versions, in certain important respects, do not coincide with his evidence to the court. I accept that on those occasions he was not subject to any form of forensic cross-examination but he was in a situation where he was fully aware of the purpose of the exercise and that it was important that he was as truthful and accurate as possible.

 

I am satisfied that the defender's relevant actings did indeed show a lack of probity at such a level to make him unfit to be concerned in the management of a company.

 

This action proceeds under the Company Directors Disqualification Act 1986. Section 7 of that Act entitles the Secretary of State to make the appropriate application to court. Section 6 requires the court to make a Disqualification Order against any director of an insolvent company where "his conduct as a director of that company makes him unfit to be concerned in the management of a company". Sub-section 4 of that section directs that disqualification will fall between two years and fifteen years. In this case it is not in dispute that the company was, at the material time, insolvent nor that the defender was, at the material time, a director of the company. Section 9 gives guidance on determining unfitness by reference to Part 1 of Schedule 1 to the Act and Part 2 of that Schedule where the company has become insolvent. Of particular relevance to this case are Item 1 "Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company" and Item 8 "The extent of the director's responsibility for the company entering into any transaction or given any preference, being a transaction or preference - (a) liable to be set aside under Section 127 or Sections 238 to 240 of the Insolvency Act, or (b) challengeable under Sections 242 or 243 of that Act or under any rule of law in Scotland". It is clear from the authorities that the statutory list is not to be regarded as exhaustive and that the issue of unfairness is a matter of fact. The issue to be determined is whether the director's conduct fell below the standard of probity and competence required by the court. Re. Sevenoaks Stationers (Retail) Limited: Re. Grayan Building Services Limited.

 

Both sides referred me to a significant number of authorities which broadly set out how the matter is to be determined. The test is an objective one. In making an assessment of conduct the court is entitled to take into account the qualifications and experience of the defender. Re. Landhurst Leasing. He is a Chartered Accountant, Insolvency Practitioner and experienced company director. It is also appropriate to take account of the personal circumstances of the defender which applied at the time of the conduct, Secretary of State for Trade and Industry v Mitchell. It is not a question simply of conduct which might deserve appropriate criticism but whether the director is unfit to be concerned in the management of a company. Re. Cubelock Limited. The conduct must go further than a commercial misjudgement and must display a lack of commercial probity although that can be constituted by gross negligence or total incompetence. Re. Lo-line Electric Motors Limited.

 

It is also clear from the authorities that it is perfectly acceptable for a company director to delegate responsibility to other directors but total abrogation of responsibility can be, in itself, a basis for disqualification Re. Westmid Packing Services Limited.

 

I am obliged to both counsel for their detailed submissions on the applicable legal issues. I do not propose to discuss all of the cases to which they referred but I did find their submissions most helpful. In the case of Re. Grayan Limited, Lord Justice Hoffmann states at page 253 (quoted short)

 

"The court is concerned solely with the conduct specified by the Secretary of State ... It must decide whether that conduct, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate of persons fit to be directors of companies. ... The purpose of making disqualification mandatory was to ensure that everyone whose conduct had fallen below the appropriate standard was disqualified for at least two years, whether in the individual case the court thought that this was necessary in the public interest or not. ... But the court is required to disqualify a director whose conduct has made him unfit as the judge said: "Even though the misconduct may have occurred some years ago and even though the court may be satisfied that the respondent has since shown himself capable of behaving responsibly.""

 

In Re Sykes (Butchers) Limited, Justice Ferris at page 498 states

 

"It appears to me that the action of a director in causing a company to make a payment in a way which, as he knew and intended, would produce a personal advantage for himself, regardless of the interests of other creditors of the company, would at the time have been regarded as morally reprehensible and indicative of a lack of commercial probity."

 

That case has a number of similarities with the present case and I endorse and follow that approach.

 

I was referred to a number of cases on the issue of abrogation. It is entirely appropriate that a company director, particularly one who is the principal director of the company, cannot be excused from his responsibilities by leaving all material matters to the discretion of another director. In Re. Westmid Packing Services Limited, Lord Woolf, Master of the Roles stated (quoted short)

 

"A proper degree of delegation and division of responsibility is, of course, permissible and often necessary, but not total abrogation of responsibility. ... It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities".

 

In Secretary of State for Trade and Industry v Thornbury [2008] B.C.C.768, AT 776, Judge Kaye stated

 

" In each case the court must consider the defendant's personal responsibility. It is not an answer for a director to say that the matter was left to others, unless and except to the extent that it was reasonable to do so."

 

As I have indicated in this case I am not satisfied that there was a total abrogation of responsibility and I am satisfied that it was the defender who made the payments to his wife. This authority and approach, however, negates any defence based on his suggestion that he thought, understood or was not told of any problem with regard to payment of the debt due to HM Revenue & Customs. It was, in the circumstances of this case, a matter which was and remained within his responsibility.

 

There is no issue of gratuitous alienation in this case. It is not in dispute that the monies paid to Mrs Campbell were repayment of advances made to the company. There is however an issue of unfair preference. The established elements of the payments would bring them within the statutory definition of unfair preference, Insolvency Act 1986 section 243, but for the provision requiring the payment to be within six months of the commencement of winding up. In this case they were outwith that period. They were, however, preferences challengeable at common law.

 

"Whatever may be the right of each creditor to force payment of his own debt without regard to others, there can be no doubt that, at common law, a debtor acts fraudulently who, conscious of his insolvency, gives away the funds which ought to be divided among his creditors; or who, after his funds have become inadequate to the payment of all his debts, intentionally, and in contemplation of his failings, confers on favourite creditors a preference over the rest." Bell Commentaries, ii, 226.

 

I am satisfied that the facts in this case fall squarely within that definition. Accordingly, given the defender's responsibility for the payments, his actings are within the terms of article 8 of Part II of Schedule 1 of the 1986 Act and this is a further factor which requires to be taken into account, although, as this is based on the same actings, it is essentially a different route to the same conclusion and which reinforces that conclusion.

 

It was suggested by the pursuer that the defender had acted in such a way as to deliberately delay the commencement of the winding up of the company. Given the common law position there would have been little purpose to such an approach. I am in any event not satisfied that the facts support that contention. HM Customs & Revenue had threatened such proceeding over a sustained period. They had gone through their procedures to the point of instructing solicitors. They could have petitioned for winding up of the company much earlier had they chosen so to do. The defender's offer to settle from the free proceeds of sale of the building was no more than that and did not prevent them from petitioning. At the point of his offer he did hope that there would be sufficient funds to settle with them. It was entirely of their own making that they did not follow the sale closely enough and raise the petition when they were not paid from the proceeds. The defender's offer to make a payment to stop the proceedings was not even a valid distraction as it was immediately refused.

 

With regard to the length of any disqualification, and with reference to the case of Re Sevenoaks Stationers (Retail) Limited, it was submitted by the pursuer's counsel that the circumstances of this case fell within the lower band but that the defender's position as a Chartered Accountant and Insolvency Practitioner was such to raise the level to the middle band. She sought a six year disqualification period. I agree that the conduct does fall within the lower band. As indicated, and operating on the basis of the averments against the defender and nothing else, it seems to me that up until the point of sale of the property the defender's conduct was satisfactory and it is only from that point onwards and, in particular his decision to prefer the creditor related to him rather than the government creditor, that his conduct brings him within the category of a person who is unfit to hold a company directorship. I am not persuaded that his status as a Chartered Accountant and Insolvency Practitioner is something which could properly be regarded as elevating that conduct from one category to another. It seems to me that the important point, at this stage, is the quality of the conduct rather than the expertise or otherwise of the individual. I consider that his status is, as stated, a factor in assessing whether or not his conduct lacked probity but I do not consider it to be a factor which can properly be taken into account when assessing the level of disqualification. In assessing the level within the lower band I consider that I can take into account the circumstances which led up to the situation, the fact that the defender's illness, although not material to his decision making process at the time, may have been a contributory factor in the way in which the situation was allowed to develop, and his previous good character. I also consider that I can take into account the passage of time which has elapsed since the relevant events. Taking all of these factors into account, I consider that the appropriate length of disqualification is one of three years and I have made the order accordingly.

 

Expenses

It was agreed that I should reserve the matter of expenses and I have done so for a hearing in due course.

 

 

 

 

 

Sheriff of Grampian Highland and Islands at Aberdeen.

 

14th June 2010.