Re AG (Manchester) Ltd ((in Liquidation)); Official Receiver v Watson and another
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE PATTEN,Mr Justice Patten,Disqualification Act 1986 |
| Judgment Date | 24 January 2008 |
| Neutral Citation | [2008] EWHC 64 (Ch) |
| Docket Number | Case No: 5MA70318 |
| Court | Chancery Division |
| Date | 24 January 2008 |
[2008] EWHC 64 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
Royal Courts of Justice
Strand, London, WC2A 2LL
Before: Mr Justice Patten
Case No: 5MA70318
In The Matter Of Ag (Manchester) Limited
(formerly Known As The Accident Group Ltd
(in Liquidation)
And In The Matter Of The Company Directors
Disqualification Act 1986
Mr Stephen Davies Q.C and Mr Nigel Bird
(instructed by Cobbetts LLP (Manchester)) for the Claimant
Mr Michael Booth Q.C and Mr Mark Harper (instructed by Pannone LLP )
for the First Defendant
Hearing dates: 8,9,10,11,12,15,16,17,18 October 2007
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
In these proceedings the Official Receiver seeks disqualification orders under s.6 of the Company Directors Disqualification Act 1986 (“ CDDA 1986”) against various former directors of AG (Manchester) Limited (formerly the Accident Group) (“TAG”) which went into administration on 23 May 2003 and was placed into compulsory liquidation on 15 January 2004. The statement of affairs (dated 25 May 2003) disclosed a total deficiency of £81.2m.
Following an investigation into the conduct of the former directors, notice of intention to commence disqualification proceedings was served on the following directors of TAG:
Mark Campion Langford (“Mr Langford”)
Deborah Langford (“Mrs Langford”)
Michael Watson (“Mr Watson”)
Gary Andrew Hoddes (“Mr Gary Hoddes”)
Andrew Christopher Hopper QC (“Mr Hopper”)
Philip John Bird (“Mr Bird”)
Jacqueline Brennan (“Mrs Brennan”)
Philip Anthony Hoddes (“Mr Philip Hoddes”)
Barry Nield (“Mr Nield”)
Neil Robertson Ross (“Mr Ross”)
No further action has been taken against Mr Hopper but on 24 April and 4 May 2005 undertakings pursuant to the CDDA 1986 were accepted respectively from Mr Philip Hoddes and Mr Gary Hoddes. Proceedings were then commenced on 25 August 2005 against the remaining directors and this resulted in further undertakings not to act as directors for periods up to three years being received and accepted from Mrs Brennan, Mr Ross, Mr Nield and Mr Bird.
The proceedings have therefore continued against Mr Langford, Mrs Langford and Mr Watson. On 9 April 2007 Mr Langford was killed in a motor accident in Spain. The proceedings against him therefore abated. At the request of Mrs Langford, I adjourned the trial fixed for 14 May 2007 having received submissions on her behalf indicating that she wished to and intended to instruct solicitors to act for her in the proceedings but needed time to make arrangements and to cope with the obvious distress caused by her husband's death. Solicitors (DWF) were instructed on her behalf but on 20 June 2007 they came off the record and she has not taken any further part in the proceedings. The application has therefore continued against her in her absence and against Mr Watson who has been represented by solicitors and counsel throughout.
TAG was incorporated on 24 June 1993 as Motor Law Limited with an authorised share capital of £350,000 divided into 350,000 shares of £1 each. All the shares were issued and fully paid up. Until 30 June 2001 Mr and Mrs Langford each held 50% of the issued share capital. On that date Mr Langford transferred the entirety of his 175,000 shares and Mrs Langford 87,500 of her shares to Insinger Trust Company (“Insinger”), a Jersey company, as trustee of the Accident Group Limited Employee Benefit Trust (“the EBT”).
The shares transferred to Insinger on 30 June 2001 were transferred on the same day to Leverington Limited (“Leverington”), a BVI company whose own shares were held as trustees for Insinger by two Jersey companies, CH Limited and CN Limited. The result of these transfers was that from 30 June 2001 Mr Langford ceased to hold any shares in TAG, Mrs Langford held 87,500 shares and Leverington held 262,500 shares. On 1 August 2001 Mrs Langford transferred 43,750 of the shares retained by her to Mr Langford. Finally, on 21 January 2002 a company called Amulet Group Limited (which was incorporated on 31 August 2001) acquired all 350,000 issued shares of TAG which therefore became its wholly owned subsidiary. 75% of the share capital of Amulet was held by Leverington with the remaining 25% split between Mr and Mrs Langford. This remained the position when TAG was placed into administration in May 2003.
The EBT was a discretionary trust set up as part of a tax scheme devised and marketed by a firm of solicitors, Messrs Baxendale Walker, as what was described in their literature as a Private Share Liberation Plan. The beneficiaries of the principal trust were the present, past and future employees from time to time of TAG together with their spouses and issue, but excluding TAG and any person connected with TAG as defined by the Income and Corporation Taxes Act 1988. This includes shareholders and directors of the company.
The trust deed contains an overriding power to appoint all or part of the fund on the trusts of another settlement but again with a prohibition on any appointment in favour of connected persons. On 18 July 2000 this power was exercised so as to create eleven sub-trusts each one of which was in favour of the spouse, children and remoter descendants of one of the named directors. As with the principal trust, connected persons are excluded as beneficiaries but the sub-trusts (as did the principal trust) gave the trustee power to lend any part of the trust fund to any person including TAG on such terms as the trustee thought fit. An issue in these proceedings which I will come to later, is whether this power on its true construction enabled loans to be made to Mr and Mrs Langford as shareholders or to any of the directors.
The initial capital for the EBT was a nominal sum of £1000 advanced by TAG to Insinger on 30 June 2001 to set up the trust. But on the same day Mr and Mrs Langford made the share transfers described in paragraph 5 above, the result of which was that the EBT became the majority (75%) shareholder in the company and Mr and Mrs Langford's holding was reduced to 25%. Throughout the remainder of 2001 the trust received dividends from TAG which were used to produce the initial capital for the sub-trusts (£11,000) and thereafter to fund loans made by each sub-trust to the director whose family members were named as beneficiaries of that particular trust.
I shall come to the detail and manner of these payments later in this judgment but the net effect of the trust arrangements was that between 1 July 2001 and 23 October 2001 some £8.786m out of a total of £11.42m paid in dividends was received by the EBT and distributed purportedly in the form of loans to directors through the various sub-trusts.
One of the principal allegations in these disqualification proceedings (made against both Mr and Mrs Langford and Mr Watson) is that they allowed TAG to create and operate the EBT without prior notice to or proper consideration by the other directors as a vehicle for the undisclosed payment of remuneration or other benefits. I shall return to the detail of this complaint later in this judgment, but the critical feature of the EBT was that it was funded directly by the payment of dividends following the transfer of the majority of the Langford shares to the various overseas companies involved in the administration of the trust.
The legality of the dividend payments is central to the case against Mr Watson and Mrs Langford. The Official Receiver contends that the dividends paid between 31 January and 22 October 2001 (amounting to £11.21m) were either unlawful because they were not made out of distributable reserves of profit as required by s.263 of the Companies Act 1985 or were at the very least imprudent having regard to the existence of a number of known uncertainties about the future profitability of TAG at the time.
This allegation is the most serious example of the way in which the management of TAG is said to have been conducted at the time. Complaint is made that Mr Langford, Mr Watson and Mr Gary Hoddes throughout 2001 (or at least until a new finance director (Mr Gordon Blair) was appointed in early November 2001) usurped the proper functions of the board of TAG and without any delegation of such powers to them by the full board took all the strategic and financial decisions including the authorisation and payment of dividends. It is also said that as part of this process neither the accounts or financial statements, nor the authorisation of dividends were ever properly put before or notified to the board even after the decisions had been taken and implemented.
Mr Watson was appointed a director of TAG (as Finance Director) on 16 November 2000 and became its CEO on 9 July 2001. On 23 May 2002 he was dismissed and left the company. As already indicated, the allegations against him are that with Mr Langford and Mr Gary Hoddes he formed what has been described in the proceedings as the inner group of directors and caused or permitted the inner group to usurp the functions of TAG's full board and to make all strategic and financial decisions for TAG without prior notice being given to or the consent of the other directors. In particular, he is said (i) to have permitted the inner group between 31 January 2001 and 22 October 2001 to authorise the payment of the £11.21m of interim dividends when he either knew or ought to have known that these payments were either unlawful under s.263 CA 1985 or imprudent having regard to TAG's current and foreseeable financial position; and (ii) to have authorised the operation of the EBT for the personal benefit...
To continue reading
Request your trial
-
Did You Know That ...? (Corporate Round-Up)
...Industry [2006] EWHC 3694 (Ch) Secretary of State for Trade and Industry -v- Thornbury [2007] EWHC 3202 (Ch) Re AG (Manchester) Ltd [2008] EWHC 64 (Ch) COMPANIES ACT 2006 Group Restructurings ? Share Capital The Companies Act 2006 has made a number of changes which increase the options avai......
-
What Makes a Director Fit? An Analysis of the Workings of Section 17 of the Company Directors Disqualification Act 1986
...of unfitness made against Mr Watson concerned his failure to ensure that “basic rules of corporate governance were observed at TAG”.2626[2008] BCC 497 at 518. This failure resulted in the payment of dividends which Mr Watson ought to have realised were illegal and amounted to …falling well ......