Appeal By Patrick Joseph Bradley Against Her Majesty's Secretary Of State For Business, Innovation & Skills
| Jurisdiction | Scotland |
| Judge | Lord McGhie,Lord Malcolm,Lady Smith |
| Neutral Citation | [2016] CSIH 80 |
| Date | 25 October 2016 |
| Docket Number | XA87/15 |
| Court | Court of Session |
| Published date | 25 October 2016 |
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2016] CSIH 80
XA87/15
Lady Smith
Lord Malcolm
Lord McGhie
OPINION OF LADY SMITH
in the appeal
by
PATRICK JOSEPH BRADLEY
Appellant and defender
against
HER MAJESTY’S SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS
Respondent and pursuer
Appellant: Davies; TLT LLP
Respondent: Thomson; Burness Paull LLP
25 October 2016
Introduction
[1] The appellant, who is an accountant, was a director of Barhaul (2003) Limited (“the company”). The company ceased trading on 30 June 2010, HM Revenue and Customs (“HMRC”) commenced proceedings for its liquidation on grounds of insolvency, an interim liquidator was appointed by the sheriff at Perth on 28 February 2011 and a liquidator was appointed on 21 April 2011.
[2] On 30 June 2010, the company’s balance sheet showed that it owed trade creditors £109,881; it also owed £134,468.86 to HMRC in relation to PAYE and NIC, and £147,567 to HMRC in relation to VAT.
[3] The business, assets and employees of the company were transferred to another company of which the appellant was a director – Adenloch Limited – on 30 June 2010 and Adenloch’s name was changed to “Barhaul Aberfeldy Limited” (“BAL”). Those assets included book debts of £378,986. The book debts were collected by BAL and used to pay the company’s trade creditors.
[4] No payments were made by the company in relation to the sums owed to HMRC and at the end of the liquidation there were insufficient funds to pay a dividend to any creditor.
Summary Application
[5] In these circumstances, the respondent presented a Summary Application at Perth Sheriff Court in terms of the Company Directors Disqualification Act 1986, seeking a disqualification under section 6(1). The sheriff heard evidence from a number of witnesses including the appellant.
[6] The unfit conduct relied on was that the appellant had failed in his director’s duties when, through the transaction with BAL, he caused book debts to be realised and paid to trade creditors, all to the detriment of HMRC, to which he chose to make no payment at all. As the appellant averred, in Ans 9.3:
“Barhaul Aberfeldy Limited collected payments on behalf of the company and made disbursements on behalf of the company. Barhaul Aberfeldy Limited collected a sum of £103,583.37 which sum was used to pay creditors of the company….”.
BAL in fact collected more than that; a sum in excess of £160,000 was realised from the company’s debtors and used to discharge the debts due to trade creditors (finding in fact 20). Nothing was paid to HMRC because, although the appellant accepted that there was a debt due by the company to HMRC – a debt which had been outstanding for a significant period – he considered that the total amounts sought were excessive. Between 30 June 2010 and 28 February 2011, he tried, without success, to reach a compromise agreement with HMRC. He made offers of payment by instalments (an initial instalment of £20,000 then £10,000 every fortnight) but he made them conditional on HMRC agreeing to enter into negotiations with him; those offers were rejected. The company did not appeal or otherwise formally challenge the assessments. HMRC never wavered from their position which was that the company owed the total sum due as shown in their assessments and the relevant VAT returns and they were entitled to proceed to enforcement if it remained unpaid.
[7] The appellant’s case was presented to the sheriff on the basis that he had a proper and genuinely held belief that receipts generated by ingathering the debts due to the company would discharge the whole of the company’s indebtedness. She did not accept that his conduct could be characterised in that way. She said: “I cannot conclude from the evidence that the defender was operating in that context” (Appeal print p.49, para 2).
[8] In evidence, the defender relied on the fact that whilst he accepted a debt was owed to HMRC, he did not accept the total sum due was as high as they claimed. The sheriff rejected that defence as irrelevant to the issue of whether or not a disqualification order was justified.
[9] She was satisfied that the conduct relied on, amounting to a deliberate policy of non‑payment to HMRC whilst paying other creditors, made the appellant unfit to be concerned in the management of a company. She ordered that he be disqualified from being a company director for three years.
Appeal to the Sheriff Principal
[10] The appellant appealed to the sheriff principal on grounds not relied on in the appeal to this court. The sheriff principal was satisfied that the basis of the application and for the sheriff’s order was the operation by the appellant of a policy of discrimination in favour of the company’s trade creditors and against HMRC; payment was withheld from one creditor whilst all others had been paid.
The Present Appeal
[11] The appeal was presented essentially on the basis that the sheriff had erred in making her assessment of whether or not the appellant was unfit to be a director. The findings in fact did not, it was submitted, support that conclusion. Counsel placed much reliance on: the absence of any allegation of fraud or dishonesty or personal gain; the absence of allegation that the transfer of the company’s business to BAL was at undervalue; his assertion (unsupported by any finding in fact) that the company was solvent on 30 June 2010; that the outcome was a matter of misjudgement by the appellant, not a deliberate policy directed against HMRC; dicta to the effect that non-payment of Crown debts does not of itself point to unfitness (Re Dawson Print Group Limited [1978] 3 BCC 322, Lord Hoffman at p. 325); dicta to the effect that ordinary commercial misjudgement does not call for a disqualification order (In re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, Dillon LJ at p.176); and dicta to the effect that the conduct relied on, if not dishonest, needs to be a breach of commercial morality or really gross incompetence (Re Dawson Print at p.324; Secretary of State for Trade and Industry v Blackwood 2003 SLT 120, Lord President (Cullen) at para 7). He submitted that the sheriff erred in concluding that the appellant’s contention that the sums claimed by HMRC were excessive was irrelevant and erred in failing to conclude that there was nothing wrong with choosing to pay trade creditors whilst trying to negotiate with HMRC. The import of the latter seemed to be that the appellant genuinely believed he would be successful in negotiating with HMRC to the extent that monies collected after 30 June 2010 would be sufficient to meet the whole of the company’s liabilities. Finally, counsel submitted that the sheriff’s decision was, in reality, based on the fact that, in the end of the day, HMRC were not paid and that, he said, was not sufficient for disqualification.
[12] In response, counsel for the respondent submitted that the sheriff had not erred in any respect. She did not accept that the appellant genuinely believed that the position would, ultimately, be that there would be sufficient funds to discharge the whole of the company’s indebtedness. There was no need to show that the transfer of the business had been at undervalue. The circumstances amply supported the sheriff’s conclusion: it was not simply a matter of non-payment of a Crown debt; the sheriff was satisfied that a policy was determined on that discriminated against one creditor; that policy was a deliberate policy of non-payment of one creditor whilst paying others; the outcome, whereby HMRC received no payment at all, was not simply the result of paying creditors as their debts fell due; the appellant’s contention that HMRC’s claim was excessive was, as the sheriff rightly determined, irrelevant; the debts due to HMRC could not be characterised as disputed given that they were the amounts due in terms of assessments and VAT returns which had never been subject to formal challenge. Further, the Sheriff’s decision was a matter of judgment and she had been entitled, in all the circumstances, to find that the appellant was unfit to be concerned in the management of a company; it was, essentially, a jury question. The grounds of appeal disclosed no proper basis to justify interference by this court with the sheriff’s decision.
Decision
[13] The sheriff disqualified the appellant in terms of section 6 of the Company Directors Disqualification Act 1986 which provides:
“(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied –
-
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
- that his conduct as a director of that company… makes him unfit to be concerned in the management of a company.”
[14] The purpose of section 6 is to protect the public, particularly potential creditors of companies, from losing money through the insolvency of companies whose directors are unfit to be involved in their management. Conduct prior to insolvency may be just as relevant as conduct engaged in after a company becomes insolvent. Section 9 provides that where it falls to a court to determine whether a person’s conduct as a director makes him unfit to be concerned in the management of a company, the court shall have regard in particular to the matters mentioned in a list in Schedule 1 to the Act but the list is not exhaustive. None of those matters were, however, relied on by the sheriff. Her approach was, rather, that facts other than those mentioned in Schedule 1 were demonstrative of unfitness.
[15] Turning first to the contention that the sheriff erred in finding that appellant’s contention that HMRC’s claims were excessive was irrelevant, I would reject it. The appellant accepted that the company was indebted to HMRC – indeed, he had offered to pay £20,000 plus £10,000 per fortnight. As the...
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