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Scottish Court of Session Decisions |
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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> HM Secretary State Trade Industry v. Walker [2004] ScotCS 25 (03 February 2004) URL: http://www.bailii.org/scot/cases/ScotCS/2004/25.html Cite as: [2004] ScotCS 25 |
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OUTER HOUSE, COURT OF SESSION |
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OPINION OF T G COUTTS, Q.C. Sitting as a Temporary Judge in the Petition HER MAJESTY'S SECRETARY OF STATE FOR TRADE AND INDUSTRY Petitioner; against ALEXANDER MACBEAN WALKER Respondent:
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Petitioner: Wright QC; Biggart Baillie
Respondent: Clark; MacRoberts
3 February 2004
[1] On 19 September 2000 the petitioner applied to the Court seeking a Disqualification Order in terms of the Company Directors Disqualification Act 1986 in respect of the respondent. He had been a non executive director of APC Limited prior to its insolvency which was constituted by the appointment of receivers by The Royal Bank of Scotland plc. A.P.C. Ltd had substantial debts and deficiencies. These it is averred were caused, amongst other things by fraudulent activity by the executive director and others. It requires to be said at the outset, however, that there was no assertion and certainly no averment made suggesting that the respondent had personally been fraudulent.THE STATUTORY PROVISIONS AND THEIR APPLICATION
[2] The matters which are relevant to consideration of the statutory provision for ordering disqualification have been authoritatively set out in a binding decision of the Inner House, Secretary of State for Trade and Industry v Blackwood 2003 SLT 120. That decision summarised essential matters from several other cases, most of which were referred to me. The summary contained in Blackwood cannot in my respectful opinion be bettered; it sets out what requires to be considered in the approach to relevancy and specification in questions of this kind. I can do no better than quote the relevant passage:"[2] Under s 1(1) of the Act the court is bound to make a disqualification order against a person where s 6 of the Act applies, that is to say, where 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.
[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 provision (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 take 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 a particular case it is convenient 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 Hoffmann LJ at [1995] Ch, p254). 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 Hoffmann 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 Hoffmann 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 misjudgement (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 101). This is particularly the case where he must actually have known this to be the position (Re Cargo Agency Ltd)."THE PRESENT CASE
[3] The petition and answers combined to form a document of some length. Senior counsel for the petitioner moderately described the pleading as being "untidy". It was also prolix and until the petitioner deleted by amendment the incorporation brevitatis causa an extremely extensive KPMG report, I would have been disinclined to allow a proof which would burden the judge with the task of finding his or her way through the quantity of material pled in that way. [4] The excuse for the length and ramification of the pleadings was that the court it was said was bound to have regard to the whole circumstances surrounding the operation of the company in order to be able to ascertain whether the respondent was guilty of such failures as to be unfit to be concerned in the management of the company. It was contended for the petitioner that not only was there no pleading referring specifically to matters in the schedule to the Act but also that such matters as had been averred were so inspecific as not to allow any general conclusion of unfitness to be drawn. [5] I did not consider that the absence of specific reference to the matters referred to in the schedule to the Act rendered the petition irrelevant. Accordingly the question before me was one of determining from the pleadings whether fair notice of the matters sought to be established by the petitioner in order to infer unfitness in their totality had been given.THE FACTUAL BACKGROUND
[6] The facts relating to the company as averred may be summarised: Two companies APC Limited and APC (Civils) Limited were incorporated on 11 October 1994 and 15 January 1997 respectively. The company Civils was wholly owned by APC and had the same directors. Those directors were Elizabeth Clow (Managing Director) Ross Alexander Belch (Non Executive) and the respondent. Michael McMahon was the Secretary of the company. The respondent is a Chartered Accountant and has practised since achieving membership in November 1965. He works as a full time non Executive Director for a number of companies and holds himself out as having expertise in Marketing and Strategy. He has dealt with the relationship between companies and their banks and other lending institutions, has undertaken reviews of key indicators of their performance, has carried out and reviewed standard accounting ratios and is and was able to assess the acceptable and manageable levels of debt which a company can carry and afford having regard to its generation of cash. He had responsibility for institutional investment and banking facilities and had knowledge of the key contracts entered into by APC. [7] Another company Cranston (Scotland) Limited, which changed its name to Arran Aggregates Limited, was associated with Elizabeth Clow and is now in liquidation. [8] The statement of affairs which was sworn and lodged by Mr Belch on 24 September 1998 showed an estimated total deficiency of £9,435,446 of which £5,990,391 was owed to ordinary creditors. Somewhat surprisingly, in view of his position, the respondent avers that he does not know or admit that matter. In addition he professes a lack of knowledge of Cranston Scotland Limited. The petitioner, however, avers that, when in January 1997 the Royal Bank expressed concern about the solvency of Cranston and its ability to repay debts to APC, the respondent wrote a memorandum to his fellow directors expressing his concerns with the company positions of APC, Arran and Cranston. Although he wrote that further information was required he took no further steps to obtain it. The response to that averment is that the respondent professes not to know and does not admit that the Royal Bank had expressed such concern, nor does he admit the averment about his memorandum. [9] The deficit above noted is averred to have come about by imprudent trading which was then disguised by fraudulent conduct and falsification of documents by other persons in the company, not by the respondent. The principal delinquents it would appear on the averments were Elizabeth Clow and Mr McMahon. The respondent in his pleadings expresses ignorance of that situation and denies that there was any opportunity to discuss it. [10] In considerable averment the petitioner expresses in detail how it is alleged the respondent failed in his responsibilities to "satisfy himself that there was in place sufficient controls over the operation and affairs at APC and did not make sufficient enquiry in respect of the affairs of the company and could not accordingly be satisfied that the accounts produced for the company showed a true and fair view of its financial affairs." The petitioners aver that standard accounting ratios would have shown that APC was trading at a non sustainable level of financing commitment. APC was having difficulty meeting creditors when their debts fell due. For example they required to attempt to negotiate instalment payments of Value Added Tax with H.M. Customs and Excise. The sum involved was substantial and represented at least the tax due for an entire accounting period. [11] Another deficiency founded upon was that there was no complete or up-to-date fixed asset register. This was admitted. [12] Perhaps the most significant indicator of the involvement of the respondent and the circumstances requiring explanation by him are narrated in condescendence 10. That narrates the inaction of the respondent after an auditor's report dated 3 July 1996 was received and also when, on 17 February 1998, the auditors wrote pointing out slack practice with regard to the issuing of cheques and the absence of a fixed assets register. The respondent was said to have taken no action. The respondent's only response on the pleading is a reference to the letters for their terms, no admission being made and a general denial.
DECISION ON RELEVANCE
[13] In my view there is sufficient information in the averments narrated above to indicate the need for an enquiry without the need to traverse other matters in the pleadings. The picture painted is one of inaction on significant matters and an abdication of the responsibility appropriate to a non-executive director. I express no view as to any conclusion the court may arrive at after having heard the evidence and in particular the evidence of the respondent himself. It is impossible to say at this stage that the petition is bound to fail. It will require to go to enquiry unless the respondent's contentions under the Human Rights Act are sufficiently substantial to necessitate the dismissal of the petition.THE HUMAN RIGHTS ARGUMENT
[14] I considered that the court had a locus to consider this argument despite there being no notice of it in the pleadings. [15] In terms of article 6(1) of the European Convention of Human Rights an individual is entitled in the determination of the Civil Rights and Obligations to fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. It was contended that if the present application were to proceed any further, the court at some stage in the future would provide the respondent with a hearing which would neither be fair nor held within a reasonable time. [16] Having regard to the particular circumstances of the case it was said that the particular characteristic of the individual affected by the delay was a relevant factor insofar as they rendered the delay particularly prejudicial. It was pointed out that the respondent was in his 60's having followed a career as a non executive director and his ability to function as such would perhaps be blighted whatever the result of the petition. [17] It was narrated that the events with which the petition was concerned began in around 1996 but particularly involved matters in 1997 and 1998. The petition was served in September 2000 and enquiry may not be concluded before the end of 2004. [18] There was produced to me, although not specifically referred to in detail, the decision of the privy council in R v H.M.A. 2003 1 AC 21. There it was held in a prosecution for indecent behaviour towards children that a plea in bar of trial asserting that the prosecution had unreasonably delayed in bringing the charges to trial should be upheld and the charges dismissed. The charges were made in that case in August 1995 but no indictment was served until 2 October 2001. That is not a situation comparable with the present. Here no question of charges arises. The petition was presented in 2000 and should be completed in 2004. It is complex, involving fraud in the company and an enquiry into the behaviour of not only the respondent but also of other directors. [19] While it is true that the petition has been hanging over the respondent since September 2000 I am not persuaded that an enquiry cannot be held within a reasonable time. In the course of adjustment of the pleadings and of minutes of amendment, both parties have sought extensions to the normal time, thereby indicating that matters were never considered by either party to be wholly straightforward. There is the added distinction that the present procedure is a matter of civil rights and obligations, not a criminal trial. Further the matter of punishment which arises in criminal trials is not of significance in this petition. The petition has been brought at the instance of the Secretary of State with a view to determining whether the public require to be protected from the respondent's having the opportunity to act as a director or being concerned in or taking part in the promotion, formation or management of a company. The process is for the protection of potential creditors. That is its principal and distinguishing feature. Furthermore, it is noted that, with the leave of the court, the effect of the disqualification can be modified or waived should circumstances warrant it. [20] For these reasons therefore I do not consider that the proceedings, so far, fall foul of article 6(1) of the Convention.RESULT
[21] I shall allow to the parties a proof of these respective averments leaving all pleas standing at this stage.
