Aaron v Secretary of State for Business, Enterprise and Regulatory Reform
| Jurisdiction | England & Wales |
| Judge | Lord Justice Thomas,Lord Justice Keene,Lord Justice Buxton |
| Judgment Date | 02 April 2009 |
| Neutral Citation | [2008] EWCA Civ 1146 |
| Docket Number | Case No: A3/2008/0983 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 April 2009 |
[2008] EWCA Civ 1146
Lord Justice Buxton
Lord Justice Keene and
Lord Justice Thomas
Case No: A3/2008/0983
Claim No 8630 of 2005
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THOMAS IVORY QC (Sitting as a Deputy High Court Judge)
Royal Courts of Justice
Strand, London, WC2A 2LL
Edward Bannister QC (instructed by Edwin Coe LLP) for the Appellants
Guy Newey QC and Andrew Westwood (instructed by Howes Percival) for the Respondent
Hearing date: 4 July 2008
This appeal raises an evidential issue in an application under s.7 of the Company Directors Disqualification Act 1986 ( CDDA) to seek the disqualification of three directors. The Secretary of State wishes to rely upon finding of fact and opinions set out in a Report of the Financial Services Authority (FSA) (made under s.170 of the Financial Services and Markets Act 2000 ( FSMA) by investigators appointed under s.167 and 168 of FSMA) and other materials on which the Secretary of State relied when deciding to make the application. The defendant directors contend that the findings of fact and the opinions expressed in the report and other documents are inadmissible, principally because of the rule in Hollington v Hewthorn. Mr Thomas Ivory QC, sitting as a Deputy Judge, decided the issue on all the materials in favour of the Secretary of State.
Background
It is not necessary to describe the background at length. A summary will suffice:
i) The first defendant, David Aaron, was the Chairman and Chief Executive of David M Aaron (Personal Financial Planners) Limited (DMA). The second defendant, Andrew Jones, was the investment director of DMA; he became the compliance officer in 2002. The third defendant was the technical director of DMA, being responsible for the provision of technical support in all areas of financial planning. DMA was a company regulated by the Personal Investment Authority (PIA) until November 2001 and thereafter by the FSA.
ii) The business of the firm was run as a partnership until 30 September 2000 when DMA was incorporated. It acted as an independent financial adviser and was authorised under the FSMA to advise and enter into deals in investments. It had about 27,000 active clients.
iii) In the period 1998 to 2003 about 28% of its business was structured products. A part of that business in structured products, though it was not possible to tell precisely how much, related to advice and the sale of structured capital at risk products (“SCARPs”).
iv) SCARPs are financial arrangements which give investors a guaranteed fixed income or growth on the initial capital invested over a fixed term; the return of the initial capital invested is linked to a specific measure such as a designated index or basket of stocks. Although the income is guaranteed, the return of the initial capital invested is dependent upon the performance of the designated index or basket of stocks to which it was linked.
v) DMA sold SCARPs either as direct sales to investors on the basis of material it provided to potential investors or on the basis of advice. About 85% was sold on the basis of written materials.
vi) In March 2002 the FSA conducted an industry-wide review of the sale of SCARPs. The review of DMA included an examination of training materials, sales documentation and complaints. The complaints related to the loss of capital on the maturity of the SCARP in which members of the public had invested. It was alleged there had been mis-selling. Concerns were identified regarding the suitability of sales. As a result a visit to DMA was undertaken in March 2003.
vii) After further action by the FSA, on 23 June 2003 the FSA commenced an investigation under s.167/168 of FSMA into the sale of SCARPs by DMA. The investigation included interviews of the officers of DMA.
viii) On 8 December 2003 the Financial Ombudsman Service (FOS) upheld 4 complaints against DMA and awarded compensation. As a result the directors of DMA consulted the FSA and KPMG. In consequence, and with the approval of the FSA, on 18 December 2003 the directors resolved to place DMA into administration. On 22 December 2003 DMA went into administration.
ix) On 30 April 2004 the FSA published its investigation report on DMA.
x) Subsequently, after considering representations from the defendants, on 25 August 2004 the FSA by a Final Notice cancelled DMA's authority to carry on business.
The FSA Report and the Final Notice included the following conclusions:
i) DMA's process for categorizing risks was flawed.
ii) In promoting the sales of SCARPs DMA did not give a proper explanation or advise correctly on their suitability for investors. DMA did not provide customers with an objective view; it played down the risks associated with the return of capital and so mis-sold SCARPs.
iii) In the risk ratings allocated to SCARPs by DMA, the risk rating was too low.
iv) The literature did not sufficiently emphasise the risks as to the return of the capital invested.
v) DMA's advertising material did not give sufficient information to enable the customer to make an informed decision.
vi) DMA's record-keeping was defective. The compliance officer failed to pay adequate attention to his role and spent too much time selling products.
The FSA Report and Final Notice set out the relevant principles of the FSA and the FSA/PIA rules which it was said that DMA had breached and the facts relied on for those breaches.
When DMA went into administration, there was a deficiency of assets over liabilities. The Financial Services Compensation Scheme received 2,600 claims against DMA; on these it has paid out £11.92m relating to 1,862 claims. The Financial Services Compensation Scheme has projected total compensation of £14.6m. In the result this would give an overall deficiency as regards creditors and shareholders of £17.3m; it was not anticipated that any dividend would be payable to creditors.
The application by the Secretary of State
The FSA Report, the Final Notice and five of the Complaints determined by FOS were considered by the Secretary of State through the Insolvency Service, an Executive Agency of his Department, in order to determine whether he should make an application for disqualification. Under the CDDA there are two powers to disqualify directors which are relevant to this application:
i) Under s.6 of the CDDA the court is obliged to make a disqualification order where the court is satisfied that the person has been a director of a company which has become insolvent and that his conduct as a director of the company makes him unfit to be concerned in the management of a company. Under s.7, the Secretary of State is entitled to make such an application within 2 years of the date on which the company became insolvent; it was under this section the application against the defendants was made.
ii) Under s.8 of CDDA the Secretary of State can apply for an order for disqualification if it appears to him “from investigative material that it is expedient in the public interest” that a disqualification order should be made against a person who has been a director of the company. “Investigative material” includes a report by Inspectors under s.437 of the Companies Act 1985, a report made by Inspectors under ss. 167 and 168 of the FSMA and information obtained under the investigations provisions in ss. 165, 171, 172, 173 and 175 of FSMA. The court will make a disqualification order where it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of it.
The Secretary of State decided to consider making an application for disqualification under s.I accept that an application could have been made under s.8 in view of the fact that there was “investigative material” set out in a report under s.170 of FSMA made by investigators appointed under s.167/168 of FSMA.
On 18 November 2005 notices were sent to the defendants giving them notice pursuant to s.16 of CDDA of the Secretary of State's intention to apply for a disqualification order under s.6 of that Act. After considering the responses of the defendants, the Secretary of State commenced the present proceedings on 20 December 2005 seeking the disqualification of the defendants. It was made a matter of days before the expiry of the two year time limit.
An affidavit in support of the application was sworn by Mr Elliott Burns, a Chief Examiner of the Insolvency Service, on behalf of the Secretary of State in support of that application. The affidavit was required to comply with Rule 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987 (as amended) which provided
“The case against the defendant
(1) There shall, at the time when the application is issued, be filed in court evidence in support of the application for a disqualification order; and copies of the evidence shall be served with the application on the defendant.
(2) The evidence shall be by one or more affidavits, except where the claimant is the official receiver, in which case it may be in the form of a written report (with or without affidavits by other persons) which shall be treated as if it had been verified by affidavit by him and shall be prima facie evidence of any matter contained in it.
(3) There shall in the affidavit or affidavits or (as the case may be) the official receiver's report be included a statement of the matters by reference to which the defendant is...
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