The Secretary of State for Trade and Industry v Vernon John Everleigh Davies and 4 Other Respondents

JUDGMENT: APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

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.

The Hon. Mr. Justice Patten

Mr Justice Patten:

Introduction .

The Insolvency Act 2000

On 2 ^nd April 2001 the Insolvency Act 2000 ("the 2000 Act") came into force. One of the main changes effected by this Act was the amendment of the Company Directors' Disqualification Act 1986 ("the 1986 Act") so as to permit the Secretary of State for Trade and Industry ("the Secretary of State") to accept disqualification undertakings from directors without the need for a court hearing. Section 1A of the 1986 Act as amended provides as follows:

"(1) In the circumstances specified in sections 7 and 8 the Secretary of State may accept a disqualification undertaking, that is to say an undertaking by any person that, for a period specified in the undertaking, the person –

(a) will not be a director of a company, act as receiver of a company's property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of a court, and

(b) will not act as an insolvency practitioner.

(2) The maximum period which may be specified in a disqualification undertaking is 15 years; and the minimum period which may be specified in a disqualification undertaking under section 7 is two years.

(3) Where a disqualification undertaking by a person who is already subject to such an undertaking or to a disqualification order is accepted, the periods specified in those undertakings or (as the case may be) the undertaking and the order shall run concurrently.

(4) In determining whether to accept a disqualification undertaking by any person, the Secretary of State may take account of matters other than criminal convictions notwithstanding that the person may be criminally liable in respect of those matters."

A disqualification undertaking therefore corresponds in terms to the order which the court may make under Section 6 of the 1986 Act and has the same consequences. The director will be prohibited by the undertaking from acting as a director or as a receiver of a company's property or as an insolvency practitioner for the period stated in the undertaking and any breach of the undertaking during the period of disqualification would constitute a criminal offence under Section 13 of the Act.

The preliminary considerations are also the same. Section 7 (1) of the 1986 Act requires the Secretary of State to form the view that it is expedient in the public interest that a disqualification order should be made against a person under section 6 before initiating proceedings for such an order. Section 7(2A) of the Act now provides as follows:

"If it appears to the Secretary of State that the conditions mentioned in section 6(1) are satisfied as respects any person who has offered to give him a disqualification undertaking, he may accept the undertaking if it appears to him that it is expedient in the public interest that he should do so (instead of applying, or proceeding with an application, for a disqualification order)."

The Secretary of State must form the opinion that the conditions specified in section 6(1) are satisfied before becoming entitled to accept a disqualification undertaking. He must therefore apply his mind to the evidence of conduct and unfitness in precisely the same way as the court is required to do when considering an application for a disqualification order. In considering the issue of conduct the court is required to have regard to the matters specified in Schedule 1 to the 1986 Act which include such things as misfeasance and breach of any fiduciary or other duty by the director, any misapplication or retention by the director or any conduct by the director giving rise to an obligation to account for any money or other property of the company and the extent of the director's responsibility for the company entering into any transaction liable to be set aside under Part XVI of the Insolvency Act. In cases where the company has become insolvent the court is required to have regard to the extent of the director's responsibility for the causes of the company's insolvency and his responsibility for any failure by the company to supply any goods or services which have been paid for whether in whole or in part. These provisions now also apply in relation to the acceptance of a disqualification undertaking. Section 9 (1A) provides that:

"In determining whether he may accept a disqualification undertaking from any person the Secretary of State shall, as respects the person's conduct as a director of any company concerned, have regard in particular:

(a) to the matters mentioned in Part 1 of Schedule 1 to this Act, and

(b) where the company has become insolvent, to the matters mentioned in Part II of that Schedule;

and references in that Schedule to the director and the company are to be read accordingly."

It is therefore clear that before the Secretary of State can determine whether it is expedient in the public interest that he should accept the undertaking which is offered he must first satisfy himself that the necessary basis for disqualification is made out.

The 1986 Act as amended also contains provisions for the release or modification of any disqualification undertakings which are accepted. Section 1A of the Act quoted above makes the prohibition contained in the undertaking subject to the leave of the court and Section 17 sets out the procedure to be followed in cases where leave is applied for. The relevant parts of Section 17 provide as follows:

"(3) Where a person is subject to a disqualification undertaking accepted at any time under section 7 and 8, any application for leave for the purposes of section 1A(1)(a) shall be made to any court to which, if the Secretary of State had applied for a disqualification order under the section in question at that time, his application could have been made.

(5) On the hearing of an application for leave for the purposes of section 1(1)(a) or 1A(1)(a), the Secretary of State shall appear and call the attention of the court to any matters which seem to him to be relevant, and may himself give evidence or call witnesses."

A director who has given a disqualification undertaking may also apply to the court under section 8A for the period of disqualification to be reduced or for the undertaking to cease to be in force. Sub-section 2 provides that:

"On the hearing of an application under subsection (1), the Secretary of State shall appear and call the attention of the court to any matters which seem to him to be relevant, and may himself give evidence or call witnesses."

Finally I should mention two provisions which featured in the submissions made to me during the course of this hearing. Section 18(2) of the 1986 Act requires the Secretary of State to maintain a register of disqualification orders and of cases in which leave has been granted to vary an order or a disqualification undertaking or for the undertaking to cease to be in force. In addition Section 18(2A) now provides that:

"The Secretary of State shall include in the register such particulars as he considers appropriate for disqualification undertakings accepted by him under section 7 or 8 and of cases in which leave has been granted as mentioned in subsection (1)(d)."

Sections 1A and 17 of the 1986 Act as amended are deemed by Section 21(2) of the Act to be included in Parts I to VII of the Insolvency Act for the purposes of various sections of that Act. These include Section 411 which contains the power to make insolvency rules. Section 411(4) of the Insolvency Act provides that rules made under that section shall be made by statutory instrument subject to annulment in pursuance of a resolution of either House of Parliament.

The procedural history

The applicant before me, Mr. Nigel Eastaway, was from May 1989 a director of Blackspur Group Limited and three other companies which as part of the Blackspur Group went into administrative receivership in July 1990 with an estimated deficiency of £34m. On 1 ^st July 1992 the Secretary of State instituted disqualification proceedings against Mr. Eastaway and four of his co-directors under the 1986 Act. On 1 ^st July 1992 criminal charges were brought against 4 of the directors including Mr. Eastaway. The Registrar therefore adjourned the disqualification proceedings generally on 28 ^th March 1994 with liberty to restore. The criminal trial ended in June 1994 with the acquittal of Mr. Eastaway and one of the other defendants. The two other directors were convicted but on appeal their convictions were quashed.

In September 1994 Mr. Eastaway requested the Secretary of State to discontinue the disqualification proceedings following his acquittal of the criminal charges. In December 1994 the Secretary of State indicated that having reviewed the position he had decided to continue with the disqualification proceedings. There was then a further delay caused by an earlier application by one of the other defendants, Mr. Davies, to strike out the...