HH JUDGE RUSSEN QC:
Introduction
- This is my judgment following a trial in the proceedings brought by the claimant, the Secretary of State identified by his then department and style, against Mr Edward Steven ("Mr Steven").
- By proceedings issued on 29 January 2016 the Secretary of State seeks a disqualification order against Mr Steven under section 6 of the Company Directors Disqualification Act 1986 ("CDDA").
- Disqualification orders under section 6 are made by reference to the conduct of a director (which includes a shadow director) of a company which has become insolvent. As their title indicates, these proceedings have been brought as a consequence of the insolvency of two such companies: CQH1 Limited ("CQH") which went into compulsory liquidation on 2 June 2014 and RTD1 Limited ("RTD") which went into voluntary liquidation on 10 February 2014. However, the Secretary of State has also brought under scrutiny Mr Steven's conduct as a director of another company, The Glassblowing House Limited ("GBH"), which went into liquidation on 31 October 2013. As explained below, the language of section 6(1)(b) permits the Secretary of State to extend the court's consideration of Mr Steven's conduct to that as a director of what might be described as a "collateral company" such as GBH. GBH is not therefore a "lead company" because its liquidation on 31 October 2013 fell outside what, for the purposes of these proceedings, was the two year period (since increased to three years) for bringing a claim under section 6.
- The proceedings were originally brought against Mr Steven and also his father, John Steven, as second defendant (and to whom I refer below either as "the father" or "Mr Steven Snr"). This was on the basis that the father was said to have breached a 2 year disqualification order which had been made on 4 May 2012 by being concerned directly or indirectly as a director of CQH, RTD and GBH; in other words, by acting as a de facto director of those companies. However, the Secretary of State discontinued the claim against John Steven on 2 March 2017 and, by a Consent Order dated 12 May 2017, agreed to pay his costs.
- With that discontinuance there also fell away a significant part of the allegations made in the continuing proceedings against Mr Steven, namely that he had permitted the father to be concerned, directly or indirectly, as a director of each of CQH, RTD and GBH from the date of commencement of the disqualification made against him (which was 25 May 2012). I should note that, as a consequence, Mr Steven made an application in November 2017 for an order that the claimant should pay the costs thrown away by the withdrawal of that allegation. That application was refused though the Order of District Judge Watkins dated 31 January 2018 made it clear that Mr Steven would be able to raise an argument before the trial judge, at the conclusion of the proceedings, over those particular costs in the context of the costs of the litigation generally.
- In essence, what remains of the allegation of unfitness on the part of Mr Steven is that he:
- 1. failed to ensure that CQH complied with its statutory duties in filing returns and making payment to HMRC and additionally that he caused CQH to trade to the detriment of HMRC from 7 January 2013 at the latest;
- 2. failed to ensure that RTD complied with its statutory duties in filing returns and making payment to HMRC and additionally that he caused RTD to trade to the detriment of HMRC and utility suppliers from 22 April 2013 at the latest; and
- 3. failed to ensure that GBH complied with its statutory duties in making payments to HMRC and thereby caused GBH to trade to the detriment of HMRC from 22 April 2012 at the latest.
- In relation to each company, the relevant period of allegedly detrimental trading is said to have ended with the cessation of the company's trading upon its sale of the business mentioned below.
- It will therefore be noted that the principal victim of the conduct complained about is HMRC, though the suppliers of utilities to RTD (British Gas, E:On and South West Water) are also identified by the Secretary of State as having remained unpaid at the date of that company's insolvency. Although each of the three companies went into liquidation owing certain amounts to other unsecured creditors, those amounts were relatively small in the context of the overall deficiency and it is a theme of the Secretary of State's evidence that Mr Steven caused the relevant company to pay other creditors whilst not making payments to HMRC (and those utility suppliers in the case of RTD) and thereby caused the company to treat HMRC differently to trade creditors, to a material degree. The allegation of detrimental trading was the primary allegation of unfitness, over that based upon the absence of returns, sought to be pressed home during the Secretary of State's closing submissions.
Background
- The background to the proceedings may be summarised by reference to a brief synopsis of each company and Mr Steven's position within it. The common theme between the companies is that they each operated a restaurant business on the Devon coast.
GBH
- GBH was incorporated on 11 April 2008 and, until its assets were sold in July 2013 to Barbican Restaurants Limited ("Barbican", a newly incorporated company of which Mr Steven was director) it carried on the business of a licensed restaurant under the name "The Glassblowing House" from premises at Sutton Harbour, Plymouth. Mr Steven Snr. had been a director of the company from incorporation (along with at least one other until April 2009) but he resigned on May 2011 when Mr Steven was appointed in his place. Mr Steven had worked in GBH's business and had risen to the position of Restaurant Manager before he was appointed as director.
- The disqualification order against Mr Steven Snr., mentioned above, was made in the Plymouth County Court in May 2012. After the expiry of his 2 year disqualification order the father became the sole director of Barbican, the successor to the business, in May 2015 (Mr Steven having resigned his directorship of Barbican in October 2013 in favour of Ms Ashlee Scott who herself resigned in May 2015).
- Mr Steven was a director of GBH between 1 May 2011 and 28 October 2013, shortly before the company entered into voluntary liquidation on 31 October 2013 following the sale to Barbican. In his affidavit filed in these proceedings, Mr Steven refers to GBH having lost a claim brought by a former employee in the employment tribunal in April 2013, resulting in a liability of £59,000, and identifies that unwelcome development (as well as a lack of seasonal trading) as the cause of the company's downfall.
- At the date of GBH's liquidation the overall liability to unsecured creditors (including associated companies) stood at £420,011 (and £377,029 excluding associates). The Official Receiver has recognised a liability to HMRC of £130,469 in respect of VAT (including interest and surcharges) and HMRC having submitted a proof of debt in respect of PAYE and National Insurance Contributions of £46,636.
- It was the earlier success of GBH, prior to this state of affairs arising, which Mr Steven says inspired him to open other restaurant businesses in the locality.
CQH
- CQH was a start-up business which traded as a restaurant under the name "Crab Quay House" from The Fish Quay, Brixham, Torbay. The company was incorporated on 24 May 2011 (under the name Brixham Quay Limited) and Mr Steven was its appointed director from the outset. He was also its sole shareholder. Mr Steven remained a director of the company until 8 April 2014 when Ms Scott was appointed (but then resigned the next day in favour of Mr Steven Snr. even though that further change was not registered until 22 October 2015).
- The company was established following Mr Steven's success in a tender process initiated by the local authority to find a tenant for its new building at the Brixham fish market. The restaurant became operational in July or August 2012 and he was responsible for the company's day-to-day administration and all operational aspects. CQH's trading life was less than 2 years as it went into compulsory liquidation on 2 June 2014 on the petition of HMRC presented on 10 April 2014 in respect of a debt of £69,271.71.
- Mr Steven attributes the failure of CQH to the unexpected impact of seasonal trade (the winter and off-peak months being exceptionally tough for business) followed by the severe storms of late 2013 and early 2014 (his Director's Questionnaire completed in June 2014 referred to the restaurant being unable to trade for 5 days and the road also being blocked as a result of the storms).
- In the month prior to the presentation of HMRC's petition, on 19 March 2014, CQH sold its business to Brixham Quay Restaurants Limited ("Brixham", a company incorporated in December 2013 with Ashlee Scott as its sole director). At the date of CQH's liquidation the company had a deficiency to creditors of £248,341 with £217,647 owed to HMRC. Including interest and applicable surcharges, the amount owed in respect of PAYE/NIC was £47,351 and the amount of outstanding VAT was £170,296.
RTD
- RTD was another start-up business which traded as "Rhodes @ the Dome" in Plymouth. The company was incorporated on 21 July 2011 (under the name RW (Plymouth) Limited) and Mr Steven was its appointed director from the outset. He remained in that position until the company entered voluntary liquidation in February 2014.
- Mr Steven says the restaurant became operational in January 2013 and that he was solely in charge of the management of the business, although Mr Steven Snr. did help with limited specialist tasks (regulated by the terms of a consultancy agreement which the father had entered into with the benefit of legal advice upon the consequences of the disqualification order against him).
- Like CQH, RTD had a short trading life before it failed. In a Director's Questionnaire dated 24 March 2014 Mr Steven attributed its failure and insolvency to five causes: (i) initial cost overruns on its building work; (ii) a poor quality chef who was caught taking drugs; (iii) a poor manager who had to be dismissed; (iv) the fact that only half the restaurant was opened for business; and (v) problems with the heating supplier. His affidavit filed in these proceedings also refers to a severe kitchen fire, the theft of the main safe, dismissal of senior staff and extensive flood damage. The same storms that afflicted CQH led to the closure of the restaurant and precipitated the sale in January 2014 of the business and assets to The Dome (Plymouth) Ltd ("The Dome", a company incorporated the previous month with Ms Scott again as the sole director).
- RTD went into voluntary liquidation on 10 February 2014. At the date of RTD's liquidation the company had a deficiency to creditors of £524,023 with £234,973 owed to HMRC and £54,763 due to utility suppliers. Excluding interest and penalties, the amount owed in respect of PAYE/NIC was £66,936 and the amount of outstanding VAT was £168,037.
The Basis of the Claim
- Section 6(1) of the CDDA states the court's duty to disqualify an unfit director of insolvent companies by providing that:
"The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied –
(a) that 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".
- There is no issue between the parties that the requirements of section 6(1)(a) are satisfied in that:
24.1. Mr Steven was a director of CQH from 24 May 2011 until 8 April 2014;
24.2. Mr Steven was a director of RTD from 21 July 2011 until it went into creditors' voluntary liquidation;
24.3. CQH went into compulsory liquidation on 2 June 2014 and was insolvent with the deficiency mentioned above; and
24.4. RTD went into creditors' voluntary liquidation on 10 February 2014 and was insolvent with the deficiency mentioned above.
- In relation to the issue raised by section 6(1)(b), the concept is one of unfitness by reference to past conduct. In a case such as the present, where the application relates to the respondent's conduct as a director prior to 1 October 2015, section 12C(4) of the CDDA and the revised Schedule 1 to the Act (which were introduced by the Small Business, Enterprise and Employment Act 2015) have no application in the light of the relevant transitional provisions. Instead, under what is now the repealed section 9 of the CDDA, his conduct is to be assessed having regard in particular (but by no means referring exclusively to) Schedule 1 as it stood before that date. For a case where the company has become insolvent, the provisions of Schedule 1 as it then stood feature an amalgam of grounds which – in relation to pre-insolvency matters - reflect the existence of a director's general statutory or common law duties as well as requiring more general consideration of his responsibility for the causes of insolvency; the specific statutory duties upon the company in relation to financial accounting, record-keeping and filings; and the company's potential exposure to challenge on statutory grounds certain pre-insolvency transactions and payments.
- However, it is plain both from the language of the former section 9 and case law that a claim under section 6 need not rest upon one or more of the specific grounds enumerated in the schedule. The CDDA does not seek to define the concept of "unfitness", as opposed to providing some pointers towards a conclusion upon the same on the facts of any particular case, and I observe that both the language and structure of section 6 and the purpose to be served by it clearly support a teleological approach to its interpretation. There are numerous decisions which recognise and establish that other unspecified grounds of reprehensible conduct on the part of a director may also be relevant and, if sufficiently grave, of equal or perhaps greater significance to a finding of unfitness as those which are specifically identified in the CDDA. The decision of the Court of Appeal in Re Sevenoaks Stationers (Retail) Limited [1991] Ch 164, per Dillon LJ at 176B-F, and of Neuberger J in Re Amaron [2001] 1 BCLC 562, at 568b-c, are just two of them.
- Mr Bamford, for the Secretary of State, made it clear that the present claim does not rest upon any of the specific matters identified in Schedule 1. Mr Brockman, for Mr Steven, did not take issue with this approach of looking beyond the scope of the schedule. Indeed, Mr Brockman cited Re Amaron, at 570, for the observation that it is often a difficult matter to decide the point at which an unfortunate and, in retrospect, mistaken commercial assessment goes beyond the pale and becomes a decision which is such that it can be said to have been either dishonest or culpable for some other reason. Difficult though such decisions might often be for the court, culpability to a degree that drives the conclusion required by section 6(1)(b) is what the court must assess. As I explain below, however, there was an issue between the parties as to whether or not the way the case was presented against Mr Steven – which was narrower than an allegation that he caused the companies to continue trading whilst insolvent to the detriment of creditors generally – somehow limited the range of defences, or extenuating circumstances, that would otherwise be potentially available to him on such a wider allegation of "wrongful trading".
- I have summarised the grounds of alleged unfitness relied upon by the Secretary of State (extending to the affairs of GBH) in paragraph 6 above. They are, in essence, that Mr Steven caused the companies to fail to make returns and/or payments to HMRC and thereby caused them to trade to the detriment of the Crown (and, in the case of RTD, its utility suppliers also). By reference to the decision of the Court of Appeal in Re Sevenoaks Stationers (at 183A) Mr Bamford recognises that the claimant needs to establish something more than mere non-payment of Crown debt and that it is necessary to look more closely to see what the significance of that non-payment is in the case against this respondent.
The Proper Approach to the Determination of the Allegations
The Nature of the Allegations
- The allegation that Mr Steven was responsible for an alleged failure by CQH and RTD to file returns with HMRC speaks for itself.
- In relation to non-payment of HMRC and utility suppliers, and as Dillon LJ went on to recognise in Re Sevenoaks Stationers (at 183E-184C) can be a ground for a finding of unfitness under section 6, the existence of substantial unpaid Crown debt is sometimes relied upon to support an allegation that the director made a deliberate decision only to pay those other creditors who pressed for payment and that monies which should have been paid to the Crown were instead used as (involuntary) working capital for that purpose. Although Dillon LJ there spoke of a director making a deliberate decision to prefer one set of creditors over another, it is clear from the authorities that it is not necessary for the applicant for an order under section 6 to adduce direct evidence of a policy of discrimination. As one would expect for an allegation which has the flavour of creditor-specific "wrongful trading", levelled by an applicant who lacks the direct and contemporaneous knowledge of the company's affairs possessed by the respondent, the case may be made good by inference.
- The decisions in Re Bath Glass Ltd [1988] 4 BCC 130, at 137, and Re GSAR Realisations Ltd [1993] BCLC 409, at 412-3, both refer to the court being able to draw an inference about the director's state of mind from the existence of unpaid Crown debt (albeit in each case in the context of a wider charge based upon wrongful trading). Re Melcast (Wolverhampton) Ltd [1991] BCLC 288, at 295i-296b, is an illustration of the court finding there to have been a deliberate decision not to pay the Crown by reference to ever-increasing Crown debts where trade creditors had been kept at a reasonably constant level. And any talk of a "policy" of such unfair discrimination, which is not in fact the language of the Secretary of State's evidence in this case nor of the prior notice served under section 16 of the CDDA, is not necessarily one that is consciously formulated: see Re Verby Print for Advertising [1998] 2 BCLC 23, at 39. Although Neuberger J (as he then was) there spoke of "the decision" being "conscious or unconscious", the context clearly suggests to me that he had in mind that the policy may be inferred from decisions that are deliberately made, albeit not necessarily made with their discriminatory consequences fully intended or appreciated.
- To my mind, these authorities can be gathered together to support the proposition that an allegation of trading to the detriment of a particular creditor or creditors may be based upon establishing the existence of decisions or choices made informally (and, if part of a series, each ad hoc) and which, at least in terms of the director's appreciation of their combined detrimental impact upon the prejudiced creditor, may have been made as much unwittingly as with any positive intention to harm. Further, if that impact appears sufficiently clearly over the relevant period of trading, when compared with the consequences for other creditors, then the degree of culpability on the part of the director responsible for it - which is required to trigger section 6(1)(b) - may be inferred.
- In the present case, for each of the three companies, the allegation of "detrimental treatment of HMRC" is presented by reference to the amount of Crown debt left unpaid at liquidation when compared with the total amount paid to other creditors after the date when the first element of that debt fell due for payment. In the case of CQH and RTD, that allegedly detrimental treatment is accompanied by the allegation of a failure to file returns for VAT and PAYE/NIC.
- In Re Finelist Ltd (No 2) [2005] EWHC 603 (Ch), at [77], Etherton J (as he then was) observed that being satisfied of the matters of this second limb of section 6(1)(b) involves a two part test:
''The determination of unfitness under s.6 is a two-stage process. First, the [Secretary of State] must establish as facts, to the requisite standard of proof, the matters on which the allegation of unfitness is based. Second, the court must be satisfied that the conduct alleged is sufficiently serious to warrant disqualification.''
Extenuating Circumstances
- There was a difference in emphasis within counsel's respective submissions in relation to the conduct resulting in the unpaid debt. Mr Bamford (in his skeleton argument and opening submissions) emphasised that the core allegation against Mr Steven is that he caused each company to trade to the detriment of HMRC and, in the case of RTD, to the detriment of its utility suppliers also. This was not, he said, a case based upon the companies' involvement in wrongful trading on a more general level and he politely sought to draw me back from my observation during his submissions that this was essentially a case of "targeted wrongful trading" (by which I meant creditor-specific). Mr Brockman on the other hand relied quite heavily in his skeleton argument upon authorities where the disqualification proceedings had been based or based in part upon allegations of wrongful trading and, therefore, where it might be said that the very concept of wrongful trading (and the essential nature of accountability for it under the quite separate provisions of the Insolvency Act 1986) involves consideration of detriment or prejudice to creditors generally.
- The reason for this difference lay not in any counterintuitive desire on the part of Mr Brockman to widen somehow the scope of the allegations against his client but, instead, his aim of increasing the range of potentially extenuating circumstances that might avail Mr Steven in meeting the charge of unfitness.
- In both his skeleton argument and his opening and closing submissions Mr Bamford cited a passage in the judgment of Morritt LJ in Secretary of State for Trade and Industry v McTighe [1996] 2 BCLC 477, at 486b-487c, for the proposition that, in a case based upon trading to the detriment of the Crown, it was not a defence for the director to say that he intended to pay all creditors, including HMRC, or that he believed that there were reasonable prospects of avoiding liquidation. In his closing submissions Mr Bamford also referred to passages in Walters & Davis-White on Directors' Disqualification & Insolvency Restrictions (3rd Ed, para. 4-12) and Mithani Directors' Disqualification (para. [412]) in support of the argument that extenuating circumstances must be directly related to the allegation in response to which they are raised.
- Against that, Mr Brockman's laid heavy emphasis upon the fact that CQH and RTD were start-up business which had traded for a relatively short period and had both failed as a result of circumstances outside the control of Mr Steven (as had GBH). To quote from Mr Brockman's skeleton argument:
"CQH and RTD were start-up businesses and operated as restaurants. CQH traded as Crab Quay House in Brixham and RTD as Rhodes @ the Dome in Plymouth. Both traded for a relatively short period and both failed as a result of circumstances outside the control of Mr Steven, and through no fault of his own. He believed that each of the businesses could trade out of difficulty and would be able to pay its creditors in full. What the Secretary of State has not done is to criticise this decision, nor has it been expressly suggested that the companies should have ceased trading earlier than they did."
"Insofar as GBH is concerned, that also failed because of an unforeseen event and lack of seasonal trading."
And (having reminded the court that the CDDA is not directed at business failure but rather at unfit conduct):
"In the interests of enterprise, it is legitimate to allow a director to try and trade out of insolvency and turn a company around or to trade with a view to selling the company's business as a going concern. If the company still fails then it is right that the Courts, with hindsight, should be slow to classify a legitimate attempt at turning the business around and obtaining a better outcome for creditors as unfit conduct even though some creditors may have suffered as a result."
- Mr Brockman took issue with his opponent's analysis of McTighe and submitted that the Court of Appeal's decision does not establish, as a matter of principle, that an allegation of trading to the detriment of HMRC cannot be met by the director's reliance upon there having been a reasonable prospect at the time that the company could avoid liquidation. He also cited Re Structural Concrete Limited [2001] BCC 578, at 587E-588C, where the relevant passage in McTighe was considered by Blackburne J with the result, Mr Brockman submitted, that this potential riposte remained available to the director in a case such as the present. This was, he said, consistent with the task of the court being that of assessing the conduct alleged against the director in the light of extenuating circumstances: see Re Grayan Building Services (in liq.) [1995] Ch. 241, 253E, per Hoffman LJ, as followed in Cathie v Secretary of State [2012] EWCA Civ 739; [2012] B.C.C. 813, at [35] and [49]. Mr Brockman said that the categories of extenuating circumstances are not limited in the way that Mr Bamford sought to suggest by reference to the textbook authority.
- In my judgment, it is open to Mr Steven to seek to rely upon what I might, as shorthand, describe as the "light at the end of the tunnel" plea to the charge of trading to the detriment of a particular creditor. I say this recognising of course that, strictly speaking, it would be no answer to an allegation that there was a period of the company's trading life when that creditor was discriminated against through preference of others for the director to say that he held a realistic belief that the period would come to an end (otherwise than through liquidation) and the effect of discrimination would be reversed. To that extent, I agree with Mr Bamford that this would be no defence, as such, to the charge based upon trading to the detriment of that creditor during the relevant period of discrimination. But, consistent with what I believe to be the proper, teleological approach to the interpretation to section 6(1)(b) having regard to the purpose for which the court is to be satisfied of the elements within it, the amorphous nature of the grounds that may support the conclusion of unfitness and the task identified in Re Grayan Building Services before any judicial decision is made in support of that purpose, I see no reason why the court should seek to rule out, as a matter of principle, particular categories of extenuating circumstances (even if such categorisation is feasible).
- I do not consider that Morritt LJ was seeking to do that in McTighe in a passage where his acceptance of the Secretary of State's submission was so heavily linked to the undisputed facts and culminated in the conclusion that the "decision to continue to trade" was not one which a reasonable and honest director could reach. At the risk of extending the tunnel metaphor too far, the "tunnel vision" which the court is required to adopt when looking at the director's relevant past conduct without attempting to assess more generally his present suitability for directorship - per Walters & Davis-White, op. cit. at para. 4-12, citing Re Pamstock Ltd [1994] 1 BCLC 716, 737, as relied upon by Mr Bamford - does not prevent the court from considering what the director might reasonably have thought to have been the future prospects of the company in the dark times before it actually went into liquidation. The textbook authorities relied upon by Mr Bamford clearly emphasise the point that any mitigating factor relied upon by the director must be consistent with this approach of viewing the alleged misconduct in retrospect, and the factor must therefore qualify temporally, but I do not read them as saying much more than that. They have no real need to do so when the word "extenuating" is otherwise self-selecting in its meaning. As the concept is one of extenuating circumstances, the factor relied upon by the director will either be a mitigating factor which reduces his culpability on the particular charge against him, or it will not.
- I am reinforced in my approach to this issue between the parties by that taken by Mr Registrar Jones in The Official Receiver v Gawn [2014] Lexis Citation 45, upon which Mr Bamford relied in his closing submissions. That too was a case under section 6 of the CDDA based upon an allegation that the director had caused the company to trade to the detriment of HMRC and where he relied upon what he contended to have been a reasonable decision to continue to trade, in the belief that HMRC would be paid in the future, as an extenuating circumstance. It is clear from the learned Registrar's judgment (at [55] and [68]) that he considered that riposte (only to reject it on the facts) as part and parcel of his determination under section 6(1)(b).
- I recognise my use of the expression "targeted wrongful trading" may not have been entirely apposite and did not attract itself to the Secretary of State. This is especially so if there is a risk that some might read into the word "targeted" the need to establish the kind of intent necessary to sustain a claim for "fraudulent trading". Yet there are similarities between the allegation of trading to the detriment of HMRC (and utility suppliers) and a more general allegation of wrongful trading to the detriment of creditors generally. They include the claimant's adoption of a "start date" for the alleged conduct and the mounting financial consequences, for at least one creditor, of the conduct continuing thereafter. If the "light at the end of the tunnel" argument could not be relied upon, at all, in the face of the narrower allegation then it might well follow that the director would be precluded from challenging the claimant's choice of start date when, plainly, the length of the period of allegedly detrimental trading is clearly a relevant consideration for the purposes of section 6(1)(b). However, I have already observed that if the applicant's evidence does establish there to have been a period of trading to the detriment of a particular creditor or creditors then that particular line of argument by the director cannot operate, as a defence, to "undo" the fact of detrimental trading during that period. Moreover, I respectfully agree with the observation of Blackburne J in Re Structural Concrete Ltd, at 588B-C, as endorsed by the Court of Appeal in Cathie, at [46], that if the period was a lengthy one then it is unlikely that, categorised more generally as an extenuating circumstance founded upon the director's optimism for the company's future, the riposte will operate to dispel a finding of unfitness unless, perhaps, there is something exceptional behind it. That said, in the light of the discouragement in Cathie, at [49], of any move away from the phrase "extenuating circumstances", in my judgment it is better to talk of the need for very persuasive extenuating circumstances where the period of alleged misconduct has been a lengthy one.
- The burden of establishing each matter identified in Re Finelist (see paragraph 34 above) lies upon the Secretary of State. As in other areas of civil litigation, the seriousness of the allegation in issue may well mean that appropriately cogent evidence is required to establish it on the balance of probabilities, as Laddie J remarked in Re Living Images Ltd [1996] 1 BCLC 348 at 355-6.
The Evidential Burden
- Those observations relate to the legal burden of proof. Mr Bamford for the Secretary of State and Mr Brockman for Mr Steven each reminded me that the evidential burden may shift within the course of the proceedings from the claimant to the defendant. They make this point particularly by reference to Mr Steven's contention that paper VAT returns were filed by CQH and RTD (in the absence of a properly functioning computer system for their electronic filing) when the allegation against him is that they were not filed. Each side asserts that, on that issue, it has put the onus upon the other side to establish the evidential case which is contrary to its own and that the opponent's evidence falls short of doing so.
- I recognise of course that in civil litigation the evidential burden upon a particular issue, which it is necessary for the court to decide, may shift to the defendant, provided of course that the evidence adduced by the claimant carries sufficient weight and momentum for it to do so. That it may shift (perhaps to and fro as the evidence upon the issue develops) is a matter of common sense in situations where the heft of the other side's case on a particular issue exposes a party to an adverse decision upon it unless he meets it with countervailing evidence. If authority is needed for this, in the context of proceedings under section 6 of the CDDA (where, despite the statutory purpose being the protection of the public, a punitive and deterrent element can be said to underpin any disqualification order that the court might make) then the point was recognised by Pill LJ in Cathie at [50]. In that case it was germane to the respondent directors' contention that they kept the Revenue appropriately informed about the progress of their company's contracts and prospective contracts, with a view to reaching agreement upon deferred payment of PAYE and NIC.
- As the Court of Appeal recognised in Cathie, there will be discrete factual issues upon which the directors formerly representing the company are likely to be the repository of any information, of potentially decisive evidential weight, which might militate against a conclusion that they have been guilty of misconduct in relation to its affairs. The parties have already recognised the shifting nature of the evidential burden in the present case. In the face of the Secretary of State's evidence designed to establish the negative (and which is avowedly recognised, in the usual way in this type of proceedings, not to be based upon direct knowledge upon the issue as opposed to conclusions drawn from the companies' and HMRC's records) – that returns were not filed – Mr Steven's evidence is that returns (for both VAT and PAYE/NIC) were submitted in paper format even though no copies of them appear to be available in either the companies' or HMRC's records.
- In relation to extenuating circumstances, falling short of a defence to the allegation levelled against him, the evidential burden must initially lie with the respondent director even though the Secretary bears the ultimate burden of persuading the court that the evidence as a whole establishes that the director has fallen below the standards of probity and competence appropriate for persons fit to be directors.
Summary
- In its approach to the grounds identified in paragraphs 6 above, therefore, the court's task is to consider the evidence as a whole in relation to the allegations against Mr Steven and any relevant extenuating circumstances relied upon by him. The question for me to decide is whether or not, allowing for any earlier shifting of the evidential burden on either aspect, the evidence satisfies me that the Secretary of State has made out his case under Section 6(1)(b) by establishing that Mr Steven's conduct falls short of the standards of probity or competence required of a director.
The Evidence
- The written evidence relied upon by the Secretary of State took the form of three affidavits of Ms Carol Butler, an Official Receiver who had been appointed liquidator of CQH. Her second affidavit was made in the light of further information which had come to light and extended to exhibiting an updated version of her first affidavit with appropriate cross-references (to an earlier exhibit) which had been omitted from it. Her third responded to certain aspects of Mr Steven's affidavit and also confirmed that neither the case against Mr Steven Snr. nor the allegations against Mr Steven in respect of the father's alleged directorship was being pursued.
- Shortly before the date of the trial before me Ms Butler retired from the Insolvency Service and in those circumstances it was necessary for a colleague within that department to adduce the evidence by which the claim might be tested at trial. That evidence took the form of the affidavit of Mr Anthony Hannon in his capacity (under what he describes as a temporary appointment) as Senior Official Receiver. By that affidavit Mr Hannon confirmed and repeated the previous evidence of Ms Butler. Like Ms Butler before him, and consistent with the very nature and basic chronology of such proceedings, Mr Hannon confirmed that he had no contemporaneous or direct knowledge of the matters relied upon by the Secretary of State which were instead based upon the documentary and other evidence available to him (including that obtained through inquiries of Mr Steven before the commencement of proceedings).
- Mr Steven's affidavit in opposition to the claim was made in response to Ms Butler's first and second affidavits and before her third. It therefore addressed that part of the claim which was based upon the alleged de facto directorship of the father.
- Both Mr Hannon and Mr Steven gave evidence at the trial. I return below to my assessment of the testimony in the context of the findings that are necessary to determine the claim.
The Rival Contentions
- Leaving aside the now redundant aspects of the Secretary of State's evidence which were directed to the involvement of the father in the respective businesses, the focus of the evidence in support of the claim has been upon the detrimental treatment of HMRC (and, in the case of RTD, the utility suppliers).
- The "matters determining unfitness" – as set out most clearly in Ms Butler's second affidavit with its cross-references to the voluminous exhibit CAB1 – has a number of common themes across the three companies. I highlight the following matters that can be distilled from the evidence relied upon by the Secretary of State:
55.1. the significant proportion of the overall liability to unsecured creditors (as at the date of liquidation) represented by the particular company's liability to HMRC. In the case of CQH, HMRC's claim accounts for approximately 93% of the unsatisfied debts (if the claims of associated creditors are excluded and some 87.5% if not). For RTD, the claims of HMRC account for almost 45% (with the three utility suppliers accounting for approximately 10.5% of it). The proportion of GBH's deficiency which is attributable to HMRC is approximately 47% if associated creditors are excluded from the total;
55.2. the alleged failure of the lead companies to file the returns necessary for the accurate calculation and prompt discharge of their ongoing liabilities to HMRC. VAT returns were due within one month from the end of the relevant quarterly trading period (or one month and seven days if filed electronically). Payments and returns in respect of employee payroll deductions in respect of income tax and national insurance contributions were due on the 19th of each month (or 22nd if the return was made electronically) though no complaint is made about default in making returns as opposed to the non-payment of the PAYE and NIC liabilities disclosed by them. In the case of CQH, it is said that the company failed to file 6 consecutive quarterly VAT returns beginning with that due in respect of the quarter ending November 2012 and that after 7 January 2013 (by which date the VAT due in respect of that quarter should have been paid) only one payment of £5,042 in September 2013 was made in respect of PAYE/NIC in circumstances where significantly greater liabilities for those had already begun to accrue. In the case of RTD, the company is said to have been in default in filing VAT returns in respect of 5 quarters beginning with the one ending April 2013 and that no payments were made in respect of PAYE/NIC after the company set up a PAYE scheme that same month. It is notable that the VAT returns which CQH and RTD did file (before the onset of their respective failures to make any returns showing output tax due to HMRC) were for VAT reclaims in respect of expenditure incurred upon the start-up of their businesses. CQH had submitted two returns for the quarters ending May and August 2012 which secured reclaimed VAT of £47,514 and RTD reclaimed a total of £168,879 under returns submitted for the quarters between those ending April 2012 and January 2013; and
55.3. the impact of the failure to file those returns upon the level of debt ultimately owed to HMRC. The headline percentages of that overall debt (and of that claimed by RTD's utility suppliers) are set out above. As I return to below, the VAT liability of both CQH and RTD was based upon HMRC assessments made in the absence of any return. In relation to GBH, the proportion of its unsatisfied debt attributable to HMRC did not reflect an accompanying failure to make returns in respect of VAT or PAYE but, instead, was the result of a significant shortfall between the liability disclosed by the returns submitted and the amount of the payments made by GBH under them. GBH fell into default in relation to PAYE/NIC on 22 April 2012 (when it paid only the PAYE element due and none of the NIC) and its last VAT payment, a partial payment of £2,500 against a greater sum already outstanding, was made on 2 January 2013. So far as the headline percentages are concerned, the sums by reference to which they are calculated are to be compared with the amounts paid to others during the period beginning with the relevant commencement date (see paragraph 6 above for each date) and the company ceasing to trade. The payments included those made to trade suppliers and in respect of business expenditure (including on credit card), employees as well as to the other two companies and to Mr Steven or an associate. The Secretary of State does not seek to impugn the propriety of any particular payment but instead relies upon the total during the relevant period to show how HMRC (and RTD's utility suppliers) have been discriminated against through non-payment. CQH paid a total of £688,604 to others during the relevant period, RTD £1,116,083 and GBH £990,949.
- That the exposure to HMRC was one across the three companies (and indeed a fourth restaurant business known as The Pickwick Inn with which the court is not concerned) was recognised by Mr Steven in the terms of an email dated 4 April 2013 which he wrote to Mr Brian Doran of HMRC. By that email he referred to the rapid expansion "from a single site business to a four site business with a fourfold increase in turnover and the number of employees within a, circa, 9 month period, this has led to significant problems in the accounting and control of the companies." Under the heading "Problem" he said:
"The problem that I believe exists is that not all of the VAT and PAYE returns have been submitted on time.
In addition, I believe there are substantial amounts of money owed to HMRC in respect of both VAT and PAYE.
I also believe there are substantial amounts of money owed back to the business as each of the businesses was started from scratch and all of the start-up and associated costs would generate a VAT reclaim.
The businesses are leasehold premises with no significant asset value, although they are trading well and the cash flow projections show that any liabilities due to HMRC can be paid, albeit a relatively short time period to pay will be needed."
- The email of 4 April 2013 went on to propose an agreement with HMRC upon a timeframe for getting the companies' accounting up to date and reconciled (through the use of an external accounting firm who might report directly to HMRC) and to contemplate that it might be necessary to agree a short-term payment plan over, say, 3 to 5 months to discharge all and any liabilities to HMRC.
- I have already mentioned (in paragraph 38 above) that Mr Steven's defence of these proceedings places heavy reliance upon the unexpected difficulties encountered by CQH and RTD in what proved to be their short trading lives. In addition to the matters affecting RTD that were identified in his affidavit, Mr Steven referred in testimony to the fact that the company's right to use the name and menu of the celebrity chef Gary Rhodes, as well as benefit from a number of personal appearances by him at the restaurant, suffered when he left the NatWest Tower in London for a new venture in Dubai. Mr Steven referred to this catalogue of incidents adversely impacting upon the businesses in circumstances where the optimism expressed in his email of April 2013 proved not to be well-founded and where, instead, the liability of all three relevant companies increased in the following months.
- In his testimony, Mr Steven did not dispute the growing level of HMRC debt owed by each of GBH, CQH and RTD when viewed against the payments made, or rather not made, by each of them. However, he did take issue with the actual amount of it based upon assessments (when, as I explain below, his position is that the assessments were not justified in the face of returns in fact submitted to HMRC) and he said there was no "priority list" as to which creditors might be paid in preference to others. He also said that he was in constant communication with HMRC and, as with all other creditors, the existence of the Crown debt was a real concern to him. He described his recognition of the need to pay HMRC as "genuine" and "categorical".
- However, Mr Steven did dispute the allegation made in respect of CQH and RTD that the companies had failed to make returns to HMRC. This allegation by the Secretary of State, involving the assertion of a negative, was based upon HMRC's computerised records, indicating the absence of filed returns, and upon the fact that VAT assessments had been raised on the basis that no returns had been filed. Of course, under the relevant tax legislation the effect of the notification of an assessment was that, even though the assessment might be appealed, the amount assessed was deemed to be the amount of VAT due and recoverable accordingly unless subsequently withdrawn or reduced. The claimant also relied upon replies given by HMRC to his solicitors in correspondence, during the course of these proceedings, to questions raised which were designed to test Mr Steven's position (which I outline below) that he filed returns with Brian Doran and Joanne Woods of HMRC. The replies given are generally qualified and sometimes enigmatic and the position is not helped by the fact that the claimant's solicitors were asking the questions in circumstances where both Mr Doran and Ms Woods had by then left HMRC. However, the general effect of the replies is that, if paper VAT returns were handed to either of them, then it appears that neither of those officers saved the returns (or recorded the fact of their receipt) on "the trader's electronic folder" and that there is no record of them having been submitted to HMRC's central processing office (then at Southend-on-Sea).
- Although he did not dispute the fact of HMRC's assessments, Mr Steven's position was that such assessments, based upon assumed turnover within each company of £1m p.a. and VAT at 12.5%, had not been justified when paper returns had, on his case, been submitted. Looking at the language of the April 2013 email, he said the problem was that some VAT returns had not been submitted "on time" and not that they had not been submitted at all. Whether or not CQH and RTD had filed VAT returns formed the most significant topic within Mr Steven's cross-examination.
- Mr Steven's witness statement explained how the timely filing of VAT returns by those companies had been hindered by their use of an accounting software package known as Xero. Xero operated through an internet, cloud-based system which was intended to and did relieve the companies of the need to keep paper files in circumstances where they had limited office space. The storage of their data only in "the cloud" meant that the Xero system differed from the Sage computer system (requiring storage on computer hardware) which CQH and RTD had used previously in 2012 to submit the returns which led to the VAT reclaims and was, Mr Steven said, the reason why satisfactory records no longer existed for the purposes of establishing whether and when certain quarterly returns were made.
- Mr Steven said that CQH began to use the Xero system in around July or August 2012 when it began trading. Neither CQH nor RTD used the Xero system for making the PAYE/NIC returns so those returns were unaffected by the problems encountered with it. Mr Stevens explained to the court that the companies encountered three types of problem with Xero. The first was that, as a new system, it carried with it a learning curve for both those working at the restaurant and the back office staff who were respectively required to input data and then monitor the data and produce and upload reports and returns based upon it. The second problem was that the first category of staff working at the restaurant (the restaurant manager or duty manager and any chef ordering produce) were inevitably tired at the end of the evening and had no appetite for inputting data at around midnight or even later. This meant, Mr Steven explained, that invoices were not filed on the correct day and that a half-hour job became a three-hour catch up, often in circumstances where the staff member had taken a day's leave in between. Mr Steven described the third problem as a technical one affecting the interface between the company and HMRC so far as filing automated electronic VAT returns was concerned.
- In relation to that third problem, in his witness statement Mr Steven had said that, during the first 12 months of using Xero, it had been assumed by Mandy Davies (the Financial Controller of the three companies) and therefore by him too that automated VAT returns were being produced by the software and successfully submitted to HMRC. Ms Davies did not give evidence but I was shown a letter from her dated 1 December 2016, and addressed "To Whom It May Concern", which said that "the Xero system should have been capable of submitting VAT Returns but this function never worked and so I would print off reports and pass to Ed." In his testimony, Mr Steven linked the discovery of this failure of the Xero system to a time quite soon after RTD started trading (in January 2013) and said it was around February 2013. He explained that it was around then that Brian Doran of HMRC made contact over the issue. On 28 February 2013 Mr Steven Snr sent an email to Mr Doran (copied to Mr Steven and Ms Davies) which was directed to a correction of the amount of VAT reclaim which RTD had obtained and referred to a recent meeting at its restaurant "to review the VAT position". That email concluded by saying "our new Zero (sic) accounting system will be up and running by the next quarter date and will enable a fully reconciled and therefore totally accurate return to be submitted including these initial submissions." This prediction that Xero system would be able to produce timely VAT returns was made in the light of references in the email to the companies obtaining assistance from an external accounting practice, rather than relying only upon those who were in-house and responsible for bookkeeping, to whom "we have recently agreed to outsource the accounting and reporting functions".
- It is clear that the father's optimism in that email was not borne out by events because neither CQH nor RTD did file any VAT returns electronically after April 2013. Minutes of CQH Board meetings on 5 September and 2 October 2013 referred to the Xero system continuing to fail to upload and automatically submit VAT returns so that Mr Steven had to print them off and submit them manually. Minutes of a later Board meeting of RTD on 15 October 2013 stated that HMRC "now have all relevant VAT Returns which they had not had due to issues with our accounting software".
- At this point I should mention the terms of an email dated 27 March 2017 from John Stacey to the claimant's solicitors. Like the 2016 letter from Ms Davies this email has been exhibited in evidence but the statements within it have been presented as hearsay and the author has not made a witness statement or affidavit or been subject to cross-examination. Mr Stacey is a chartered accountant whose firm, Riley Chartered Accountants in Plymouth, had recommended the Xero system to the companies. Mr Steven accepted in cross-examination that Rileys were the "mainstream professional accounting practice" that his father had mentioned in the April 2013 email to Mr Doran. Whereas Ms Davies' letter supported Mr Steven's position that there were issues with the Xero software, Mr Stacey's email said "the VAT returns were complicated by invoices being entered into the wrong companies and then being cancelled and recharged. There was nothing wrong with the software but simply a lack of resource and understanding and therefore returns were late or incomplete." Mr Steven did not accept the assertion that there was nothing wrong with the software.
- It is also relevant to note, as Mr Bamford sought to emphasise, that Mr Riley's email said that the Xero software was installed over a period from 2011, and the processing of information soon fell behind in circumstances where the Rileys' assistance resulted in tasks remaining uncompleted on grounds that they were not being paid, and that "we ceased acting for these clients in 2013". The terms of his email are at odds with the impression given by the father's email dated 4 April 2013 which was to indicate to Mr Doran that Rileys had only recently come on board.
- Mr Steven's evidence was that it was after February 2013, or thereabouts, and knowing then that the system for filing automated electronic returns was not working that CQH and RTD began to print off hard copies of the VAT returns and file them manually by post or in person, either to Mr Doran or his colleague Joanne Wood. He said that no return was handed over at the February meeting, to which the father's email referred, but that there were half a dozen meetings with Mr Doran and/or Ms Wood (the next one in April 2013) at which VAT returns were handed over. He pointed to the terms of the CQH minutes of autumn 2013, mentioned above, as support for the practice of submitting paper returns. Mr Steven says that, if copies of these returns were made at the time then they should be in the relevant company's records, although he is not sure that any copies were kept in paper form. He says the real value of the Xero system was perceived to be that of dispensing with the need to have significant paperwork.
- In relation to the allegation that CQH failed to file any VAT returns for the quarters ending November 2012 and February 2013, therefore, Mr Steven does not dispute the fact of such failure but instead says his unawareness of the problem means that he was not guilty of conduct indicating unfitness. In relation to the allegation that both CQH and RTD failed to file VAT returns after April 2013, he does not accept that they were in default because they submitted paper returns after it became clear that the attempt at electronic filing had not been and continued not to be successful.
- Mr Steven was asked questions in cross-examination about entries within HMRC's computerised "Action History" records (for CQH). An entry for 28 November 2013 notes a telephone conversation with Mr Stevens Snr. which refers to outstanding VAT returns for the quarters between November 2012 and August 2013 in which, as Mr Steven recognised in cross-examination, the father is recorded as saying he would discuss with the in-house agent Mandy Davies with a view to them being submitted, as he wanted to sort the matter out. Mr Steven said it would have been his father's way to give that kind of straight answer but that he should have reported back to him when he had no recollection that he had. Another computerised entry for 6 January 2014 suggests that Mr Steven Snr. had written a letter to HMRC dated 16 December 2013 "stating vat returns will be submitted during the week". When shown that entry, Mr Steven accepted that it would have made sense for his father to have spoken to him about this but he also observed that there was no way of knowing which returns were being referred to.
- When cross-examined by reference to an HMRC letter dated 10 March 2014 and addressed to him at CQH, notifying the company of its officer's additional assessments (based on sales of £1m) supplementing those already made centrally, Mr Steven said he did not recall receiving the letter and that it was written after GBH and RTD had sold their businesses and around the time when CQH was in the process of selling its own.
Analysis
- In relation to Mr Steven's contention that, as a result of the problem of electronic filing coming to light in February 2013, paper VAT returns were filed either in person or by post for the quarter ending April 2013 onwards, I cannot accept this. In my judgment and assessment of the evidence he has failed to displace the conclusion to be drawn from HMRC's contemporaneous records - the "Action History" - and actions (in the issuing of assessments in the absence of returned figures for input and output tax) which is that no returns were filed by HMRC.
- Clearly, it was open to me to accept Mr Steven's evidence that returns were handed to Mr Doran and/or Ms Wood in circumstances where I received no evidence from those former HMRC officers and where it is possible that the absence of any duplicate copy reflects the web-based nature of the Xero system and the absence of any contemporaneous record of them within HMRC's database, reflects a filing failure by those individuals (having been handed the paper returns by Mr Steven or Ms Davies) rather than by the companies.
- On this aspect of the case I note that the answers given by Mr Hannon in cross-examination were to the effect that he recognised that the companies had indeed used the Xero electronic accounting system but that neither he nor, so far as he was aware, any colleague of his in the Official Receiver's Office had followed up with a response to Mr Steven's own question within the Director's Questionnaire (for CQH) as to what was required of him in the way of computer records. Mr Hannon did say that the interrogation of any computer files would have been a matter for the Forensic Computing Unit rather than the Official Receiver.
- However, I have felt unable to form a conclusion, favourable to Mr Steven, about what would have been the first step in establishing that paper returns were printed and filed (namely that the returns were prepared on the company's or companies' computer ready for printing) in circumstances where the same questionnaire contained Mr Steven's statement that he would deliver up the company's records for its last 2 years. Mr Hannon's re-examination established the receipt for books, papers and records delivered to the Official Receiver in June 2014 did not include any reference to a computer. Mrs Butler's third affidavit, as adopted by Mr Hannon, exhibited and summarised in tabular form the correspondence passing between Mr Steven and the Official Receiver which shows that there was ample opportunity and encouragement thereafter for Mr Steven to provide any computer or other records. Indeed, in relation to RTD, in January 2015 the examiner from the Insolvency Service was pressing Mr Steven for an explanation as to why he had failed to maintain, preserve and deliver up VAT and other financial records.
- I must also address the point made by Mr Brockman in his closing submissions which was to say that it would have taken remarkable foresight on the part of Mr Steven to prepare the Board minutes in the autumn of 2013 (mentioned in paragraph 65 above) which referred to computer issues and the manual submission of VAT returns if they did not reflect the actual position but were part of an exercise in laying a false paper trial to support his present defence. When those minutes were put to Mr Hannon in cross-examination his answers were, in effect, that they said what they said, so far as submission of paper returns in the period September to November 2013 was concerned. Mr Steven was himself cross-examined upon some of those minutes and accepted that they had in part been an exercise in protecting himself from future criticism but those questions and answers related to the summary within them of the review of the relevant company's solvency at that point in time. Mr Steven was not questioned by reference to the material within Mrs Butler's third affidavit, indicating that the paper trail did not extend to copies of the minutes having been found within the companies' files on liquidation and neither his cross-examination nor (therefore) Mr Bamford's closing submissions extended to an outright attack upon the authenticity of the minutes.
- Nevertheless, I have been left with a sense of unease about these apparently contemporaneous minutes in circumstances where they were not produced by Mr Steven before he filed his evidence in these proceedings despite the ample opportunity and encouragement referred to above. Even viewing them as at the autumn of 2013, it would not so much have been cynicism expressed in terms of "remarkable foresight" of the current proceedings that prompts doubt over their accuracy but, instead, the point that they seem to be at odds with what Mr Steven Snr was saying to HMRC (at least in relation to CQH) at around that time: see paragraph 70 above. And it must be remembered that even the exhibited minutes only purport to speak from a time which was 6 months on from Mr Steven's discovery of the problem over electronic uploads in circumstances where both CQH and RTD are alleged to have missed returns falling due in the earlier period. As with Mr Steven's point that the claimant has failed to persuade me that there do not exist, somewhere, computer files which would show the historic creation of VAT returns fit for printing, I therefore do not find his reliance upon these Board minutes to be evidentially persuasive.
- There are, however, a number of more positive reasons why I have felt unable to accept Mr Steven's explanation in relation to the filing of paper returns and they are as follows.
78.1. Firstly, Mr Steven has freely recognised the problems with the operation of the Xero system which prevented the timely submission of VAT returns and these included the inability of in-house staff to cope with the record-keeping: see paragraph 63 above. The starting point, therefore, is one of failure on that front. During cross-examination Mr Steven was asked questions about Mr Stacey's email of 27 March 2017 mentioned in paragraph 66 above. Although he disputed the observation that there was "nothing wrong with the software" (and pointed out that figures for the year-end accounts of CQH and RTD were, unlike GBH, not required when the accounting deadline for those new businesses had not fallen due) he did accept that a "serious backlog" had developed and that the efforts of Rileys in attempting to clear it had been hampered by them stopping work due to non-payment of fees.
78.2. It is clear, therefore, that problems in the prompt preparation of VAT returns continued during the trading lives of CQH and RTD. The terms of Mr Steven's email dated 4 April 2013 (written some 8 months into CQH's trading life and 4 months into RTD's) recognised not only that that some VAT returns had not been filed on time but that there was also a need to get the companies' accounting records up-to-date and reconciled (with the assistance of Rileys). It is also notable that the father's email of 28 February 2013 (which he wrote in relation to RTD's "reclaim" return submitted timeously using the old Sage system) volunteered inaccuracies within the figures underpinning the filed return. In circumstances where it is obvious that, contrary to the indications within both emails, Rileys were not (continuously) engaged on terms that resulted in the accounting backlog being cleared, the second reason to doubt that paper VAT returns were delivered or posted lies in the picture of ongoing problems in relation to the accounting work required to ensure the companies were in a position to make returns. Put another way, in my judgment the evidence shows that Mr Steven's discovery of the third problem with Xero outlined by him (paragraph 64 above) did not carry with it any remedy for the other two.
78.3. The third reason supporting the conclusion that Mr Steven has not discharged the evidential burden that arises in the face of HMRC's records lies in what those records reveal. It is important to note that they show not just one or two "non-returns" but a significantly greater number: six missed returns for CQH and five for RTD. This number of missed returns, with HMRC's database showing the quarterly liability displaced by successive assessments, makes it inherently unlikely that Mr Doran and Ms Wood failed to pass on to their colleagues in Southend-on-Sea the information that Mr Steven says was being given to them. I have to bear in mind that Mr Steven recognises that Mr Doran made contact with him because of an issue over RTD's VAT reclaim return and the scenario of Mr Doran (or Ms Wood) thereafter receiving paper returns but not then filing them seem implausible. The likelihood of such ongoing human error becomes even more remote when the prospect of VAT returns also going astray, through no fault of the companies, after being put in the post (as Mr Steven says some of them were) falls to be assessed. As my exchanges with counsel during closing submissions revealed, there is some uncertainty as to how many of the paper returns were posted but Mr Steven's witness statement does say some were.
78.4. That third reason links to the fourth and last, which in my view is the most significant when it comes to the determination of the first limb of the unfitness test under the approach in Re Finelist. My last reason for not accepting Mr Steven's account rests upon the contrast between what the contemporaneous records (aside from the absence of any computerised record or log of filed returns) show when considered against his version of events. Mr Steven's position is that, until February 2013, he believed that electronic returns were being uploaded automatically through Xero and that, with effect from April and having been disabused of that belief by Mr Doran, paper returns were then submitted. The first and second reasons identified above provide grounds for doubting that this could have been done, or done on-time, in either period but, even if those could be left to one side, Mr Steven's explanation has to be considered in the light of the communications that were passing between HMRC and the companies. Notably, there is no record of either CQH or RTD protesting that HMRC were proceeding on the basis that one or more returns had not been filed when that was incorrect and the VAT liability should not have been on an assessed basis. On the contrary, the communications between Mr Steven Snr. and HMRC in late 2013 and early 2014 (see paragraph 70 above) belie the suggested understanding that returns were not outstanding. An earlier email that the father wrote on 14 September 2012 to Ms Davies in relation to GBH, copying in Mr Steven, made it clear that an assessment would be the consequence of not filing a return and emphasised the need to submit future VAT returns on time. This was approximately one month after CQH commenced trading and yet, after that date, that company's VAT liability was determined by reference to assessments rather than returns. Somewhat unsatisfactorily, HMRC's records do not show the precise dates when the assessments issued by central office were sent out (compare the officer's increased assessment of March 2014 mentioned in paragraph 71 above) and Mr Steven's testimony left it open as to when they were issued and received. Yet his own email of 4 April 2013, written in relation to all the companies, recognised that sums were due in respect of VAT (albeit saying there was a need for an accurate assessment reflecting sums due by way of reclaims in respect of start-up costs). It is true that the email said "not all" of the VAT returns for the respective businesses had been submitted "on time" but, given Mr Steven's position in this litigation, the striking thing about the terms of the email is that there is no protest or positive case about the liability to HMRC being wrongly based upon their oversight that others had been.
- In relation to that last reason, and recognising that the father's previously alleged de facto directorship no longer forms part of the claim, it did strike me that Mr Steven's testimony showed that his knowledge of the ongoing position between CQH and RTD and HMRC was really quite basic and much more limited than his position as sole director properly warranted. His witness statement had stated in one sentence (repeated for RTD) that CQH had VAT returns submitted manually or by post when it became apparent that electronic filing was not working. In response to a question from me, he elaborated upon this slightly to explain that there were a number of occasions at RTD's premises when he handed over returns to Mr Doran or Ms Wood. However, the narrative ended there and there was no explanation from him as to what either of those officers had to say about the suggested arrangement when (even on Mr Steven's case) it plainly did not work in avoiding assessments being raised. Mr Steven's inability to say very much about the recorded communications between the father and HMRC in late 2012, because he had no recollection of being told about them, gave me the clear impression that Mr Steven had delegated to his father the task of dealing with HMRC without ensuring he was kept fully informed. The result was Mr Steven's somewhat jejune account of matters in his evidence. As the sole director he should have made it his business to know about and establish the true position with clarity. He had no positive case that he was unaware that assessments were being raised on the basis that the relevant quarterly return had not been made and, even if he had not been aware of them, his position as director means he should have been.
- I therefore find that the Secretary of State has made good the allegation that Mr Steven failed to ensure that CQH and RTD themselves failed to comply with their statutory duty to file VAT returns, as summarised in paragraph 6 above.
- I now turn to the separate allegation that Mr Steven caused each of the three companies to trade to the detriment of HMRC (and RTD to the detriment of its utility suppliers also). Although linked, in the case of CQH and RTD, to the alleged unfitness based upon the failure to file VAT returns this is a free-standing allegation and, Mr Bamford submits, the more significant one and, as he put it, "what the case is really all about". Its independence from that based upon non-returns is clear from the fact that Mr Steven recognises that this is the only allegation pursued against him in relation to GBH and from his acceptance that the Xero software issues had no impact upon the ability of CQH and RTD to submit returns for PAYE and NIC and yet outstanding liabilities for both were incurred by those companies.
- On this aspect of the claim I remind myself of the court's ability to draw an inference of discrimination against a creditor based upon decisions reached deliberately or unwittingly so far as their consequential detrimental impact upon that creditor is concerned.
- The evidence which supports this allegation is easier to assess and includes Mr Steven's own evidence. Although Mr Steven rejected the idea that any kind of priority list had been created, favouring other creditors, he did accept during cross-examination that some creditors were treated more favourably than others. He said that, for obvious reasons given their businesses were restaurants, the companies tried to ensure that the suppliers of equipment, food and drink were paid. The payment of rent to the landlord was also high up as a priority. Mr Steven said that GBH did manage to negotiate with its landlord the payment of rent on a monthly instead of quarterly basis, to assist with cash flow, and that some suppliers were content to agree to deferred payment terms. But, generally, these day-to-day and regular business expenses were paid (as he put it) "in order to keep the company trading". Mr Steven said that, as sole director, he decided who got paid and when shown an email to him from Mandy Davies dated 10 September 2012 (listing certain proposed payments with the request "please let me know if they can be paid") accepted that, aside from any immediate supplies that may have been ordered and paid for by the chef or restaurant manager on site, it illustrated how he decided the direction of cash flow.
- In these circumstances, Mr Steven was driven to accept that some creditors were treated more favourably than others. Reminded of the terms of the father's email of 14 September 2012 (paragraph 78.4 above) stating that payment of VAT "needs to be a priority in cash flow arrangements", Mr Steven accepted that he failed to prioritise payment of VAT. Indeed, the incontrovertible evidence shows that HMRC were not only not given priority but that the sums which should have been paid to them were applied elsewhere.
- Mr Steven accepted that each of the dates relied upon by the Secretary of State (see paragraph 6 above) marked the time when the company concerned became cash-flow insolvent. Allowing for the fact that it is Mr Steven's case (which I have rejected) that the VAT liability after April 2013 should have been based not upon assessments but on the output tax recorded in paper returns, and him also mentioning that RTD had a dispute with British Gas over bills based upon estimates rather than actual readings, the fact that the Crown and RTD's utility suppliers were left substantially unpaid during those periods speaks for itself. The earliest of the start dates for trading to the detriment of the Crown was that for GBH (namely 22 April 2012). Mr Steven recognised that GBH failed to keep an agreement with HMRC, reached in July 2012, to pay VAT arrears at the rate of £15,000 per month with the result that the total amount then outstanding was demanded in September 2012. The father's email of 14 September 2012 is to be considered in that context.
- Mr Steven accepted that HMRC were not needed for day-to-day business support and yet the monies due to them had been used as involuntary capital for those who were providing supplies. He recognised in hindsight that the trading was to the detriment of the Crown and RTD's utility suppliers (during a period when they had not been threatening a termination of supply) and that he could also see this detriment at the time.
- In my judgment the claimant has, by reference to these facts, also made good the allegation that Mr Steven caused each of GBH, CQH and RTD to trade to the detriment of the Crown (and RTD to the detriment of its utility suppliers) as set out in paragraph 6 above.
- On this aspect of the case, however, for the purposes of the determination required under section 6 there remains the issue of the extenuating circumstances relied upon by Mr Brockman. I have explained above why, as a matter of principle, it should in my judgment be open to him to do so. In his witness statement Mr Steven had said that, by causing the companies to continue to trade during the relevant periods, he reasonably believed they would pay the outstanding debt to HMRC and this was a theme of his testimony. He also said that it was necessary to continue to trade in order to maximise the return to creditors by selling the business as a going concern. In relation to the sale of RTD's business to The Dome, Mr Brockman also pointed to the fact that The Dome, as purchaser, had taken on liabilities of RTD totalling approximately £475,000. As with the absence of personal financial benefit for Mr Steven from the businesses (when he had drawn little or no remuneration and in fact suffered exposure under personal guarantees given by him to creditors) this reduction in what would otherwise have been RTD's even greater deficiency is relied upon as an extenuating circumstance.
- Mr Hannon was asked about these matters in cross-examination. In relation to both CQH and RTD he confirmed that he had not given thought as to whether or not, during the period of allegedly detrimental trading, the relevant company should have ceased trading; and neither had he paid particular consideration to the fact that each one was a start-up business. Nor did Mr Hannon take any serious issue with the transfer of liabilities from RTD to The Dome, or the transfer of employees from CQH to Brixham. That said, he did question whether the employees' length of service in either CQH or RTD would have entitled them to redundancy payments (or in fact had resulted in a claim by the Redundancy Payment Service in either liquidation) and he made the obvious point that The Dome's assumption of liabilities was accompanied by a transfer of assets to it.
- I note that the price payable for RTD's business was £496,413 and the greater part of this was satisfied by the agreement to pay ongoing liabilities (many of them leasing liabilities in respect of transferred assets) of £475,753. The price paid by Brixham to CQH was the relatively modest amount of £8,615 which reflected the value of the goodwill (£100), leasehold interest and trade inventory less certain direct and indirect liabilities in respect of staff (accrued pay and claims to holiday entitlement). Brixham also agreed to take on lease purchase liabilities in respect of the kitchen equipment and furniture and (whatever difficulties over enforcement might have arisen once the covenantee entered into liquidation on a petition presented the following month) also agreed, in qualified terms, to pay CQH an additional sum of £15,000 "in respect of a future profit share" over 3 years commencing 19 March 2015.
- Does the fact that the Secretary of State does not advance a positive case that any of the three companies should have ceased trading at an earlier date, coupled with the further point that the overall deficiency within RTD might well otherwise have been much greater (and perhaps that within CQH too) had they done so, constitute a relevant extenuating circumstance? I have expressed my view above that such matters might amount to extenuation which dispels a conclusion of unfitness under section 6(1)(b): see paragraphs 40 to 43 above.
- In my judgment the matters relied upon by Mr Brockman do not operate to excuse Mr Steven from the conclusion otherwise to be drawn from the fact that he permitted each of the companies to trade to the detriment of a particular creditor or creditors. I have reached this conclusion for the following reasons:
92.1. First, as I have already observed in agreeing with the approach of Blackburne J in Re Structural Concrete Ltd, such extenuating circumstances would have to be very persuasive if they are to deflect the court from a finding of unfitness based upon a prolonged period of trading to the detriment of a particular creditor. In this case the relevant period of trading was prolonged: a period of 14 months (GBH), 14 months (CQH) and 12 months (RTD) respectively culminating in the pre-liquidation sales of the businesses to Barbican, Brixham and The Dome. In the case of CQH and RTD, the failure to pay HMRC persisted over the greater part of their short trading lives and commenced well before the winter storms which finally put any prospect of business recovery beyond reach. That there is nothing persuasive in the present case, or indeed any significantly redeeming factor that might avail Mr Steven, appears from the following four matters.
92.2. There is the fact that CQH's and RTD's trading to the detriment of HMRC occurred in circumstances where, as I have found, they failed to file VAT returns. So far as the VAT element of their respective Crown liabilities are concerned, the failure to pay took place in circumstances where, in my judgment, Mr Steven was also responsible for them failing to take adequate steps to ensure that the amount payable was even properly quantified. The result was, of course, that the quantification took the form of successive (including increased) assessments by HMRC which were justified and, in the event, not challenged. Indeed, the failure of CQH and RTD to pay HMRC over most of their trading lives reflected their failure to submit any liability-based returns after those submitted for reclaimed VAT in respect of the start-up costs they incurred so as to be in a position to commence trading.
92.3. There is also the point, which is quite separate from the failure to submit returns, that there is no clear evidence that Mr Steven caused the companies to communicate with HMRC with a view to apprising them of any belief and cause for belief that the tax liabilities would be cleared. Of course, a lack of information provided to the prejudiced creditor, falling short of a situation of informed consent, is implicit in the notion that the creditor has been unfairly discriminated against – see Cathie at [52]-[53] - and I do not make this point to somehow add to the charge against Mr Steven, but rather to observe that there was no communication at the time which might now be said to mitigate the bald fact of non-payment.
92.4. Next, and related to the duration of the detrimental trading, there is the point that any "light at the end of the tunnel" type of submission relied upon my Mr Steven has to be assessed against the fact that CQH's and RTD's default in the payment of Crown debts began at the outset and certainly well before the winter storms of late 2013 and early 2014 which really spelled the end for the businesses. This raises the question as to what causes for optimism in the long term and for the clearance of ever-increasing arrears of tax there might reasonably have been in circumstances where it was the involuntary working capital provided by HMRC and RTD's utility suppliers that had sustained the companies' cash flow from the outset. Mr Brockman's submission that Mr Steven treated himself as prejudicially as the Crown (by not drawing a salary) must be viewed in the context of this point as it is a further indication that the companies were not financially viable at the outset, though the stark distinction between the voluntary contribution of this "human capital" by a director/shareholder who stands to benefit from any future profitability or balance sheet surplus of the company and the involuntary funding by the Crown, which does not, is in any event obvious.
92.5. Lastly and flowing from the other reasons above, there is in my judgment too much uncertainty and speculation behind the suggestion (made in relation to RTD in particular) that the decision to continue to trade was a reasonable one or, even if reasonable, one that deflects from the discriminatory treatment of HMRC. I believe the point can be tested by considering the significance of the liabilities transferred by RTD to The Dome. As I suggested during the course of closing submissions, even if the purchaser company had paid the entire £496,413 in cash in return for the transfer by RTD of unencumbered assets then HMRC would only have benefited, pari passu, from any dividend payable out of the greater cash sum in a liquidation (after allowance for liquidation costs and expenses). The effect of the discrimination of HMRC prior to liquidation (at the rate of 100 pence in the pound) would therefore only be modestly addressed in that scenario. The fact that the liabilities attached to the transferred assets were not discharged but taken over by The Dome, in lieu of cash consideration to RTD, means that the value of creditors in RTD's liquidation is not as large as it might otherwise have been but, likewise, the fact remains (see paragraph 55.1 above) that HMRC accounts for about 45% of the deficiency.
Disposal
- For the reasons set out in this judgment I therefore conclude that the Secretary of State has established, by reference to his conduct in relation to each of GBH, CQH and RTD, Mr Steven is unfit to be concerned in the management of a company. The allegations summarised in paragraph 6 above, which I have found to be made out without any extenuating circumstances to persuade me otherwise, satisfy me that Mr Steven's conduct was serious and fell markedly short of the standards of probity and competence to be expected of a director.
- In these circumstances the making of a disqualification order must follow.
- At the time the allegations in respect of the father's suggested directorship were withdrawn, by his solicitors' letter dated 30 March 2017, the Secretary of State indicated that he would invite the court to make a disqualification order to run for 4 years. In my judgment, and taking account of the evidential matters that have fed into my analysis above, the appropriate period of disqualification of Mr Steven is 3 years.
