Secretary of State for Trade and Industry v. Ferrier & Ors [2003] ScotCS 246 (25 September 2003)

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Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Secretary of State for Trade and Industry v. Ferrier & Ors [2003] ScotCS 246 (25 September 2003)
URL: http://www.bailii.org/scot/cases/ScotCS/2003/246.html
Cite as: [2003] ScotCS 246

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OUTER HOUSE, COURT OF SESSION

P103/01

P97/01

OPINION OF LORD MACKAY OF DRUMADOON

in the Petitions of

HER MAJESTY'S SECRETARY OF STATE FOR TRADE AND INDUSTRY

Petitioner;

against

MICHAEL GEORGE FERRIER and RAYMOND BROWN

Respondents:

for

Disqualification Orders in terms of the Company Directors Disqualification Act 1986

________________

Petitioner: Wright, Q.C., S. Wolffe; Biggart Baillie.

First Respondent: Ross; Bennett & Robertson

Second Respondent: Party

26 September 2003

Introduction
[1] In October 1999, the Petitioner raised the present petitions proceedings against the Respondents. In each set of proceedings, the Petitioner applies for a Disqualification Order, under the provisions of section 6 of the Company Directors Disqualification Act 1986 ("the 1986 Act"), in respect of one of the Respondents. These applications for Disqualification Orders arise out the Respondents' service as directors of a limited company known as Uppa Crust (South) Limited ("UCS").

[2] On 5 July 2001, a Hearing on the Petition and Answers was allowed in both sets of proceedings. The Hearings were conjoined and took place before me. Evidence was heard over thirteen days. Over two subsequent days, I received oral submissions from the parties. During those two days of submissions, reference was made to a number of documents, setting out proposed findings in fact and written submissions, which the parties had prepared. I am grateful to counsel and to Mr Brown, the second Respondent, who appeared on his own behalf throughout the Hearing, for the efforts that were put into the preparation of those documents. The documents have proved to be of assistance to me, in assessing the oral evidence and the extensive documentary productions that were placed before me during the Hearing. Whilst the detailed terms of those documents have in certain respects added to the complexities of the factual issues that arise, the contents of the documents have left me in no doubt as to the respective positions of parties in relation to the issues that are before me for my decision. The Hearings having been conjoined, it is a matter of agreement that I should issue one Opinion, covering both sets of proceedings.

[3] As I have indicated, these proceedings arise out of Mr Ferrier and Mr Brown having served as Directors of Uppa Crust (South) Limited. The limited company that came to be known as Uppa Crust (South) Limited ("UCS") was incorporated on 22 June 1995. Mr Ferrier was a Director of UCS between 5 July 1995 and 14 April 1997. He was also Chairman of UCS between the same dates. Mr Brown was a Director of UCS between 5 July 1995 and 25 September 1997. Mr Brown demitted office as a Director of UCS with effect from 25 September 1997, although it was established during the evidence that Mr Brown had given the Board of UCS notice of his wish to resign as a Director of that company on 11 June 1997 and had left the employment of the company during August 1997. The evidence I heard has made clear that Mr Brown was not personally responsible for any delay there may have been in intimating to the Companies Office his resignation as a Director of UCS.

The Respondents
[4] Mr Ferrier is 62 years of age. He is a Chartered Accountant and a Fellow of the Institute of Cost and Management Accountants. For over thirty years he has held a variety of positions in public and private companies, including a period of several years when he served as a director of Seaforth Maritime Limited. Since the mid-1980s, Mr Ferrier has invested in property and a number of private companies. Those investments have normally been effected through the medium of a privately owned company, Ferrier Holdings Limited. The investments have enabled Mr Ferrier to provide financial and managerial support to other companies, which, when the companies in question prospered, has brought financial benefit to Mr Ferrier. It is clear that before he became involved with UCS, Mr Ferrier had extensive experience in the governance of a large number of companies, both large and small.

[5] Mr Brown is aged 53. He has been employed in industry and commerce for approximately thirty years. After he left university, he initially worked abroad. He returned to Scotland during 1998. At that time Mr Brown set up a carpet retailing business, which he sold after 5 years. Mr Brown then set up an office cleaning business, which he eventually sold to Nevis Group Limited ("Nevis"), with whom he went to work. During 1994 Mr Brown became a Director of Uppa Crust Limited, a subsidiary company of Nevis. Despite the fact that Mr Brown has been in regular employment, since he left university, it is clear from the respective careers of Mr Ferrier and Mr Brown and from the evidence that they gave, that Mr Brown does not have the same knowledge, understanding and experience of corporate affairs and finance as Mr Ferrier does.

Undertakings given by other Directors of UCS
[6] When the present proceedings were commenced, the Petitioners also initiated similar proceedings against two other former Directors of UCS, James Anderson Clark and Gordon McRae Hope. Mr Clark and Mr Hope were Directors of UCS between 5 July 1995 and 25 September 1997. Both Mr Clark and Mr Hope defended the proceedings taken against them. On 15 April 2002, however, they gave separate undertakings to the Petitioner, in accordance with the provisions of section 1A of the 1986 Act. Those undertakings were to the effect that Mr Clark and Mr Hope would not, amongst other things, serve as a director of a company for a period of 21/2 years.

Law
[7] Sections 1(1), 6 (1), (2) and (4), 7(1), 9(1) and Schedule 1 of the 1986 Act are in the following terms:

"1.-(1) In the circumstances specified below in this Act a court may, and under section 6 shall, make against a person a disqualification order, that is to say an order that for a period specified in the order -

(a) he shall not be a director of a company, act as receiver of a company's property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court, and

(b) he shall not act as an insolvency practitioner.

.....

6.-(1) The court shall make a disqualification order against a person in any case 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.

(2) For the purposes of this section and the next, a company becomes insolvent if -

(a) the company 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,

(b) an administration order is made in relation to the company, or

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

.....

(4) Under this section the minimum period of disqualification is two years, and the maximum period is 15 years.

.....

7.-(1) If it appears to the Secretary of State that it is expedient in the public interest that a disqualification order under section 6 should be made against any person, an application for the making of such an order against that person may be made -

(a) by the Secretary of State, or

(b) if the Secretary of State so directs in the case of a person who is or has been a director of a company which is being wound up by the court in England and Wales, by the Official Receiver.

.....

9.-(1) 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, have 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 II of that Schedule;

and references in that Schedule to the director and the company are to be read accordingly.

.....

SCHEDULE 1

MATTERS FOR DETERMINING UNFITNESS OF DIRECTORS

PART 1

MATTERS APPLICABLE IN ALL CASES

1. Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company.

2. Any misapplication or retention by the director of, or any conduct by the director giving rise to an obligation to account for, any money or other property of the company.

3. The extent of the director's responsibility for the company entering into any transaction liable to be set aside under Part XVI of the Insolvency Act 1986 (provisions against debt avoidance).

4. The extent of the director's responsibility for any failure by the company to comply with any of the following provisions of the Companies Act 1985, namely -

(a) section 221 (companies to keep accounting records);

(b) section 222 (where and for how long records to be kept);

(d) section 352 (obligation to keep and enter up register of members);

(e) section 353 (location of register of members);

(f) section 363 (duty of company to make annual returns);

(h) sections 399 and 415 (company's duty to register charges it creates).

5. The extent of the director's responsibility for any failure by the directors of the company to comply with -

(a) section 226 and 227 of the Companies Act 1985(duty to prepare annual accounts), or

(b) section 233 of that Act (approval and signature of accounts).

5A. In the applications of this Part of this Schedule in relation to any person who is a director of an investment company with variable capital, any reference to a provision of the Companies Act 1985 shall be taken to be a reference to the corresponding provision of the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996 or of any regulations made under regulation 6 of those Regulations.

PART II

MATTERS APPLICABLE WHERE COMPANY HAS BECOME INSOLVENT

6. The extent of the director's responsibility for the causes of the company becoming insolvent.

7. The extent of the director's responsibility for any failure by the company to supply any goods or services which have been paid for (in whole or in part).

8. The extent of the director's responsibility for the company entering into any transaction or giving 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 1986, or

(b) challengeable under section 242 or 243 of that Act or under any rule of law in Scotland.

9. The extent of the director's responsibility for any failure by the directors of the company to comply with section 98 of the Insolvency Act 1986 (duty to call creditors' meeting in creditors' voluntary winding up).

10. Any failure by the director to comply with any obligation imposed on him by or under any of the following provisions of the Insolvency Act -

(a) section 22 (company's statement of affairs in administration);

(b) section 47 (statement of affairs to administrative receiver);

(d) section 99 (directors' duty to attend meeting; statement of affairs in creditors' voluntary winding up);

(e) section 131 (statement of affairs in winding up by the court);

(f) section 234 (duty of any one with company property to deliver it up);

(g) section 235 (duty to co-operate with liquidator, etc.)."

[8] There was no dispute between the parties as to the law that falls to be applied in proceedings of this nature. It was agreed that was helpfully summarised in Paras. [3] - [8] of the Opinion of the Court in Secretary of State for Trade and Industry v Blackwood 2003 SLT 120:

"[3] For this purpose the court is bound, in terms of s 9 of the Act, to have regard in particular (a) to the matters mentioned in Pt I of Sch 1 to the Act, and (b) where the company has become insolvent, to the matters mentioned in Pt II of the Schedule. Part I includes misfeasance or breach of any fiduciary or other duty in relation to the company (para 1), the extent of the director's responsibility for any failure by the company to comply with various provisions of the Companies Act, or any failure by the directors to comply with such provisions (paras 4 and 5). Part II covers, for example, the extent of the directors' responsibility for the causes of the insolvency (para 6) and for the company entering into a challengeable transaction or preference (para 8).

[4] The effect of a disqualification order in terms of s 1(1) of the Act is that, inter alia, the person who is the subject of the order is not to be a director of a company or act as a receiver of a company's property or in any way, whether directly or indirectly, be concerned or taken part in the promotion, formation or management of a company unless (in each case) he has the leave of the court.

[5] Before coming to the circumstances of the present case it is convenient for us to note a number of points which are well recognised.

[6] It is not in dispute that Sch 1 to the Act does not exhaust the matters on which a disqualification order may be founded. It is also not in dispute that the fact that a director had caused or permitted the company to trade where there was no reasonable prospect of its creditors being paid in full, does not necessarily mean that he is 'unfit to be concerned in the management of a company'. If, however, he is unfit, a disqualification order for at least the minimum length of two years is mandatory (In re Grayan Building Services Ltd (in liquidation)).

[7] The Act does not lay down any test as to what constitutes such unfitness. Whether the conduct of the director is sufficiently serious to merit that description plainly depends on the circumstances of the particular case, whether it is regarded as a question of fact (In re Sevenoaks Stationers (Retail) Ltd per Dillon LJ at [1991] Ch, p 176) or as a question of mixed fact and law (Grayan Building Services Ltd per Hoffman LJ at [1995] Ch, p 254). However, it is useful to bear in mind a number of significant statements as to what is or may be involved in unfitness. In Grayan Building Services Ltd Hoffman LJ observed at p 253: 'It [the court] 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.' In Re Dawson Print Group he said, as Hoffman J, at [1987] BCLC, p 604: 'There must, I think, be something about the case, some conduct which if not dishonest is at any rate in breach of standards of commercial morality, or some really gross incompetence which persuades the court that it would be a danger to the public if he were to be allowed to continue to be involved in the management of companies, before a disqualification order is made.'

[8] It follows that it is not enough that there has been ordinary commercial misjudgment (Sevenoaks Stationers (Retail) Ltd, per Dillon LJ at p 176) or mere mismanagement (In re McNulty's Interchange Ltd, at [1989] BCLC, p 712), and that not every breach of duty or impropriety calls for a disqualification order (Re Deaduck (In Liquidation) and Re Wimbledon Village Restaurant Ltd). If, on the other hand, a director knew or ought to have known that there was no reasonable prospect of the company avoiding going into insolvent liquidation, he may well be held to be unfit (Secretary of State for Trade and Industry v Creegan, per Sir Martin Nourse at [2002] 1 BCLC, p 1010). This is particularly the case where he must actually have known this to be the position (Re Cargo Agency Ltd)."

[9] Senior counsel for the Petitioner acknowledged that, in proceedings of this nature, and subject of course to the provisions of section 9 of the 1986 Act, the Court is confined to the particular allegations, as to the conduct of the Respondent, of which the Petitioner has given notice. Senior counsel accepted that it was not open to the Court to take account of allegations as to conduct that had not been pled against a Respondent. Senior counsel acknowledged that, if particular allegations as to the conduct of an individual Respondent are established, the Court is then required to consider whether that conduct makes the Respondent unfit to be concerned in the management of a company. If the Court reaches the view that the conduct complained of does fall to be so characterised, then the Court has no alternative but to make a Disqualification Order. Reference was made to Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164, per Dillon L.J. at 176 A-G and Re Grayan Building Services Limited [1995] Ch. 241, per Hoffman L.J. (as he then was) at 253C-254F, Henry L.J. at 257F-258B and Neill L.J. at page 258C.

[10] Senior counsel for the Petitioner also acknowledged that whilst conduct that demonstrates a lack of commercial probity will generally be regarded as sufficient to render an individual "unfit" to be concerned in the management of a company, ordinary commercial misjudgement will not. It was, however, submitted that in a case such as the present, in which one of the allegations made is that the Respondents caused a company to continue trading, whilst that company was insolvent, it was appropriate for the Court to have regard to the need for the directors concerned to weigh up the benefits to be gained from continuing to trade, against the risks of failure, with due regard being paid to the interests of potential creditors. It was submitted that other relevant factors, which the Court should have regard to, included the availability of any capital support for the insolvent company, the extent (or lack) of professional advice taken by the directors of the insolvent company and the existence of any practice, on the part of the directors of the insolvent company, of paying creditors selectively.

[11] Counsel for Mr Ferrier did not seek to challenge the submissions by senior counsel for the Petitioner as to the relevant law. It was stressed on Mr Ferrier's behalf that it was important for the Court to look at the circumstances of the particular application for a Disqualification Order with great caution. It was not enough for the Petitioner to establish that there had been ordinary commercial mismanagement. By reference to Re CS Holidays Ltd [1997] BCC 172 and Secretary of State for Trade and Industry v Creggan and Others [2002] 1 BCLC 99, counsel stressed that the directors of a company do not require to cease trading merely because the company becomes insolvent. It was submitted that those authorities illustrated that before company directors, faced with a situation of corporate insolvency, were liable to be made the subject of Disqualification Orders, it required to be shown that the directors knew, or ought to have known, that there were no reasonable prospects of paying the creditors of the company and avoiding the company going into insolvent liquidation.

[12] Mr Brown, for his part, accepted all of the submissions of senior counsel for the Petitioner as to the relevant law. In the written submissions to which he spoke, Mr Brown stressed the need for the Petitioner to establish "some conduct which if not dishonest was at any rate in breach of standards of commercial morality or some really gross incompetence". Those words are, of course, taken from the Judgment of Hoffman J. (as he then was) in Re Dawson Print Group [1987] BCLC 601, at page 604, and quoted in the Opinion of the Court in Blackwood. It will be noted that in the same passage Hoffman J. went on to refer to the conduct complained about "persuading the Court that it would be a danger to the public if the individual concerned was to be allowed to continue to be involved in the management of companies".

[13] In his written submissions, Mr Brown referred to a number of authorities. In addition to authorities I have already mentioned, reference was made to Re McNulty's Interchange Ltd [1989] BCLC 709, Re Deaduck (In Liquidation) [2000] 1 BCLC 148 and Re Wimbledon Village Restaurant Ltd [1994] BCC 753.

History and corporate structure of Uppa Crust (South) Limited
[14] Nevis Group plc ("Nevis") was the parent company of and a majority shareholder in UCS. During 1995, 1996 and 1997, Mr Ferrier and Mr Clark were the principal shareholders in Nevis, although Mr Hope and an institutional investor, Abtrust, also held minority shareholdings in that company. Nevis had been set up with the intention of identifying, and restoring to profitability, companies that were ailing, on account of a lack of sound management and/or adequate financial resources. Nevis invested in and provided financial and managerial support to such companies.

[15] Throughout 1995, 1996 and 1997, Mr Ferrier, (who also acted as Chairman of Nevis), James Clark, and Gordon Hope were Directors of Nevis. Following his resignation as a director of UCS on 14 April 1997, Mr Ferrier remained a director of Nevis. Hugh Little, a senior employee of Abtrust, served as a director of Nevis during 1996 and 1997.

[16] During the period with which these proceedings are concerned, between 1995 and 1997, Nevis held shares in nine subsidiary companies. Some of those subsidiaries were wholly owned. Others were not. The subsidiary companies engaged in a variety of different types of business. Two of those subsidiary companies, UCS and Upper Crust Limited ("UCL"), were involved in the manufacture and distribution of sandwiches.

[17] As I already indicated, Mr Ferrier was a Director of UCS between 5 July 1995 and 14 April 1997. He was also chairman of UCS between 5 July 1995 and 14 April 1997. Mr Brown, for his part, was a Director of UCS between 5 July 1995 and 25 September 1997. James Clark and Gordon Hope were also Directors of UCS between 5 July 1995 and 25 September 1997. By the end of 1996, Nevis had invested in excess of £100,000 in exchange for shares in UCS. Mr Brown also owned a limited number of shares in UCS.

[18] The limited company that came to be known as Uppa Crust Limited ("UCL") was incorporated in December 1992. Nevis was the parent company of UCL, although, as was the position with UCS, UCL was not a wholly owned subsidiary of Nevis. Mr Brown also owned a limited number of shares in UCL. Between 1994 and 1997, the Directors of UCL included Mr Ferrier, Mr Brown, Mr Clark and Mr Hope. Mr Ferrier resigned as a Director of UCL on 14 April 1997.

[19] From around October 1996 Mr Ferrier and Mr Clark allocated between them responsibility for the management of the various subsidiaries of Nevis. Mr Ferrier took responsibility for UCS and UCL. Thereafter he was more actively involved in the management of UCS and UCL, than had previously been the position. From about November 1996 until 14 April 1997 (when Mr Ferrier resigned as a Director of UCS and of UCL), the executives of UCS reported to Mr Brown, who was the Managing Director of UCS, and Mr Brown was required to report to Mr Ferrier, as the Chairman of UCS.

[20] Throughout the period with which these proceedings are concerned, the bank accounts of UCS and UCL, with the Bank of Scotland, were secured by fixed and floating charges and guaranteed by Nevis. Nevis also banked with the Bank of Scotland. By December 1996, Nevis was balance sheet insolvent.

The businesses of UCL and UCS during 1996
[21] UCL carried on business from premises in Inverurie, Aberdeenshire. The company, which came to be known as UCL, commenced trading in May 1993. In May 1993 UCL had acquired a sandwich business, previously run by Susan and Richard Stott. The Stotts' business had run at a loss. In May 1993, Mrs Stott became a Director of and minority shareholder in UCL. The other shares were owned by Nevis. On 6 January 1994, Mrs Stott was removed from office, as a Director of UCL.

[22] In addition to preparing sandwiches at Inverurie and selling those sandwiches to retail outlets, UCL also set up outlets, from which they sold sandwiches directly to members of the public. Those outlets were located within the offices of large companies in the oil service industry. From those outlets sandwiches were sold to employees of those companies. UCL referred to this part of their trading activities as "the Workshop". UCL continued to trade throughout 1996.

[23] When UCS commenced trading, they did so from premises in Blantyre, Lanarkshire. UCS acquired a sandwich-making business formerly owned by Shepherd Foods Limited ("Shepherds") in 1995. UCS did so shortly before the liquidation of Shepherds. Shepherds had reported a pre-tax loss on trading of about £29,459 for the year to 30/11/94 and as at that date had net current liabilities of about £184,297. Mr Shepherd, who had been involved with Shepherds before that company's liquidation, joined the management of UCS.

[24] As with UCL, UCS' business was limited to the preparation and distribution of sandwiches. The sandwiches were made at Blantyre and distributed from there to retail outlets, including a number of Shell Filling Stations. The sales to the Shell Filling Stations took place in accordance with arrangements laid down in a contract with the Food Service Centre ("FSC"). UCS continued to trade throughout 1996.

Receivership of UCS
[25] In September 1997, Nevis sold the share capital of UCS to David Orr and Alexander McIntyre. By this time Nevis had acquired Mr Brown's shares in UCS. Mr Orr and Mr McIntyre were directors of a company known as United Central Bakeries ("UCB"), a company with whom UCS had been in negotiation for some months. Mr Orr and Mr McIntyre paid £1 for the share capital of UCS.

[26] Within a few weeks of Mr Orr and Mr McIntyre acquiring the share capital of UCS, UCS became the subject of insolvency proceedings. The Bank of Scotland held a Bond and Floating Charge over UCS, dated 4 August 1995. On 21 October 1997, the Bank of Scotland appointed Ewan Alexander, a Chartered Accountant and Licensed Insolvency Practitioner, as Receiver of UCS.

[27] Following his appointment, Mr Alexander commenced an investigation of the financial position of UCS. A Statement of Affairs, relating to UCS, was sworn by Mr McIntyre on 23 January 1998. The Statement of Affairs disclosed that, as at the date of the receivership, UCS had realisable assets of approximately £484,000 and owed debts (i) to the preferential creditors of approximately £57,000, (ii) to the Bank of Scotland of approximately £594,000 and (iii) to the ordinary creditors of approximately £650,000. Mr Alexander, the Receiver of UCS, attempted to sell the business that had been carried on by UCS. He was unable to do so. After the assets of UCS had been realised, the preferential creditors of UCS were paid in full. £321,000 was paid to the Bank of Scotland. The unsecured creditors of UCS received no payments out of the receivership.

[28] Having regard to the provisions of section 6(2)(c) of the 1986 Act, the receivership of UCS requires that, for the purposes of these proceedings, UCS be held to have become 'insolvent'

Summary of allegations against Mr Ferrier and Mr Brown
[29] I should summarise the allegations as to the conduct of Mr Ferrier and Mr Brown on which the Petitioner continues to base her applications for Disqualification Orders. A number of allegations as to the conduct of Mr Ferrier and Mr Brown, which had been included in the Petitioner's written pleadings, were departed from during the course of the Hearing. Those that remain are as follows.

[30] Firstly it is alleged that each of Mr Ferrier and Mr Brown caused or allowed UCS to trade when there had been no reasonable prospects of that company being able to pay its creditors in full. In the pleadings, it is averred, that from about October 1996, or at the latest by February 1997, each of Mr Ferrier and Mr Brown knew, or ought to have known, that UCS was unable to pay its debts in full, as they fell due, and that for the company to trade beyond those dates would be to the detriment of its creditors.

[31] Secondly, it is alleged that both Mr Ferrier and Mr Brown caused or allowed UCS to make an inter-company disposal to UCL, to the detriment of the creditors of UCS. The pleadings on behalf of the Petitioner complained about a number of transfers of funds from UCS to UCL, namely £62,281.32 on 20 May 1997, £32,574.54 on 29 May 1997, £42,912.08 on 17 June 1997 and £148,000 on 25 June 1997. The actual payment of those sums took place on the instructions of Mr Hope. In the Petitioner's written pleadings it was averred that all of those payments had been made when UCS was capitally insolvent and was not paying its creditors in full. During the course of the Hearing, however, senior counsel for the Petitioner accepted that there had been no impropriety in respect of the payment by UCS of the first three of those sums. As far as the fourth of the sums was concerned, senior counsel restricted his complaint to that part of the sum of £148,000 which, he maintained, constituted settlement of £28,000 out of a figure of £79,000, which was payable by UCS to UCL, for the "goodwill" of UCL.

[32] In advancing that particular allegation, as to the conduct of Mr Ferrier and Mr Brown, senior counsel for the Petitioner recognised that the payment of £148,000 had not been made whilst Mr Ferrier remained a director of UCS. It was argued, however, that the payment was made as a consequence of an agreement entered into by the Directors of UCS, on 18 December 1996, to the effect that if the business of UCL was taken over by UCS, UCS would pay UCL £75,000 by way of goodwill. Mr Ferrier was, of course, a Director of UCS on 18 December 1996. The payment of £148,000, on 25 June 1997, followed upon UCL issuing an invoice to UCS dated 30 April 1997, for a total figure of £169,000, in respect of the sale of UCL's "Business and Trade" to UCS. That total figure was intended and understood by Mr Hope to include £79,000 for goodwill. The circumstances in which the figure for goodwill of £75,000, which was discussed on 18 December 1996, had increased to £79,000, by the date of the invoice, were not clarified during the evidence. No criticism was made of the payment by UCS of the other sums that made up the figure of £148,000.

[33] The contention on the part of the Petitioner was that if either or both of those allegations about the conduct of either or both of the Respondents were to be established, then the Court should hold that the conduct in question made the Respondent(s) unfit to be concerned in the management of a company.

Evidence during Hearing
[34] The Petitioner led the evidence of Mr Alexander, the Receiver of UCS, Gordon Hope, and Anthony Hannon, Senior Examiner and Head of the Company Directors Disqualification Unit in Scotland of the Department of Trade and Industry in Scotland. Mr Ferrier gave evidence on his own behalf and led the evidence of Robert Anderson, CA, and Thomas MacLennan, CA. Mr Brown also gave evidence on his own behalf.

[35] Mr Anderson is a highly experienced chartered accountant. In March 1997, he was commissioned by Nevis to undertake a review of the financial affairs of the Nevis Group of companies, including UCS and UCL. That review was commissioned at the instigation of the Bank of Scotland, prior to the Bank determining the extent to which it was prepared to continue providing overdraft banking facilities to Nevis and its subsidiary companies. The Report, which Mr Anderson prepared by the middle of April 1997, was referred to in evidence as the A2B Report. During June 1997, and again in September 1997, Mr Anderson was re-engaged, at the insistence of the Bank of Scotland, to update his assessment of the financial position of the Nevis subsidiaries. Subsequently, in May and June 2002, when acting on the instructions of Mr Ferrier, Mr Anderson prepared two further reports, which dealt with certain of the issues that arise in these proceedings. All three of Mr Anderson's reports were lodged as productions on Mr Ferrier's behalf.

[36] Mr MacLennan is also a highly experienced chartered accountant. He has practised as an insolvency practitioner for many years. He was also instructed by Mr Ferrier to compile a report, in preparation for the Hearing. That report was lodged as a production on Mr Ferrier's behalf.

[37] Having reviewed the evidence before me, I have reached the conclusion that, with the exception of Mr Ferrier, all of the witnesses did their best to give honest, complete and accurate evidence. The witnesses were all speaking to events that happened some years ago. Much of their evidence related to detailed figures in documents that they had not seen for sometime and, indeed, in certain instances, had never seen before. Frequently the witnesses were asked to construe the somewhat cryptic terms in which many of the Minutes and other records of UCS and Nevis had been framed. On many occasions, witnesses were asked to comment upon factual situations about which they had an incomplete knowledge or understanding. For these, amongst other reasons, some of the evidence given by the witnesses was not evidence upon which I have felt able to rely. That was because it was factually inaccurate or because it involved the expression of opinions that were based on a misunderstanding of the relevant facts and, in some instances, of the law. All of those observations apply in particular to Mr Brown, who was, in my opinion, correctly described by senior counsel for the Petitioner as being a conscientious individual, who, when giving evidence, had been "apparently honest and sincere".

[38] There is, however, some force in the criticisms that senior counsel for the Petitioner advanced as to the manner in which Mr Ferrier gave his evidence and about the content of that evidence. Those criticisms included that Mr Ferrier suffered from a selective memory, that he was prone to make assertions that were not be backed by contemporaneous evidence and that he had a tendency to engage in a great deal of rationalisation after the event. Throughout the giving of his evidence, Mr Ferrier sought to argue his case, rather than to answer the questions he was being asked. He put up a dogged defence of everything he had done and he frequently displayed an unwillingness to acknowledge that anyone could legitimately hold a view alternative to the view he was espousing or that there could have been any another possible course of action to the one he had followed.

[39] When answering questions, Mr Ferrier was quick to cite evidence given by previous witnesses, rather than to respond to questions with his own recollection of events or his own opinion. On certain occasions I had the distinct impression that he was seeking to avoid answering questions that touched upon potentially valid criticisms of his behaviour. Mr Ferrier did so by criticising the terms of the question posed or by suggesting that he did not understand the question or by answering a question slightly different to the question that he had been asked. During his submissions, senior counsel for the Petitioner identified certain passages in Mr Ferrier's evidence, which illustrated the criticisms he had advanced. These examples related to Mr Ferrier's evidence about the entry in No. 7/52 of process relating to the payment of £75,000 for goodwill. Those examples were not, however, the only parts of Mr Ferrier's evidence in respect of which I have required to exercise a measure of care in deciding whether, and to what extent, I should accept and rely on the evidence that Mr Ferrier gave.

[40] At this stage I should also deal with certain comments made by Mr Ferrier and Mr Brown, about the manner in which Mr Alexander and Mr Hannon discharged their duties, on the one hand as the Receiver of UCS and on the other as the official, within the Department of Trade and Industry, who had been responsible for the decision to initiate the present proceedings. In summary, the criticism was that neither individual had investigated the affairs of UCS fully and fairly, in Mr Alexander's case, before he reported on the Directors of UCS to the Department of Trade and Industry and in Mr Hannon's case, before he instructed that steps be taken to seek Disqualification Orders against Mr Ferrier and Mr Brown. On more than one occasion during the Hearing, it was necessary for me to point out that these were not the proceedings for formally reviewing any decisions that may have been taken by either Mr Alexander or Mr Hannon. On the other hand, as senior counsel for the Petitioner fully accepted, the extent and nature of the investigations carried out by Mr Alexander and Mr Hannon, prior to their giving evidence, are highly relevant factors in my assessment of the evidence those witnesses gave and, in particular, the opinions they expressed about the conduct of Mr Ferrier and Mr Brown. In that regard, the fact that Mr Alexander saw the projections relating to UCS for the year to 31 December 1997 (No. 7/52 of Process) for the first time, on the morning his evidence began, was obviously highly relevant to my assessment of the opinions he expressed as to whether or not the Directors of UCS ought to have caused and allowed UCS to have continued trading after 18 December 1996.

[41] During the proof I heard fairly detailed evidence about the trading histories and financial positions of UCL and UCS, right up until the appointment of the Receiver of UCS. That evidence was given under reference to a variety of productions, including minutes of meetings of the directors of both companies and monthly management accounts that were prepared and normally made available to the directors of the two companies, approximately three weeks after the particular months to which they related. Unfortunately full sets of such minutes and management accounts were not produced.

[42] Nor, despite repeated encouragement from myself, which commenced on the first day of the proof, was any Joint Minute lodged agreeing the contents of any of the numerous productions or those parts of the chronological history of events that were not in dispute. I do not seek to apportion blame for the fact that no such Joint Minute was lodged. I also recognise that all parties put a considerable degree of effort into the preparation of the written submissions, to which they spoke at the conclusion of the proof. Nevertheless, I am in no doubt that the absence of a Joint Minute prolonged the Hearing. Likewise the absence of a Joint Minute rendered my assessment of the considerable volume of the oral and documentary evidence a more complex exercise than it might otherwise have been.

[43] I shall have more to say about certain of the monthly management accounts in due course. At this stage, it might be helpful to record that each of the monthly management accounts included a gross profit analysis, a budget report and details of the net profit of the company, for the month in question and also for the year to date. The monthly accounts also included an up-to-date balance sheet. In the financial analyses, which formed part of the management accounts, the term "forecast profit/loss" was employed to refer to the predictions that had been made at the beginning of the financial year as to the profit/loss that would arise, on a month to month basis, over the next twelve months. It was accordingly possible to identify from the management accounts of UCS and UCL how the company in question was performing against the forecasts for the financial year in question. In the minutes of Meetings of the Directors, the term "estimated profit/loss" was employed to refer to a revised prediction of the profit/loss that would arise during the current month. These revised predictions were prepared during the months to which they related. The predictions were prepared on a monthly basis, for the Meetings of Directors of UCS and UCL. These meetings were normally held during the third week of each calendar month.

[44] Various minutes of Meetings of the Directors of UCS, UCL and Nevis were lodged as productions by the Petitioner and Mr Ferrier. The style, format and language used in the preparation of certain of those minutes were surprisingly poor. In some instances the same minute covered meetings relating to more than one of the companies. A limited number of the minutes summarised, in a concise and informative manner, the information presented to the meeting, the subjects discussed, the decisions reached and any actions to be taken. But many other minutes did not, to the extent that, in some instances, it was not at all clear what the minute was intended to record as having been discussed and agreed.

[45] Against that background, it was hardly surprising that there emerged during the course of the evidence a measure of dispute amongst the former Directors of UCS as to what had been the purpose of the minutes of Meetings of the Directors of UCS. Mr Hope stated that they were intended to be a summary of what had been discussed. That was disputed by Mr Ferrier, who maintained that the minutes were intended to be action sheets. He maintained that they were not intended to be an accurate précis of what had been discussed or of the reasons for any decisions the Directors had taken.

[46] Despite the summary and indeed cryptic form of the certain of the entries in minutes, all of the Directors of UCS, who gave evidence, frequently sought to rely on such entries in support of their contentions that issues had been fully addressed and discussed during Meetings of the Directors of UCS. On occasion, I found such reliance on the minutes less than persuasive. But whatever the Directors' intentions were as to the purpose of the minutes, I would have expected meetings of directors chaired by an accountant and company director with the experience of Mr Ferrier to have insisted on the preparation and approval of minutes of a far more complete and informative nature than many of the minutes of Meetings of the Directors of UCS that were lodged in process. That is particularly so, having regard to the financial position of UCS throughout the time both Mr Ferrier and Mr Brown were directors of that company and the importance of the issues that ought to have been before the Directors of UCS and the potential consequences of the decisions the Directors required to take.

[47] Poor record keeping is not pled against either Mr Ferrier or Mr Brown as a reason why they are unfit to be further involved in the management of companies. And as I have stressed, it was conceded on behalf of the Petitioner that Disqualification Orders can only be founded on allegations about the conduct of the Respondents of which appropriate notice has been given. Nevertheless, a detailed consideration of the contents of the records of UCS, which were lodged, has been essential to an examination of the allegations that have been pled against the Respondents. There can be little doubt that during the Hearing a great deal of time was spent on seeking to understand what the entries in minutes and other documents of UCS did in fact record and what those entries were intended to mean. Much of that time could have been saved had the minutes been better prepared or had the parties found it possible to enter into a Joint Minute along the lines I have referred to.

Trading History of UCL
[48] As I have already mentioned, UCL acquired the sandwich business at Inverurie, which had previously been owned by Susan and Richard Stott. That business had not been a financial success. After the business was taken over by UCL, Inverurie became the base from which UCL sought to develop its own business of preparing and distributing sandwiches. UCL reported a trading loss for its first year of trading (from 17/12/1992 to 31/12/1993) of £29,234. UCL then reported a trading loss of £60,042, for the year to 31/12/1994 and a loss of £97,922 for the year to 31/12/1995. The management accounts for UCL for the month of December 1996 disclose (i) that UCL had incurred a net loss for that year of approximately £70,000, as against a budgeted profit of £51,295; and (ii) that there was a balance sheet deficit of £108,097.

[49] It is clear, therefore, that UCL never reported a profit for any of the years over which it traded. Whilst there were certain months, in which UCL did achieve profits, during 1996 UCL was balance sheet insolvent. As at December 1996 Nevis regarded its investment in UCL as reducing in value, because UCL was loss-making. During evidence and submission, it was a matter of agreement that UCL could not have continued trading after 31 December 1996. In the absence of some form of reorganisation or amalgamation, receivership of UCL would have been unavoidable.

[50] In the event, no formal insolvency proceedings were ever taken in relation to UCL. As I shall detail in due course, after discussions in late 1996 and early 1997, which involved Mr Ferrier, Mr Brown and others, the business and assets of UCL were sold to UCS. UCL ceased trading in February 1997. UCL's liabilities to all of its creditors, with the exception of Nevis, were paid in full or settled, before UCL was removed from the Register of Companies.

[51] As I have indicated, Mr Ferrier and Mr Brown were directors of UCL throughout 1995 and 1996 and into 1997. So long as UCL continued trading, Mr Brown was involved, on a day to day basis, with the affairs of that company. Over the same period, Mr Ferrier had a regular, albeit less extensive, involvement with UCL. Monthly management accounts were submitted to him and he attended meetings of the Directors of UCL. It is quite clear, therefore, that, throughout 1995 and 1996 and into the early months of 1997, both Mr Ferrier and Mr Brown were well aware of the state of UCL's finances.

Trading history of UCS
[52] Shortly after UCS was incorporated on 22 June 1995, the company acquired a sandwich business, which had been carried on from premises in Blantyre by Shepherd Foods Ltd. As was the position with UCL, UCS' business was that of preparing and distributing sandwiches. The company sought to develop that business out of the business they had taken over from Shepherds. Their efforts to do so did not meet with financial success. During the first six months of trading, from June to December 1995, UCS incurred a loss before taxation of approximately £117,000. The capital of £100,100, which Nevis and Brown had introduced into UCS, had been used up by December 1995 and the balance sheet as at 31 December 1996 disclosed a deficit of £17,248. UCS' Report and Financial Statements for the period between 22 June 1995 and 31 December 1995 were approved by the Directors of UCS at a Meeting on 28 October 1996.

[53] Monthly management accounts and reports were prepared in respect of UCS throughout 1996. The management accounts of UCS for the month to 31 August 1996 disclosed (i) that the sales achieved by UCS that month were about £50,000 less than had been budgeted, (ii) that the sales achieved for the year to date were about £74,500 less than had been budgeted, (iii) that the profit for the month was approximately £16,000 less than the budget figure and (iv) that the net loss for the year to date was approximately £29,000, being greater by about £7,000 than the loss that had been budgeted.

[54] The management accounts and report for 30 September 1996 were produced on or about 21 October 1996. They disclosed (i) that the sales achieved for the month of September were approximately £51,000 less than budgeted, (ii) a net loss for the month of about £3,618, against a budgeted profit of about £14,565, producing an adverse variance of about £18,000 from budget, and (iii) a net loss for the year to date of approximately £18,000. According to the management accounts for the period to 30 September 1996, the net deficit on the balance sheet had increased to £58,301.

[55] The management accounts and reports to 31 October 1996 and 30 November 1996 disclosed similar trends. Those for the month to 31 October 1996 disclosed (i) that a net loss for the month of about £1,888 had been incurred, against a budgeted profit of about £15,393, and (ii) that the net deficit as at 31 October 1996 exceeded approximately £60,000.

[56] The management accounts and report to 30 November 1996 disclosed (i) that a net loss for the month of £19,612 had been incurred, against a budgeted profit of £12,423 and (ii) that the net cumulative loss for the year to date was approximately £44,000, as opposed to a budgeted profit of £19,500, producing an adverse variance from budget of £64,000. As at 30 November 1996, the deficit on the balance sheet exceeded £80,000.

[57] The management accounts and report 31 December 1996 disclosed (i) that UCS incurred a gross loss for that month of £47,965, as against a budgeted profit of £25,570, (ii) that UCS suffered a net loss for that month of £74,560, as against a budgeted loss of £5,700, and (iii) that the net loss for the year was £124,999, as against a budgeted profit of about £13,748, producing an adverse variation of £138,747. The management accounts also disclosed that there had been an increase in the trade creditors of UCS during the course of 1996, from approximately £188,000 to a figure approaching £337,000. As at 31 December 1996 the net deficit on the balance sheet had increased to about £152,244. No audited accounts in respect of UCS, for the year 31 December 1996, were ever prepared.

[58] The management accounts and report in respect of UCS, for the year to 31 December 1996, were placed before the Directors of UCS around the middle of February 1997. When those management accounts and report became available, it was immediately apparent that accounting errors had been made in preparing some of the earlier management accounts during 1996. Those errors and the financial consequences of them were discussed at a meeting of the Directors of UCS, which was held on 13 February 1997, and recorded in the Minutes of that meeting. The errors that came to light in the management accounts for the period to 31 December 1996 raised questions for the management of UCS as to the reliability of the financial information being provided to them and the extent to which reliance could be placed on that information. At a later stage in this Opinion, I shall return to what was discussed during that meeting

[59] It is clear from certain of the management accounts, to which I have referred, that throughout 1996 UCS was trading at a loss. In some months UCS may have done better against budget forecasts than it did in others. But the management accounts continued to report losses. Those accounts must have indicated to the directors of UCS, in fairly clear terms, that it was consistently costing the company more to manufacture their sandwiches than could be recouped from the sale of the sandwiches at the prices at which they could be sold.

[60] A number of witnesses, including Mr Ferrier and Mr Brown, spoke of the difficulties that UCS had experienced in controlling costs. One difficulty was that a substantial proportion of UCS' sales were carried out under the control of an agency, Food Service Centre ("FSC"), which supervised UCS' supply of sandwiches to individual Shell Filling Stations. The terms that FSC was able to insist upon, in respect of those supplies, were in certain respects disadvantageous to UCS. In particular, FSC was able to control the prices at which particular kinds of sandwich could be sold, dictate the range of sandwiches to be supplied to particular filling stations, require the return of unsold sandwiches to UCS and control the choice of suppliers of the raw materials from which the sandwiches were made. UCS, for their part, were required to deliver sandwiches directly to the Shell Filling Stations, who were the individual customers of UCS and to each of whom UCS required to look for payment.

The plan for UCS during 1997
[61] In the months leading up the end of 1996, there was a consistent failure to meet budget forecasts throughout the Nevis Group, and in particular within UCS and UCL. Whilst there had been occasional months, during which profits had been earned by UCS and UCL, the picture, in respect of both companies, was one of increasing losses and increasing balance sheet deficits. Indeed, during the latter part of 1996 the financial position of UCS had become so serious, that, as was the position with UCL, UCS could not continue to trade as before.

[62] During the concluding months of 1996, the Directors of UCS, UCL and Nevis began to address the possibility of amalgamating or consolidating the businesses of UCS and UCL. Neither UCS nor UCL was trading profitably. In the absence of an amalgamation of the business of UCS with that of UCL, or the sale of UCS or its business to a third party, UCS had no future. In evidence, both Mr Ferrier and Mr Brown acknowledged that, without such an amalgamation or sale, it would have been inevitable that UCS would have had to go into receivership.

[63] Those assessments of the respective positions of UCS and UCL, as at late 1996, were shared by Mr Anderson, the chartered accountant, who compiled the A2B Report in April 1997, at the instigation of the Bank of Scotland. Furthermore, as Mr Ferrier conceded during his evidence, had UCS or UCL gone into liquidation or receivership, around the end of 1996, it was likely that the Bank of Scotland would have called up the guarantee that Nevis had granted to them. During 1996, Nevis was experiencing what was referred to in evidence as "considerable financial discomfort". In the event, that remained the position throughout 1997. Had Nevis' guarantee of the bank accounts of UCL and UCS been called up, that would only have added to Nevis' financial problems. Indeed, Mr Ferrier stated that had the guarantee been called up between December 1996 and March 1997, it would have been difficult for Nevis to fund their full obligations under the guarantee, without selling some of its assets.

[64] In these circumstances, it is clear that it was in the interests of Nevis to strive to avoid the insolvent failure of either or both of UCS and UCL. As Mr Anderson's A2B Report subsequently recorded, in April 1997: "Nevis Group's underlying trading position is shown in the projections for the year ending 31 December 1997 to be loss making. The only means by which Nevis Group can repay its liabilities is by effecting a sale of its investments as a substantial premium over book amount. (Para. 1.2)".

[65] Against that background the plan, which the Directors of Nevis and UCS mooted during the latter part of 1996, was that of merging the businesses of UCL and UCS. In due course, I shall consider, in greater detail, the evidence I heard about the formulation and subsequent execution of that plan. For the meantime what happened can be summarised as follows. In December 1996, the directors of UCS agreed that UCS would take over the business of UCL, with effect from 7 February 1997. The directors of UCL and Nevis also agreed that UCL would cease trading, as from 7 February 1997.

[66] Project Rainbow, as the plan was referred to, involved the integration or amalgamation of the sandwich business that UCL carried on, from their premises at Inverurie, with the business of UCS. In practical terms, the plan involved combining production facilities at Blantyre, maintaining a distribution depot at Inverurie, the acquisition by UCS of the assets and business of UCL and the payment by UCS to UCL, by way of consideration, of an amount required to settle UCL's creditors. One intended consequence of the plan was that the insolvent failure of UCL could be avoided. The intention was that UCL would cease trading, settle its debts, including its indebtedness to the Bank of Scotland, and then be dissolved. Looking at matters from Nevis' perspective in late 1996, one obvious benefit of the successful execution of Project Rainbow would have been that Nevis' guarantee of UCL's overdraft facilities might no longer have been required.

[67] Nevis' intention was that UCS would continue to trade, with an augmented turnover, the hope being that UCS would trade profitably and be taken over by another company. If that could be achieved, Nevis would realise a gain on their investment in UCS and would be released from their guarantee of UCS' indebtedness to the Bank of Scotland.

[68] During the evidence I heard, there was no suggestion that anyone involved in the planning and implementation of Project Rainbow anticipated UCS remaining indefinitely in the ownership of Nevis. The intention of Nevis was that UCS be brought to a position in which UCS was trading profitably and could then be sold to a third party.

Detailed history of events
[69] Turning to consider the history of events in greater detail, Project Rainbow having been conceived, during the latter part of 1996 UCS and UCL continued to be run as separate businesses. The minutes of Meetings of the Directors of UCS and UCL held on 22 August 1996, 3 October 1996, 30 October 1996 and 5 December 1996 make only the briefest of references to Project Rainbow. That coincides with an impression I formed during the oral evidence, namely that the plan was primarily being promoted on the initiative of those individuals who were Directors of Nevis, namely Mr Ferrier, Mr Clark and Mr Hope. The obvious reason for this was that Nevis was experiencing financial difficulties. Nevis was capital insolvent. That required Nevis' directors to address a variety of possible options for making Nevis more successful, including the disposal of certain of their subsidiaries. UCS clearly fell within that particular option.

[70] It is no criticism of Mr Brown to observe that he is less experienced in management, finance and corporate governance than Mr Ferrier is. Moreover, Mr Ferrier was a director of Nevis, a holding company that was in a position to control the futures of both UCS and UCL. Indeed Nevis were in a position to close down either of these companies immediately, if they had thought that was the appropriate course of action to follow. Furthermore, having heard the evidence of Mr Ferrier, Mr Hope and Mr Brown, it is obvious that, amongst those three, Mr Ferrier is by virtue of his business experience and personality the most forceful character. My view to that effect finds support in a passage during the evidence of Mr Brown, in which he spoke of the Nevis style of management being "to a degree autocratic and secretive". He spoke of the directors of Nevis not sharing their problems with the managing directors of the subsidiary companies.

[71] My clear impression was that as far as the taking of significant decisions was concerned, Mr Brown's views were secondary to those of the directors of Nevis, in particular to those of Mr Ferrier and Mr Hope. Having said that, it was clear from the evidence that the plan having been mooted, Mr Brown was throughout very loyal to his colleagues on the Board of UCS. Mr Brown threw himself with vigour into assessing the feasibility of Project Rainbow and, once the plan was adopted, into the detailed arrangements that required to be put in place.

[72] During the latter part of 1996, projections as to the likely trading of the "amalgamated" or "integrated" businesses were prepared by Mr Brown. This exercise was overseen by Mr Hope. When the Directors of UCS met on 5 December 1996, some earlier versions of these forecasts were available. Mr Brown also sounded out the customers of UCL, who purchased the sandwiches manufactured at Inverurie, in an attempt to assess the extent to which customers would continue to purchase sandwiches, were they to be produced in Blantyre.

Meeting on 18 December1996
[73] On 18 December 1996, a meeting was held at a hotel in Blantyre. It was attended by Mr Ferrier and Mr Hope (both directors of Nevis, UCL and UCS) Mr Brown (a director of UCL and UCS), Brian Duguid (Operations Director of UCL), Shepherd (Operations Director of UCS) and James Lewis (an accountant employed by UCS). Prior to that meeting taking place, none of the Directors of UCS took any independent advice on the issues that would arise for discussion and decision at that meeting. No independent professional advisers of any of the companies involved were present at the meeting.

[74] Mr Ferrier, Mr Hope and Mr Brown all accepted that no minutes of the meeting were prepared. No other form of contemporaneous record of the meeting was kept. Certainly, none was produced during the Hearing. Indeed, with the exception of the written projections (No 7/52 of Process), to which I will refer shortly, it is not clear precisely which other documents, that may have been available at that meeting, were lodged as productions.

[75] In anticipation of the meeting of 18 December 1996 various sets of written projections were prepared. These sought to project the income, expenditure and profitability of UCS in the event that the businesses of UCL and UCS were amalgamated and UCL ceased trading. The written projections, lodged as a production by Mr Ferrier (No. 7/52 of Process), possibly constitute one of the sets of projections considered during the meeting. More probably, they are a subsequently revised copy of one of the sets of projections that were before the meeting. All of the written projections prepared for the meeting had been prepared to the same format.

[76] The projections (No. 7/52 of Process) run to eight sheets. The first five sheets, which are laid out in tabular form, contain detailed entries and calculations, culminating in forecasts of the net profit that could by earned by UCS, on a month to month basis, during the year to 31 December 1997. Those calculations proceed on the basis that the businesses of UCS and UCL would be amalgamated, with effect from the second week in February 1997. They proceed on the assumption that thereafter UCS would retain 85% of the turnover of UCL. The projections forecast a net profit of £48,852 for the year to 31 December 1997.

[77] The first five sheets of No. 7/52 of Process are in similar format to the profit forecast that had been prepared for UCS for the year to 31 December 1996. To a substantial extent the "Uppa Crust" businesses were seasonal, incurring losses in winter months. The forecast for 1996 had projected sales income for the months of May to August 1996, totalling £1,093,764, with a net profit of £34,242, and for the months of September to December 1996, sales income of £1,155,773, with a net profit of £36,613. The projections for 1997, which constitute No. 7/52 of Process, forecast sales income for the months of May to August 1997, totalling £1,598,987, with a net profit of £53,971, and for the months of September to December 1007, sales income of £1,636,877, with a net profit of £69,930. Those figures illustrate the substantial increase in UCS' income from the sale of sandwiches that was forecast for the year to 31 December 1997.

[78] The final three sheets of the projections in respect of UCS contain Cash Flow Workings and a Balance Sheet for the year to 31 December 1997. The Cash Flow Workings include, under the heading of "Capital Expenditure", entries to the effect that during February 1997 UCS would assume liabilities to UCL of £35,000, for the plant at Inverurie being taken over by UCS, of £8,000, for the office equipment at Inverurie being taken over by them and of £75,000, as goodwill for Inverurie. The calculations also proceed on the basis that UCS would assume responsibility for a loan of £59,000, which UCL had received from Nevis, and certain hire purchase and local authority loan liabilities of UCL. The calculations (as revised by Mr Hope) projected a balance sheet deficit for UCS, amounting to £146,806 as at 31 December 1997. The evidence was that Mr Brown had been primarily responsible for the preparation of the first five sheets of the projections and Mr Hope for the last three sheets.

[79] The meeting on 18 December 1996 lasted several hours. The witnesses present at that meeting indicated that Mr Ferrier had "tested" the sets of projections, which had been prepared. This exercise had included discussing what percentage of UCL's business UCS was likely to be able to retain. The witnesses explained that this exercise had involved their examining whether there was a sound basis for each of the various figures that had been included in the projections, whether as items of income and expenditure. In certain instances the individual figures had been based on past experience and known cost. In others, estimates had required to be made. Mr Ferrier, Mr Hope and Mr Brown repeatedly emphasised that any assumptions, which lay behind such estimates, had been carefully scrutinised.

[80] As I have indicated, No. 7/52 of Process had been prepared on the basis that, once the businesses of UCS and UCL were amalgamated, UCS would retain 85% of the business generated by the customers of UCL that was to be transferred to UCS. Other projections were prepared, using higher and lower retention rates of the business being transferred from UCL. Whilst those other projections had been before the meeting on 18 December 1997, none of those other projections were lodged as productions.

[81] At a later stage in this Opinion, it will be necessary for me to consider in further detail of a limited number of the entries in No. 7/52 of Process. At this stage, it is sufficient to record that the evidence of those present at the meeting was that the meeting had agreed that the amalgamation of the two businesses should proceed, on the assumption that the amalgamation would take place with effect from 7 February 1997. It was also agreed that the amalgamation should proceed on the basis that UCS would be able to retain 85% of business generated by UCL's customers. The evidence of those present at the meeting was that following upon the scrutiny carried out by Mr Ferrier, none of the entries contained in the projections, which now constitute No. 7/52 of Process, required to be altered.

[82] It is probable that in the weeks following the meeting, the original projections on which No 7/52 of Process are based were revised by Mr Hope, in relation to certain minor and unspecified details. The projections set out in No. 7/52 of Process forecast a total net profit of £48,852, for the year to 31 December 1997. No. 7/52 of Process is the only contemporaneous record available as to what the directors of all three companies intended would be (i) the financial payments UCL would receive from UCS, (ii) the obligations of UCL that UCS would take over and (iii) the indebtedness of UCS to UCL, in the event that the amalgamation proceeded. Mr Ferrier sought to categorise all these matters as being no more than parts of a plan. That was not a view shared by other witnesses. For my part it does no violence to the English language to hold that on 18 December 1996, and during the run up to 7 February 1997, those involved were in agreement that the amalgamation of the business of UCL into the business of UCS should take place on the basis set out in the projections that, as revised, now constitute No. 7/52 of Process.

[83] During the Hearing, I heard extensive evidence, and indeed very complicated evidence, about the entries included in the projections under the heading of "Goodwill". As I have indicated, they appeared in a section entitled "Capital Expenditure". The total figure shown for 'Goodwill at Inverurie' was £84,000 and that for February (the only individual month showing an entry) £75,000. The discrepancy between the two figures was never satisfactorily explained during the evidence. The witnesses, who had been present on 18 December 1996, were agreed that the figure for goodwill, which was discussed at the meeting, had been £75,000. I also understood those witnesses to agree that the figure of £90,000, which appeared in the written projections under the heading "Inverurie Loan Account", also related to the payment of goodwill. In the Payments section of the Cash Flow Forecast in No. 7/52 of Process, there were entries which indicated the Inverurie Loan Account being reduced by monthly payments of £5,000, beginning in April 1997.

[84] The evidence I heard relating to the figure of £75,000 for goodwill touched on a number of questions - (a) why the figure came to appear in the written projections, (b) how the figure had been calculated, (c) whether any payment of goodwill by UCS to UCL was warranted, (d) if so, whether the figure of £75,000 was reasonable, (f) whether any agreement had been reached in respect of that figure, (g) if so, by whom and (h) whether the inclusion of the figure of £75,000 within the written predictions was anything more that an indication, on the part of those examining the feasibility of the plan, that, if and when UCS proved to be profitable, the Directors of UCS would arrange for UCS to pay £75,000 to UCL, at a time and in instalments that would not cause any prejudice to the other creditors of UCS, in particular to the trade creditors.

[85] The volume of evidence relating to the figure of £75,000 for goodwill, which I heard, is a good illustration of the consequences of there having been no written record kept of what was discussed and decided at the meeting on 18 December 1996. In the event, I have reached the view that the explanation of how the figure of £75,000 came to be included in the predictions is quite straightforward. That explanation emerged during the evidence of Mr Hope. He explained that, when he was planning the amalgamation of UCL's business with that of UCS, one of his objectives was to ensure that UCL had sufficient funds to settle all their creditors. If UCL had been restricted to selling their plant and office equipment at net book value and their stock at cost, UCL would have had insufficient funds to settle all their outstanding creditors. Mr Hope had calculated that a further sum of £75,000 would be required to enable UCL to do so. That was how the figure of £75,000 came to be included in the projections.

[86] Mr Hope explained that during the meeting on 18 December 1996 there had been some discussion about the figure of £75,000. He said that it had appeared "fair and reasonable" to those present. The plan involved UCS taking over UCL's business, which had a turnover of £900,000. Mr Hope referred to discussions that the directors of Nevis and UCL had engaged with one of their competitors, BFD, during the preceding months. Those discussions had related to the possibility of setting up a new company, involving a merger of the competitor's business with that of UCL, and had involved some consideration of the goodwill that might have been paid for UCL's business and of the value of UCL's shareholding in the new company. Unfortunately, the evidence relating to the proposed transaction involving BFD was one of a number of topics on which the evidence I heard was confused and was neither supported nor clarified by any contemporaneous documentation.

[87] What is clear is that figure of £75,000 was determined without any professional advice having been taken and without any proper record having been kept, as to what had been decided and the reasons for the decisions taken. The lack of any such record facilitated a further dispute in the evidence as to whether an "agreement" had been reached that £75,000 would be paid to UCL, in instalments of £5,000 a month, commencing in April 1997, or whether all that the discussions of 18 December 1996 had produced had been a "plan" that UCL should receive £75,000, if UCS was trading profitably and when UCS was in a position to pay that sum.

[88] Having regard to the evidence I heard, I am in no doubt that those present at the meeting were agreed that, if the amalgamation proceeded, UCL would receive a payment of goodwill from UCS and that payment would be one of £75,000. I am satisfied that such a payment was not viewed merely as a possibility or a plan, which any of Nevis, UCL or UCS could have varied on their own initiative. I am satisfied that those present were agreed that UCL should receive £75,000, albeit that payment of the sum would be made by monthly instalments, beginning in April 1997. In my opinion, such an agreement was reached for the simple reason that UCL required those funds to settle with their creditors. It was clear from Mr Hope's evidence that Nevis was proceeding on the basis that UCL should be placed in the position to do so. No doubt, as Mr MacLennan pointed out, with UCS' obligation to pay £75,000 to UCL being an inter-company liability, between two subsidiaries of Nevis, there could have been some scope for varying when payment was to be made. Indeed if all the parties involved, including Nevis, had agreed, the agreement might have been modified in other respects. But, according to the evidence I heard, no such re-negotiation of the agreement, or of UCS' liability in respect of goodwill, ever took place.

[89] In these circumstances, I am quite satisfied that at the meeting on 18 December 1996 those present authorised that the amalgamation should proceed on the basis that UCL would receive certain sums from UCS, including a payment of £75,000 for goodwill. The fact that, following the meeting of 18 December 1996, the directors of UCS and UCL never gave any further consideration to the amount that was to be payable for goodwill is entirely consistent with such a conclusion. Indeed, I have little doubt that had UCL gone into receivership, following the amalgamation of its business with that of UCS, any Receiver of UCL would have sought to recover the sum of £75,000, as a debt due by UCS to UCL. I consider he would have done so, whether or not an invoice for that amount been issued by UCL. In the absence of an invoice, the Receiver would no doubt have founded on the terms of No. 7/52 of Process.

[90] It is also clear that when Mr Anderson came to prepare the A2B Report, he proceeded on the understanding that an agreement had been reached between UCS and UCL that had enabled the assets of UCL to be transferred to UCS. I do not find it surprising that Mr Anderson recommended that for the protection of those concerned a formal transfer document be initiated. Such a document would have been inappropriate if, as Mr Ferrier maintained during his evidence, all that the directors of UCS and UCL had done had been to evolve a plan which allowed UCS to take over the trade and assets of UCL, without their assuming any binding obligation to pay any sum in respect of goodwill to UCL.

[91] I should make it clear that senior counsel for the Petitioner did not seek to dispute that the meeting of 18 December 1996 had taken place or that those present at the meeting had considered whether or not the businesses of UCL and UCS should be amalgamated. Nor was it disputed that Mr Brown and Mr Hope had prepared projections for the meeting, which had been calculated on the basis that the businesses of UCS and UCL would be amalgamated. Rather the Petitioner questioned whether the scrutiny of those projections had been as rigorous, as those present at the meeting had described, and whether proper consideration had been given to the sensitivities of the projections and the poor histories of both companies in meeting the forecasts prepared by their managements. The decision to proceed with the amalgamation was also criticised because it had not been accompanied by any plans to introduce significant changes in the management of UCS and because Nevis had not been in a position to provide UCS with additional capital support of any great significance.

Events following meeting of 18 December 1996
[92] Following the meeting of 18 December 1996, considerable efforts were put in place to bring about the amalgamation of the businesses of UCS and UCL with effect from 7 February 1997. Customers of UCL were contacted with a view to ensuring their custom would be retained by UCS. The physical transfer of equipment and production from Inverurie to Blantyre was arranged. The redundancies of production staff at Inverurie were co-ordinated. Mr Brown was particularly involved in all of this. Documents lodged as productions illustrated the practical steps that were taken. Those documents confirmed the impression I gained from Mr Brown's own evidence that considerable efforts were made to implement the amalgamation of the businesses of UCL and UCS in as effective and efficient a manner as could be. That was indicative of a determination on the part of Mr Brown and other members of the staff of UCS that every effort should be made to ensure that the amalgamation produced such results as it was capable of bringing about.

[93] During the weeks leading up to 7 February 1997, and in the months thereafter, UCS continued to require financial support. That came from a variety of sources. At some point in late 1996, the directors of Nevis indicated that Nevis would inject a payment of £40,000 into UCS, to assist with UCS' finances. Nevis made clear, however, that was subject to their being able to raise the necessary funds to do so. In the event, Nevis were unable to make this cash payment until late February 1997. Once it had been received by UCS, the loan added to the overall level of UCS' liabilities.

[94] At the end of December 1996, the Workshop business was sold by UCL to Linkfleet. For reasons that I need not elaborate upon, the transaction involved a sale of the Workshop business to UCS and from UCS on to Linkfleet. In settlement of this transaction, which appears to be another transaction that was not fully documented, Linkfleet paid UCS £60,000. That payment was received during February 1997 and was one that the Directors of Nevis permitted the directors of UCS to defer passing on to UCL. The receipt of that payment of £60,000 obviously added to the overall level of UCS' liabilities. The assumption by UCS of the loan of £59,000 also added to UCS' liabilities. In the early months of 1997, UCS continued to enjoy overdraft facilities from the Bank of Scotland. Pending the completion of the A2B Report, these facilities were renewed by the Bank on a month to month basis.

[95] Board Meetings of the Directors of UCL and UCS were held on 16 January 1997. Amongst those present were Mr Ferrier and Mr Brown. As far as UCL was concerned the directors were informed that the actual loss for November 1996 had been £8,000, against a forecast profit of £7,800 and an estimated loss of £5000. They were informed that the estimated loss for December 1996 was £12,000, which would be offset by an estimated profit of £2,500 from the Workshop. The Minutes record that Project Rainbow was continuing, it being noted that the "Blantyre company was acquiring the assets and trade of UCL". It was also noted that according to the budget all Inverurie creditors would be paid in full by the end of April 1997, although the Bank might take "slightly longer" to clear out of the profits from Blantyre. As far as UCS was concerned, the directors were informed that the actual loss for November 1996 had been £19,000, against a forecast profit of £12,400 and an estimated loss of £13,000. The Directors were informed that the estimated loss for December was £22,000.

[96] The Minutes of the meetings held on 16 January 1997 contain no indication that the Directors of UCS and UCL, and in particular Mr Ferrier and Mr Brown, gave any detailed reconsideration to the question of whether Project Rainbow should proceed. Nor is there is any suggestion in the Minutes that the projections contained in No. 7/52 of Process were reconsidered. On the other hand, the Minutes do record that, when the funding of the amalgamated businesses was discussed, one option considered was receivership. Others included the substitution of Nevis' guarantee to the Bank of Scotland and further investment by Nevis out of the sale of another of Nevis' business interests. From those entries, it could be inferred that by this stage the Directors of UCS and Nevis held, or were beginning to hold, some concerns that even if the amalgamation of the businesses of UCL and UCS proceeded, UCS might not prove to be financially viable.

[97] The next meetings of the Directors of UCS and UCL took place on 13 February 1997. By this stage the amalgamation of the businesses had taken place. Mr Ferrier and Mr Brown were present at the meetings. As far as UCL was concerned the Directors were informed that the actual loss for December 1996 had been £18,200, against a forecast profit of £1,500 and an estimated loss of £12,000. It was estimated that the loss for January 1997 would be £14,000. During December 1996, the Workshop had made a loss of £1,800, against an estimated profit. It was also reported that the Workshop business had been sold, with effect from 31 December 1996.

[98] As far as UCS was concerned, the situation reported to the Directors was much more serious. The Directors were informed that the actual loss incurred by UCS during December 1996 had been £74,560, against a forecast loss of £5,700 and an estimated loss of £22,100. They were also informed that it was estimated that the loss for January 1997 would be £36,000, against a forecast loss of £30,500. The Minutes record a variety of reasons for the difference in the December 1996 Accounts, between the actual loss and the estimated loss. These reasons include the over-statement of sales in earlier months to the extent of £19,000, the cost of materials having been higher than expected and wages and salaries having been wrongly calculated. During the evidence, blame was placed on James Lewis, UCS' former accountant, for the errors that had come to light, when the management accounts for the month of December 1996 were being prepared. Mr Lewis had left the employment of UCS during January 1997. Whether the blame apportioned to Mr Lewis was warranted, I need not determine. It is sufficient to observe that during the meeting on 13 February 1997 the Directors of UCS, including Mr Ferrier and Mr Brown, were confronted with UCS' financial position being significantly different from what had been understood to be the position on 18 December 1996.

[99] The Minutes for the meeting of 13 February 1997 contain the following passage: "It was noted by the Directors that the Balance Sheet at the end of December showed a negative net worth of £152,000. The Directors recognised their responsibilities under the unfair trading legislation, but in light of the trading forecast for 1997 showing a profit of £48k and the month on month improving results, they felt justified in continuing to trade. The turnaround had been greatly assisted by the consolidation of the production units, resulting in a 60% increase in business in Blantyre". I heard evidence that, whilst the meeting was still taking place, Mr Ferrier had dictated that passage to the person preparing the Minutes. Quite what was intended by the reference to "the month on month improving results" is slightly uncertain. What is clear, however, it that nowhere in the Minutes is there any suggestion that having been faced with the actual loss for the year to 31 December 1996 and the reasons for that loss being significantly higher than anticipated, the Directors had considered it necessary to revisit the projections set out in No. 7/52 of Process. Those projections, of course, set out the financial basis on which the Directors had decided to amalgamate the two businesses and continue trading with UCS.

[100] The Directors of UCL and UCS met again on 6 March 1997. Mr Ferrier and Mr Brown were present, as was Mr Hope. The management accounts for UCL for January 1997 were not available. Those for UCS showed an actual loss of £39,700, against a forecast loss of £30,500 and an estimated loss of £37,000. Once again, whilst the higher than expected losses were noted, there is no suggestion in the Minutes that the Directors had explicitly re-considered whether UCS should continue trading. In particular the Minutes contain no record of any assessment having been made by the Directors as to whether there were reasonable prospects of UCS being able to repay their creditors in full.

[101] On 10 March 1997, during a meeting of the Board of Nevis, the Directors of that company received some general advice about wrongful trading, from Mr Barrie, a corporate partner in Paull and Williamson, Solicitors, Aberdeen. At that meeting Mr Barrie did not provide any advice specific to the circumstances of UCS or of any other subsidiary of Nevis. Mr Brown was not present at that meeting.

[102] During his evidence, Mr Ferrier claimed that shortly after the Nevis meeting on 10 March 1997, he had had an informal discussion with Mr Barrie about the circumstances of UCS. Mr Ferrier claimed that discussion had reaffirmed his views as to the rights and wrongs of UCS continuing to trade. Mr Barrie was not called as a witness. In the absence of any evidence from Mr Barrie, I have not found it possible to place any reliance on the evidence Mr Ferrier gave about private discussions with Mr Barrie. It may well be the case that by March 1997 the time had come for the Board of Directors of UCS to take legal advice specific to the circumstances confronting UCS. On the assumption that stage had been reached, it is surprising that an individual with the experience of Mr Ferrier did not recognise the need for the content of any legal advice to be fully and carefully recorded and placed in writing before all the Directors of UCS. The Minutes of the Nevis meeting on 10 March 1997 also record that the potential sale of UCS to three companies was being explored. One of those companies was McIntosh of Dyce.

[103] Further meetings of the Directors of UCL and UCS took place on 28 March 1997. Mr Ferrier was abroad on holiday on that date. Mr Brown was present, as were Mr Clark and Mr Hope. Management accounts for UCL for the period from 1 January 1997 to 7 February 1997 were not available. Management accounts for UCS to 28 February 1997 showed an actual loss of £35,300, against a forecast loss of £31,700 and an estimated loss of £36,000. Those management accounts also showed that the number of sandwiches being sold was ahead of forecast, albeit that the figures for gross profit/loss and net profit/loss for the year to date were below forecast. In particular the net loss to the end of February was £12,884 greater than had been forecast in No. 7/52 of Process.

[104] Mr Brown's written report to the meeting of 28 March 1997 spoke of UCS having seen "good sales growth and returns (i.e. of sandwiches) within budget." His report recorded the efforts being made to acquire new business and the success that had been achieved in that regard. During his evidence, Mr Brown gave some explanation as to the reasons for the production and distribution costs having been higher than forecast. Once again, however, the Minutes of the meeting contain no record of the Directors of UCS having explicitly re-considered whether there were reasonable prospects of the company's creditors being paid in full and whether it was appropriate for UCS to continue to trade. The impression I gained from the evidence was at this time the efforts of the Directors continued to be focused on managing UCS, trying to acquire new business for that company and endeavouring to keep costs down, all with the objective of UCS being sold.

[105] The A2B Report was finalised and made available to Nevis around 11 April 1997. That meant that Mr Ferrier, Mr Clark and Mr Hope had access to the Report. Mr Brown was not given a copy of the Report at that time. Indeed, he did not see the Report until after these proceedings had commenced.

[106] The A2B Report was prepared on the premise that UCS would continue trading, with a view to it being sold by Nevis. Having considered the contents of that Report, the Bank of Scotland afforded UCS the further overdraft facilities the company and Nevis had sought.

[107] Mr Ferrier resigned as Director of UCS on 14 April 1997. On the same date, Mr Ferrier resigned his directorships in all of the other subsidiaries of Nevis. He explained that his reason for doing so had been a concern on his part that Mr Clark was seeking to "cherry pick" the profitable parts of the Nevis Group, out of Nevis and into another company, namely Linkfleet Ltd. Linkfleet was, of course, the corporate vehicle that Mr Clark had used when he acquired "the Workshop". Mr Ferrier's explanation as to why he had resigned as a director of UCS was not challenged on behalf of the Petitioner.

[108] On 22 April 1997, a revised set of management accounts for March 1997 became available. In preparing this revised set of accounts, expenditure of £17,500 on the part of UCS, on what were described as having been "one-off integration costs", had been removed from the Profit and Loss Account and treated as capital expenditure. Notwithstanding that adjustment, the revised accounts disclosed that whilst the level of sales in March 1993 had exceeded forecast, UCS's expenditure on the direct costs of manufacturing and distributing their sandwiches had been significantly higher than had been budgeted for. The accounts indicated that UCS' net loss for March 1997 was approximately £8,500, almost £4,000 higher than had been forecast, and that the net loss for the year to date was over £9,000 greater than forecast. The revised accounts also made clear that the continued trading of the amalgamated businesses had led to an increase of some significance in the level of trade creditors. Whilst this increase had been in line with increases in the levels of production and sales of UCS, it had nevertheless led to an increase in the overall level of UCS' liabilities.

[109] Mr Brown prepared a paper for a review meeting, which took place on 25 April 1997. The paper summarised the problems that UCS and its staff were facing. It recorded (a) that the March results had been much worse than anticipated, (b) that the consolidation project had been completed, (c) that some serious management and operational weaknesses had arisen, (d) that the sales forecast had been met and exceeded, but that several of the key cost areas had been overspent, (e) that there were still problems in the dispatch area and (f) that there was severe pressure on the cash flow of the business and constant problems with suppliers. On the more positive side, the paper recorded that discussions were taking place with McIntosh of Dyce, who were interested in acquiring UCS from Nevis. A meeting of the Directors of UCS took place on 28 April 1997. No Minutes of that meeting were lodged.

[110] It is clear from the evidence that by the end of April 1997 it ought to have been obvious to the Directors of UCS that all of the hoped for benefits of the amalgamation were not being realised. Such hoped for benefits were certainly not being realised within the timescale set out in No. 7/52 of Process. By this stage, the Directors of UCS were also aware that pressure from the creditors of UCS was beginning to emerge. Certain key suppliers were tightening up on their terms of credit. Notwithstanding those developments, there does not appear to have been any structured reconsideration of the validity of the projections for 1997 upon which the continued trading of UCS had been predicated. No assessment was made as to whether the continuing drive for increased production and sales was leading to increased losses, which were unavoidable, as opposed to the movement into profit, which had been forecast for UCS. The clear impression to be gained from all the evidence before me was that from the end of April 1997 onwards, the principal, if not the sole, focus of those individuals, who remained directors of both UCS and Nevis, was that of keeping UCS trading, in the hope that UCS could be sold to the benefit of Nevis.

[111] I have little doubt that Mr Brown was well aware of Nevis' wish to sell UCS. Indeed, during the course of the evidence, it emerged that he had made the first approaches to McIntosh of Dyce and United City Bakeries. I have also little doubt that out of a sense of loyalty to UCS and to the staff and other directors of UCS, Mr Brown continued to do all he could to improve the productivity of UCS. Unfortunately, the efforts being made to achieve a sale of UCS appear to have diverted the Directors of UCS from standing back and giving proper consideration to the interests of the creditors of that company. In particular, it appears to have diverted them from considering whether the stage had now been reached that there were no reasonable prospects that the creditors of UCS would be paid in full.

[112] What is clear from the evidence I heard is that following the end of April 1997, the finances of UCS deteriorated dramatically. For the month of April 1997, the actual loss was £26,900, against an estimated loss of £500. For May 1997 the actual loss was £6,900, against an estimated profit of £5,200. Whatever may have been the position prior to 31 March 1997, it is quite clear that the costs of UCS were out of control from April 1997 onwards. As Mr MacLennan indicated during the course of his evidence, by the time the April accounts came through there were valid reasons to question whether the strategy for UCS was correct. The principal element of that strategy was, of course, that UCS should continue to trade in the hope that it could be sold to the benefit of Nevis.

Invoices dated 31 March 1997 and 30 April 1997
[113] UCL issued a number of invoices to UCS dated 31 March 1997 and 30 April 1997. Mr Hope appears to have been responsible for that occurring. The invoices included an invoice dated 30 April 1997 for £169,000 for the "Sale of Business and Trade". During the evidence it was established that Invoice was intended to include a figure of £79,000 for goodwill, although why the figure was £79,000, as opposed to £75,000, was never fully clarified. Other invoices, dated 31 March 1997 and 30 April 1997, covered the costs of the plant and equipment belonging to UCL, which had taken over, and certain management and other charges that UCL had borne on behalf of UCS. The delay in the issuing of those invoices, which related in part to the sale of UCL's business to UCS, was referred to during the evidence as have been "a function of delays in internal financial housekeeping". Whatever the cause of the invoices being issued on the dates they bore, on 25 June 1997 Mr Hope arranged for UCS to pay UCL the sum of £148,000. It is clear that Mr Hope instructed that payment on the basis that it was in partial satisfaction of UCS' indebtedness to UCL. Having regard to the terms of a letter that Mr Hope sent to McIntosh of Dyce on 26 June 1997, I am satisfied that Mr Hope understood that the payment of £148,000 would reduce, to a figure of around £40,000, UCS' indebtedness in respect of the items covered in the invoice for £169,000. Those items included goodwill. Mr Brown gave evidence, which I believed and which was not challenged, that he had been unaware that the payment of £148,000 had been made by UCS, until sometime after he left UCS.

McIntosh of Dyce
[114] Nevis' negotiations with McIntosh of Dyce continued beyond the end of April. On 9 May 1997 McIntosh of Dyce wrote to UCS outlining the basis on which they would be prepared to acquire the share capital of UCS. The letter expressly stated that its terms did not constitute a formal offer. In outline, the proposals were that, in exchange for the shares of UCS, McIntosh of Dyce would pay the shareholders £75,000, repay loans due by UCS to Nevis, amounting to £58,386, and issue the current shareholders of UCS with loan notes, to the value of £100,000, the loan notes to be repayable over a two year period. The proposals were subject to various clawback conditions. On 31 May 1997, McIntosh of Dyce made clear that they were not prepared to submit any formal offer along those lines, on account of the losses that UCS had incurred during April 1997. McIntosh of Dyce did indicate, however, that they remained willing to acquire the business of UCS at nominal cost. Discussions between Nevis, UCS and McIntosh of Dyce continued into July, but nothing came of them. Nevis ultimately rejected an offer of £75,000 for the share capital of UCS, which was conditional on Nevis leaving its bank guarantee in place.

[115] During July 1997, Nevis and UCS opened discussions with United Central Bakeries Limited. I need not go into the detail of these. On 2 September 1997, the share capital of UCS was sold to David Orr and Alexander McIntyre for £1. This was done after full consultation with the Bank of Scotland, who agreed to release Nevis from its guarantee of the bank accounts of UCS and UCL.

Allegations made in respect of the conduct of Mr Ferrier and Mr Brown.

[116] As I have indicated the first of the allegations made in respect of the conduct of Mr Ferrier and Mr Brown is that they caused or allowed UCS to continue to trade "beyond October 1996 and certainly beyond February 1997", with no reasonable prospects of UCS being able to pay their creditors in full. The background to that complaint is the acceptance by both Respondents that, but for the amalgamation with UCL, UCS could not have continued trading. It is argued that from October 1996 onwards, both Respondents should have been considering the interests of the creditors of UCS as a whole, not just the interests of UCS, UCL and Nevis. That necessarily would have involved the continued monitoring of the potential consequences for the unsecured creditors of UCS, in the event that UCS went into receivership or an insolvent liquidation. It was argued that such monitoring had not taken place. It was also argued that the justification put forward for UCS continuing to trade did not stand up. Standing the trading histories of both UCS and UCS and the known circumstances in December 1996, the adoption of the plan to amalgamate the two companies had been too risky. There had been inadequate financial support available to UCS, whether from Nevis, the Bank of Scotland or any other source. In the absence of any changes of any significance in the management of UCS, there had been no basis for any confidence that costs could be controlled and profitable trading achieved. Viewed properly, there had been no realistic prospects of the creditors of UCS, and in particular the unsecured creditors of UCS, receiving payment in full through the sale of USC by Nevis. That had remained the position throughout the respective periods during which Mr Ferrier and Mr Brown had remained Directors of UCS.

[117] I have not found it easy to reach conclusions as to the merits of these particular allegations as to the conduct of Mr Ferrier and Mr Brown. This has been partly because of the mass of information placed before me and partly because, although the evidence available is extensive, it has not painted a complete picture of the history of events between October 1996 and the date when UCS went into receivership.

[118] The central question I require to address, in relation to each of the Respondents, can be simply stated - "During the period when he remained a Director of UCS, did he know or ought he to have known that if UCS was allowed to continue trading there were no reasonable prospects of UCS' creditors being paid in full?". It is important to bear in mind that the test encapsulated in that question includes the phrase "no reasonable prospects". It is also important to remember that the question requires to be asked separately in relation to each Respondent. And in relation to each Respondent, the answer to the question is dependent, to some extent, at least, on the state of knowledge of the individual concerned. Very importantly, it must not be forgotten that the onus is on the Petitioner to establish, on the basis of the evidence led, that the question should be answered in the affirmative in respect of the Respondent in question. If the Petitioner fails to discharge that onus, in respect of either or both of the Respondents, then no Disqualification Order can be imposed in respect of the Respondent(s) in question.

[119] I have reached the view that it is appropriate I should consider the question of whether or not UCS was allowed to continue to trade, when the Respondents knew or ought to have known that there were no reasonable prospects of the creditors of UCS being paid in full, at different points during the history of events I have sought to outline.

[120] During his closing submissions, senior counsel for the Petitioner observed that there was limited scope for this particular allegation sticking in late 1996. That appears to me to have been a very fair and realistic submission. By October 1996 the fortunes of UCS were such that both the question of whether UCS should continue trading and the interests of the creditors, as a whole, should have been at the forefront of the minds of the Directors of UCS. But I am not satisfied that by October 1996, with the amalgamation of the businesses of UCS and UCL having been mooted, the stage had been reached that UCS required to cease trading. The Petitioner has certainly not proved that Project Rainbow having been conceived, the project should have been rejected without any investigation and assessment.

[121] In my opinion, the next date at which to consider the question is 18 December 1996. I choose that date because I consider it was reasonable and perfectly responsible for the directors of UCS, and indeed the directors of UCL and Nevis, to consider the possibility of amalgamating the businesses of UCL and UCS into UCS. The earliest date by which that exercise could have been carried was around December 1996.

[122] Having considered all the evidence I have heard about the financial positions of Nevis, UCS and UCL prior to and around 18 December 1996, about the work done by Mr Hope and Mr Brown in preparation for that meeting and about what happened during that meeting, I am not persuaded that as at the date of that meeting either Mr Ferrier or Mr Brown knew or ought to have known that if the proposal to integrate the businesses of UCL and UCS was allowed to proceed, there were no prospects of the creditors of UCS being paid in full.

[123] In reaching that conclusion, I am conscious of the fact that both of the Respondents acknowledged that the financial position of UCS was such that receivership would have been unavoidable, unless the company had been taken over or the company had significantly increased its turnover, by amalgamating its business with that of UCL. I should also make clear that I accept the submissions, made on behalf of the Petitioner, that the Directors of UCS were bound to consider the interests of the creditors of UCS in the light of the trading histories of that company and of UCL and the losses that both companies had consistently made. I have also taken account of the criticisms that were advanced in evidence and submission about the continuing failure of the management of UCS and UCL to meet forecasts and achieve profitability. I have borne in mind the evidence and submissions I heard about the sensitivities inherent in the projections set out in No. 7/52 of Process and the extent of the financial support known to be available to UCS, as 1997 beckoned. In particular, I am conscious of the fact that the sensitivities of the projections were such that it would not have taken much to change the profit projected for the year to 31 December 1997 into an actual loss, either because UCS was unable to sell their sandwiches in the projected numbers or on account of a failure on the part of UCS to control the constituent elements of their costs.

[124] The only witness who expressed the unequivocal view that it was not appropriate for the directors of UCS to allow the company to continue trading after 18 December 1996 was Mr Hannon. Mr Hannon's view was not supported by Mr Alexander, who acknowledged that in late 1996 it was appropriate for the directors of UCS to continue trading, until such time as they felt that there were no prospects of avoiding an insolvent liquidation. Mr Alexander did not consider that such a situation had been reached by 18 December 1996.

[125] The contents of the A2B Report and perhaps, more importantly, the evidence given by Mr Anderson support the Respondents' position that when they assessed the position of the creditors of UCS in December 1996 they were not driven to the conclusion that there were no prospects of the creditors of UCS being paid in full. I accept that the A2B Report was commissioned some months after December 1996. I accept that it was commissioned to assist the Bank of Scotland in determining what banking facilities it should continue to provide to Nevis and its subsidiaries, having regard to the various guarantees and other forms of security that were in place. I also accept that the issues which Mr Anderson was addressing, when he prepared his Report, are not identical to the questions that the Directors of UCS required to consider. It is correct that Mr Anderson did not have before him all the financial information relating to UCS and UCL that was available to the Directors of UCS. Indeed, he probably did not have access to all of the documents, relating to those two companies, that are lodged as productions. It is also correct that the A2B Report does not contain any recommendations for the Bank. That was because, with the agreement of Nevis and the Bank of Scotland, the Report was addressed to Nevis, to minimise the risk of Mr Anderson's firm being sued by any party, such as the Bank of Scotland, who might found a decision on the contents of the Report.

[126] Nevertheless, the Report was prepared on the understanding that the amalgamation of UCL's business with that of UCS was proceeding. The written projections for the amalgamated business, No. 7/52 of Process, were amongst the documents made available to Mr Anderson. Nowhere in the Report is there any indication that the plans of the Directors of UCS were doomed to failure. In my opinion, the views Mr Anderson expressed, in his Report and during his evidence, do not support Mr Hannon's contention that, as at 18 December 1996, there were no reasonable prospects of the creditors of UCS being paid in full, if the company continued to trade. Furthermore, the Petitioner did not lead any evidence from a suitably qualified expert witness, who had been given the opportunity of examining all the documents lodged as productions and, having done so, was prepared to express the conclusion that Nevis' objective of seeking to trade UCS' profitably, and then sell it on to a third party, had been, when viewed in December 1996 and during the early months of 1997, a wholly unrealistic one with no prospects of success.

[127] The evidence I heard about UCL's dealings with BFD, during the autumn of 1996, and of the negotiations involving McIntosh of Dyce and United Central Bakeries during 1997, was extremely confusing. There were a variety of reasons for that, including the manner in which the evidence was led, the absence of evidence from any employees of the three companies concerned and the very limited nature of contemporaneous documentation relating to those negotiations. Nevertheless the very fact those negotiations took place supports the view that the objective of Nevis, which the Directors of UCS were content to pursue and support, had not been an unrealistic one, certainly when viewed as at December 1996.

[128] In considering Mr Hannon's evidence, I have also required to bear in mind that he himself had not had long to give any detailed consideration to the written projections contained in No. 7/52 of Process. That did not inhibit Mr Hannon from expressing views as to reliability of the profit forecasts for the year to 31 December 1997, which are set out in that document. I do, however, have some reservations as to whether Mr Hannon had fully reconsidered his original assessment of the actings of the Respondents, in the light of the contents of No.7/52 of Process, and indeed in the light of other of the productions lodged by the Respondents, such as the Reports of Mr Anderson and Mr MacLennan. The need for the Petitioner to keep the validity of her allegations as to the conduct of the Respondents under constant review, in the light of additional information and documents as they come to hand, was, of course, borne out by the fact that during the Hearing, senior counsel for the Petitioner departed from a number of the allegations made in respect of the Respondents' conduct.

[129] Some complaint was made by senior counsel for the Petitioner that No. 7/52 of Process had only been lodged as a production, by Mr Ferrier, a few days before the Hearing began. The document was indeed lodged at that time and no sound explanation for the late lodging of the production was provided. But the existence of such a document had been flagged up long before these proceedings were commenced. That occurred when Mr Hope returned his Director's Conduct Questionnaire to the Receiver of UCS. In that Questionnaire Mr Hope explicitly referred to forecasts that had been prepared on the basis that the production carried out by UCL at Inverurie would be transferred to UCS at Blantyre, forecasts which indicated that profits of £48,000 should be produced during 1997. Those forecasts could have been recovered by the Petitioner, and assessed on her behalf, long before the start of the Hearing before me.

[130] In considering the position as at 18 December 1996, I have, of course, had regard to all the points made on behalf of the Petitioner, including (a) that the Directors of Nevis, who were present at the meeting of December 1996, had an interest to protect Nevis' investments in UCS and UCL and to limit Nevis' exposure as a guarantor of the bank accounts of UCS and UCL, (b) the limited availability of additional capital support for UCS, (c) the consistent unreliability of the forecasts upon which UCS had operated since it commenced business, (d) the recurrent failure on the part of the Directors of UCS to control the company's costs and (e) the submissions made by senior counsel for the Petitioner that there had been no reasonable prospects of UCS being able to trade out of the capital insolvency in which the company had found itself in December 1996. I am conscious of the fact that the meeting of 18 December 1996 proceeded without the Directors of UCS having obtained professional advice from any independent source. I am also very conscious of the facts that no Minutes of the meeting of 18 December were ever created and that no other records of that meeting were produced as productions. It is not, however, disputed that the meeting took place and I have had regard to all the evidence that I heard in respect of that meeting, in reaching my views about the conduct of the Petitioners as at 18 December 1996.

[131] The next date at which I consider it appropriate to consider matters is as at 13 February 1997. The amalgamation of the businesses of UCL and UCS had taken place one week previously. As I have previously recorded, at their meeting on that date, the Directors of UCS had available to them management accounts for the year to 31 December 1996. Those accounts indicated that the loss during that month had been over £50,000 higher that what had been the estimated loss, as at 18 December 1996.

[132] The Minutes of the meeting on 13 February 1997 provide some indication of the Directors' position in respect of the situation that they faced. They felt justified in continuing to trading. That was a position which both Mr Ferrier and Mr Brown defended during their evidence. Both Respondents maintained that there had been no requirement to revise the projections in No. 7/52 of Process, because the errors, which had given rise to the additional loss disclosed in the December 1996 management accounts, had not materially affected the accuracy or prudence of those forecasts. The projections for 1997, set out in No. 7/52 of Process, had not been based on the actual trading results of UCS and UCL for November and December 1996. That attitude could be viewed as being indicative of a failure to place sufficient importance on the central question that the Respondents required to keep under constant review, namely whether, if UCS continued to trade, there were reasonable prospects of all of the creditors of UCS being paid in full. In my opinion, that question ought to have involved keeping the continuing scrutiny of the projections for 1997.

[133] There is nothing in the Minutes of the Meeting of 13 February 1997 to indicate that the Directors gave specific consideration to whether the actual results for November and December 1997 raised the possibility of UCS failing to achieve the projections for 1997 or adversely affected the "sensitivities" of those projections. The sensitivities of those projections were, of course, considerable. There is accordingly force in the criticism that the apparent failure of the Respondents to revisit the "sensitivities" of the projections for 1997 affected the reliance that it was appropriate to be place on those projections.

[134] During their evidence both Mr Ferrier and Mr Brown repeatedly maintained that the interests of the creditors had been before them at all times. They were adamant that there had been a detailed discussion of the prospects of UCS during the meeting on 13 February and that the decision had been reached that it was not necessary for UCS to cease trading, only six days after the businesses of UCS and UCL had been amalgamated. Whilst the Minutes for the Meeting include the paragraph dictated by Mr Ferrier, which I have quoted previously, my reading of those Minutes and my consideration of the evidence I heard has not persuaded me that the position of the creditors was as carefully considered as Mr Ferrier and Mr Brown maintained and was not considered it the detail that it might have been.

[135] As far as assessing matters as at February 1997 is concerned, Mr Hannon's view remained as it had been in respect of the position in December 1996. It was not appropriate for the Directors to have allowed UCS to continue trading. During his evidence in chief, Mr Alexander expressed the view that in February 1997, when the accounts for December 1996 became available, the Directors of UCS ought to have considered what impact those results had on the future projections for UCS. He stated that with the benefit of hindsight, it was difficult to justify continued trading and that at that stage the Board of UCS ought to have considered whether they could rely on the continued support of Nevis, without which UCS could not have continued to trade. Mr Alexander went on to indicate that standing the sensitivities of the projections, he thought that the creditors' position was potentially going to deteriorate during 1997 and, that being the case, it would not have been proper for UCS to continue trading. However, when he was questioned by senior counsel for the Petitioner, about the position as at February 1997, Mr Alexander was not invited to address the very specific question of whether, if trading had continued beyond February 1997, there would be have been no reasonable prospects of the creditors of UCS being paid in full. Thus Mr Alexander's evidence could be summarised in these terms. Having regard to the additional information made available to the Directors of UCS at the meeting on 13 February 1997, the position of the creditors was potentially going to deteriorate during 1997.

[136] In considering the reliance I should place on the evidence of Mr Alexander, I require, of course, to have regard to the fact that, before he began his evidence, Mr Alexander had been given virtually no opportunity to consider the terms of the projections for 1997. He was shown No. 7/52 of Process, for the first time, on the morning his evidence began. It would clearly have been prudent for Mr Alexander to have been afforded the opportunity of considering the details of No. 7/52 of Process, and indeed a number of the other productions, some days, if not longer, before the Hearing began.

[137] The A2B Report and Mr Anderson's evidence (which included reference to one of the other reports he had prepared prior to his giving evidence during the Hearing) afford some assistance to the Respondents' position as at 13 February 1997. As I have already noted, the A2B Report was completed around the middle of April 1997. It contained Mr Anderson's views that the projected growth in the turnover of UCS appeared to be achievable, that the projected growth was capable of being exceeded and that the assumptions as to the net unit sales price could also be regarded as achievable. The Report also drew attention to the very low level of the profitability projected for UCS and other areas, such unit costs and delivery costs, in which careful monitoring of the figures was required. In his subsequent report and during his evidence, Mr Anderson expressed the view that it was difficult to see how it could be concluded that, as at February 1997, UCS had no reasonable prospects of being able to pay its creditors in full. Mr MacLennan's evidence, which was related to a report that he had prepared on the instructions of Mr Ferrier, also provided some limited support for Mr Ferrier and Mr Brown and indeed for the strategy that Nevis was seeking to implement, namely that of restructuring UCS with a view to selling the company.

[138] It is obviously possible to criticise the Directors of UCS for not having done more than they did, during and around the time of the meeting of 13 February 1997, to re-assess the prospects for the amalgamation of the businesses of UCL and UCS and the validity of the projections, set out in No. 7/52 of Process, on which that amalgamation was proceeding. Nevertheless the question remains as to whether the Petitioner has proved that, as at 13 February 1997, Mr Ferrier and Mr Brown knew or ought to have known that if UCS continued trading, there were no reasonable prospects that the creditors would be paid in full. On the basis of the evidence that I heard, that has not been proved. Having regard to the evidence upon which the Respondents found, I am not persuaded by the evidence of Mr Alexander and Mr Hannon that the Respondents should not have allowed UCS to continue trading beyond February 1997.

[139] Whilst the duty on the Respondents to keep the position of the creditors under review was obviously a continuing one, the next date at which it is appropriate to consider the position is 28 March 1997. A Meeting of the Directors of UCS was held that day. Mr Clark, Mr Hope and Mr Brown were present. Mr Ferrier was not. He was abroad on holiday. By this date the management accounts for February 1997 were available. Those accounts disclosed that the net loss for the month was £35,325, against a Forecast Loss of £31,713 and an Estimated Loss of £36,000. Sales for the month were ahead of forecast, although problems were still being encountered in the production and dispatching of sandwiches to customers.

[140] The papers relating to that meeting, which included Mr Brown's Report, to which I have referred earlier, give the clear impression that Mr Brown and his staff were doing all they considered they could to overcome the difficulties associated with the amalgamation, to expand UCS' sales and turnover and to improve the management and productivity of the whole business. The papers give no indication that Mr Brown knew that the prospects of the creditors being paid in full were deteriorating to the extent that they were beyond retrieval. At that meeting, it was estimated that the accounts to 31 March 1997 would show a net loss of £8,300 against a forecast loss of £12,500. Further discussion took place that day on the procedures for the monitoring of Key Performance Measures, which UCS had recently introduced. Whilst it is clear that there was some concern amongst the Directors of UCS about certain of the costs the company had incurred and was facing in the future, the contents of the management accounts for February 1997 and the Minutes of the Meeting of 28 March 1997, do not persuade me that awaiting, as they were, Nevis's receipt of the A2B Report and the Bank of Scotland's decision in light of that Report, the Directors of UCS ought to have concluded that UCS should cease trading forthwith, because there were no reasonable prospects that the creditors of the company would be paid in full. In particular, the fact that the management accounts for February 1997 indicated that both the number of sandwiches sold that month and the income realised from those sales were in excess of 8% above forecast, support the view that the Directors of UCS do not fall to be criticised for allowing UCS to continue to trade as at 28 March 1997.

[141] Mr Ferrier resigned on 17 April 1997. That resignation came as a complete surprise to the other Directors of UCS, who, at their Meeting on 28 March 1997, had noted that Mr Ferrier would chair all future Board Meetings.

[142] I turn to consider the Review Meeting held on 25 April 1997 and the Meeting of the Directors of UCS, which took place on 28 April 1997. I have already summarised the documents that were available at those meetings. They disclosed that the financial problems of UCS had increased. Notwithstanding the terms of the A2B Report, which the Directors of UCS had recently received, and the Bank of Scotland's willingness to continue funding the Nevis Group of companies, it is clear from the evidence before me that by the end of April 1997 the Directors of UCS ought to have realised that more serious questions were now arising as to whether UCS was going to achieve profitability and prove to be an attractive acquisition for a third party. Such a disposal was the only realistic means by which the creditors of UCS could be paid in full. The absence of minutes for either meeting does nothing to dispel the impression that around this time the Directors of UCS were concentrating all their efforts on trying to achieve an acceptable deal with McIntosh of Dyce and failing to address whether the stage had now been reached when they required to conclude that there were no longer reasonable prospects that the creditors of UCS were going to be paid in full.

[143] If that stage had not been reached by the end of April 1997, it had certainly arrived by the end of May 1997. According to Mr Hope, alarm bells were ringing by May 1997. The management accounts for March 1997, in their revised form, were available for the Directors at their meeting of 22 April 1997. In paragraph [108] of this Opinion, I have already summarised what those accounts disclosed. By the end of May 1997, McIntosh of Dyce had made it clear that they were not prepared to submit a formal offer along the lines that they had been discussing with Nevis and UCS over the previous couple of months. Indeed, by this stage, the best that Nevis could have hoped for from McIntosh of Dyce was that UCS would be taken off their hands, with no more that a nominal consideration being paid to Nevis. By this stage, the Bank of Scotland was also becoming concerned about the delay in the production of monthly management accounts for the subsidiaries of Nevis, including UCS. That was why the Bank had required the services of Mr Anderson to be re-engaged.

[144] Even in the absence of the management accounts for April 1997, which were not lodged, it has been proved to my satisfaction that by 31 May 1997, if not a few weeks before that, the Directors of UCS ought to have concluded that if UCS continued trading there were no reasonable prospects of the creditors of UCS being paid in full. In the event of course, the Directors of UCS at that time, who included Mr Brown, allowed UCS to continue to trade.

[145] It follows, accordingly, that whilst the Petitioner has failed to make out her allegation as to Mr Ferrier having caused and allowed UCS to continue trading, when he knew or ought to have known that there were no reasonable prospects of UCS paying their creditors in full, the Petitioner has done so in respect of Mr Brown.

[146] I turn to deal with the allegations made by the Petitioner in respect of goodwill. In the written pleadings in both Petitions, the conduct complained of forms part of what is described as the Respondent as having caused or allowed UCS to make inter-company disposals to the detriment of the company's creditors. As I have indicated, the written pleadings refer to a number of payments made by UCS to UCL during May and June 1997. By the stage when senior counsel for the Petitioner came to make his closing submissions, the complaint as to this aspect of the conduct of the Respondents was limited to that part of the payment of £148,000, made on 25 June 1997, which amounted to part payment of a figure for goodwill. As I have explained, UCS and UCL proceeded on the basis that goodwill amounting to £79,000 had been encompassed within the invoice for £169,000, issued by UCL on 30 April 1997. Senior counsel assessed the contribution towards settlement of the payment for goodwill, which had been contained within the payment of £146,000, as having been a sum of approximately £28,000. Whilst that was disputed on behalf of Mr Ferrier, I am satisfied that was a reasonable assessment to make.

[147] How the figure for goodwill of £75,000 came to increase to £79,000 was never explained during the evidence. It may be no more that an arithmetical mistake. The difference between £75,000 and £79,000 may not matter, however, because the Answers for Mr Ferrier explicitly state that "(t)he sum of £79,000 represents a payment for the said business to which UCL was entitled upon sale". Whilst the Answers go on to aver that no such payment was made or authorised by Mr Ferrier or UCS, whilst Mr Ferrier was a director of UCS, it is quite clear that his written pleadings admit that UCL had an entitlement to a payment of £79,000. That admission cannot be construed as relating to anything other than an agreement by UCS to make a payment for goodwill to UCL. Such a concession is entirely consistent with the view I have reached as to what happened and was decided during the meeting on 18 December 1996. It is also consistent with Mr Anderson's understanding of the position, when he prepared the A2B Report, and Mr Hope's actions, when he arranged for UCL to issue invoices to UCS and for UCS to make the payment of £148,000 to UCL. Quite how the terms of Mr Ferrier's pleadings can be reconciled with the evidence Mr Ferrier gave is more difficult to understand.

[148] In the Answers lodged by Mr Brown the position relating to the figure of £79,000 for goodwill is dealt with in slightly less explicit terms. In response to the Petitioner's averments about inter-company disposals, Mr Brown avers that payments and transfers between UCS and UCL "were properly made pursuant to the trading arrangements between the two companies and the arrangements for the Project Rainbow consolidation". In response to the averments relating to a payment of a figure of £79,000, Mr Brown avers that a fair value was paid for the business of UCL. In his evidence, however, Mr Brown stated that the agreement between UCS and UCL on goodwill was recorded in No. 7/52 of Process.

[149] In my opinion, an allegation of causing and allowing a company to make a payment should be construed as covering the conclusion of any agreement that the payment in question be made, just as much as it would cover the authorisation of the issue of a cheque or a bank transfer in settlement of the payment. Any other view of the responsibilities of the directors of a company of the size of UCS would be quite unrealistic. Once the directors of a company agree that expenditure is to be incurred, they cannot escape responsibility for their conduct merely by asserting that it fell to others to implement their decision. In my opinion, that remains the position even when the decision is implemented after a director has resigned from his post. In these circumstances, although there may be a measure of uncertainty as to precisely how much of the payment for £148,000 is attributable to goodwill, I am satisfied on the basis of the evidence before, including the paragraph at the top of Page 5 of Mr Anderson's Report dated June 2002, that part of that payment covered part of UCS' indebtedness to UCL in respect of goodwill.

[150] As far as the reasonableness of the figure of £75,000 is concerned, extensive efforts were made on behalf of both Respondents to justify the figure as having been a reasonable one. Much of the evidence on the subject of goodwill related to the discussions that took place between McIntosh of Dyce, Nevis and UCS, several months after 18 December 1996. Those discussions, culminating in the correspondence during May 1997, to which I already referred, related to the possibility that McIntosh of Dyce might acquire the share-capital of UCS. I found neither that evidence nor evidence relating to similar discussions with BFD and other companies, which had preceded the meeting of 18 December 1996, to be of any material assistance in determining whether £75,000 was an appropriate figure for the Directors of UCS to have agreed to pay.

[151] That was principally because the transactions being mooted with those other companies had been of a different format or structure to that adopted when UCS took over the business and assets of UCL and UCL ceased to trade. Furthermore there was considerable disagreement amongst the witnesses, who gave evidence on this issue, as to how the term "goodwill" fell to be defined, the basis on which goodwill should be assessed and how it should be referred to in the accounts of limited companies.

[152] In the event, I have been persuaded by the evidence I heard that it was reasonable for UCS to agree to pay some figure for goodwill to UCL in exchange for that company agreeing to transfer its business to UCS. I do not accept the views of Mr Alexander and Mr Hannon that merely because UCL had been trading at a loss, there was no justification for the payment of any figure for goodwill. On that issue, I prefer the evidence of Mr Anderson and Mr McLennan. Mr Anderson in particular justified the payment of goodwill on the basis that UCS was taking over UCL's customer base and that there had been in late 1996 and early 1997 grounds for believing that the amalgamated businesses would trade profitably.

[153] On the other hand, the evidence before me as to whether a figure of £75,000 was fair and reasonable, was of a very confused nature. To a very large extent, it was based either on very general assertions that such a figure appeared to be fair and reasonable or on complicated extrapolations from incomplete information about other possible transactions involving UCS, including the transaction discussed in UCS' negotiations with McIntosh of Dyce, which took place several months after December 1996.

[154] Looking at all the evidence I have heard, it does not strike me that the figure of £75,000 necessarily falls outwith the range of valuations of goodwill, which an independent accountant or expert might have advised as being appropriate, had UCS sought advice in December 1996. I certainly do not consider that a figure of £75,000 was obviously and inherently unreasonable, having regard to the turnover of UCL that it was proposed should be consolidated into the business of UCS. The projections for 1997 in No.7/52 of Process forecast that the former customers of UCL would generate slightly over 25% of the projected sales income of UCS, the total sales income for UCS being projected to be a figure in excess of £4.3 million. In these circumstances, whilst a figure of £75,000 (or indeed £79,000) for goodwill may have been excessive, the Petitioner has not been established to my satisfaction that it was.

[155] In summary, therefore, the conclusions I have drawn from the evidence I heard are (i) that on 18 December 1996 the Directors of UCS decided that the amalgamation of the businesses of UCL and UCS would proceed on the basis that UCS would pay £75,000 to UCL, in respect of goodwill for UCL's business, (ii) that, as a practical consequence of the decision of the Directors on 18 December 1996, UCS made a payment to UCL in respect of goodwill, which formed part of the payment of £148,000 dated 25 June 1997, (iii) that it was not unreasonable for UCS to have agreed to pay UCL some figure by way of goodwill, (iv) that the figure of £75,000 was calculated and decided upon on a unwarranted basis, namely that of ensuring that UCL received sufficient funds to settle their liabilities, but (v) that a figure of £75,000 (or £79,000) may have been one that was fair and reasonable.

[156] Insofar as the Petitioner's complaints about the payment for goodwill, as they are set out in her pleadings, also include the assertion that the making of the payment on 25 June 1997 was irresponsible, because it put the sum involved beyond the control of the directors of UCS and paid it to UCL, which was at that time insolvent, that particular complaint cannot be upheld in respect of either Respondent. Mr Ferrier had resigned as a Director by that date and Mr Brown was unaware that the payment of £148,000 had been authorised by Mr Hope and made by UCS, until after he left UCS.

[157] For these reasons, I have reached the conclusion that the Petitioner has failed to establish her complaints as to the conduct of the Respondents in respect of causing and allowing UCS to make a payment for goodwill, for which there had been no justification.

Whether a Disqualification Order should be imposed on Mr Brown
[158] Senior counsel for the Petitioner accepted that the Petitioner is not entitled to a Disqualification Order under the 1986 Act merely by establishing that a company director has conducted himself in a particular manner. Senior counsel acknowledged that the provisions of Section 6 of the 1986 Act requires the Court to consider the additional question of whether the proved conduct of a particular Respondent, as a director of UCS, has made that Respondent unfit to be concerned in the management of a company. As Hoffman L.J. said in Re Grayan (supra) at page 253E, '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 extenuating circumstances, has fallen below the standards of probity and competence for persons fit to be directors of companies'. That assessment requires the Court to consider the conduct complained about in the context of the circumstances that prevailed at the time of the conduct. Senior counsel stressed, of course, that this assessment requires to be considered in the light of the provisions of Section 9 and Schedule 1 to the 1986 Act.

[159] In my opinion, the conduct of Mr Brown between April 1997 and the date he resigned as a Director of UCS did not make him unfit to be concerned in the management of a company. I am quite satisfied that throughout that period Mr Brown dedicated himself to the business of UCS. I am quite satisfied that throughout that period of time Mr Brown genuinely believed there were reasonable prospects of UCS being sold, as a going concern and that such a sale would have been in the interests of the trade creditors of UCS.

[160] As senior counsel for the Petitioner volunteered, during the course of his submissions, the evidence indicated that Mr Brown had been a conscientious employee of UCS, throughout the time with which these proceedings are concerned. Linked to that is the further observation made by senior counsel for the Petitioner that Mr Brown appeared to have been sincere and honest in the evidence he gave. In my opinion, that observation is as applicable to Mr Brown's recollection of the events of 1996 and 1997, whilst UCS was still trading, as it is to the opinions Mr Brown expressed during the course of his evidence.

[161] I am conscious that in considering this issue, I must have regard to the provisions of Section 9 and Schedule 1 to the 1986 Act. That has involved me having regard to the part that Mr Brown played in causing UCS to become insolvent. That in turn has required me to compare the differing roles played by the Directors of UCS, during 1996 and 1997. In that regard, it is important to bear in mind that Mr Brown is not an accountant. Throughout the relevant period, he was working under the direction of three individuals, who were Directors of both Nevis and UCS, all of whom were accountants and all of whom were in a position to supervise and direct Mr Brown. Moreover, Mr Ferrier and Mr Clark were also able to close down UCS and thereby terminate Mr Brown's employment. Of the Nevis directors, who were also directors of UCS, Mr Hope was probably the most deeply involved in controlling and monitoring the overall finances of UCS. That was clear from the evidence I heard about the negotiations with the Bank of Scotland, as to the overdraft facilities available for UCS, and with McIntosh of Dyce, as to a possible takeover of UCS. But at different stages during 1996 and 1997, Mr Brown required to rely on Mr Ferrier, Mr Clark and Mr Hope for information and guidance. I have some doubts whether he received the advice and guidance he might have expected. There is more than a suspicion that certain financial information was kept back from Mr Brown, as is evidenced by the fact that he was not provided with a copy of the A2B Report (or at least a copy of those parts of the Report that related to UCL and UCS). Relevant here is Mr. Brown's own comment about the Nevis style of management having been "to a degree autocratic and secretive".

[162] As I have already indicated, there were a number of occasions during the proof when it was apparent that Mr Brown had an incomplete understanding of the factual and legal ramifications of the circumstances which UCS faced. Mr Brown's misunderstanding of the full legal ramifications of the proposed transaction with McIntosh of Dyce was but one example of when Mr Brown had not been fully aware of what his fellow Directors were engaged in doing. Such misunderstandings served to illustrate the extent to which Mr Brown had trusted and relied on his fellow Directors. It is unnecessary to dwell on whether that trust may have been misguided. The fact remains that Mr Brown relied on his fellow Directors of UCS and that they, for their part, did not keep Mr Brown fully informed about all matters that were of relevance to the future of UCS.

[163] As the observations of Hoffman L.J. in Re Grayan Building Services Limited, make clear, I am required to consider whether the conduct of Mr Brown after April 1996 fell below the standards of probity and competence appropriate for persons fit to be directors of companies. It has been suggested that is a jury question, for the Court to decide in the light of all the evidence before it, evidence which it must assess within the statutory framework laid down in the 1986. With the benefit of hindsight, it is possible to criticise Mr Brown for certain of the actions that he took and for certain actions that he failed to take. As I have indicated, however, I am not persuaded that his conduct over the relevant period was such as to make him unfit to be concerned in the management of a company. In particular, I am not persuaded that Mr Brown displayed such gross incompetence or breached the standards of commercial morality to such an extent that it rendered him unfit to be involved in the management of a company.

[164] In the circumstances, I am not prepared to make Disqualification Orders in respect of either of the Petitioners. Accordingly, I will sustain the second pleas in law for each of the Respondents and refuse the prayers of the Petitions.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Secretary of State for Trade and Industry v. Ferrier & Ors [2003] ScotCS 246 (25 September 2003) URL: http://www.bailii.org/scot/cases/ScotCS/2003/246.html Cite as: [2003] ScotCS 246