Secretary of State for Trade and Industry v Backhouse
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE ALDOUS |
| Judgment Date | 26 January 2001 |
| Neutral Citation | [2001] EWCA Civ 67 |
| Docket Number | Case No: A3/2000/2844; A3/2000/2899 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 January 2001 |
In The Matter Of North West Holdings Plc (in Liquidation)
And In The Matter Of North West Holdings Limited (registered In Alderney)
And In The Mattter Of The Insolvency Act 1986
[2001] EWCA Civ 67
Lord Justice Aldous
Lord Justice Mance and
Mr Justice Charles
Case No: A3/2000/2844; A3/2000/2899
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
COMPANIES COURT
MR JUSTICE HART
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr A. Elleray QC (instructed by D.P. Hardy & Co for the Appellants)
Mr R. Hildyard QC and Miss B. Lucas (instructed by The Treasury Solicitor for the Respondent)
This is an appeal against the orders of Hart J of 19th October 1990 which ordered Mr Backhouse to pay the costs of the Secretary of State for Trade and Industry in two petitions.
The two petitions were presented by the Secretary of State on 21st April 1998. They sought the winding up of North West Holdings Plc (Holdings) and North West Holdings Limited (Limited) pursuant to sections 124 and 124A of the Insolvency Act 1986.
Holdings was incorporated in 1987 and the shares were held by Mr and Mrs Backhouse. They were the directors until 1993 when Mrs Backhouse resigned. According to the audited accounts for the years 1993, 1994 and 1995 it did not trade and the balance on the profit and loss account was £999. The audited accounts for the year ending 31st July 1996 showed that Holdings received an income of £10,000 and incurred expenditure to the same amount. Thus the balance on the profit and loss account remained at £999.
Limited was a company registered in Alderney with two companies as its shareholders. The shares in those two companies were beneficially owned by Mr and Mrs Backhouse. Thus Limited was in effect a company owned and controlled by Mr and Mrs Backhouse.
Although the accounts of Holdings showed it to be a dormant company, it operated as a front for the business ventures of Mr Backhouse. He carried on business as a financial and business adviser.
On 16th June 1997 the Secretary of State authorised Mrs Cropper, pursuant to section 447 of the Companies Act 1985, to require Holdings to produce to her such documents as she might specify. On 19th June Mrs Cropper wrote to Holdings requiring it to furnish its books and to provide a considerable amount of information. Having seen the books and obtained replies to her queries from the companies, supplied by Mr Backhouse, the petitions to wind up Holdings and Limited were presented on 21st April 1998 with a return date of 3rd June 1998. On 22nd April 1998 the Official Receiver was appointed as provisional liquidator. On 1st June 1998 solicitors acting for the companies informed the Secretary of State that the companies intended to oppose the petitions. There followed on 3rd June 1998 an application to discharge the provisional liquidator. It was refused on 23rd July 1998, but the court ordered that the application should come on for hearing with the hearing of the petitions. That decision was the subject of an unsuccessful appeal to this Court.
The hearing of the petitions started on 1st September 1998. Unfortunately during the hearing counsel appearing on behalf of the companies became ill with the result that an adjournment became necessary. During the time of the adjournment, the companies sought to appeal against the judge's ruling on the validity of the advertisements. The application failed. At that stage counsel advised that the companies should not resist the orders sought as they were insolvent. The court was informed on 19th October 1998 of the decision not to resist the winding up orders being made, but as they were public interest petitions Hart J decided that the hearing should continue and he gave judgment on the same day. After judgment counsel on behalf of the Secretary of State intimated that his client would be considering making applications, pursuant to section 51 of the Supreme Court Act 1981, for orders that Mr Backhouse should pay the costs personally. Such applications were made and were heard on 7th and 8th June 1999. Hart J in his judgment upheld the applications with the result that Mr Backhouse was ordered to pay the costs of both petitions. Mr Backhouse was refused leave to appeal by the judge, but leave was granted by me on paper on 2nd May 2000.
The order granting leave to appeal extended the time for service of the notice of appeal until 4.30 pm on 27th May 2000, but service was not effected until at least 10th August 2000. Thus Mr Backhouse had to seek an extension of time for service. That was resisted by the Secretary of State.
The facts relating to the application for an extension of time were not in dispute. It seems that the Civil Appeals Office notified the parties by letter of the decision granting permission, as the Treasury Solicitor received such a letter on 18th May 2000. Mr Hardy, the solicitor acting for Mr Backhouse said that he did not receive a corresponding letter and did not have notice of the decision granting permission and requiring service of the notice within 10 days of the order until he received a letter of 19th June 2000 from the Treasury Solicitor. Thereafter Mr Hardy appears to have done nothing until applying to the Civil Appeals Office for an extension of time on about 10th August 2000.
The delay that occurred would normally not be excused, but this case is exceptional in that no prejudice has resulted and the steps needed to be taken were formal in that the draft Notice of Appeal and skeleton were before the Court and the Treasury Solicitor knew at an early stage that permission had been given. In those exceptional circumstances and in the light of the issues involved, we decided to extend the time and to go on to hear the appeal. Despite that indulgence there can be no doubt that the inaction of Mr Hardy was not acceptable. I also deprecate his failure to attend court as the solicitor on the record, particularly as his inaction had put his client's appeal in jeopardy.
Mr Elleray QC, who appeared on behalf of Mr Backhouse, submitted that the judge had wrongly exercised his discretion when ordering Mr Backhouse to pay the costs of the petitions. I shall come back to the submissions of Mr Elleray, but in essence he challenged the conclusion of the judge that the circumstances were sufficiently exceptional to result in Mr Backhouse, a person not party to the petitions, being required to pay the costs. He also drew attention to the fact that Mr Backhouse had been ordered to pay the costs prior to the date when the petitions were presented. He submitted that could not be right. If it was then he submitted the controlling shareholder and director of a company would always be liable to pay the costs leading up to presentation of a petition.
Mr Hildyard QC, counsel for the Secretary of State, supported the conclusion and reasons of the judge. He submitted that this Court should not interfere with the discretion of the judge.
At the hearing of the petitions there were three complaints which were at the heart of the case of the Secretary of State. First, no proper books of account were maintained. It was conceded that the accounts of Holdings were "fundamentally misleading in suggesting that it was a dormant company".
Second, the business of Mr Backhouse and the companies were intertwined with Mr Backhouse treating the monies earned as his and his wife's.
Third the majority of business carried on, the sale of a flexible savings and protection scheme, involved excessive charges which were so concealed as to be misleading. The judge said that, stripped of its packaging, the scheme involved the client opening a savings bank account with Carter Allen Bank and the making of regular monthly payments into the account. At the same time the client signed a standing order drawn on that account in favour of account in the name of Premium Collection Services. That was an account of Holdings. The monies paid under the standing order were used by Holdings partly to defray the cost of servicing an insurance policy in the name of the client and in part paying Holdings' charges under the scheme. Those charges were said by the judge to be excessive. The charging structure of the scheme was so designed that, for example, in the first year of the scheme very nearly the whole of the client's regular payments were swallowed up by the charges. Thus the financial benefit obtained by the client from the arrangements were, firstly the acquisition of a term of life insurance and, secondly a sum, accumulating over time, in his named bank account. To that was added the undertaking by Holdings to make available their services, but that obligation was terminable on a month's notice.
Having analysed the way that the scheme was promoted the judge came to this conclusion:
"The Secretary of State's case in relation to the scheme is, first, that charges are not appropriately explained in that or any other document. That is a question that may strike different minds differently. It is certainly the case that one has to read the document with care and patience in order to discover exactly how the charges work, both as to obtaining and as to amount and the document is certainly not designed to make that task easy. The real objection, however, is not only to the obscure way in which charging structure is explained in that document, but to the level of charges which result and to which I have already briefly referred. The expert evidence which is before me, and which in the case...
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