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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Cathie & Anor v Secretary of State for Business, Innovation and Skills [2011] EWHC 3026 (Ch) (18 November 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/3026.html Cite as: [2011] EWHC 3026 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Rolls Building, Fetter Lane London, EC4A 1NL
		18/11/2011

MR JUSTICE HENDERSON:

INTRODUCTION


 


1. This is my judgment on the appeals brought by two former directors of Janus Technologies Limited ("Janus" or "the Company"), Mr Stephen Cathie and Mr Stephen Kellar, against disqualification orders under section 6 of the Company Directors Disqualification Act 1986 made against them by District Judge Smith ("the Judge") in the Manchester County Court, following a trial which took place over four days between 9 and 12 June 2010.
2. The Judge delivered an oral judgment on 14 June 2010, when he decided that disqualification orders should be made against both Mr Cathie and Mr Kellar, and expressed the provisional view that Mr Kellar should be disqualified for the minimum period of two years and Mr Cathie, whom he considered to be more culpable, for a period of three years. Due to listing difficulties, the hearing to fix the periods of disqualification did not take place until 9 March 2011. By his order of that date, as subsequently amended on 20 June 2011, the Judge made disqualification orders against Mr Kellar for two years and against Mr Cathie for two years and six months, beginning in each case on 30 March 2011. He refused the directors permission to appeal, and also refused Mr Kellar's application for a stay of the order against him.
3. On 13 April 2011 permission to appeal was granted to both directors by His Honour Judge Purle QC, sitting as a judge of the High Court, and the disqualification order against Mr Kellar was stayed until final disposal of his appeal. Directions were also given for the appeal to be expedited, with a time estimate of two days. The appeal was then listed to be heard between 13 and 15 July 2011, but an application to adjourn the hearing was made by the directors on the ground that leading counsel retained on their behalf under a full conditional fee agreement, Mr Clive Freedman QC, was engaged in a trial which had overrun. The application was granted by Norris J on 8 July, and the appeals eventually came on for hearing before me in the last week of the Long Vacation on 27 and 28 September 2011. Both sides were now represented by leading and junior counsel, with Mr Freedman QC leading Mr James Morgan (the latter of whom had appeared at the trial) for the directors, and Mr Mark Cunningham QC leading Ms Lucy Wilson-Barnes (the latter of whom had also appeared at the trial) for the Secretary of State.
4. Section 6(1) of the 1986 Act provides as follows:

"The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied –

(a) the 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

(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company."

By virtue of section 6(4), the minimum period of disqualification that may be imposed under section 6 is two years, and the maximum period is 15 years.

5. Janus ceased trading on 29 August 2006, and on 13 October 2006 it entered creditors' voluntary liquidation. There is no dispute that Janus then became insolvent within the meaning of section 6(1)(a). The joint liquidators appointed on that date were Mr Stephen Wainwright and Mr Stephen Lord, both of Poppleton & Appleby, a Manchester firm of insolvency practitioners.
6. On 3 March 2008 the Secretary of State gave formal notice to the directors, pursuant to section 16 of the 1986 Act, of his intention to apply to the court for disqualification orders to be made against them. The sole ground relied upon in each notice was failure to ensure that Janus

"complied with its statutory obligation to remit monies to HM Revenue and Customs ("HMRC") in respect of PAYE/NIC deductions from employee wages, with the effect that the company traded at the risk and to the detriment of HMRC incurring a final liability in respect of PAYE/NIC in the sum of at least £193,030.65 (including interest of £4,855.53)."

The period of the alleged failure was between 19 June 2005 and 29 August 2006 in the case of Mr Cathie, and between 9 August 2005 and 2 August 2006 in the case of Mr Kellar. For present purposes, nothing turns on these minor differences of date, which reflect the fact that Mr Kellar resumed his directorship of Janus (after an intervening period of bankruptcy) on 9 August 2005, and he then resigned on 2 August 2006, a few weeks before Janus went into liquidation.

The basic facts

7. The basic facts were set out by the Judge in paragraphs 12 to 27 of his judgment. They are not controversial, and the following account is largely drawn from those paragraphs and from the helpful summary in Mr Morgan's initial skeleton argument in support of the appeal.
8. Janus was incorporated on 19 July 2001, and on 12 October 2001 Mr Cathie and Mr Ian Templeton were appointed directors and Mr Kellar was appointed company secretary. Mr Templeton was formerly the managing partner of BDO Stoy Hayward, the well-known firm of accountants. No allegations of unfitness to act as a director have been made against him.
9. The Company began trading in November 2001, from premises in the centre of Manchester. In its early years the Company's core business was the buying and selling of used printing machinery. Mr Cathie had a considerable background in that industry.
10. On 28 February 2002 the Company purchased some chattels from Mr Kellar for approximately £50,000. These chattels were the contents of Mr Kellar's flat, which was in a building adjacent to the Company's offices. He needed money to fund litigation in which he was involved, and was contemplating selling the contents of his flat for that purpose. Mr Templeton suggested that it would make more sense for the Company to purchase the chattels, as it could then use the flat as a meeting room, and this suggestion was then adopted.
11. On 29 April 2003 Mr Kellar resigned as company secretary, and Ms Lesley Cranwell was appointed in his place. Ms Cranwell was also employed as an administrator and was responsible for accounting functions, including passing on information to HMRC. The accounts to the year ending 30 April 2003 showed a turnover of £3,001,717, a profit of £114,828 and net assets of £126,389.
12. On 15 September 2003, Mr Kellar was declared bankrupt.
13. By 2004 it had become clear that the increasing use of the internet was having a significant adverse impact on the Company's trading in the used printing machinery sector. In particular, on-line business-to-business trading and auctions meant that the Company's trading volume was reduced, and its long term viability was no longer sustainable on its current business model. This pressure was reflected in the accounts for the year ending 30 April 2004, which showed a reduced turnover of £2,214,495, a trading loss of £134,553 and net liabilities of £8,165. In response to these difficulties, a new strategy was devised whereby Janus would seek to become the exclusive UK sales agent for high quality overseas manufacturers of printing equipment. Agency agreements were subsequently entered into with some of the world's leading suppliers in the field, including WIFAG (on 14 November 2004), Idab Wamac ("iDAB", on 23 December 2004), Drent Goebel (on 1 March 2005) and Metso (on 17 June 2005).
14. The Company soon became involved in negotiations for a number of substantial contracts, and had already scored an early success in October 2004 when it obtained a contract for the sale of a WIFAG printing press worth £23.4 million to TMP Oldham (the printers of the Daily Mirror). This generated a commission of £540,000 for the Company. The Company was also involved in negotiations for the sale of WIFAG/Metso machinery to Northcliffe Press for a contract price of around £15 million (with potential commission of £353,000) and with TMP Watford for the supply of WIFAG machinery in a deal worth in excess of £20 million (with potential commission of £475,000). In addition, the Company was in discussions with North Wales Newspapers and Express Broughton for the supply of WIFAG machinery valued at £7.5 million and £8 million respectively (with potential commission in excess of £200,000).
15. In December 2004 the Company lost the potential North Wales contract. The reason for this was that WIFAG could no longer meet the tight time scales required by the purchaser.
16. On 1 April 2005 Mr Kellar was discharged from bankruptcy.
17. The Company's accounts for the year ending 30 April 2005 showed increased turnover of £2,544,981, profit of £21,653 and net assets of £93,547.
18. In the summer of 2005 the Company began to fall into arrears in making payments of PAYE income tax and NICs to HMRC. On 19 July 2005 the Company paid £34,063.84 to HMRC which discharged in full its liability for the tax year 2004/2005, approximately three months after the due date. Meanwhile, the sums due for the first three months of the current tax year remained unpaid.
19. On 9 August 2005 Mr Kellar was re-appointed as a director of the Company, and Mr Templeton resigned.
20. On 16 August 2005 the Company paid a further £10,586.22 to HMRC (for month 1 of the current tax year), and on 16 September 2005 it made a payment of £5,695.83 (being approximately half of the payment due for month 2). In each case, the payment was again about three months late. The September payment was the last payment made by the Company to HMRC.
21. In September 2005 the Company lost the TMP Watford contract, because the existing supplier offered a price that WIFAG could not meet. On 30 September 2005 the Company also unexpectedly lost the Northcliffe contract. This occurred even though WIFAG and Metso, who had Janus as their agents, had been selected as the suppliers and approved by the board of Northcliffe, and a draft contract and press release had been drawn up. The reason was that, at the last minute, Northcliffe's parent company had announced that Northcliffe was to be sold, which required the project to be aborted. The Judge recorded that this was "totally unprecedented" in the dealings of Mr Ellington (of Northcliffe) with the Company.
22. In December 2005 the Company also lost a contract with TMP Scotland, again because WIFAG could not meet the delivery time scale. In the same month, however, the Company obtained contracts with the Daily Mail worth approximately £3.7 million, which generated commission of £221,000 for the Company.
23. Soon afterwards creditors began to issue proceedings against the Company in respect of unpaid debts. For example, in January 2006 one supplier issued proceedings for £925 in respect of invoices dated October 2005, and in February 2006 another supplier issued proceedings for £2,937.50, again in respect of invoices dating back to October 2005.
24. On 30 April 2006 the chattels which had been purchased by the Company from Mr Kellar were re-purchased by him for approximately £40,000. The purchase price was satisfied by a corresponding reduction in his loan account.
25. In July 2006 the Company lost the Express Broughton contract, even though WIFAG (and therefore the Company as it agent) had been recommended to the board by the executive who was leading the negotiations for the purchaser, and he had informed Mr Cathie and Mr Kellar in confidence of that recommendation. Instead, a deal was done "out of the blue" with a competitor of WIFAG over the head of those previously engaged in the negotiations.
26. The unexpected collapse of the Express Broughton contract soon led the directors to conclude that the Company had to cease trading. On 2 August 2006, Mr Kellar resigned as a director; on 29 August, the Company ceased trading; and on 13 October it went into creditors' voluntary liquidation, with a total deficiency of about £680,000 and no prospect of any distribution to unsecured creditors.

The Judge's decision

27. The Judge began his judgment by directing himself, in terms which both sides accept as correct, that it was first necessary for him to resolve any factual issues between the parties, and then to determine whether there had been misconduct within the terms of the 1986 Act by the directors. If so, he would then need to consider whether the misconduct justified a finding of unfitness, and finally, if it did, to determine a period of disqualification.
28. The Judge then turned to the law. He reminded himself, by reference to the judgment of Dillon LJ in Re Sevenoaks Stationers (Retail) Limited [1991] Ch. 164 at 176B-C, that the test of unfitness in section 6(1)(b) is framed in ordinary words which should be simple to apply in most cases, and that it is important to adhere to the statutory wording. He quoted the words of Hoffmann LJ in In Re Grayan Limited [p1995] Ch. 241 at 253E:

"[The court] must decide whether that conduct [i.e. the conduct specified by the Secretary of State], viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies."

29. He also quoted extensively from the judgment of Laddie J in Re Living Images Limited [1996] BCC 112, including in particular what Laddie J said about the burden of proof and the dangers of hindsight at 116E:

"These are civil proceedings. The appropriate standard of proof is therefore a balance of probabilities. However, disqualification does involve a substantial interference with the freedom of the individual … Furthermore some of the allegations made by the Official Receiver may involve serious charges of moral turpitude. They do in this case. In such cases the court must bear in mind the inherent unlikeliness of such serious allegations being true. The more serious the allegation, the more the court will need the assistance of cogent evidence … But in the end these are civil, not criminal proceedings.

…

I should add that the court must also be alert to the dangers of hindsight. By the time an application comes before the court, the conduct of the directors has to be judged on the basis of statements given to the Official Receiver, no doubt frequently under stress, and a comparatively small collection of documents selected to support the Official Receiver's and the respondents' respective positions. On the basis of this the court has to pass judgment on the way in which the directors conducted the affairs of the company over a period of days, weeks or, as in this case, months. Those statements and documents are analysed in the clinical atmosphere of the courtroom. They are analysed, for example, with the benefit of knowing that the company went into liquidation. It is very easy therefore to look at the signals available to the directors at the time and to assume that they, or any other competent director, would have realised that the end was coming. The court must be careful not to fall into the trap of being too wise after the event."

30. Having cautioned himself against the dangers of hindsight, the Judge then said, in a passage which is criticised by Mr Freedman QC on behalf of the directors and to which I will need to return:

"The burden of proof is clearly on the Crown to prove misconduct. The usual rules apply as to the evidential burden, namely that the party alleging a particular fact must prove it, and as will be seen that is particularly relevant to the issue of whether there was any agreement with HM Revenue and Customs … in terms of the outstanding liabilities."

31. The Judge set out the single allegation of misconduct against the directors, and referred to the procedural history of the case and the several rounds of evidence which had been filed. He listed the witnesses from whom he had heard oral evidence or whose statements he had read, and commented:

"Matters went into, in my view, an extraordinary amount of detail given the apparently straight forward terms of the single allegation made, and the agreements between both counsel that there was no doubt that this was a lower bracket case within the brackets given in the Sevenoaks decision."

The principal witnesses who gave oral evidence were Mr Tranter, who was head of the Birmingham investigation team within the Insolvency Service and gave evidence on behalf of the Secretary of State; Mr Allan Cadman, a case manager at Poppleton & Appleby who had worked on the matter under the direction of the liquidators of Janus; the two directors; and Ms Cranwell. The other witnesses were various representatives of companies involved in major contracts, or potential contracts, with Janus, and an expert who dealt with the value of the chattels sold to Janus and re-purchased by Mr Kellar. It is convenient to say at this point that the sale and re-purchase of the chattels was found by the Judge to have an innocent explanation, and he attached no significance to it. It has played no part in the argument on the appeal, and I therefore need say no more about it.

32. The Judge recorded that he had read in full the Sevenoaks case, Re Parkhouse Properties Limited [1997] 2 BCLC 530 (Neuberger J), Re Verby Print for Advertising Limited [1998] BCC 652 (Neuberger J) and Re Structural Concrete Limited [2001] BCC 578 (Blackburne J). He observed that all four of those cases included allegations of non-payment of Crown debt, and extracted from them a number of points relevant to the decision he had to make:

1) Crown debts are not in a special category of their own. The issue is whether the directors took unfair advantage of the forbearance on the part of a creditor, whether the Crown or anyone else.

2) A policy of non-payment which is required for the finding of misconduct may be conscious or subconscious, and the reasons for it may likewise be conscious or subconscious.

3) An intention by the directors to pay the debts in the long term does not provide an excuse which will prevent disqualification.

4) Similarly, acting in good faith does not, by itself, excuse the actions of directors.

5) Again, the fact that directors are making payments to some creditors to keep the business trading does not, of itself, excuse them.

6) The fact that the directors may personally benefit while creditors are not being paid is an aggravating factor.

7) Conversely, the fact that the directors make a loss themselves, or at least do not benefit, is again not of itself an excuse.

8) It is clear that a policy of non-payment for a relatively short period will suffice, and there appears to be no minimum period.

9) A failure by the Crown to exercise its draconian enforcement powers does not form any excuse for the conduct of the directors.

10) A failure to inform a creditor of the position with a view to reaching agreement for non-payment is a highly relevant matter.

None of these propositions was criticised by counsel for the directors. The Judge then quoted this passage from the judgment of Blackburne J in Re Structural Concrete Limited at 588C:

"I find it difficult to envisage circumstances in which such conduct [i.e. a policy of deliberate non-payment of a class of debt, whether Crown or otherwise], if carried on over a lengthy period and if the non-payment is at the risk of the creditors in question, will not constitute misconduct justifying a finding of unfitness."

33. The Judge then made the findings of fact which I have incorporated in the previous section of this judgment, before turning to address the questions in dispute between the parties. The first question was whether there had been any discrimination at all against HMRC. Having reviewed the evidence, and the submissions of counsel, the Judge concluded as follows:

"33. Mr Cathie in his evidence was quite candid that money was very tight, and it was necessary to pay creditors who were pressing for payment and creditors whose continued co-operation was essential for the Company's continuation. Mr Kellar, in his cross-examination accepted that the Inland Revenue were at the bottom of the list, but he said that that was because of the agreement which the Company had reached with them.

34. In my judgment, the nature of the Revenue debt and the way in which they were treated does amount to discrimination from September 2005. In my judgment there is insufficient evidence to show any discrimination from June 2005, and as I have said payments were being made until September 2005. However, after September no other creditor with a debt of that size which accrued monthly was treated in the same way as the Revenue, in other words, no payments were made.

35. Contrary to Mr Morgan's submissions, in my view I am entitled to find discrimination for a shorter period than that which is alleged …

36. … In my judgment the period must start in September 2005 but it must also end in July 2006, as it appears to me clear that … no payments were made to any creditors after that, and in my judgment there cannot be any discrimination in those circumstances. So I answer the first question, "Was they any discrimination," in the affirmative."

34. The Judge then considered whether there was a policy of discrimination, and again answered that question in the affirmative:

"37. … I have already identified from the authorities that a policy can be a policy for reasons which are conscious or sub-conscious. In this case it is quite clear that the defendants knew of the debt; they knew that it was accruing and they knew that payment was not being made. It is also clear that they were aware that other payments were being made that were required to keep the company trading or to pay off creditors who were bringing proceedings. In my judgment this is clearly a policy, whether or not it was a conscious decision not to pay the Revenue, it is a policy within the meaning of the authorities. So I answer the second question in the affirmative."

35. The third question was whether money was available to pay HMRC, or the issue of "free funds". The Judge said that this issue had been extensively debated during the hearing. He pointed out that much of Janus' trading was done under retention of title terms, which meant that the Company could not complete a sale and receive its margin on a deal until its supplier had been paid. This severely limited the amount of free funds available to Janus. The Judge also discussed the Company's overdraft limit of £100,000, and the discretion exercised by the bank in regularly allowing the limit to be exceeded. He then stated his conclusions in paragraph 40:

"40. Generally, consideration of the bank statements from October 2005 … shows three things. Firstly, that there are many occasions within the period in question when there was headroom available. [Examples are then given]. I accept that a number of those periods are very short; I accept that in some instances the headroom was not considerable. However, some of the periods are much longer and in some cases the headroom runs to tens of thousands of pounds. Secondly, payments were made to many different parties. While it is true that the bank appears to have been very eager to take payments due to itself, which is not surprising, and that would include payments due on credit cards in respect of expenses incurred by the directors, when one peruses the statements it is clear that there is a wide range of parties being paid. Thirdly, there very substantial payments received during the period in question. As I have said it is necessary to remove monies received under essentially retention of title terms. Miss Wilson-Barnes in her closing submissions gave a monthly breakdown of what she says are the free funds, which were some £395,000 from October 2005 to July 2006. In fairness those specific figures were not put to Mr Cathie in evidence. However it does seem quite clear that there was a substantial amount of free funds received during that period. I set against that the fact that there was no real attempt to make any payment to the Revenue, the only possible payment attempt that is referred to is that referred to by Mr Kellar, the telegraphic transfer which was not actioned. I therefore find thirdly that there were free funds available from which some payment could have been made to the Revenue. I do not need to find how much could have been paid but clearly there was more than one opportunity when payment could have been made."

36. It is important to note that there is no appeal against the Judge's findings or conclusions in relation to the first three questions which he considered.
37. The Judge then turned to the fourth question, namely the contact which had taken place between Janus and HMRC, and whether any (and if so what) information had been supplied to HMRC. He began by noting some difficulties, which he said he "must take heavily into account". The first difficulty was that Janus' files in relation to HMRC were missing. The Judge accepted, having heard the evidence, that the files were given to the liquidator, and that they had subsequently been mislaid. On this point he accepted the evidence of Ms Cranwell, which "was given confidently and in detail". Janus was therefore "hampered by not having its Inland Revenue files". The second difficulty was that the evidence from HMRC was "also far from complete": the court had before it very few documents emanating from HMRC, and no live evidence. The best evidence was contained in a letter dated 26 March 2009, written by the Debt Management (Enforcement & Insolvency) office at Worthing to the solicitors acting for the Secretary of State, Wragge & Co. That letter, however, was not written by the HMRC officer who in 2005 to 2006 had conduct of the Company's tax affairs, Ms Anne Dalton in Edinburgh. The Judge then said:

"Having said that, I go back to where I started, the onus is on the defendants to prove that they kept the Revenue appropriately informed with sufficient accurate information with a view to agreeing to defer payment: if they did so, it is very difficult to see how the Revenue could have been unfairly treated. The Secretary of State in respect of the evidence expressly does not submit that Mr Cathie or Mr Kellar is lying to the Court; however the Secretary of State does, nonetheless challenge their credibility. They are challenged as being unreliable witnesses who have albeit unwittingly exaggerated their evidence."

38. The Judge then reviewed the evidence available to him about the contact between Janus and HMRC, in the light of the contention articulated in a letter dated 18 June 2008 written by the directors' then solicitors in response to the section 16 notice from the Secretary of State:

"Further, during this period HMRC were fully informed of the situation on an ongoing basis and understood the position that the company was in. In particular, Mr Cathie spoke to Ann[e] Dalton at HMRC regularly and kept her advised as to [the Company's] situation. It is to be inferred from the fact that HMRC permitted the company to continue trading and took no legal proceedings that HMRC accepted and understood the situation."

39. The Judge quoted the following passage in paragraph 46 of Mr Cathie's first affidavit:

"On each occasion that I spoke with Ms Dalton, I explained to her the stage that [Janus] was at with regard to the various newspaper projects. I found Ms Dalton to be quite accommodating and understanding regarding [Janus'] situation, and she gave me the impression that HMRC was willing to allow [Janus] time to try and conclude the potential sales so that the Company would then be able to pay the outstanding PAYE/NIC liabilities."

He also quoted from an email dated 21 February 2006 from Mr Cathie to Mr Kellar:

"I spoke with Anne Dalton. She is OK at the moment but is clearly keen for us to start making payments. She said that we should always specify which months we are paying when we send it a payment. As a rule we should always pay the current month and whatever back months we can. If the computer system sees that we are paying current months it looks better than simply paying back months and leaving a large arrears outstanding.

She strongly advises that we try and clear the backlog by 6 April. After this date the government are introducing late penalties and interest charges for late payments.

She has requested that we ring her in three weeks time to give her an update."

40. The Judge recorded that the next contact with HMRC was on 12 May 2006, when Ms Dalton wrote a letter before action to Janus in the following terms:

"Re: - Janus Technologies Limited

Unpaid debt 2005/06 - £82,121.62 including interest

Further to telephone calls to your office, I am disappointed to note that I have not received a payment towards this debt.

I have therefore raised estimates for the amounts I calculate are due and payable. Please refer to the Notice requiring payment enclosed, which relates to months 10, 11 and 12 of 2005/06. I have also enclosed a statement of liability confirming the total amount considered to be due to today's date.

Please note that interest continues to accrue until this debt is paid in full.

If payment in full is not received within 14 days, your file will be referred to Worthing Enforcement Office to commence legal action."

41. The Company's response to this letter, dated 19 May 2006, was described by the Judge as "extremely important". The letter was drafted by Mr Kellar, because Mr Cathie was out of the office at the time, but it was signed by Mr Cathie as managing director for and on behalf of Janus. Because of the importance of this letter, it is convenient at this point to quote it in full:

"Re: Janus Technologies Limited:

Unpaid Debt 2005/2006 £82,121.62

I acknowledge receipt of your letter and assessment of liability dated 12 May. I apologise for not being in touch in the last couple of months but as this letter may explain I have had my hands full trying to manage a very difficult situation.

Firstly I must emphasise that Janus has not honoured its commitment to pay the amount … due because it cannot rather than because it does not want to.

The Company represents a number of large overseas new equipment manufacturers which supply the newspaper industry. It therefore derives its revenue from commissions paid by its clients on contracts which they negotiate with major UK newspapers publishers and printers.

Unfortunately a large project with Northcliffe Newspapers which was in the final stages of negotiation has fallen through because the group's parent company DMGT unexpectedly decided to put the company up for sale. Two other large projects which should have been contracted early this year have slipped back to the summer for reasons beyond our control. The impact on expected cash inflow has been huge. The net result is that the Company has excellent future prospects but is at this time in some considerable difficulty."

Pausing there, the Judge commented that this seemed to be a reasonable summary of the Company's position at the time. The letter continued:

"The directors have not drawn their salaries since late last year and have been supporting payroll requirements personally. We are unable to do more. There are a number of small projects in the course of completion which will start to turn the situation round until the company is able to realise the fruits of work in progress on the larger projects. Survival in the meantime is going to be precarious but recovery is certainly possible if we are given time to reorganise.

We recognise the right of [HMRC] to take whatever steps they consider appropriate in the circumstances. Should they do so however the company is totally unable at this point of time to make any substantial payment and will fail. There is little prospect of creditors making any significant recovery should this happen.

Were you to however be prepared to accept a payment under a direct debit or standing order of say £2,000 per month until such time as capital, interest are paid in full there is an excellent prospect that this can be serviced and that the arrears will recover in full. We will undertake to pay current PAYE and NI liability as it falls due.

I ask you to therefore to seriously consider [sic] this offer carefully before taking further action.

Please feel free to speak to me on [number] if you require further clarification or wish to speak to me about this matter further."

42. The Judge said that it was the paragraph beginning "The directors have not drawn their salaries" which was the difficulty so far as the directors were concerned:

"The difficulty with that is that it is not true. There is no suggestion that there was a deliberate attempt by the directors to mislead the Revenue. However, Mr Cathie's evidence on this point [in paragraph 49 of his first affidavit] is this:

"I had drawn some salary in early 2006 (although not to the full extent of my entitlement)".

In fact what he actually received was his normal monthly payment of £4,583.33 gross less deductions each and every month.

47. I am afraid that I find even his explanation that I just read out itself to be misleading because that was the normal monthly sum he received. I accept, although there was some doubt about this, that he was contractually entitled to a higher amount. However his own evidence [in paragraph 66 of his first affidavit] is that the balance was taken on an "as and when" basis, so it would have been more accurate to say that he drew his normal salary on a monthly basis throughout 2006. Therefore the statement that he had not drawn his salary since late last year was utterly incorrect.

48. In respect of Mr Kellar, he had been paid £5,000 on 15 March, £1,000 on 7 March and £5,000 on 28 April, the latter being made on behalf of Janus via a company called Rainy City Productions Limited, which was in fact Mr Kellar's company. He says in explanation, in his [first affidavit] paragraph 14:

"I did not regard the sums taken in 2006 as salary, but rather as a partial repayment of my loan account."

He also says [ibid, paragraph 9]:

"Were it to be regarded as salary, even with these payments, I had still not taken anything like the amount I was entitled to from [Janus] for 2005".

49. That is technically correct, and his loan account shows a substantial liability to him. However, it does not square with the wording of the letter, "The directors have not drawn their salaries since late last year". The picture painted in this paragraph is in my judgment, as Miss Wilson-Barnes categorised it, one of an impression that the directors were suffering as well as the Revenue. Mr Morgan submitted that it was in fact an accurate summary, so the Revenue could make an informed decision. I do not agree; in my judgment the true position was very different indeed to that which was painted in the final paragraph in the first page of the letter."

43. The Judge then found that no real progress was made in respect of the Company's offer to pay £2,000 per month, and he paraphrased paragraph 50 of Mr Cathie's first affidavit (which I will quote verbatim):

"In any event, we did not receive a reply to the letter of 19 May 2006. Accordingly, the offer of £2,000 per month was not accepted. In June of 2006, Lesley Cranwell informed me that Ms Dalton had been calling the office. I tried to call Ms Dalton but I found that the number was constantly engaged … Although I cannot remember the specific details, I believe that Ms Dalton and I spoke on one or two occasions in late June and early July 2006. I believe that I informed her that the two projects were still very much on track and that I would keep her updated. HMRC did not take proceedings against [Janus]. This is consistent with the fact that Ms Dalton (in common with myself and Mr Kellar), although rightly concerned about the indebtedness, considered that there was a reasonable prospect that HMRC would be paid."

The Judge referred to the possibility of a time to pay agreement, mentioned in HMRC's letter of 17 March 2009 to Wragge & Co, but commented that it certainly came to nothing, and was not even mentioned by Mr Cathie in his evidence.

44. The Judge then continued:

"52. In cross-examination Mr Cathie was unable to recall if he had informed the Revenue in the person of Miss Dalton of the company's successes, particularly in obtaining the Daily Mail contract and the receipts that went with it. In my judgment it is highly unlikely that he did inform her of that, because it is highly likely that the Revenue would have taken a more proactive role had they been aware of it. In my judgment he was providing information to the Revenue which assisted the company's case in trying to persuade them not to press for payment. Although Mr Cathie and Mr Kellar were generally good witnesses and had a good grasp of detail, in my judgment both of them were extremely uncomfortable about this letter and the last paragraph, and Mr Cathie was also very uncomfortable when asked whether he had informed the Revenue of the Daily Mail contract and the receipts that would follow from that. In my judgment he did not.

53. I have dwelt on that at some considerable length because it forces me to the conclusion that the Revenue were not provided with sufficient accurate information. At the highest there was a brief agreement in February 2006, that was to clear the backlog by the end of April. It was based on the making of monthly payments which did not follow and it was also made without knowledge that the Daily Mail contract had already been won. There was no further contact until May, and that contact on the 19 May was highly misleading. In my judgment against that background the discrimination against the Revenue was unfair, they were never given a wholly accurate informed opportunity to make a decision whether or not to pursue payment.

54. The fifth issue I therefore have to determine is whether the defendants are unfit to be directors given my findings as to misconduct. I have already read from Structural Concrete and the need for there to be exceptional circumstances where I have found misconduct of this type. I make the following findings in that respect. Firstly, the defendants acted honestly and in good faith at all times. Secondly, they did intend to pay all debts eventually, including the Revenue debt. Thirdly, they had reasonable grounds for believing that they would obtain the contracts they were seeking, particularly the Express contract and the Northcliffe contract, even though the nature of their business was inherently risky. As it was put more than once in evidence, there is no prize for coming second in a contract competition. Fourthly, the defendants made payments to certain creditors to enable the business to continue while they sought to obtain the contracts. Fifthly, the defendants ultimately suffered personal losses. Sixth, they were clearly acting under extreme pressure of trying to keep the business going in the circumstances.

55. Against that I set the following points: firstly, no payment was made to the Revenue for ten months and the debt was allowed to increase month on month. Secondly, there was no real attempt to make any payment of the debt despite the discussions with the Revenue and the offers to make payment. Thirdly, the directors themselves drew money that was due to them while not paying the Revenue. Fourthly, the letter of 19 May was highly misleading and it is difficult for me to accept that that could simply have been a mistake. As I have said Mr Kellar's position as to salary was technically correct but the letter gave a different impression. In respect of Mr Cathie, he simply must have known that he was drawing his normal salary, and if it was an error it was an error that must have involved him not reading the letter at all before signing it, which in itself was highly negligent.

56. In all those circumstances I do not consider that I can find that there were exceptional circumstances. Accordingly, the allegation is proven and I must make a disqualification order against both defendants."

The proper approach of an appellate court

45. In the Grayan case, Hoffmann LJ identified the nature of the decision which the trial judge has to make in a case under section 6(1) of the 1986 Act. Once the court has decided that the director's conduct falls below the appropriate standard, it is then under a duty to disqualify him for at least the minimum period of two years, whether or not the protection of the public still requires it. As Hoffmann LJ said at 253G:

"The purpose of making disqualification mandatory was to ensure that everyone whose conduct had fallen below the appropriate standard was disqualified for at least two years, whether in the individual case the court thought that this was necessary in the public interest or not. Parliament has decided that it is occasionally necessary to disqualify a company director to encourage the others … If this should be thought too harsh a view, it must be remembered that a disqualified director can always apply for leave under section 17 and the question of whether he has shown himself unlikely to offend again will obviously be highly material to whether he is granted leave or not. It may also be relevant by way of mitigation on the length of disqualification …"

46. Hoffmann LJ then turned to the approach which an appellate tribunal should adopt on an appeal from the trial judge's decision. Beginning at 254F, he said this:

"Once one is clear about the precise nature of the decision which the judge has to make, it is easier to decide how an appellate tribunal should approach an appeal against his decision. The judge is deciding a question of mixed fact and law in that he is applying the standard laid down by the courts (conduct appropriate to a person fit to be a director) to the facts of the case. It is in principle no different from the decision as to whether someone has been negligent or whether a patented invention was obvious: see Benmax v Austin Motor Co Limited [1955] A.C. 370. On the other hand, the standards applied by the law in different contexts vary a great deal in precision and generally speaking, the vaguer the standard and the greater the number of factors which the court has to weigh up in deciding whether or not the standards have been met, the more reluctant an appellate court will be to interfere with the trial judge's decision."

47. After referring to the reluctance of an appellate court to interfere when considering the "fair and reasonable" test in the Unfair Contract Terms Act 1977, or the question whether a testator had made "reasonable financial provision" for a dependent for the purposes of the Inheritance (Provision for Family and Dependents) Act 1975, Hoffmann LJ continued at 255E:

"These cases are at one end of a spectrum and decisions such as whether a motorist has driven with due care and attention are probably somewhere near the other end. Where lies the decision that a director's conduct fell below the appropriate standard? In my view, nearer to the negligence end than that represented by Finney Lock or Coventry. If Mr Bannister were right in saying that the judge was involved in a general inquiry about the defendant's current fitness to be a director, then I think he would probably be right about the approach to an appeal from such a decision. But since I think that the true question is a much narrower one, namely whether specific conduct measures up to a standard of probity and competence fixed by the court, I agree with the way in which the matter was put in In Re Hitco 2000 Ltd [1995] B.C.C. 161. After citing a passage in In Re Sevenoaks Stationers (Retail) Limited [1991] Ch. 164, 176 in which Dillon LJ referred to the question of unfitness as a "jury question," the deputy judge went on:

"Plainly the appellate court would be very slow indeed to disturb such a conclusion as to fitness or unfitness. In many, perhaps most, cases, the conclusion will have been so very much assisted and influenced by the oral evidence and demeanour of the director and other witnesses that the appellate court would be in nowhere near as good a position to form a judgment as to fitness or unfitness than was the trial judge. But there may be cases where there is little or no dispute as to the primary facts and the appellate court is in as good a position as the trial judge to form a judgment as to fitness. In such cases the appellate court should not shrink from its responsibility to do so and, if satisfied that the trial judge was wrong, to say so.""

Preliminary observations

48. With these principles in mind, I would make some preliminary observations about the judgment under appeal. First, it is common ground that the Judge directed himself correctly about the substantive law relating to applications under section 6 of the 1986 Act. Secondly, he heard oral evidence and submissions over four days, including the cross-examination of both directors. Thirdly, there is no appeal against his findings that Janus discriminated against HMRC between September 2005 and July 2006 (a period of approximately 11 months); that this discrimination was the result of a policy (which in the circumstances must have been deliberate, although the Judge did not say so in terms); and that there were substantial free funds available from which at least some payment could have been made to HMRC, although probably nothing like the full amount outstanding. Fourthly, the case was therefore likely to turn on an examination of the contacts between HMRC and Janus during the relevant period, and on the answer to the question whether HMRC were presented with sufficient accurate information to enable them to make an informed decision to allow Janus further time for payment. Fifthly, in his examination of this question the Judge took "heavily into account" the fact that Janus' tax files were missing, and the fact that the evidence from HMRC was "far from complete", with few documents and no live evidence from Ms Dalton or anybody else. Sixthly, the Judge was highly critical of the letter of 19 May 2006 (drafted by Mr Kellar, and signed by Mr Cathie) which Janus wrote in response to HMRC's letter before action of 12 May. He found the paragraph in the letter in which the directors claimed not to have drawn their personal salaries since late 2005 to be untrue and "highly misleading": Mr Cathie had in fact continued to draw his normal salary on a monthly basis in 2006, and Mr Kellar had been paid a total of £11,000 in March and April 2006 (although he was credited with these sums as a partial repayment of his loan account, and they were not technically paid to him as salary). Seventhly, the Judge also found that Mr Cathie did not inform HMRC about the Company's success in winning the Daily Mail contract, and that he provided information to HMRC "which assisted the Company's case in trying to persuade them not to press for payment". Finally, the Judge said that although Mr Cathie and Mr Kellar were generally good witnesses with a good grasp of detail, they were both "extremely uncomfortable" about the letter of 19 May 2006 and Mr Cathie was also "very uncomfortable" when asked whether he had told HMRC about the Daily Mail contract and the receipts that would follow from it.
49. In the light of these findings, my strong initial impression is that there was adequate material to justify the Judge's limited findings of misconduct against each director, and that the findings turned to a significant extent on his assessment of their oral evidence and their demeanour in the witness box. The Judge's decision is therefore of the type which, according to Grayan, the court should be "very slow indeed to disturb". I now come on to the directors' grounds of appeal.

The grounds of appeal

(1) The burden of proof

50. The first ground of appeal is that the Judge erred in law in holding that the directors bore any evidential burden which required them to prove any particular fact. This ground is supported by reference to what the Judge said in paragraphs 4 and 41 of the judgment (the relevant extracts from which are quoted in paragraphs 30 and 37 above) in relation to the issue of the Company's dealings with HMRC. It is said the Judge ought to have held that if the directors adduced evidence capable of supporting (and not necessarily proving) their case on the treatment of debt due to HMRC, the Secretary of State then had the obligation to adduce evidence to disprove such evidence, which he had not done. The Judge thereby imposed too high a burden on the directors.
51. Both parties were content to accept as correct the following statement of the law in Halsburys Laws of England, 5^th edition, vol. 11, at paragraph 771, under the heading "Incidence of the Evidential Burden":

"The evidential burden (or the burden of adducing evidence) will rest initially upon the party bearing the legal burden but, as the weight of evidence given by either side during the trial varies, the evidential burden may be said to shift to the party who would fail without further evidence. However, rather than referring to a shifting burden, it may be more accurate to say that it is the need to respond to the other party's case that changes as the trial progresses according to the balance of evidence given by each party at any particular stage. If the party bearing the legal burden fails to adduce evidence, he has failed to discharge his burden and there will be no need for the other party to respond; however, if the party bearing the legal burden brings evidence tending to prove his claim, the other party may in response wish to raise an issue such as causation and must then adduce evidence capable of supporting though not necessarily proving his point, and once he has done so then the party bearing the legal burden will have to bring evidence to disprove that point. If a party fails to adduce evidence when he bears the evidential burden, he risks losing his case."

52. In my judgment there are a number of answers to this ground of appeal. In the first place, I am not satisfied that the Judge misdirected himself. He was clearly well aware of the difference between the legal and evidential burdens of proof, and when he said in paragraph 4 of the judgment that "the usual rules apply as to the evidential burden, namely that the party alleging a particular fact must prove it", I read this as a compressed reference to the process described in more detail in the passage from Halsbury which I have quoted. I bear in mind that the judgment was an oral one, albeit delivered three days after the conclusion of the hearing, and it therefore lacks some of the polish which one might have expected if the Judge had taken the trouble to produce a written judgment. An appellate court should in my view be slow to infer that a Judge has misdirected himself on the evidential burden, when he has said in terms that the usual rules apply.
53. Secondly, support for the Judge's formulation may be found, in the context of a disqualification case, in Re Deaduck Limited [2000] 1 BCLC 148, where Neuberger J (as he then was) said this in relation to a payment made by a director, Mr Baker, at a time when the company was insolvent:

"In these circumstances, I consider that the correct analysis is as follows. As at 13 October 1994, the payment was made at a time when the company was insolvent, and at a time when Mr Baker should have appreciated that it was insolvent and that there was a real risk of an insolvent liquidation … While Mr Baker had no desire to prefer Inc over the general body of creditors, it nonetheless remains for him to show that, following the payment, the company made payments to its creditors, possibly from the £188,750, so that "the general body of creditors" was not in fact prejudiced by the payment. On the evidence, he failed to do that.

One has to be careful before concluding that there is an onus on a respondent, particularly in the context of directors' disqualification proceedings. However, where a director is responsible for something which, judged at the time it happened, appears to justify a charge, and he seeks to meet the charge by reference to what happened subsequently, it is up to him to make good, albeit only on the balance of probabilities, the subsequent events upon which he relies."

54. In my judgment the approach reflected in this passage is of general application, and is not confined to the situation where a director seeks to rely on subsequent events to negate a prima facie case of misconduct. Thus in the present case it was, in practice, necessary for the directors to satisfy the Judge, on the balance of probabilities, that they had supplied HMRC with sufficient accurate information, if the prima facie case of misconduct against them was to be successfully rebutted.
55. Thirdly, and perhaps most importantly, the point is anyway irrelevant, because the Judge's critical findings in relation to the letter of 19 May 2006 and the non-disclosure of the Daily Mail contract did not depend in any way on the incidence of the burden of proof, but rather on the oral evidence of the directors and their demeanour.
56. For these reasons I am satisfied that there is nothing in the first ground of appeal.

(2) Adverse findings of fact

57. The second ground of appeal is that the Judge erred in law, or made findings of fact for which there was no (or no sufficient) evidence, when he found adversely to the directors:

a) that the draft contract with Northcliffe Newspapers (referred to in Janus' letter of 19 May 2006) had not previously been sent to HMRC;

b) that no real progress was made in the communications between the Judge and HMRC after the offer in the letter of 19 May; and

c) that Mr Cathie never informed HMRC about the Daily Mail contract.

These contentions are advanced in the light of the loss of the Company's files by the liquidator, and the alleged failure of the Secretary of State "to adduce any satisfactory evidence from HMRC".

58. In his oral submissions, Mr Freedman QC emphasised the difficulties caused to the directors by the loss of the Company's tax file and the contemporary documents which it would have contained, including emails and notes of telephone conversations in addition to the correspondence passing between Ms Dalton and the Company (all of which has been recovered from one source or another, and is therefore in evidence). He also submitted that it was incumbent on the Secretary of State to call Ms Dalton as a witness, especially as the directors had said as early as 18 June 2008, in their initial formal response drafted by their solicitors:

"If you contend that HMRC was not kept fully informed, then it is incumbent on you to provide us with the appropriate evidence from the relevant personnel from HMRC to that effect."

Mr Freedman submitted that the Insolvency Service and HMRC were both emanations of the State, and that fairness required the Secretary of State to adduce evidence from Ms Dalton. Adverse inferences should therefore be drawn from his failure to do so, and the evidence of the directors should be treated with corresponding benevolence. Mr Freedman referred me to the principles about when it is permissible to draw adverse inferences from the absence of a witness stated by the Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] PIQR 324 per Brooke LJ, with whom Roch and Aldous LJJ agreed.

59. I do not find these submissions convincing. As to the loss of the tax file, the Judge expressly took into account the fact that the Company was hampered by its absence, and I am unable to see what more he could or should have done. In any event, the absence of the file was to a significant extent compensated for by the presence of the complete correspondence passing between Edinburgh and the Company, and by HMRC's letter of 26 March 2009 to Wragge & Co, written by the officer at Worthing with responsibility for the Company's liquidation, which gave particulars of all the telephone calls between the Company and Ms Dalton from January to September 2006. The officer who wrote this letter (Mrs D White) said that she was unable to provide copies of the telephone notes, but she had plainly either seen them or been informed of their content, because she referred to them several times and summarised their content where she thought it material to do so. I find it a little surprising that neither side took any steps to obtain copies of the notes from Edinburgh, given the resources which have been devoted to the case; but this was in principle a step that could have been taken by the directors as well as by the Secretary of State, and in my view the directors have only themselves to blame for their inaction. I do not accept that the directors were entitled to adopt a passive attitude and then criticise the Secretary of State for failing to produce HMRC's documents. It is true that HMRC and the Insolvency Service are both, in a broad sense, part of the State, but they are separate departments with separate functions, and governed by different legislation. I cannot think of any good reason why HMRC would have refused to disclose Ms Dalton's telephone notes to the directors, had they been asked to do so; and even if they had refused, the directors could then have sought an order for third party disclosure from the court.
60. For similar reasons, I do not accept that the Secretary of State was under any duty to adduce evidence from Ms Dalton. He could no doubt have done so – there is no suggestion that she would have been unavailable as a witness – and if he had done so, his case might have been stronger. But there is no monopoly in a potential witness, and if the directors were so confident that Ms Dalton would support their version of events, there is no reason why they could not have taken steps to call her as a witness themselves. I therefore decline to draw any adverse inferences from the failure of the Secretary of State to adduce her evidence, while recognising that its unexplained absence probably had the effect that the Secretary of State's case was rather weaker than it otherwise might have been. Furthermore, given the failure of the directors to help themselves in either of the ways which I have mentioned, I do not consider that the Judge was required to treat their evidence with any particular benevolence.
61. Having cleared these points out of the way, I must now consider whether the Judge was entitled to make the three adverse findings of which complaint is made.

(a) Was the draft Northcliffe contract sent to HMRC?

62. As the Judge noted in paragraph 45 of the judgment, there was a conflict of evidence on this point. Mr Kellar's recollection was that Mr Cathie had sent contractual documents relating to the Northcliffe deal to Ms Dalton in 2005, but this recollection was not shared by Mr Cathie. In his affidavit evidence he said nothing about sending the draft Northcliffe contract to Ms Dalton, and in cross-examination he said "I do not think we sent any information in 2005", and also accepted that Mr Kellar was not necessarily aware of what he had sent to HMRC. The Judge will have had this evidence in mind, and he also observed that the letter of 19 May appeared to be telling HMRC for the first time about the contract. His implicit conclusion that the document had not been sent therefore turned on his assessment of the oral evidence of Mr Cathie and Mr Kellar, and on an inference drawn from the wording of the letter. In my view this was a conclusion which it was entirely open to the Judge to draw, and no possible grounds for disturbing it have been established.

(b) Lack of progress after the offer made on 19 May 2006

63. The complaint here is not so much about the Judge's finding that "no real progress was made" after the offer contained in the letter of 19 May, but more about the rather negative way in which the Judge dismissed the subsequent discussion of a possible time to pay agreement as something that came to nothing. It is submitted that, in the light of the available evidence, the Judge's assessment should have been more positive. It appears from Mrs White's letter of 26 March 2009 to Wragge & Co that on 20 June 2006 Ms Dalton informally agreed in a telephone conversation with Mr Cathie that the Company should be granted a period of six months within which to make payment, reviewable within three months, but she required a copy P35 form to be submitted to enable her to check the figures and reach a formal time to pay agreement. It seems probable that the Company's P35 (or annual return) form for the tax year 2005/6 had in fact been sent to HMRC by Ms Cranwell on or shortly after 31 May 2006, but there may have been delays in processing it, and Ms Dalton does not seem to have received it until 7 July, when she asked Ms Cranwell to supply her with a copy of it, and Ms Cranwell immediately did so by fax. It is said that this shows the willingness of HMRC to work with the Company and allow it time to pay, even towards the end of the period of discrimination against HMRC.
64. It is no doubt true that Ms Dalton was in principle prepared to enter into a time to pay agreement, but the fact is that it never materialised, and (as Mr Cathie had to accept in cross-examination) the Company's ability to honour even the offer which it made in the letter of 19 May depended on winning the Express Broughton contract. When that contract fell through, the Company was soon unable to continue trading, and any discussions about a time to pay agreement became academic. Furthermore, HMRC's apparent willingness to contemplate such an agreement does not meet the main thrust of the allegation against the directors, which is that they failed to provide HMRC with all the information necessary for them to make a fully informed decision whether or not to enter into such an agreement. In my view there is no substance in the criticisms made of the Judge's findings in paragraph 51 of the judgment, and although he could have dealt with the history of events after the letter of 19 May 2006 in more detail, the events were of only peripheral relevance and there was no need for him to do so.

(c) Did Mr Cathie inform HMRC about the Daily Mail contract?

65. The relevant passage in Mr Cathie's cross-examination reads as follows:

"Q. For you to say that the Inland Revenue were kept fully informed of the position, would you accept as a matter of principle, that you should have told them of the failures and successes of particular contracts and what, if successful, they were achieving for Janus in terms of commission?

A. I had numerous discussions with her on the telephone. I did not write to her to tell her that we had lost a contract, but she had the projections. She knew the possibilities of what was available to us.

Q. I think you have confirmed that only in 2006 you sent her a projection.

A. Yes.

Q. Are you saying that you informed the Inland Revenue of the potential receipt of the commission of £232,000 which was decided in December 2005, the Daily Mail contract?

A. I honestly cannot remember.

Q. The reality is that the Inland Revenue has been very interested and expecting to receive some money from that, and nothing was ever paid to them.

A. What I would say on that, it is stage payments.

Q. I understand that. You never informed the Inland Revenue even of the success, never mind the staging of those payments.

A. I cannot remember."

The Judge observed that Mr Cathie was "very uncomfortable" when asked whether he had informed Ms Dalton of the Daily Mail contract. He also thought it "high unlikely" that he had informed her, because in that case HMRC would probably have taken a more proactive role. It was clearly put to Mr Cathie in cross-examination that he never informed HMRC about the contract, so he had every opportunity to comment, but said only that he was unable to remember. In these circumstances, it was in my view plainly open to the Judge to make the finding which he did.

66. For all these reasons, the second ground of appeal also fails.

(3) No informed opportunity

67. The third ground of appeal is that the Judge erred in rejecting the directors' evidence in relation to their communications with HMRC and/or in concluding that HMRC were not given an informed opportunity whether or not to pursue payment. It is said the Judge should have concluded that the directors adduced sufficient evidence to support their case about communications with HMRC, and the Secretary of State had adduced no admissible evidence to disprove it; and that any errors in the letter of 19 May 2006 were in any event not material.
68. Although a number of points are wrapped up in this ground of appeal, its main focus is on the letter of 19 May 2006 and the significance that the Judge attached to it. The directors start here from the unpromising position that the letter was admittedly untrue in what it said about Mr Cathie's salary, and it also failed to disclose the recent payments of £11,000 made to Mr Kellar in partial repayment of his loan account. There is no challenge to the Judge's finding that Mr Cathie had in fact drawn his normal monthly salary of £4,583.33 gross (less deductions) throughout 2006 (i.e. for four months), although he was contractually entitled to a higher amount. Equally, there is no dispute that Mr Kellar received the £11,000, although he said in his affidavit that he did not regard the sums taken as salary. In my judgment the Judge was fully entitled to take the view that these errors and omissions were a serious matter. The letter was written in response to a formal letter before action from HMRC, and it sought further time for payment at the rate of only £2,000 per month. If HMRC were to be invited to accept payment at such a miserly rate (which would have taken three and a half years to clear even the unpaid debt for 2005/6, let alone the further tax which had fallen due since April and continuing interest on the arrears), it was in my view essential that HMRC should be put in possession of all the information they might reasonably need in order to make an informed decision, and that the letter should contain no material inaccuracies. The errors and omissions identified by the Judge were in my view clearly material, in the sense that they might objectively have influenced HMRC's decision whether or not to accept the offer. Indeed, this is implicitly recognised in the wording of the letter itself, because, if they were not material, why should the Company have represented to HMRC that the directors had not drawn their salaries since late 2005, that they had been supporting payroll requirements personally (an apparently separate point, which appears to be unsupported by any evidence before the Judge) and that they were "unable to do more"?
69. It is fair to add that the Secretary of State did not accuse the directors of dishonesty in permitting the letter to be sent in these terms, and it is no part of his case (as Mr Cunningham QC expressly confirmed to me) that there was any deliberate intention to deceive HMRC. Nevertheless, the error in relation to Mr Cathie's salary is such a glaring one that he could not possibly have failed to notice it if he gave the draft letter more than a cursory glance. Since he signed the letter himself, it must follow that he either did not read it at all, or that he only glanced at it. In cross-examination he said "it seemed fine and I signed it", and "Had I drafted the letter myself, it may well have been worded differently". On any view, his conduct in allowing the letter to go out under his signature, containing such an egregious error in relation to his own salary, was grossly negligent. The position in relation to Mr Kellar is not quite so stark, but again the letter created a thoroughly misleading impression through his failure to mention the £11,000 he had received. Since he drafted the letter himself, responsibility for this misleading impression must be laid squarely at his door.
70. To a certain extent the third ground of appeal appears to rely on matters already covered in grounds 1 and 2. Since I have rejected those grounds, it follows that they can contribute nothing to the third ground. I have explained why the Judge was in my view amply justified in making the findings which he did about the letter of 19 May, and why the errors in the letter were material. Accordingly, this ground of appeal also fails.

(4) The finding of misconduct

71. The fourth ground of appeal is that the Judge reached a conclusion of fact that the directors were guilty of misconduct in relation to HMRC for which there was no, or no sufficient, evidence. I can deal with this very briefly. Having dismissed the first three grounds of appeal, I have no doubt that the Judge was entitled to make a finding of misconduct based on the factors summarised by him in paragraph 53 of the judgment. It needs to be remembered, in this context, that the negotiations with HMRC, and the letter of 19 May, have to be viewed against the background of an established policy of discrimination against HMRC in comparison with other creditors, and of the Company's failure to make any payments to HMRC after September 2005, despite the availability of at least some free funds. This ground of appeal therefore adds nothing to the earlier ones, and is in my view a hopeless one.

(5) Exceptional circumstances

72. The fifth ground of appeal is that the Judge erred in law in holding that, once findings of misconduct had been made, exceptional circumstances then had to be shown in order to avoid a determination of unfitness. It is said that the Judge was wrong to derive this proposition from the judgment of Blackburne J in Re Structural Concrete Limited, where it did not form part of the decision and was merely a test which the judge had applied, on the facts found in that case, in evaluating the decision of the court below.
73. I have to say that I find this a paradoxical ground of appeal, because even if the Judge erred in the manner suggested, the error can only have told in the directors' favour. Furthermore, the factors listed and considered by the Judge in paragraphs 54 and 55 of the judgment were ones which he anyway had to review and evaluate before deciding whether the misconduct which he had found to be established was sufficiently serious to require the court to make a disqualification order against either director. I agree with Mr Freedman that, if and in so far as the Judge thought there was a separate test of "exceptional circumstances" which he had to consider, this was an unwarranted gloss on the simple "jury question" which the Sevenoaks case requires the court to answer, and that nothing in Re Structural Concrete Limited supports the existence of the test as a separate requirement in all cases. However, I fail to see how the directors can have been prejudiced in any way by the Judge's error on this point, if error there was. Accordingly, I am not satisfied that the Judge erred in any material respect, and this ground too must be dismissed.

(6) The conclusion of unfitness

74. The final ground of appeal is that the Judge was not entitled on the evidence before him to conclude that the directors were unfit to be involved in the management of a company, or alternatively that such a conclusion was wholly against the weight of the evidence.
75. In the light of my rejection of the other grounds of appeal, and the limited circumstances in which an appellate court can properly interfere with a conclusion about fitness or unfitness, I am satisfied that this ground too cannot succeed. The Judge rightly recognised that the conclusion of unfitness did not necessarily follow from his findings of misconduct, and that he had to review all the evidence, and take into account any mitigating factors, before deciding whether the statutory test of unfitness was satisfied. He performed that further task in paragraphs 54 and 55 of the judgment, and the conclusion which he reached was in my judgment one that was properly open to him.

Conclusion

76. In the event, despite the arguments skilfully deployed by Mr Freedman on behalf of the directors, I am satisfied that no grounds have been made out for disturbing the findings of unfitness made by the Judge in relation to both Mr Cathie and Mr Kellar. There is no appeal against the periods of disqualification imposed by the Judge, which were either at or near to the minimum period of two years. The appeal will therefore be dismissed.