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Scottish Court of Session Decisions |
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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Secretary Of State For Trade & Industry, Re Application For A Disqualification Order [2000] ScotCS 280 (9 November 2000) URL: http://www.bailii.org/scot/cases/ScotCS/2000/280.html Cite as: [2000] ScotCS 280 |
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OUTER HOUSE, COURT OF SESSION |
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OPINION OF LORD CARLOWAY in the petition of THE SECRETARY OF STATE FOR TRADE AND INDUSTRY Petitioner
for a disqualification order in terms of the Company Directors Disqualification Act 1986 in respect of James Samson Mitchell Respondent ________________ |
Act : A.F. Stewart; Steedman Ramage WS
Alt : Fitzpatrick; Cochrane & Blair Paterson SSC
9 November 2000
[1] The Company Directors Disqualification Act 1986 (c.46), provides that :
"6(1) The Court shall make a disqualification order against a person in any case where.....it is satisfied -
(a) that he is or has been a director of a company which has at any time become insolvent.....and
(b) that his conduct as a director.....makes him unfit to be concerned in the management of a company.....
(4)..... the minimum period of disqualification is two years and the maximum period is 15 years."
[2] Section 9 requires a Court to have regard to certain particular matters contained in Schedule 1 and these include :
"Part I .....4. The extent of the director's responsibility for any failure by the company to comply with.....(a) section 221 (companies to keep accounting records)
Part II....6. The extent of the director's responsibility for the causes of the company becoming insolvent."
[3] Glendene Protective Services Limited was incorporated in 1974 and traded as an industrial painting and shotblasting concern. The respondent held 50% of its shares with the balance held by another decorating concern. He became a director in 1986 and was the sole director from 1992. The company was the subject of a members' voluntary winding up resolution on 6th September 1996 and was dissolved on 15th April 1998. At the time of the resolution, it was insolvent.
[4] Prior to the resolution, the company had been trading for about two years during which there was no reasonable prospect that its creditors could be paid in full. In each year from 1991 onwards the company's current liabilities exceeded its assets and from 1992 onwards its net liabilities also exceeded its assets. This was shown in the audited accounts for 1991, 1992 and 1993, which the respondent signed in October 1992, June 1994 and October 1994 respectively and in draft accounts for 1994 and 1995, sent to him in March 1996. Despite an increasing turnover, the company made a net loss in each of these years.
[5] The accounts showed, from 1993 onwards, increasing amounts owed to the Government in the form of Value Added Tax, tax due under the Pay As You Earn scheme and National Insurance. In the 1993, 1994 and 1995 accounts, the total amounts owed were : £33,685, £67,455 and £107,919. By the date of the resolution, the sum had grown to £205,976. On the other hand, at that date, there was only one trade creditor and it was owed only £5,571. In October 1994, the respondent had a meeting to discuss the solvency of the company with his accountants. He expressed optimism that the company could trade profitably in the future. It did not. From at least then it was effectively using money owed to the Government as working capital. In 1995 the amount of directors' remuneration increased by 50% to £36,226.
[6] There were failures to comply with the requirements of section 221 of the Companies Act 1985 in respect that a number of business books and supporting vouchers were not kept. The respondent withdrew unexplained cash sums from the company by using a Business Visa card. There were also breaches of section 242 of the Act in that audited accounts of the company were not delivered timeously to the Registrar of Companies.
[7] The respondent was currently the director of Protective & Decorative Surface Coatings Limited, which carries on a business similar to that of the liquidated company. There was no present difficulty with his mental health.
[8] The petitioner averred that the respondent knew from at least October 1994 that the company had no realistic prospect of being able to regain net solvency and to avoid some form of insolvent event. The respondent replied that :
"Ans 5.....between 1987 and 1996 the respondent suffered from impaired mental health. His illness affected his judgment and his ability to cope with his business affairs. It was a symptom of his illness that he would involuntarily become blind to work related imperatives with which he was not coping. He did not consciously choose to do so. His illness developed progressively until late 1994 when he entered an acute phase of breakdown, during which period he was unable to attend to his business affairs at all. It is a characteristic of the condition that major current business problems are not recognised as such. In the circumstances, the respondent does not accept that he "knew or ought to have known" that an insolvent event "was looming".....Between early 1994 and 1996 the respondent was suffering from a depressive illness to such an extent that he was incapax. Most of the serious failings complained of by the petitioner relate to that period. Those occurring prior thereto are of a lesser degree."
These averments were coupled with a general admission of the petitioner's "factual averments" but I was advised that the petitioner accepted that this admission was not intended to cover the petitioner's positive averment about what the respondent "knew or ought to have known". The petitioner denied that the respondent had any form of mental health impairment.
[9] The petitioner averred that the respondent was responsible for failing to remit monies owed to the Government. The respondent replied :
"Ans 6 .....The respondent does not accept that he was "responsible" for the failure to remit monies owed to the Crown. Reference is made to the preceding answer."
Again, despite a general admission of the petitioner's "factual averments" and the precise wording of this response, I gathered that the reply was intended to mean that the petitioner's averment about the respondent being "responsible" for non payment was "denied". In relation to the statutory failures, which the petitioner claimed were caused by him, the respondent averred :
"Ans 7.....The respondent does not accept that he voluntarily or intentionally caused the company to fail to comply with the requirements of the.....statute".
In response to the petitioner's reference to the statutory provisions entitling the Court to make a disqualification order, the respondent stated :
"Ans 9.....the conduct complained of by the petitioner is referable to the period in which the respondent was suffering from increasingly impaired mental health. He has since recovered. The respondent's conduct was not culpable. He is not unfit to be concerned in the management of a company by reason of that conduct....."
I should add here that the petitioner asked leave to amend to include formal denials of the respondent's averments in the answers to the seventh and ninth statements of fact and this was not opposed.
(a) PETITIONER
[10] Counsel for the petitioner maintained that the averments of the respondent quoted above relative to the respondent's mental state were irrelevant and that the Court should therefore, in the absence of any other substantive answer to the petition, grant the prayer of the petition to make an order that the respondent should not :
"without leave of the Court be a director of a company or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a period of not less than two nor more than fifteen years as the Court shall consider proper".
The purpose of the legislation was to protect members of the public and potential creditors of limited companies and to ensure that the directors of such companies complied with the standards required of persons operating with the privilege of limited liability. The Act provided a two stage procedure. First, the Court had to determine whether the conduct was such as to make the director unfit. Secondly, it had to determine the period of the disqualification. In neither part of this procedure was the mental state of the director a relevant consideration.
[11] In relation to the unfitness of the director, the question was whether the conduct complained of fell below the standards of probity and competence appropriate for persons fit to be directors. If it did then disqualification had to follow no matter whether the Court thought that the director was now fit to be a director (In re Grayan Ltd. [1995] Ch 241, Hoffmann LJ at 253-254; Secretary of State for Trade and Industry v Bannister [1995] 2 BCLC 271, Morritt LJ at 276). Although any mental element might be taken into account in determining criminal culpability, that element did not effect the suitability of a person to be a director (Goodman (1993) 14 Cr App R (S) 147, Staughton LJ delivering the opinion of the Court at 151). Indeed, medical unfitness was further evidence of unfitness rather than mitigation as it ought to have prompted the director to resign (Re Stoneacre Ltd. 22 August, unreported (and untraced by counsel) quoted in Mithani : Directors' Disqualification (2nd ed.) para 1679).
[12] The reference to the "extent of the director's responsibility" in the Schedule was to whether a particular director had administrative responsibility within a company's structure for the particular failure rather than to some wider concept of culpability (see e.g. Re Wimbledon Village Restaurant Ltd. [1994] BCC 753, Michael Hart Q.C. at 765; Re Cladrose Ltd [1990] BCLC 204, Harman J. at 207 and 213).
[13] The question of mental capacity was also not relevant to mitigation of the potential period of disqualification (Mithani (supra)). Therefore, the answers to the petition should be repelled and the prayer of the petition granted since there was no other substantive defence to that prayer raised. In relation to the appropriate period, six years was appropriate. The case fell into the lower end of the middle bracket of cases described in In re Sevenoaks Stationers (Retail) Ltd. [1991] Ch 164 (Dillon LJ at 174).
(b) RESPONDENT
[14] Counsel for the respondent moved for a proof before answer. He invited me to repel his second plea but maintained that his other two pleas should remain standing, viz. :
"1.The respondent's conduct not having been such as to make him unfit to be concerned in the management of a company, the prayer of the petition should be refused.
3. The respondent having been ill and incapax when he committed the conduct complained of, any period of disqualification should be assessed accordingly."
Counsel said that there was little disagreement on the law generally. He accepted that the making of a disqualification order was manadatory where the director's conduct at the time made him unfit and that section 9 and the Schedule gave the Court some guidance on the factors to be taken into account. However, the use of the words "the extent of the director's responsibility" in the Schedule did involve considering the degree of blame involved and not just administrative divisions. Any extenuating circumstance would have to be taken into account (In re Grayan Ltd. (supra), Hoffmann LJ at 253-254; cf Re Polly Peck International plc (No. 2) [1994] 1BCLC 574, Lindsay J at 583 on present unfitness; In Re Pamstock Ltd. [1994] 1 BCLC 716, Vinelott J at 736-7).
[15] The issue was ultimately a "jury question" (In re Sevenoaks (supra) Dillon LJ at 176) There was nothing to preclude mental state being an extenuating circumstance. Where issues such as dishonesty were involved, mental state must be a consideration. Of course, it may be that it could be said that a person with insight into a deteriorating mental state should resign from any directorships but that was not the issue focused in this case. It had to be possible to excuse conduct because of some personal circumstance existing at the time of the conduct, such as the director being in intensive care or being the subject of coercion. All the respondent was asking here was an opportunity to put these circumstances forward at a proof.
[16] Counsel also submitted that such circumstances must also be relevant to the period of disqualification. In this case, the period should be the minimum one given the mitigating factors.
[17] In In re Grayan (supra) Hoffmann LJ said (at 253-254) :
".....it will be convenient to consider the nature of the decision which the trial judge has to make. The question is whether, in the words of section 6(1), 'his conduct as a director.....makes him unfit to be concerned in the management of a company'. [Counsel for the defendants] submitted that this required the court to be satisfied that the defendant was at the time of the hearing a person who, for the future protection of the public, should not be allowed to concern himself in the management of a company. For this purpose the court could look at any evidence which showed that despite the defendant's shortcomings in the past, he was unlikely to offend again.
I do not agree. It is true that the subsection uses the present tense "makes" but I agree with Peter Gibson J in In re Glass Ltd [1988] BCLC 329, 332 that this means only that the court has to make the decision on the evidence put forward at the hearing. In that case the judge, rightly in my view, rejected the submission that the court could consider conduct 'other than conduct as a director of the insolvent company or other companies relied upon.....to obtain a disqualification order.' 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 for persons fit to be directors of companies.
.....I am not sure whether in In re Polly Peck.....Lindsay J's discussion of the need to prove present unfitness was intended to express a different view. Some of the examples given by the judge are of extenuating circumstances which accompanied the conduct in question. These are matters which it seems to me it would always be proper for the court to take into account. On the other hand, if the judge meant that the court was concerned with anything other than whether that conduct, taken in its setting, fell below the appropriate standard, I would respectfully disagree."
[18] I agree entirely with this approach. The Court is concerned with measuring whether the conduct founded upon by the Secretary of State makes the director unfit to be concerned in the management of a company. That measurement is done by looking at the conduct at the time and not by reference to circumstances occurring after the conduct and/or existing at the time of the hearing but potentially bearing on the director's current fitness. Thus an improvement in a director's general conduct, expressions of regret or remorse or a proved change in attitude on the part of the director will not avoid a disqualification order. However, the conduct complained of cannot be looked at in isolation, outwith its context or setting. The circumstances surrounding the conduct and existing at the time of the conduct may have to be looked at to determine whether the conduct in its context or setting renders the director unfit.
[19] Personal circumstances applying at the time of the conduct are one example of what may relevantly be taken into account. If, to take one example, a director has been in intensive care at the time of admitted Companies Act defaults, it would be hard to declare him thereby unfit even if he were the responsible, or indeed the only, director. Where issues of honesty arise, as they may do here in relation to the non payment of Government debts, the mental state of the director may be a factor in assessing his commercial probity and general honesty. Whether the personal circumstances ultimately have a decisive or substantial effect on the Court's assessment of unfitness stemming from the conduct will, in a given case, no doubt depend upon the particular facts of that case. Where a director alleges that his mental state has prompted him to do particular things or fail to do others, it may be that the Secretary of State can make out an alternative case that his failure to resign in the face of his having some insight into his failings itself amounts to conduct rendering him unfit (the apparent result in Re Stoneacre Ltd. (supra)). That allegation has not, as yet, been made in this petition. Again, whether such an argument were to succeed or not may depend upon the particular facts and circumstances and, perhaps of some importance, the degree of mental impairment established in evidence.
[20] As Dillon LJ said in In re Sevenoaks Stationers Ltd. (supra) relative to judicial guidelines on the topic (at 176) :
"Such statements may be helpful in identifying particular circumstances in which a person would clearly be unfit. But there seems to have been a tendency, which I deplore.....to treat the statements as judicial paraphrases of the words of the statute, which fall to be construed as a matter of law in lieu of the words of the statute. The result is to obscure that the true question is a question of fact - what used to be pejoratively described in the Chancery Division as "a jury question"."
Approaching it in that manner, the judge hearing the proof will no doubt answer the jury question of unfitness after examining the relevant conduct not on its own but in the context of the surrounding circumstances including the respondent's mental state.
[21] For similar reasons, these circumstances may also be relevant to the determination of the length of the disqualification. The contest on the length of penalty, should unfitness be made out, appears to be between the lowest end of the "middle bracket" and the lowest end of the "minimum bracket" described in In re Sevenoaks Stationers Ltd. (supra, Dillon LJ at 174). That will involve a determination by the Court of whether the case is "serious" or "not very serious". Again, the question and degree of the respondent's honesty or probity may well prove important in selecting both the bracket and the correct point within it. In order to do so, not only the conduct should be considered but also its context and setting.
[22] In all the circumstances, I will : (1) allow the record to be amended by adding at the end of statements of fact 7 and 9 "The respondent's averments in answer are denied"; (2) repel the second plea-in-law for the respondent; and (3) since the petitioner has effectively raised a preliminary plea relative to the respondent's answers, allow a proof before answer on all the averments in the petition and answers.
