Bradley v Secretary of State for Business, Innovation and Skills Court of Session (Inner House, Extra Division), 25 October 2016
| Jurisdiction | Scotland |
| Judgment Date | 25 October 2016 |
| Neutral Citation | [2016] CSIH 80 |
| Docket Number | No 10 |
| Date | 25 October 2016 |
| Court | Court of Session (Inner House) |
[2016] CSIH 80
Extra Division
Sheriff Court
Dawson Print Group Ltd (Re) [1987] 3 BCC 322; [1987] BCLC 601
Grayan Building Services Ltd (In Liquidation) (Re) [1995] Ch 241; [1995] 3 WLR 1; [1995] BCC 554; [1995] 1 BCLC 276
Secretary of State for Trade and Industry v Blackwood 2003 SLT 120; [2005] BCC 366
Sevenoaks Stationers (Retail) Ltd (Re) [1991] Ch 164; [1990] 3 WLR 1165; [1991] 3 All ER 578; [1990] BCC 765; [1991] BCLC 325
Company — Directors — Disqualification — Director arranging for trade creditors to be paid but not HM Revenue and Customs — Whether there was a deliberate policy of non-payment of HM Revenue and Customs and, if so, whether that was a sufficient basis for disqualification
The Secretary of State for Business, Innovation and Skills presented a summary application in the sheriffdom of Tayside, Central and Fife seeking an order in terms of sec 6(1) of the Company Directors Disqualification Act 1986 disqualifying Patrick Joseph Bradley from being a director, or in any way (directly or indirectly) being concerned or taking part in the promotion, formation or management of, a company. The sheriff heard evidence and granted the order. The appellant appealed to the sheriff principal (MW Lewis). His appeal was refused. The appellant appealed to the Court of Session.
Section 6(1) of the Company Directors Disqualification Act 1986 (cap 46) provides that “[t]he court shall make a disqualification order against a person in any case where, on application under the section, it is satisfied (a) that the person is or has been a director of a company which has at any time become insolvent …, and (b) that his conduct as a director of that company … makes him unfit to be concerned in the management of a company.”
A debtor company ceased trading, owing sums to trade creditors and to HM Revenue and Customs (‘HMRC’). The debtor's business, assets and employees were transferred to a new company. Both companies had the same director. The assets transferred included book debts, which the new company collected and used to pay the debtor's trade creditors, but not HMRC. The debtor was wound up. There were no assets to pay dividends to any creditor. The Secretary of State sought disqualification of the director on the basis that he caused the debtor's book debts to be realised by the new company and paid to the debtor's trade creditors to the detriment of HMRC. The director accepted that a debt had been due by the debtor to HMRC, but disputed the amount and relied upon that in his defence. He had tried without success to reach a compromise agreement with HMRC in the months following the debtor ceasing to trade and his evidence was that he believed that the receipts from the book debts would satisfy the whole of the debtor's indebtedness if the HMRC debt was reduced. The sheriff was satisfied that the director had adopted a deliberate policy of non-payment to HMRC while paying other creditors, and that that made him unfit to be concerned in the management of a company and ordered his disqualification. The director's appeal to the sheriff principal was refused. The director appealed to the Court of Session. The director argued that the sheriff's findings in fact did not support the conclusion that he was unfit to be a director. He argued that the sheriff erred in concluding that his 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 while trying to negotiate with HMRC. He argued that the sheriff's decision was, in reality, based on the fact that in the end HMRC was not paid, but that that was not sufficient for disqualification. The Secretary of State argued that the decision was one the sheriff was entitled to make, as she had not accepted the director's account that he genuinely believed that there would be sufficient funds to discharge the whole debt, including HMRC's debt. The circumstances were not simply the non-payment of debt but a deliberate policy of non-payment of one creditor while paying the others.
Held (diss Lord Malcolm) that: (1) it was irrelevant whether HMRC's claim was excessive, because the director accepted that the company was indebted to HMRC and did nothing to discharge it (paras 15, 34); (2) the findings in fact suggested no basis for the director having had any reason to think that he had an entitlement to control payments to HMRC while paying other creditors from a finite source of funds, the debtor had not appealed the tax assessment, and therefore the director had not made a commercial misjudgment (paras 17, 35); (3) the sheriff was entitled to conclude that the director had a deliberate policy of not paying HMRC while paying other creditors, choosing thus to favour trade creditors to the detriment of HMRC, which justified disqualification (paras 18, 36); and appeal refused.
Observed (per Lord McGhie) that on a reading of the sheriff's judgment as a whole, it is clear that she did not exclude evidence of the director's motivation (paras 32–35).
Dissenting (per Lord Malcolm) that: (1) the court should apply its mind to all potentially relevant circumstances when deciding whether it is satisfied that the director's conduct makes him unfit to be concerned in the management of a company, and in this case the director's motivation in connection with a failure to pay claims made by HMRC was a potentially relevant factor (para 22); (2) once the full background was taken into account, it was difficult to conclude that the director operated an unfair policy of discrimination in favour of other creditors, as his preference was to make some payment to HMRC albeit linked to his desire to negotiate down the claim as a whole (para 29); and (3) when regard was had to the narrowly-focused basis for alleged unfairness, and once the full circumstances were taken into account, there was no lack of commercial probity or marked incompetence such as would make the director unfit to manage a company (para 31).
The cause called before an Extra Division, comprising Lady Smith, Lord Malcolm and Lord McGhie, for a hearing on the summar roll, on 29 June 2016.
At advising, on 25 October 2016—
Lady Smith—
[1] The appellant, who is an accountant, was a director of Barhaul (2003) Ltd (‘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 pay as you earn (‘PAYE’) and National Insurance contributions (‘NIC’), and £147,567 to HMRC in relation to value added tax (‘VAT’).
[3] The business, assets and employees of the company were transferred to another company of which the appellant was a director (Adenloch Ltd) 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.
[5] In these circumstances, the respondent presented a summary application at Perth Sheriff Court in terms of the Company Directors Disqualification Act 1986 (cap 46) (‘the 1986 Act’), seeking a disqualification under sec 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 answer 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...
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