Her Majesty's Secretary for Trade and Industry v. Robert Mccartney [2002] ScotCS 114 (19th April, 2002)
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OUTER HOUSE, COURT OF SESSION
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OPINION OF LORD MacLEAN
in Petition of
HER MAJESTY'S SECRETARY OF STATE FOR TRADE AND INDUSTRY
Petitioner;
against
ROBERT McCARTNEY
Respondent:
for
A Disqualification Order
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Petitioner: Bevan; Biggart Baillie
Respondent: Party
19 April 2002
- In this Petition the Secretary of State for Trade and Industry seeks a Disqualification Order under section 6 of the Company Directors Disqualification Act 1986 ("the Act") in respect of the respondent arising out of his conduct as a director of Industrial Engineering Sales Limited ("IES"). Dashrandom Limited was incorporated on 16 September 1993 but changed its name to IES on 21 October 1993. The company traded as industrial engineering wholesalers. Sarah Killoran Gillon was a director of it from its incorporation. The respondent was closely involved in the affairs of IES, certainly from 1997 onwards. He was appointed a director of IES on 22 April 1998 but before being appointed director he was sales manager of the Company. At the material time he was also a director of Kinning Park Engineering Limited ("KPE"). At an EGM of IES held on 12 May 1998 two resolutions were passed. The first was that it had been proved that the Company could not by reason of its liabilities continue its business and that it was advisable that it should be wound up voluntarily. The second was that Mr K M Stewart of K M Stewart & Co., C.A., should be appointed liquidator of the Company. The record of that meeting was signed by the respondent as director of IES.
- A meeting of creditors of IES was held on 26 May 1998 in terms of section 98 of the Insolvency Act 1986. At that meeting the respondent was in the chair. The liquidator, Mr Stewart, reported fully to the meeting on behalf of the respondent. He explained that IES had suffered a downturn in trade and this, together with a dispute with the Company's debt factors, had resulted in "the demise of the Company". After discussion with the directors about the financial position, it was agreed that the best course of action was to place the Company in creditors voluntary liquidation. Subsequently, at a meeting of the directors held on 12 May 1998 it was resolved that Mr Stewart should be appointed liquidator. There was presented to the meeting an Estimated Statement of Affairs ("ESA") disclosing total assets of £59,502 and a total deficiency of £234,934. The deficiency figure contrasted with the figure of £249,172 in the schedule of increasing indebtedness (No.6/15 of process). A dispute arose at the meeting about who should be appointed as liquidator. After submission of the dispute to the Institute of Chartered Accountants, John Charles Geoffrey Readman was appointed liquidator and the relevant papers were handed over to him on 4 June 1998. On 10 June 1998 Mr Readman lodged notice of his appointment on 26 May 1998 with the Company's office (No.6/17 of process). Mr Readman is a partner in Ernst & Young, C.A., but the senior manager on the liquidation was Mr Melvyn Ruddocks, C.A., who is a licensed insolvency practitioner. He gave evidence before me, as also did Mr Tony Hannon, the head of the Company Directors Disqualification Unit in Edinburgh.
- I have set out the contemporary history of the liquidation because the respondent, who was unrepresented but appeared on his own behalf before me, sought on a number of grounds to demonstrate that IES was not at the material time truly insolvent. This may seem on any view a most remarkable submission in view of the fact that as a director he must have accepted in the days, or perhaps weeks, preceding the meeting which was held on 12 May 1998, that IES could not continue its business because of its liabilities for which reason, so ran the resolution, it was advisable to wind up the Company. Further, he must have co-operated with the liquidator, Mr Stewart, in preparing the ESA to the Company's creditors at the meeting on 26 May 1998. In his own evidence, which he gave by way of an oral statement, he was unable to explain why he had not at that time taken a different view of the solvency of the Company. It seems to me, however, that logically I should consider the respondent's submissions before I consider the allegations made about his unfitness to serve as a director, because these allegations might only be relevant if indeed the Company at the time of his actions was insolvent.
- The respondent maintained in his answers that twenty nine of the creditors' claims were either grossly overstated or fraudulent. If that was substantiated, there would be a difference of about £104,000. Mr Hannon said that the respondent's list which he submitted to the DTI had been checked. Two of the claims were found to be in error. The total of these was £21,612. All the remaining claims appeared valid. It was very rare indeed to come across a fraudulent claim. He himself had never encountered one. The more accurate total was £235,272. Besides, even if the respondent were right, there would still be substantial indebtedness and the Company would still be insolvent to the extent of approximately £130,000. Besides, through solicitors acting for the DTI he had offered to meet the respondent and discuss the claims received in the liquidation, but the respondent had failed to respond to that invitation. Mrs Grant, who was a partner in the solicitors firm at the time, spoke to such offers being made to the respondent's representative in the course of 2000. By the time she left the solicitors firm in June 2000, the offers had not been taken up. I accept Mr Hannon's evidence and I prefer it to that of the respondent. Mr Hannon's figure of £235,272, in any event, is very close to the figure in the ESA presented to the meeting of creditors on 26 May 1998. That figure was £234,934.
- Next, the respondent maintained that the trade debtors figure for £24,319.63 in the liquidator's statement of intromissions from 12 May 1998 to 2 August 1999 (No.6/18 of process), bore no relation to the figure of £168,000 in the Company's unaudited accounts prepared to December 1997. Both Mr Hannon and Mr Ruddocks explained, however, that the relevant comparable figure was the book value figure for trade debtors in the ESA, namely £97,383. The figure allowed in the ESA for bad debts was £73,038 or 20% to 25% of the book value figure. The debt factoring company was owed £50,000, so if the ESA were right, about £23,038 might be recovered. In the event, the sum of £24,319.63 was recovered by passing the outstanding balances to a third party for collection. Mr Ruddocks conceded that if he had enlisted the respondent's assistance it might have been that more could have been recovered. But there had been doubt about the respondent's conduct in the management of the Company's affairs, and for that reason his offer to assist had been refused. I found the explanation given by Mr Hannon and Mr Ruddocks convincing, and I accept that in the circumstances £24,319.63 was the best that could be recovered as trade debts. The respondent maintained that he deliberately withheld the collection of debts from January 1998 to the date of the liquidation because the Company was in the process of changing its debt factoring company. This seems to me an extraordinary course to take in the face of mounting debt owed by the Company. It simply does not make sense. I would have thought that the sooner the Company debts were pursued and collected, the better.
- The respondent also attacked the stock figure in the liquidator's statement of intromissions, namely £13,247.60, when in the unaudited accounts for December 1997 it was put closer to £140,000. But, as Mr Hannon pointed out, the unaudited accounts represented a position five or six months earlier when the Company was trading on its existing stock. In a liquidation, stock value was a mere percentage of what it would be valued at in other circumstances. As both Mr Hannon and Mr Ruddocks pointed out, in the ESA the going concern value was assessed at £20,000 and the estimated realisable value was £8,000. These values had, according to Note 1 in the ESA, been supplied by professional auctioneers and valuers. In the result, more was realised than the estimated figure. As before, both Mr Hannon and Mr Ruddocks drew attention to the fact that the respondent, as director of IES, had appeared to approve stock figures in the ESA. I consider the respondent's attack on the figure of £13,247.60 to be unfounded.
- The respondent put to both Mr Hannon and Mr Ruddocks that, if they were correct, it would be very surprising that the Company, apparently trading profitably, could have had such a sudden downturn. Mr Hannon who gave the impression that he had seen it all, said that it was not unusual for companies to decline dramatically in profitability even a short time after being in credit or being solvent according to the balance sheet. Mr Ruddocks agreed that there was nothing unusual about this. When the respondent became a director of IES it was already hopelessly insolvent.
- In Answer 3(e) the respondent said:
"There are I believe two other reasons why this horrendously unbalanced deficit has been wrongly claimed. Firstly the building at 8 Muriel Street owned by IES which had undergone major renovations (assisted by local grants) was subject to a forced sale. As it had been recently valued, I estimate a further £20,000 would have been realised had this not been the case. Secondly, and I believe most damning, is the fact that Ernst & Young who at the very least had been proven to be incompetent, charged £40,000 in fees for the privilege of carrying out the liquidation."
So far as the premises at Muriel Street were concerned Mr Ruddocks said that he had instructed valuers before putting the property on the market. At least two offers had been received. The highest of these was £70,000, but the sale fell through, as he put it. The next offer was £55,000, but the Clydesdale Bank, as security holders for £52,525, realised the security themselves. No funds were available from the sale. As for the fees which were charged by the liquidator's firm, Mr Ruddocks explained that after the first year the firm applied to the court to fix the fee, which was fixed at £30,000 by the court reporter who acted independently. The firm recovered £28,866 and left it at that. In my opinion, neither of these criticisms is well founded. In all the foregoing circumstances I am entirely satisfied that by 12 May 1998, at the latest, IES was insolvent, and that the ESA presented to the creditors of the Company at their meeting of 26 May 1998 was a reasonable and remarkably accurate assessment of the overall indebtedness of the Company.
- I now turn to the conduct of the respondent as a director of IES which is complained against in the petition. Three aspects of that conduct were focused upon. First, it was alleged that after IES had gone into liquidation the respondent drew three cheques in the bank account in the name of the Company. The cheques were dated 26, 27 and 29 May 1998 and were payable respectively to Vivienne Scofield (said to have been a close friend) and to "cash" for the sums of £1,000, £200 and £1,200, respectively. It was further alleged that the respondent authorised the transfer to KPE of which, of course, he was also a director, of the sums of £465.98 and £1,000 respectively, on 29 May 1998 and 3 June 1998. The respondent admitted that he had drawn the cheques and authorised the payments, under the explanation that the sums were withdrawn to pay individuals unfairly caught up in circumstances beyond their control. I am bound to raise a somewhat cynical eyebrow in relation to that explanation. He further explained that he always intended to repay the sums to the liquidator. In the event, the liquidator raised an action against the respondent in the Sheriff Court at Glasgow and on 26 August 1998 he obtained decree against the respondent for the sum of £3,865.98.
- Whatever were the reasons for withdrawing these sums from the Company's accounts, the respondent had no legal authority to do so, as he must have known. Section 103 of the Insolvency Act 1986 provides:
"On the appointment of a liquidator, all the powers of the director cease, except so far as the liquidation committee (or, if there is no such committee, the creditors) sanction their continuance."
Section 9(1)(a) of the Company Directors Disqualification Act 1986 provides:
"Where it falls to a court to determine whether a person's conduct as a director of any particular company or companies 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 or, as the case may be, each of those companies, had regard in particular - (a) to the matters mentioned in Part 1 of schedule 1 to this Act, and (b) where the company has become insolvent, to the matters mentioned in Part 2 of that schedule; and references in that schedule to the director and the company are to be read accordingly."
Part 1 of the schedule applies to all cases. I note that paragraph 2 provides for "any misapplication... by the director of.... any money or other property of the company." I would have thought the respondent was guilty of such misapplication and the fact that decree was granted against him personally in an action for recovery of the money by the liquidator would tend strongly to support that view. I did not however receive any submission to that effect. Rather, Mr Bevan referred me to the dicta of Peter Gibson, J., (as he then was) in re Bath Glass Ltd (1988) 4 B.C.C. 130 at pps.132-3 where his Lordship drew attention to the words "in particular" in section 9(1) of the Act and said:
"The court is required by section 9(1) to have regard in particular to certain matters listed in schedule 1 to the 1986 Act. The words 'in particular' suggest the court is not confined to looking at those matters, and that even if there be some misconduct not specified in schedule 1, the court may properly look at that matter."
He also said at p.133:
"To reach a finding of unfitness the court must be satisfied that the director has been guilty of a serious failure or serious failures, whether deliberately or through incompetence, to perform those duties of directors which are attendant on the privilege of trading through companies with limited liability. Any misconduct of the respondent qua director may be relevant, even if it does not fall within a specific section of the Companies Acts or the Insolvency Act."
In my opinion the withdrawal by the respondent of these sums from the funds of the Company after liquidation, amounts to conduct which makes him unfit to be concerned in the management of a company. His withdrawal of the sums was deliberate. Nor did he repay them to the liquidator as he said he intended to do. The liquidator had to resort to court action to recover from him the sums withdrawn.
- The second aspect of the respondent's conduct complained of was the alleged transfer of IES assets at undervalue to another company of which he was a director. Mr Bevan, however, informed me in his closing submission that he was not insisting upon this allegation.
- The third aspect was alleged to be the granting of an unfair preference in favour of KPE of which the respondent had been sole director since 9 January 1998. It has now also gone into liquidation. It appears that an agreement was entered into on 1 May 1998 between Sarah Gillon on behalf of IES and the respondent on behalf of KPE. It purports to set out sums due by IES to KPE and sums due by KPE to IES. The balance of these sums is said to be £17,296.25 in favour of KPE. If that sum was not paid by IES by 7 May 1997 (which should be 7 May 1998) the ownership of certain plant, it was provided, would transfer to KPE. No payment having been made by that date, the ownership of that plant transferred, with the result that when the liquidator was appointed on 12 May 1998 no such plant appeared in books of IES.
- The first point which must be clearly understood and expressed, I think, is that when the respondent entered into this agreement he must have known or had every reason to believe that IES was insolvent. What, however, makes this transaction more serious is that it undoubtedly understates the indebtedness of KPE to IES. Mr Ruddocks said that on examination of IES's bank accounts he discovered further payments made by IES to KPE between 27 February 1998 and 20 March 1998. The amount in the agreement was stated to be £8,026. That figure was greatly understated. The true figure, conservatively viewed, was £24,699.96. So the balance due by IES to KPE was only £699.29. I agree with Mr Bevan's submission that the respondent's denial that these additional payments had been made flies in the face of the facts and is futile. Accordingly, the plant which was transferred was transferred for a mere £699.
- Section 243(1) of the Insolvency Act 1986 provides:
"Subject to sub-section (2) below, sub-section (4) below applies to a transaction entered into by a company, whether before or after 1 April 1986, which has the effect of creating a preference in favour of the creditor to the prejudice of the general body of creditors, being a preference created not earlier than six months before the commencement of the winding up of the company although making of an administration order in relation to the company."
Section 243(2) provides:
"Sub-section (4) below does not apply to any of the following transactions -
(a) a transaction in the ordinary course of trade or business;
(b) a payment in cash for a debt which when it was paid had become payable, unless the transaction was collusive with the purpose of prejudicing the general body of creditors;".
Mr Ruddocks' evidence was that the transfer of plant from IES to KPE was not a transaction in the ordinary course of business. As it was not a payment in cash for a debt, there could be no question of it escaping categorisation as an unfair preference under section 243(2)(b). In my opinion this was an unfair preference in terms of section 243 of the Insolvency Act 1986. Paragraph 8 of schedule 1 to the Company Directors Disqualification Act 1986 provides that one of the matters applicable for determining unfitness of directors where a company has become insolvent is
"the extent of the director's responsibility for the company entering into any transaction or giving any preference being a transaction or preference -
...
(b) challengable under section 242 or 243 of the Insolvency Act 1986 or under any rule of law in Scotland."
I have no hesitation in finding it established on this head that the respondent's conduct as a director made him unfit to be concerned in the management of a company. What made this matter all the more anxious was the fact that in the course of the hearing of the petition it appeared that the respondent did not understand what an unfair preference amounted to.
- I turn now to consider the appropriate period for which the respondent should be disqualified from acting as a director. As is customary in these matters reference is made to the Opinion of Dillon L.J., in Re Sevenoaks Stationers (Retail) Ltd 1991 All E.R. 578 at pps.581-582. In my opinion the respondent's conduct falls at the upper end of the minimum bracket of two to five years disqualification. I was informed that his co-director Sarah Gillon had accepted voluntarily a period of four years. I see no reason to impose a longer period than that upon the respondent. So I will grant the prayer of the petition and make the disqualification order in relation to the respondent for a period of four years.
