Cathie & Anor v Secretary of State for Business, Innovation and Skills

This is an appeal against a judgment of Henderson J dated 18 November 2011 in which he dismissed an appeal by Mr Stephen David Cathie (“Mr Cathie”) and Mr Stephen Elliot Kellar (“Mr Kellar”) (“the appellants”) against a judgment of District Judge Smith given at the Manchester County Court on 14 June 2010. District Judge Smith made disqualification orders against the appellants, who were former directors of Janus Technologies Limited (“the company”), under section 6 of the Company Directors Disqualification Act 1986 (“the 1986 Act”). The orders were made on the application of the Secretary of State for Business, Innovation and Skills (“the Secretary of State”).

Mr Cathie was disqualified for 2½ years and Mr Kellar for 2 years. The order against Mr Kellar was subsequently stayed pending appeal and was ordered by Henderson J to commence on 9 December 2011.

Section 6(1) of the 1986 Act provides:

“6.

Duty of court to disqualify unfit directors of insolvent companies.

(1)

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.”

It is not disputed that the company became insolvent within the meaning of section 6(1)(a). The company ceased trading on 29 August 2006 and entered creditors’ voluntary liquidation on 13 October 2006. The company began trading in Manchester in 2001 and in its early years the core business was the supplying and selling of used printing machinery. The increasing use of the internet had an adverse impact on the company’s trading and a new strategy was devised whereby it would seek to become the UK sales agent for substantial overseas manufacturers of printing equipment. Mr Cathie became a director in 2001 and Mr Kellar, who had earlier been company secretary, became a director on 9 August 2005. Mr Kellar resigned on 2 August 2006.

Notice to the appellants of the Secretary of State’s intention to apply to the court for disqualification orders against them was given on 3 March 2008. The sole ground was that they had failed to ensure that the company:

“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 the year ending 30 April 2003, the company showed a turnover of just over £3 million and a profit of £114,828. In the following year, turnover was reduced to about £2,200,000 and there was a trading loss of £134,553. Following some success with the new strategy, there was a turnover for the year ending 30 April 2005 of about £2,500,000, with a profit of £21,653. On 19 July 2005, the company paid just over £34,000 to HMRC (“the Revenue”) thereby discharging, albeit 3 months after the date due, its full liability for the tax year 2004-2005. For the tax year 2005-2006 two payments were made, in themselves late. A payment for one month, £10,586.22, was made on 16 August 2005 and a payment of £5,695.83, about half a month’s payment, on 16 September 2005. Those were the only payments made by the company to the Revenue after 5 April 2005 and before the company became insolvent. Allowing for those payments, the company was almost 15 months in arrears when it ceased trading. The arrears amounted to the sum of £193,000 stated in the notice.

In its efforts to obtain business, the company had some successes between August 2005 and August 2006 but more failures. A contract involving the Daily Mail was obtained in December 2005 and generated commission of over £220,000. Substantial contracts that it was expected to achieve did not materialise. Creditors began issuing proceedings against the company during 2006. The directors concluded that the company would have to cease trading. The total deficiency was about £680,000, with no prospect of any distribution to unsecured creditors.

At paragraphs 33 to 35 of his judgment, Henderson J cited the judgment of District Judge Smith:

“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.

. . .

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.

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.

. . .

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 were 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 [for the Secretary of State] 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.”

Henderson J stated, at his paragraph 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.”

Henderson J went on to analyse the District Judge’s approach to the further question of what contact there had been between the company and the Revenue during the relevant period and whether any, and if so what, information had been supplied to the Revenue. He referred to such evidence as there was of discussions with Ms Ann Dalton (“Ms Dalton”), the employee of the Revenue with whom the appellants had contact, and to letters exchanged in May 2006.

The District Judge concluded, at paragraph 41, that, through no fault of the appellants, the company files in relation to the Revenue were missing and the company was hampered by that in the litigation. He accepted that if the appellants kept the Revenue appropriately informed with sufficient accurate information with a view to agreeing to defer payment, it would be very difficult to see how the Revenue could have been unfairly treated.

The District Judge cited a solicitor’s letter dated 18 June 2008, written on behalf of the appellants:

“Further during this period HMRC were fully informed of the situation on an ongoing basis and understood the position the company was in. In particular Mr Cathie spoke to Ann Dalton at HMRC regularly and kept her advised as to JTL’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.”

The judge added an extract from Mr Cathie’s statement:

“On each occasion I spoke to Miss Dalton I explained to her the stage that JTL was at with regard to the various newspaper projects. I found Miss Dalton to be quite accommodating and understanding regarding JTL’s situation, and she gave me the impression that HMRC was willing to allow JTL time to try and conclude the potential sales, so that the company would then be able to pay the outstanding liabilities.”

An email from Mr Cathie to Mr Kellar dated 21 February 2006 stated:

“I spoke with Ann Dalton, she is okay at the moment but is clearly keen for us to start making payments. She said that we should always specify which month we are paying when we send a payment. As a rule we should always pay the current month and whatever back month 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^th April, she has requested that we ring her in three weeks time to give her an update.”

The District Judge noted (paragraph 42) that Mr Cathie acknowledged that there was no further contact between the company and the Revenue in March or April. This was followed by an exchange of correspondence in May 2006.

Ms Dalton wrote on 12 May 2006:

“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.”

The company replied in a letter dated 19 May 2006 signed by Mr Cathie as Managing Director though, it appears, drafted by Mr Kellar:

“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.

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 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.”

The District Judge noted that Mr Cathie accepted in evidence that the draft Northcliffe contract was not sent to the Revenue and the District Judge accepted that, though it was inconsistent with Mr Kellar’s recollection. In relation to salary, the District Judge concluded that the statement in the letter that Mr Cathie had not drawn his personal salary since last year was “utterly incorrect”. He was being paid over £5,000 a month.

It was accepted that Mr Kellar had been paid £5,000 on 15 March 2006, £1,000 on 7 March and £5,000 on 28 April, the third sum having come to the company from another company of Mr Kellar’s. He did not regard those sums as salary but rather as a partial repayment of his loan account, the company having agreed to buy equipment from him at a price of £50,000. District Judge Smith found that the explanation “does not square with the wording of the letter.”

The District Judge noted that no real progress was made after the offer of £2,000 a month. That sum was not paid. The Revenue did not take proceedings against the company.

In his second affidavit, Mr Cathie referred to a summary of calls and dealings between Ms Dalton and representatives of the company at the material time prepared by the Revenue. He did not accept that the summary included a full or accurate record of calls between 19 January and 7 August 2006. He claimed to have sent Ms Dalton cash flow projections and a full account of the contracts the company was seeking. Form P35, an annual return, was sent. Mr Cathie said he believed that Ms Dalton had informally made a ‘time to a pay’ agreement on or around 20 June 2006.

In his oral evidence, Mr Cathie said that Ms Dalton was “very, very supportive of us”. She was willing to wait and the absence of action from the Revenue was indicative of that. Ms Dalton “was on board with us and informed of what we were doing.” The Revenue were working “with the full knowledge of what we were trying to achieve.” At that point in the cross-examination, counsel for the Secretary of State sought to return to the letter of 12 May but, on the application of counsel for the appellants, was curtailed from doing so.

Assessing their oral evidence, Judge Smith said that both Mr Cathie and Mr Kellar were “extremely uncomfortable” about the letter of 19 May and concluded that Mr Cathie did not inform the Revenue of the Daily Mail contract and the receipts that would follow. District Judge Smith concluded that the letter of 19 May was “highly misleading”. He stated, at paragraph 53:

“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.”

He identified the further issue he had to decide:

“whether the defendants are unfit to be directors given my findings as to misconduct.”

He prefaced his comments by referring to “the need for there to be exceptional circumstances where I have found misconduct of this type”, citing Re Structural Concrete LimitedOfficial Receiver v Barnes & Ors [2001] BCC 579 (Blackburne J). District Judge Smith found as a fact that Mr Cathie had not told the Revenue of the Daily Mail contract. He concluded:

“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.”

District Judge Smith made these findings at paragraphs 54 and 55:

“54.

. . . 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.”

The District Judge stated, at paragraph 56, that in those circumstances he could not find that there were exceptional circumstances. He said that he must make a disqualification order against both appellants.

The District Judge went on to criticise the Secretary of State’s conduct in certain respects including that there were errors in the evidence of Mr Tranter, Head of an Investigation Team, that the Secretary of State was prepared in the case to devote huge resources to issues which were ultimately irrelevant and that disclosure of documents was delayed.

Henderson J upheld the District Judge’s findings. He had not wrongly approached the burden of proof and the critical findings of the District Judge depended not on the burden of proof but on the District Judge’s analysis of the oral evidence of the appellants and their demeanour. It was not incumbent on the Secretary of State to call Ms Dalton as a witness and the loss of the file, though unfortunate, was not decisive. The complete correspondence between the Revenue in Edinburgh and the company was available and particulars of telephone calls between the company and Ms Dalton from January to September 2006 were given by way of summary. The judge found it surprising that neither side took the step of obtaining copies of the actual notes from Edinburgh and stated that the appellants have only themselves to blame for their inaction.

Henderson J found that the District Judge was entitled to conclude that the draft Northcliffe contract had not been sent to the Revenue. He accepted that Ms Dalton was in principle prepared to enter into a time to pay agreement but it had never materialised and the company did not even honour the offer made in the letter of 19 May. Henderson J added:

“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.”

Henderson J held that the District Judge was entitled to find that Mr Cathie had not informed the Revenue of the Daily Mail contract.

In relation to the finding of misconduct, Henderson J stated, at paragraph 71:

“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. . .”

Henderson J added, at paragraph 75:

“The [District] 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.”

Henderson J also considered the ground of appeal based on the District Judge’s statement, at paragraph 56, that he did not consider that he could find “that there were exceptional circumstances”. The District Judge’s reference to exceptional circumstances appears to be based on its use by Blackburne J in Structural Concrete, to which I will refer. The District Judge set out possibly mitigating factors, including that the appellants were clearly acting under extreme pressure of trying to keep the business going, and the factors, already summarised, (paragraph 55) pointing in the other direction, before stating the conclusion he did at paragraph 56. Henderson J stated, at paragraph 73:

“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.”

Henderson J stated that he was not satisfied that the judge erred in any material respect.

The District Judge made findings of fact:

In Re Lo-Line Electric Motors Ltd [1988] Ch 477 Sir Nicholas Browne-Wilkinson V-C stated, at page 486:

“Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate.”

In Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, Dillon LJ, with whom Butler-Sloss and Staughton LJJ agreed, referred to the words of section 6 of the 1986 Act which he described as “ordinary words of the English language”, and to other judicial comment, and added, at page 176F:

“Such statements may be helpful in identifying particular circumstances in which a person would clearly be unfit. But there seems to have been a tendency, which I deplore, on the part of the Bar, and possibly also on the part of the official receiver’s department, to treat the statements as judicial paraphrases of the words of the statute, which fall to be construed as a matter of law in lieu of the words of the statute. The result is to obscure that the true question to be tried is a question of fact – what used to be pejoratively described in the Chancery Division as ‘a jury question’.”

In Re Grayan Building Services Ltd(in liquidation) [1995] Ch 241, Hoffmann LJ, with whom Neill and Henry LJJ agreed, defined the task of the court:

“It must decide whether that conduct, 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.”

In Sevenoaks, Dillon LJ also considered the situation where an allegation of misconduct is made, as in the present case, by way of unfairness between one creditor, or class of creditors, and others. Dillon LJ stated, at page 183E-F:

“[The Director] made a deliberate decision to pay only those creditors who pressed for payment. The obvious result was that the two companies traded, when in fact insolvent and known to be in difficulties, at the expense of those creditors who, like the Crown, happened not to be pressing for payment. Such conduct on the part of a director can well, in my judgment, be relied on as a ground for saying that he is unfit to be concerned in the management of a company. But what is relevant in the Crown’s position is not that the debt was a debt which arose from compulsory deduction from employees’ wages or a compulsory payment of VAT, but that the Crown was not pressing for payment, and the director was taking unfair advantage of that forbearance on the part of the Crown, and, instead of providing adequate working capital, was trading at the Crown’s expense while the companies were in jeopardy. It would be equally unfair to trade in that way and in such circumstances at the expense of creditors other than the Crown.”

Confirming that the burden of proof is on the Secretary of State when he seeks a disqualification order, Neuberger J in Re Verby Print For Advertising Ltd [1998] BCC 652, stated, at 658G:

“I would accept the grave nature of an allegation of unfitness under section 6(1)(b) of the 1986 Act must be borne in mind when considering whether that allegation is made out.”

In Structural Concrete, Blackburne J reversed the finding of a District Judge that there was no unfitness. I set out the reasoning of Blackburne J in some detail because his use of the expression “exceptional circumstances”, repeated by the District Judge, gives rise to one of the principal grounds of appeal. Having cited the judgment of Morritt LJ in Secretary of State for Trade & Industry v McTighe [1997] BCC 224, he stated, at page 588:

“I do not think that [Morritt LJ] was intending to lay down, as a proposition applicable in all cases, that a policy of deliberate non-payment of a class of debt, whether Crown or otherwise, necessarily gives rise to a finding of unfitness although I find it difficult to envisage circumstances in which such conduct, 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.”

Having referred to the facts, which included a long period of time in which the Revenue had received nothing and a substantial and increasing amount was becoming due, Blackburne J stated, at page 589H-590D:

“Those being the facts (either undisputed or as found by the district judge) it would, in my judgment, require exceptional circumstances to justify a finding that this did not amount to misconduct justifying a finding of unfitness on the part of those responsible. In reaching her firm conclusion that unfitness had not been demonstrated, the district judge appears to have laid emphasis on the fact that the directors' intention was ultimately to pay the Revenue debt in full and on the fact that the length and depth of the recession and the number of contract disputes which they could expect to be raised far exceeded their reasonable expectation. At the heart of her decision appears to have been her view that the course of action pursued was a ‘commercial one’ taken by the respondents in good faith (i.e. with no attempt to benefit personally or conceal the company's true state of affairs) and with thought and proper advice (from Mr O'Brien ‘who had once worked for the Revenue’), that the directors were being ‘realistic and prudent in relation to their projections as to income and payment’, that the choice was between immediate liquidation and deferred payment to the Revenue and that the directors were encouraged to take this action ‘having had direct experience of Inland Revenue debts before’ and, acting on Mr O'Brien's advice, believing they could negotiate payment of the Revenue's claim by instalments.

With every respect to the district judge, whose experience in these cases (to which she drew attention in her judgment) I accept, I do not consider that these matters, even when coupled with the particular matters to which Mr Tager QC drew my attention (e.g. the fact that the respondents acted in good faith in reliance on the advice of Mr O'Brien, whose experience and competence they had no reason to question and that the company's bank and auditors did not question the course which SCL was pursuing), justify the conclusion that the directors' conduct ‘does not cross the threshold of even a marked degree of incompetence or negligence, let alone a very marked degree’. In my judgment, making every allowance for their good faith and reliance on the advice of others, their conduct clearly did cross that threshold. It would be to send out entirely the wrong message if it were to be thought that a deliberate policy, followed over very many months, of not making any payment of a Crown debt of this kind, allowing it to rise to £460,000-odd and making no attempt to secure the Crown's agreement to this course of action, while at the same time paying the company's other pressing creditors, could not lead to a finding of unfitness and therefore to disqualification. The district judge's error lay not in failing to identify the correct test to be applied but in failing correctly to apply that test to the facts as she had found them.”

The facts have much in common with the present case but Mr Freedman relied on the amount due to the Revenue in Structural Concrete being substantially larger, and the period for which payments were not made somewhat longer, than in the present case.

On behalf of the appellants, Mr Freedman QC submitted that the District Judge had misdirected himself by introducing a test of “exceptional circumstances” when considering whether misconduct led to a conclusion of unfitness. Secondly, the District Judge had erred in imposing a burden of proof on the appellants in relation to their dealings with the Revenue. Thirdly, the District Judge erred in failing to draw adverse inferences against the Secretary of State and in failing to treat the appellants’ evidence with benevolence in circumstances where the appellants were at a disadvantage because of the loss of the file and other failures of the Secretary of State, to which the District Judge referred. Fourthly, the District Judge erred in his evaluation of the evidence as to whether the appellants had kept the Revenue informed of the company’s position and prospects. The general submission was also made that the Secretary of State had conducted the proceedings unfairly, for example, by not calling Ms Dalton and not producing material documents. Mr Freedman invited the court to consider the points cumulatively. Henderson J had erred in upholding the conclusions of the District Judge and in failing to detect those errors.

Mr Freedman underlined the need for the Secretary of State to conduct himself fairly in making the application. In Secretary of State for Trade and Industry v Hickling & Ors [1996] BCC 678 at 690, His Honour Judge Weeks QC stated:

“At this stage I want to say a little about the applicant’s duties. It is accepted that these are not ordinary adversarial proceedings but have an element of public interest and may entail penal consequences. It follows that there is a duty on the applicant to present the case against each respondent fairly.”

Secretary of State for Business v Doffman & Another [2011] Bus LR 457 was concerned with an application to strike out proceedings under section 6 of the 1986 Act. Newey J stated:

“14.

. . . What the defendant will not usually, in my judgment, be able to do is have the proceedings struck out on the basis that the Secretary of State has committed a breach of duty by failing to obtain evidence or otherwise to investigate.

15.

Where, however imperfect the investigations may have been, the Secretary of State has in fact assembled evidence of a defendant's unfitness to be concerned in the management of a company, it is, as I see it, for the court to determine at trial whether the Secretary of State has made out his case. If, in the event, the evidence proves to be sufficient to establish unfitness, the defendant should be disqualified even if the Secretary of State failed to obtain relevant evidence or ensure a thorough investigation. On the other hand, the defendant may be able to point to the absence of evidence or investigation to cast doubt on the Secretary of State's case.

16.

Even where a defendant can demonstrate that the Secretary of State has failed in his duties, it will not always, by any means, follow that the proceedings should be struck out.”

Mr Freedman submitted that evidence available to the Secretary of State should have been procured. Ms Dalton should have been called. Documentary evidence of cash flow could have been available. Given the resources available and deployed in other directions more should have been done.

It was submitted that not only was the file lost without fault by the appellants, but it was reasonable to have expected the Secretary of State to call Ms Dalton or other appropriate personnel from the Revenue. The Secretary of State and the Revenue were both organs of Government and the cooperation of the Revenue should have been obtained. It was not accepted that the notes of contacts had been adequately summarised. It was submitted that further documentation might have revealed that the Revenue had been told of the successful Daily Mail contract and of the Northcliffe draft.

Mr Freedman submitted that the decision of the District Judge is fatally flawed by his applying the test, borrowed from Structural Concrete, of exceptional circumstances. Given the statutory test, the finding, at paragraph 56, that the District Judge must make a disqualification order because he could not find exceptional circumstances was a misdirection central to the decision made. A burden to establish exceptional circumstances could not properly be put on the appellants. Henderson J had not rectified the situation but had compounded it by finding, at paragraph 73, that, if the District Judge did make an error, it “can only have told in the directors’ favour.”

Mr Freedman’s overall submission was that, having found errors of law, the court should make its own assessment of the misconduct and reverse the finding of unfitness. That was done, though in the opposite direction, in Grayan and in Structural Concrete.

I do not consider that in Structural Concrete, Blackburne J was departing from the correct and traditional test. Having found misconduct of a type not dissimilar from the alleged misconduct in the present case, Blackburne J was stating that, upon such findings, it would require exceptional circumstances to justify not making a finding of unfitness. Blackburne J carefully analysed the conduct of the directors and, on the facts found by the District Judge in that case, came to the conclusion that the threshold leading to a finding of unfitness was crossed.

The District Judge performed a very similar exercise in the present case. The evidence and findings of fact were carefully set out. The District Judge concluded, following Structural Concrete, and as he was entitled to conclude, that where he had found misconduct “of this type” exceptional circumstances would be required to avoid a finding of unfitness. The District Judge then carefully set out, at paragraph 54, the points in the appellants’ favour and set against them, at paragraph 55, the points demonstrating misconduct, which had been established on the evidence. He reached his conclusion on the evidence as a whole, or to borrow Mr Freedman’s word, on the totality of the evidence. He was justified in concluding that unfitness was established and disqualification required.

When Henderson J stated that he failed to see how the appellants “can have been prejudiced in any way by the judge’s error on this point, if error there was”, he was in my view intending to acknowledge that the District Judge had considered the evidence and taken an overall view in accordance with the statutory requirement.

While the District Judge was not in error, the use of the expression exceptional circumstances, even in the narrow sense intended, is better avoided. In Grayan, Hoffmann LJ used the expression “extenuating circumstances”. The task of the fact finder, as Hoffmann LJ stated, is to consider the evidence as a whole, including extenuating circumstances, and decide whether the director has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.

I find no merit in the submission on burden of proof. The District Judge stated that the burden of proving misconduct is clearly on the Secretary of State. Evidential burdens will often arise when the evidence would otherwise establish misconduct and unfitness. When stating, at paragraph 41, that the onus of proving that the Revenue were kept appropriately informed was upon the appellants the District Judge was stating the obvious. Information about the progress of the company’s contracts and prospective contracts could only come from the company. If the directors were seeking to defeat the inference which arose from prolonged non-payment of tax and national insurance by means of information capable of demonstrating informed acceptance, or even forbearance, by the Revenue, it was for them to provide the evidence.

I have set out the District Judge’s findings of fact. There is every indication that the judge applied his mind to the evidence and reached a conclusion on the evidence as a whole. There is no indication that, in performing that exercise, he was hidebound by consideration of an evidential burden. He made it clear that it was for the Secretary of State to establish unfitness and he would have been wrong to exclude “extenuating circumstances”, when reaching his conclusion.

The District Judge was fair, possibly more than fair, to the appellants when stating that it would be very difficult to see how the Revenue could have been unfairly treated if the appellants proved “that they had kept the Revenue appropriately informed with sufficient accurate information with a view to agreeing to defer payments.” In Sevenoaks, Dillon LJ found that “forbearance” on the part of the Revenue was not necessarily sufficient to excuse.

There is no respondent’s notice on that point, though Mr Cunningham QC, for the Secretary of State, submitted that “full and informed consent” to the delay in payment would be required. An informal understanding would be insufficient, he submitted. On the facts as found, I find it unnecessary to go into the nuances of defining precisely what forbearance would be needed to exculpate directors.

The District Judge took into account and assessed the disadvantages under which the appellants were labouring. He also made substantial criticisms of the Secretary of State’s conduct in the litigation. Those considerations did not disentitle him, on the evidence, from making the findings he did. It was his task to make findings on the available evidence and Henderson J fairly made the point that it was open to the appellants, if they were dissatisfied with the summary of contacts during 2006, to seek the original documents. The evidence which led to the findings of misconduct and unfitness came largely from the appellants themselves, including the admitted absence of payments to the Revenue, the admission that they were advised to “try and clear the backlog by 6 April”, the payments to other creditors and, in Mr Cathie’s case, the drawing of salary.

It is of course open to directors to claim that pursuit of them by the Secretary of State amounted to an abuse of process but Doffman demonstrates the difficulty of achieving that. Of course frankness and fairness are to be expected of the Secretary of State and remedies for lack of them are available in the trial process. I do not consider that the manner in which the case was prepared and presented provide a basis for rejecting the findings of the District Judge.

The findings of fact were carefully made and explained and well founded on the evidence. It is a little surprising that the oral evidence of Mr Cathie about telephone contacts with Ms Dalton in June and July of 2006 was not addressed but, given the earlier evidence, the absence of documentary support and the findings of fact, that cannot have made a difference. I agree with Henderson J’s finding, at paragraph 64, that the events of June and July 2006 “were of only peripheral relevance” and his finding that there was no need for the District Judge to do more than record, at his paragraph 51, that “no real progress was made” at that time. As Henderson J put it:

“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.”

Members of the court were somewhat at odds with Mr Cunningham over his emphasis on the appeal being against the judgment of Henderson J, so that the court should focus, he submitted, on where Henderson J is supposed to have erred and not on the errors allegedly made by the District Judge.

That is to misunderstand the nature of the jurisdiction, in my view. The District Judge was the fact finder and it was for him to reach a conclusion applying the appropriate test to the facts found. Some errors of law may be correctable on appeal. It may be open to the appellate court to find that, on a true construction of the judgment, there were no errors or that the errors were not material to the decision. An appellate court may also, as in Sevenoaks and in Structural Concrete, reach a different conclusion of law upon the facts found at the trial. If, however, the fact finder has reached a conclusion by applying an erroneous legal test, or has misconstrued the evidence, the best possible exposition of the legal test by the appellate court does not remedy its erroneous application or other failings by the fact finder.

Linked with that submission of Mr Cunningham’s was the submission that, this being a second appeal, it is not open to the court to conduct a “microscopic trawl through the evidence”. Evaluation of the evidence is inherently incompatible with the limited scope of second appeals, he submitted. I am not prepared to take such a limited view of the court’s jurisdiction upon a second appeal. Lewison LJ found that the test for a second appeal was met and gave detailed reasons for his conclusion. No application to set aside the permission was made (and nor are such applications to be encouraged). Mr Cunningham submitted that, having considered the submissions on behalf of the appellants, the court should conclude that the second appeal test was not met and leave it at that, dismissing the appeal on that basis.

I did not accept that approach in the present case. Submissions have been made which potentially give rise to important points of principle or practice and it would be unrealistic to consider them other than in the factual context in which they arise. I have been in no doubt that the evidence, and the manner in which the District Judge assessed it, was susceptible to analysis in this appeal. Permission having been granted, it should be conducted like a first appeal. I do not exclude the possibility that there could be cases in which, permission for a second appeal having been granted, the point of principle or practice could be isolated from the more general appraisal customary on appeals but I would not expect them to be common.

What can be said, and was said by Mr Cunningham, is that the District Judge’s consideration of the evidence has already been appraised on the first appeal and this court should give full weight to that appraisal and not lightly depart from it. Henderson J has considered the test applied and has appraised the procedures followed by the District Judge and found that they were not in error. He found in relation to exceptional circumstances that, if there was an error, the appellants were not thereby prejudiced.

Save in a somewhat different approach to the “exceptional circumstances” issue, I agree with Henderson J’s analysis. I have not found it necessary to repeat fully his analysis, with which I agree, of the District Judge’s findings of fact, or his analysis of the judgment of the District Judge’s conclusions. Henderson J accepted that the District Judge “had to review all the evidence, and take into account any mitigating factors, before deciding whether the statutory test unfitness was satisfied” (paragraph 75). Henderson J found, at paragraph 76, that no grounds had been made out for disturbing the findings of unfitness made by the District Judge in relation to both appellants.

I agree with the conclusion of District Judge Smith and of Henderson J and would dismiss this appeal.

I agree.

I also agree.