1

In this summary application the pursuer, who is Her Majesty's Secretary of State for Business, Innovation and Skills, seeks a disqualification order under section 6(1) of the Company Directors Disqualification Act 1986 ("the 1986 Act") against Jon Jeromson ("the defender"). The pursuer's motion for decree by default, No 5/1 of process, called before me on 25 February 2013,

2

Ms MacDonald appeared for the pursuer. The defender did not appear nor was he represented. The procedure which led to the pursuer's said motion, was that following an earlier peremptory diet, a proof was fixed and the defender ordained to lodge defences. He has not done so, which resulted in the pursuer lodging a motion for decree by default. A hearing on that motion was fixed for 25 February 2013, which was intimated to the defender. In these circumstances, I accepted that the defender was in default and I considered it appropriate to deal with the application in the defender's absence. I therefore proceeded to hear submissions from Ms MacDonald. [Although my attention was not drawn to it at the hearing, I have since noted that the process includes a copy of a letter by the defender to the pursuer's solicitor, dated 17 January 2013, in which he states that he no longer intends to defend the action and offers an undertaking not to act as a company director for a period of two years.]

3

The facts are fully set out in the application and are, where appropriate, vouched by the productions lodged. The defender was a director of Jonathan Masters Property Limited, a company incorporated under the Companies Acts ("the Company"). The Company was incorporated on 22 February 2007. It traded in the business of public house and property development. It ceased trading in about January 2010 and an interim liquidator was subsequently appointed upon the making of a winding up order by the court on 10 October 2010. The Company is insolvent for the purposes of section 6 of the 1986 Act. It has an estimated deficiency as regards ordinary creditors of £407,167.

4

The defender was appointed as a director on 22 February 2007 and remained in office until the commencement of the liquidation.

5

The company's authorised share capital was £1,000 divided into 1,000 ordinary shares of £1 each. The issued share capital was 100 ordinary shares of £1 issued for cash and fully paid up. The defender was the majority shareholder, holding 51 shares. The remaining 49 shares were held by Diane Jeromson, who is apparently the defender's ex-wife.

6

The conduct of the defender which forms the basis of the application is set out in article 9 of condescendence and is, simply, that the defender failed to deliver to the Company's liquidator adequate books and records of the Company, despite being repeatedly requested to do so. In the event that his failure arose from a failure to so keep those books and records, such failure likewise, it is averred in article 10, rendered him unfit to be a director.

7

Articles 11 to 15 contain averments about the detriment caused by the defender's failure to deliver books and records. I do not propose to repeat those averments in detail. The essence of them is that the liquidator was hampered in her administration of the Company's estate, and in particular was unable to verify whether certain transactions were bona fide or not. Those transactions comprised, in the main, payments to Diane Jeromson totalling £214,000, and also included other payments to or for the benefit of the defender's son and what appeared to be other associates. Those payments were made at a time when other creditors were going unpaid. The defender attended a meeting with the pursuer's solicitor on 13 July 2012 when he sought to answer enquiries of him in relation to the various payments. He stated that the payments to Diane Jeromson were repayments of a loan made to him (sic) in 2006, £41,160 of which was payment for a racehorse. He no longer had the horse. He was unable to confirm which account the funds were paid into by Diane Jeromson. He also averred that the other payments under investigation were repayments of loans, but could not explain why there were no records of the loans having been made to the Company in the Company bank statements or Company accounts.

8

Ms MacDonald was at pains to point out that the pursuer was not in a position to aver positively that the payments were not bona fide payments for the benefit of the company. However, there was a whiff of suspicion about them, which required explanation and investigation. The pursuer did not regard the defender's explanations, as recorded in the pursuer's solicitor's file note no 2/1/33 of process, as satisfactory. The failure to make available the Company's books and records rendered further investigation impossible. She also submitted that even if the loans had been made, as the defender had alleged, no explanation had been forthcoming as to why those creditors had been repaid at a time when other creditors were going unpaid. She was also careful to draw my attention to the fact that the defender's previously stated position was that he had delivered all accounting records to a previous employee of the liquidator. However, that was denied and that position had not been put forward in any defences lodged by or on behalf of the defender.

9

Against this background Ms MacDonald told me that the pursuer sought a disqualification order for seven years against the defender. By not providing the books and records sought, when they were of obvious critical importance, the defender had demonstrated unfitness to be a director.

10

The material statutory provisions are as follows. In section 6(1) of the 1986 Act it is provided:

6(1)

"The court shall make a disqualification order against a person where, on an application under this section, it is satisfied-

(a)    

That he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently); and

(b)    

That his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company."

11

Section 6(2) provides that a company becomes insolvent if (inter alia) it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up, and further provides that

"references to a person's conduct as a director of any company or companies include, where that company...has become insolvent, that person's conduct in relation to any matter connected with or arising out of the insolvency of that company."

12

Section 9(1) provides:

"Where it falls to a court to determine whether a person's conduct as a director of any particular company...makes him unfit to be concerned in the management of a company, the court shall, as respects his conduct as a director of that company... have regard in particular -

(a)    

to the matters mentioned in Part I of Schedule 1 to this Act, and

(b)    

where the company has become insolvent, to the matters mentioned in Part II of that Schedule..."

13

Part I of Schedule 1 lists matters to be taken into account in all cases. These include, read short, the extent of the director's responsibility to keep accounting records. Part II of the schedule lists the matters applicable where the company in question has become insolvent, which include the extent of the director's responsibility for the company entering into any transaction or giving any preference which is liable to be set aside as a gratuitous alienation or unfair preference.

14

Ms MacDonald submitted that the defender was unfit to be concerned in the management of a company and that, consequently, a disqualification order must be made. As regards the length of the order, Ms MacDonald founded upon In Re Sevenoaks Stationers (Retail) Ltd 1991 Ch 164. In that case, the Court of Appeal endorsed the division of the potential 15 year disqualification period into three brackets, as follows: (i) the top bracket for periods over 10 years should be reserved for particularly serious cases, including cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again; (ii) the minimum bracket of 2 to 5 years' disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious; (iii) the middle bracket of 6 to 10 years' disqualification should apply for serious cases which do not merit the top bracket. Ms MacDonald submitted that the present case fell at the medium range of the middle bracket and that the appropriate period was one of seven years. As regards other case law, she advised me that she had been unable to find any case directly in point, where the sole ground of disqualification was a failure to deliver, or to keep, accounting records. However, she referred to the following cases where such a failure did feature as one of the factors relied upon: Secretary of State for Trade and Industry v Arif [1996] BCC 586 (in which a disqualification order of seven years was made); Re Tansoft Ltd [1991] BCLC 339 (seven years); Re Galeforce Pleating Co Ltd [1999] 2BCLC 704 (nine years); and Re Firedart Ltd [1994] 2 BCLC 340 (six years). As Ms MacDonald acknowledged, in all of these cases, at least one other failure on the part of the director was also taken into account in fixing the period of disqualification.

Discussion

15

I am satisfied that the defender was a director of the Company, and that the Company became insolvent at a time when he was a director. The condition in section 6(1)(a) of the Act is therefore met.

16

The next question in relation to the defender is whether his conduct as director of the Company makes him unfit to be concerned in the management of a company. I am satisfied that his conduct as director does make him so unfit. He has failed either in his duty to keep proper accounting records, or to deliver the accounting records to the liquidator. The failure to do so has severely impacted upon the liquidator's ability to investigate the payments under investigation. On any view, there is clearly a question mark over the bona fide nature of those payments. There has been a clear breach of the standards of commercial morality and the public clearly require protection from the defender.

17

It follows that by virtue of the terms of section 6(1) of the 1986 Act, I am bound to make a disqualification order. The only remaining question is the length of the disqualification period.

18

While Ms MacDonald made it clear that she was not in a position to aver fraud on the part of the defender, and I approach the case on that basis, nonetheless, I consider it legitimate to view the defender's failure to keep or deliver records in the light of the transactions which the liquidator was obliged to investigate, being transactions which on the face of it might well have been either transactions which were not bona fide transactions for the benefit of the company, or unfair preferences to a creditor at a time when other creditors were not being paid. Indeed it is difficult to see any more favourable explanation for the defender than the latter of these two possibilities. The defender's past explanation of the transactions, at a meeting with the pursuer's solicitor, as recorded in the file note No 2/1/33 of process, is far from satisfactory and included, for example, the statements that he regarded the money in the company bank account as his own, and that the payments to Diane Jeromson were repayments of a loan to him, which loan may have been paid into the company bank account. Even if there is some innocent explanation, not so far advanced by the defender, the simple fact of the matter is that further investigation by the liquidator is impossible due to the defender's failure to keep or deliver records, and the company and its creditors have been deprived of any opportunity which might have otherwise have been afforded the liquidator to seek to recover some or all of the sums involved in the suspect transactions would have been recoverable. I therefore proceed on the basis that the failure to keep or deliver accounting records has had a serious detrimental effect on the company and on its creditors. I am also entitled to have regard to the extent of the shortfall.

19

Against that background, I now turn to consider the authorities to which I was referred. In Secretary of State v Arif [1997] 1 BCLC 34, a disqualification order of seven years was made in respect of a director who was responsible for a failure to maintain adequate accounting records combined with the reckless unsecured lending of substantial sums (£1.8m) to associated companies. It is important to note that in that case, too, there was no hint of dishonesty or misappropriation by the director. Rather, the court proceeded on the basis that the statutory machinery put in place for the protection of creditors of limited companies had been frustrated by the failure of those responsible for the affairs of those companies to fulfil their obligations. In Re Tansoft [1991] BCLC 339, where a period of seven years was also selected following many breaches of his fiduciary duties by the director in question, Warner J made it clear at page 357 that compliance with the duty to maintain records was not a mere formality and that a failure to observe that requirement was in itself serious, also stating that those dealing with limited companies and others concerned with their affairs are entitled to have access to the information that those documents should contain and it is important that they should have such access. Similar comments were made by Arden J in Re Firedart Ltd [1994] 2 BCLC 340, at page 351, where he referred to the importance of accounting records so that the officers of a company might make business decisions based upon reliable information. In that case, the company had also traded whilst insolvent and the director had caused payments to be made to himself and his wife by way of remuneration and benefits which exceeded what the company could be expected to pay. He was disqualified for six years.

20

The cases make clear that a failure to maintain books and records is a serious failure in itself. I regard the defender's failure in this case as particularly serious, having regard to the amounts of the transactions not recorded and his apparent inability, at interview, to distinguish between company assets and his own. I am therefore content to accept Ms MacDonald's submission that the case falls within the mid-range of the middle category. The case does not belong to the most serious category of offences but, equally, it is far from being capable of being described as not serious. Every case must of course turn on its own facts but given the factors just mentioned, and the amount of the shortfall, I consider that the defender's failures can be placed on a par with those of the director in Arif and categorised as slightly more serious than those of the director in Firedart. I am therefore content to accept Ms MacDonald's submission that the appropriate period in the present case is one of seven years, and I have so ordered.

21

The application having been successful, and a significantly longer period of disqualification imposed than the defender was willing to concede by undertaking, I have found the defender liable in expenses.