Secretary of State for Trade & Industry v Swan & Ors

The SoS claims that Mr Swan had actual knowledge of cheque kiting in the Group. In support of that allegation the SoS relies principally on the following matters.

The SoS relies, first, upon various matters that, it is said, indicate the probability that Mr Swan was fully aware of all the principal financial and accounting policies of the Group, including in particular cheque kiting. It was submitted that the Group was dominated by Mr Swan’s personality and driven by an aggressive executive management style. Further, it is said that, as the CEO, he would have wanted to know and would have been aware precisely how much cash there was in the Group’s bank accounts. That conclusion is reinforced, it was submitted, by the fact that from November 1998 all the directors were sent weekly cash flow statements. Reliance was also placed on Mr Swan’s so-called “black book”, in which he recorded in manuscript detailed weekly figures for the Group and each business in the Group comparing budgeted and actual amounts both for the current and the previous year, demonstrating his day to day operational control. Reliance was also placed in this context on his receipt of a daily reporting pack, monthly “flash forecasts”, detailed monthly accounts, quarterly strategy meetings with the Group’s bankers - in particular NatWest, and his close review of cash collection.

Further, it is said, on behalf of the SoS, that Mr Swan, as chairman and CEO, was well aware of the policy of maximising cash at the year end by delaying payments to suppliers, notwithstanding that in 1999 the Group’s creditors were clearly unhappy about it. As I have said earlier, on the basis of Mr Clifton’s evidence, that practice was, at least in part, to cover the necessary unwinding of cheque kiting (and so the loss of the artificial credit) at the end of the half year and full year accounting period and with an eye to the audit as at those dates.

Second, reliance is placed on the signing by Mr Swan of the June Cheques. It is not in dispute that they were part of the cheque kiting policy.

It is said that the June Cheques were, on their face, so manifestly extraordinary that, if Mr Swan did not raise any query about them at the time he signed them, it must have been because he was aware of cheque kiting and had no objection to it. Reliance is placed by the SoS on the very large face values of the June Cheques; the fact that the June Cheques signed by Mr Swan for AEW and EW respectively were for matching amounts; the fact that they would, according to the evidence of Mr Clifton, have been presented without a requisition slip; the fact that the EW cheques were drawn on the bank account of a company which Mr Swan must have known had been dormant since the transfer of the EW Business to AEW at the end of June 1998; the fact that the payments were being made by cheque when the Group had online banking facilities with NatWest which could have been utilised to make inter-company transfers; the fact that “genuine” inter-company payments would be made on the 15^th day of each month or the next working day; the fact that the payments of £5m between EW and AEW were disproportionate to the trade between AEW and the EW Business and to the total turnover of AEW; the fact that the cheques were for round sums of £4m and £1m; the fact that the cheques were all handwritten; and the fact that the value of the June Cheques exceeded the Group materiality level, which at that time was 10% of profits before tax, that is to say about £3m.

The SoS contends that if, alternatively, Mr Swan did question the June Cheques at the time, he would have been told about the cheque kiting policy, since the policy was an open and established practice by the finance and treasury personnel at the head office.

Third, the SoS relies upon Mr Swan’s role and conduct in relation to the Maccess Circular. The SoS’s starting point, in relation to this issue, was that the board of directors of Finelist delegated to a committee of two, comprising Mr Swan and Mr Reddy, the direct responsibility for dealing with the disposal of Maccess.

It is said that Mr Swan would have queried the figures in the Indebtedness Statement, which were materially incorrect, if he had properly carried out his responsibilities; and his failure to do so is explicable on the basis that he knew the figures were incorrect because he knew of the cheque kiting.

Prior to the conclusion of the completion meeting on 15/16 July 1999 (“the Completion Meeting”) the cash balance on page 12 of the draft Circular was altered in handwriting by £8m, increasing the figure from £2.363m to £10.363m. Mr Swan accepted in his evidence that he would have noticed this.

The SoS contends that the only way of explaining that change would have been by reference to the schedules attached to a letter dated 16 July 1999 from PriceWaterhouse Coopers (“PwC”) informing the Finelist directors and Hawkpoint of the extent to which PwC had reviewed the financial information in the Circular (“PwC’s Comfort Letter”). A list of bank balances contained in a schedule to PwC’s Comfort Letter (“the cash Schedule”) showed very large balances on the current accounts of EW and AEW (as a result of cheque kiting), without which the Group would have had a negative cash balance. Mr Swan admitted in his evidence that, if he had seen the cash Schedule, he would not have expected to see such large credit balances in the accounts of AEW and EW.

The SoS claims that Mr Swan’s failure to enquire into the £8m increase in the Group’s cash balance in the draft Circular, and into the large credit balances in bank accounts of AEW and EW shown in the cash Schedule, was due to the fact that he knew about cheque kiting and did not wish it to be revealed as it would have destroyed the Maccess sale.

In further support of that analysis and conclusion, the SoS relies upon the following matters as showing that Mr Swan was fully aware of his duty to enquire into the £8m increase, the large balances for EW and AEW in the cash Schedule, and generally the accuracy of the Indebtedness Statement: namely (1) statements in PwC’s Comfort Letter that the information in the cash Schedule had not been reconciled with the accounting records, PwC had not carried out an audit in connection with the Indebtedness Statement, and PwC placed reliance on the representations of management and the directors of Finelist; (2) notes prepared by Slaughter and May, the Group’s solicitors, sent to the directors of Finelist for the purpose of recording the steps taken to verify the facts and the bases for expressions of opinion in the Circular (“the Verification Notes”), which Notes included statements that it was important that each director should appreciate that he took personal responsibility for ensuring that all material facts were disclosed in the Circular, and that the directors must believe and have reasonable grounds for believing that each material statement of fact or opinion in the Circular was true and not misleading, and that signature of the Notes by each director indicated that such person had taken appropriate steps to ensure the accuracy of the facts and bases for the opinions given in the answers to various questions raised in the Notes, including the answer that the directors were satisfied that the details of the Group’s indebtedness were accurately set out in the Circular, and that the indebtedness of the continuing Group as at close of business on 14 June 1998 was accurately set out in Part IV of the Circular, and drawing attention of the directors to the need to sign a responsibility statement confirming their responsibility as set out in paragraph 1 of Part IV of the Circular (“the Responsibility Statement”); (3) the Responsibility Statement itself, which recorded that the directors of Finelist accepted responsibility for the information contained in the Circular, and that, to the best of their knowledge and belief, having taken all reasonable care to ensure that such was the case, the information contained in the Circular was in accordance with the facts and did not omit anything likely to affect the import of such information; and (4) the minutes of the Completion Meeting, which was attended by Mr Swan, who signed the minutes as accurate, and which he confirmed as accurate in his oral evidence, which minutes recorded that there were produced to the meeting, among other things, a final proof of the Circular, the Verification Notes and representation letters to be given by Finelist to PwC in relation to the Indebtedness Statement, and which also recorded that each director of Finelist had signed a Responsibility Statement, the directors present confirmed the Responsibility Statements, working capital and Indebtedness Statements were noted, confirmed and approved, the directors had conducted a thorough verification exercise of the contents of the Circular, and it was resolved that the Verification Notes and answers be approved and the directors be required to sign them, and PwC’s Comfort Letter be approved.

Further, the SoS relies on the fact that the May 1999 management accounts were received by Mr Swan prior to Finelist’s board meeting on 21 July 1999. He would then have been able to compare the cash position of the Group as at 31 May 1999, 14 June 1999 (the reference date for the Indebtedness Statement in the Maccess Circular) and 30 June 1999 (the end of the accounting and financial year). The SoS points out that the cash in the Group, on the face of the documents, swung from a position of being overdrawn by £4.159m on 31 May 1999, to a positive cash balance of £11.6m on 14 June 1999, and then a reduced balance of £4.46m on 30 June 1999.

The SoS contends that, since the year end was when cash was maximised by deferring the payment of creditors, it should have been expected that the cash would remain flat or increase during the last two weeks of the accounting year, whereas the cash in fact dropped in the second half of June. That drop, it is said, was the consequence of the 14 June 1999 cash figure having been distorted by cheque kiting. The SoS submits that, if Mr Swan had indeed been unaware of cheque kiting, those unusual movements in the Group’s cash balances would have struck Mr Swan as most peculiar. The SoS claims that Mr Swan’s failure to correct the Indebtedness Statement before the EGM on 2August 1999 must, in all those circumstances, have been because he was in fact aware of the cheque kiting and was untroubled by the consequential inaccuracy of the Indebtedness Statement.

Fourth, the SoS relies upon the reaction of Mr Swan at and following the meetings on Monday 6 December 1999 as evidence that he knew about the Group’s cheque kiting policy.

There are many disputes of fact concerning the meetings on 2, 3 and 6 December 1999. Mr Swan was not present at the meetings with Mr Ainsworth, Mr Blackburn and Mr North on 2 and 3 December 1999.

The SoS’s case is that Mr Swan and Mr Reddy decided over the weekend of 4/5 December 1999 to find a way of preventing the financial irregularities and concerns raised in the meetings between Mr Reeve and Mr Grourk, on the one hand, and Mr Ainsworth and Mr Blackburn, on the other hand, from being properly investigated. It is contended, on behalf of the SoS, that Mr Swan and Mr Reddy had a meeting on the morning of 6 December 1999 with Mr North, and in the absence of Mr Reeve, in which they decided “what their strategy would be for the rest of the day, the goal being to silence the whistle blowers” [in the language of the written closing skeleton submissions on behalf of the SoS]. It is said that the strategy which was devised was to crush and pressurise Mr Reeve so that he was effectively “squeezed out”; Mr Grourk would be removed; and Mr Blackburn would be intimidated into “keeping his mouth shut”. It is said that strategy was implemented during the course of 6 December 1999.

It was submitted, on behalf of the SoS, that there could not have been an adequate investigation of the allegations at the meeting with Mr Reddy on the morning of 6 December 1999 since, according to the evidence of Mr Swan and Mr North, that meeting began at about 7.30 am and lasted no more than 30-40 minutes.

The SoS’s case is that Mr Reeve was not present at a meeting with Mr Swan or Mr North or Mr Reddy at 7.30 am on 6 December 1999; that, at a subsequent meeting that morning between Mr Swan and Mr Reeve, Mr Swan adopted an intimidating manner towards Mr Reeve; that Mr Blackburn was later that morning summoned to see Mr Swan and Mr Reddy in Mr Swan’s office where he was intimidated and effectively “told to keep his mouth shut”; that Mr Grourk was dismissed later that day and was immediately escorted off the head office premises by a security guard; and thereafter Mr Reeve was “harassed, bullied, threatened and undermined”, and was improperly and unlawfully dismissed in February 2000 without any proper prior attempt to place before Mr Reeve the allegations which were the recorded grounds for his dismissal.

The SoS’s case is that those matters show that Mr Swan knew of the Group’s cheque kiting policy and was motivated by a concern that it should not be publicised.

The SoS has not, in my judgment, established to the requisite standard of proof that Mr Swan knew of cheque kiting.

I have already referred to the need for appropriately cogent evidence to sustain a claim of unfitness under s.6 of the Act. No direct evidence has been adduced that Mr Swan was informed by any specific person on any specific occasion about cheque kiting. The SoS rests her case of Mr Swan’s actual knowledge of cheque kiting entirely on inference from the range of matters to which I have referred.

In my judgment those matters are neither singly nor collectively capable of supporting, on a balance of probabilities, the inference of actual knowledge of Mr Swan of cheque kiting within the Group.

I agree with the SoS that the personality of Mr Swan and his management role and style form an important part of the background of the case, against which the suggested inferences must be considered. I do not, however, agree that the dispute between the parties as to whether Mr Swan’s personality and management style were domineering and aggressive or intimidating is critical.

What is important, in my judgment, is the evidence that was given, and the impression that I have formed, that Mr Swan was a businessman with obvious flair and drive in relation to operational matters, but he was not a person likely to pay attention to financial or accountancy technicalities or other matters of detail which he did not regard as having an obvious impact on the profit or loss of the Group. Mr Swan repeatedly emphasised, in the course of his evidence, that by 1999 the Group was a large and dynamic organisation, the size and scale and complexity of which inevitably resulted in him leaving to the Group’s accountancy department and finance team, the auditors, the Group’s financial consultants and its banks the supervision, control and monitoring of financial matters which did not have an obvious and immediate impact on the Group’s profit or loss. I accept his evidence that this was his approach.

In the light of that evidence, and the impression I formed of Mr Swan’s management style, I do not accept that Mr Swan would have wanted to know and would have been aware precisely how much cash there was in the Group’s bank accounts.

I am not satisfied that either the daily reporting packs, or the monthly “flash forecasts” or the detailed monthly accounts or the quarterly strategy meetings with the Group’s bankers would have alerted Mr Swan to cheque kiting.

Nor am I satisfied that the weekly cash flow forecasts sent to Finelist’s directors from November 1998 would have been likely to, let alone did in fact, alert Mr Swan to cheque kiting. Mr Swan gave evidence, for example, that AEW’s cash flow incorporated many Group costs, including interest and other costs subsequently re-charged to other companies within the Group.

I accept Mr Swan’s evidence that his interest in cash was limited, as he described it, to the “components of the cash”, which were such matters as cash from the sales ledger, costs collection, and amounts spent on stock. Those were the matters recorded and monitored in his “black book”.

Further, although Mr Swan was undoubtedly aware of, and indeed promoted, the policy of maximising cash at the half-year and year end, by delaying payment to suppliers, I cannot safely conclude that this indicates that he knew about cheque kiting. The evidence, not only of Mr Swan but also of other witnesses, was that this had been the practice within the Group for many years, and well before cheque kiting began, and it was the practice among many companies within the industry. The object was to present the financial situation of the companies in the best light in their published accounts.

So far as concerns the June Cheques, I agree with the SoS that there were several aspects of those Cheques which were highly unusual. For the reasons I shall give in due course, I agree that, if Mr Swan was not already aware of cheque kiting, the June Cheques called out for comment and question by Mr Swan at the time he signed them. In the light of all the other matters to which I have so far referred, however, and in particular my findings as to Mr Swan’s personal characteristics and management style, I do not accept that, on the balance of probabilities, he signed the June Cheques in the knowledge that they were part of a cheque kiting policy within the Group.

For reasons I give in detail later in this judgment, I do not accept that Mr Swan’s failure to query the figures in the Indebtedness Statement in the Maccess Circular is cogent evidence of his knowledge and acceptance of a cheque kiting policy within the Group. In general terms, I do not accept that the circumstances leading up to the approval of the Maccess Circular by Mr Swan, and what happened afterwards, including the documents which he saw and read, were such as might reasonably be expected to have led him, if he did not know about cheque kiting, to question the accuracy of the Indebtedness Statement or to ask other questions which would have uncovered cheque kiting within the Group.

I do not accept that Mr Swan’s conduct at and following the meetings on 6 December 1999 is cogent evidence of Mr Swan’s knowledge and acceptance of a cheque kiting policy within the Group. The reasons for that conclusion can be stated shortly. In the first place, no express mention was made at any of those meetings of practices within the Group amounting to cheque kiting. Second, there is no evidence that anything was said at those meetings which would or should have alerted a person in Mr Swan’s position and with his knowledge to the fact that there might be such practices within the Group. If follows that, third, even if the matters raised at those meetings ought to have led Mr Swan to instigate a fuller investigation of them – a point it is not necessary for me to decide for reasons I shall give later in this judgment – his failure to do so is not cogent evidence that he knew of cheque kiting within the Group.

The SoS claims that, if Mr Swan did not actually know of cheque kiting within the Group, he ought to have known about it.

In support of that claim, the SoS relies upon all the same facts and matters said to support the inference of actual knowledge.

In addition, the SoS relies upon various matters which, it is said, indicated or should have indicated to Mr Swan deficiencies in financial controls or were warning signs of possible financial or accounting malpractices within the Group.

The SoS places reliance, for example, on Mr Blackburn’s evidence of concerns raised in 1998 by KPMG who were then carrying out consultancy work for the Group, and on the 1998 audit report, which raised various concerns about financial controls and, in particular, the failure to reconcile inter-company balances and the failure to reconcile EW’s bank statements with the accounting records. The latter issue was raised again in the 1999 audit report, by which time the problem had worsened.

Further, it is the SoS’s case that, during the Relevant Period, Mr Swan had or was aware of doubts about the competence and integrity of Mr Reddy.

I accept the SoS’s alternative case that Mr Swan ought to have been aware of cheque kiting within the Group.

I do not consider that advice given by KPMG in 1998, or the 1998 audit report or the 1999 audit report ought to have been material factors in alerting Mr Swan to the existence of cheque kiting.

Precisely what KPMG advised in 1998 is in dispute. I remain unclear as to precisely what advice the SoS says was given by KPMG, and on which the SoS now relies. There is no written record of that advice. No employee or former employee of KPMG was called by the SoS to give direct evidence of the alleged advice. Further, and in any event, it seems reasonable to suppose that any significant financial or accounting irregularity would have been identified and noted in the 1998 and 1999 audit reports.

I accept Mr Swan’s evidence that, so far as concerns the lack of reconciliation of inter-company balances mentioned in the 1998 and 1999 audit reports, he was reasonably entitled to take the view that adequate steps were taken to tackle the problem after the 1998 audit report, and that the 1999 audit report indicated a significant improvement in the position.

So far as concerns the failure to reconcile bank statements with accounting records mentioned in the 1998 and 1999 audit reports, I accept Mr North’s evidence that this was an intractable problem due to the vast number of small value sales, and that it had nothing whatever to do with cheque kiting.

So far as concerns knowledge of lack of competence and integrity on the part of Mr Reddy, I accept the evidence given by Mr Swan and Mr North that they had no doubts about the integrity of Mr Reddy and that their view was that the financial and accounting problems disclosed by the 1998 and 1999 audit reports were the consequence of the very rapid expansion of the Group and the lack of sufficient financial accounting personnel rather than notable incompetence on the part of Mr Reddy, and those problems were being addressed. The SoS has not made out a case that Mr Swan and Mr North were wrong and incompetent in holding that view. Mr Reeve gave evidence that he was told many times that Mr Reddy was incompetent, but he gave no evidence that Mr Swan or Mr North told him that, and he gave no particulars of precisely who, where, when and in what context those criticisms of Mr Reddy were made.

On the other hand, and notwithstanding my rejection of the SoS’s case on those points, I have no doubt that Mr Swan ought to have discovered about cheque kiting within the Group when he was asked to sign the June Cheques on 1 June 1999.

Mr Swan’s evidence was that he cannot remember signing the June Cheques or the circumstances in which he signed them. He cannot remember if he asked any questions about them and, if he did so, what, if any, reply was given or by whom.

In opposing the SoS’s case on the June Cheques, Mr Swan relied upon the following points in particular.

First, there is evidence, in the form of two cheques signed by Mr Swan on Finelist’s account, that Mr Swan has signed other large cheques for round sums, which are not the subject of any allegation of cheque kiting.

Second, having regard to the printed numbers on the two EW cheques signed by Mr Swan on 1 June 1999 (nos. 9800 and 9904) Mr Swan maintains that it is likely that the June Cheques were part of a much larger batch of cheques which he was asked to sign. Mr Swan supported that proposition with his evidence that, when he was asked to sign cheques, he did so for cheques of all values and not just large cheques.

Third, Mr Davies submitted that it has not been established that all the June Cheques were in fact signed on 1 June 1999 or were all signed on the same day. It is said, on behalf of Mr Swan, that nowhere in Mr Bruce’s affirmations is it positively asserted that the June Cheques were all signed on the same day. Further, reliance is placed by Mr Swan on the evidence of Mr Clifton that the cheque kiting procedure was that Mr Clifton would note and record for each day of the following week the amount which would be required to maintain borrowing at a particular level; cheques of the value required to maintain that level would be prepared in advance of that week, and would be dated and signed with one signature, leaving only the second signature outstanding. The second signature would only be added if and when the cheque was required to be paid into the bank.

Fourth, Mr Swan relies upon the fact that, even after the transfer of the EW Business to AEW at the end of June 1998, leaving EW technically dormant, the EW Business continued to be run as a distinct entity within AEW, and that there were trading transactions between the EW Business and the rest of AEW.

Fifth, Mr Swan gave oral evidence that NatWest expressly permitted the continued use of EW’s cheque books after the transfer of the EW Business to AEW.

Sixth, Mr Swan relies upon the fact that on 1 June 1999 there was a substantial outstanding balance due from AEW to EW as a result of the sale of the EW Business to AEW in 1998.

Seventh, Mr Swan relies upon the fact that it is not known who gave him the June Cheques for his signature, or what answer was or might have been given to any query which he made or might have made at the time concerning the June Cheques.

Eighth, Mr Swan’s evidence, supported by the entries in his diary, was that he was extremely busy in the period in question. His diary shows that his visit to the head office on 1 June 1999 was one of only four occasions during a 19 day period in which he was at the head office. The diary also shows that he had a series of meetings on 1 June 1999 and would have been very pressed for time on that date. Mr Davies submitted that, if the June Cheques were in fact signed by Mr Swan at the same time on 1 June 1999, the overwhelming likelihood is that, by virtue of pressure of time or momentary distraction, Mr Swan had a “90 second” lapse and no more.

I do not consider that the SoS’s case is advanced by the fact that two of the June Cheques were on EW’s bank account rather than, as in the case of other genuine transactions in 1999, on an account designated “Edmunds Walker (a division of AEW Limited)”.

On the one hand, I do not accept, in the absence of corroboration, Mr Swan’s oral evidence that NatWest expressly authorised the continued use of EW’s cheque books after the transfer of the EW Business at the end of June 1998. That was a point raised for the very first time in the course of Mr Swan’s oral evidence, notwithstanding that he had prepared several extremely detailed and lengthy affidavits over a number of years.

On the other hand, the evidence is that, after June 1998, the EW Business, with some 50 branches, continued as a separate trading and branded entity within AEW, with its own management, management accounts and bank accounts. I also accept that after June 1998 there were genuine trading transactions between the EW Business and the rest of AEW.

In all the circumstances, I do not consider that it was incompetent of Mr Swan to have failed to appreciate that the two June Cheques in favour of “Autela” were drawn on EW’s account rather than on an account of the EW Business, as a division of AEW.

Nor is the SoS’s case supported or advanced by the fact that the relevant payments on 1 June 1999 were made by cheque rather than by use of the Group’s online banking facilities with NatWest. I accept the evidence of Mr North that it was Group policy for inter-company balances to be paid every month by cheque rather than by electronic transfer in order to impose financial discipline within the Group in relation to inter-company balances.

Further, I accept Mr Swan’s evidence that he was not aware that inter-company payments were or ought to be made on the 15^th day of every month or the next working day and so, for that reason, the June Cheques dated 1 June might not be for a genuine or proper purpose.

Nor do I accept that Mr Swan should have been alerted to the fact that the June Cheques might not be for a genuine or proper purpose because they were handwritten or for round sums. The SoS relies on the contrast between the June Cheques and other cheques in evidence which were on accounts in the name of the EW Business and AEW and were completed in print. There is no evidence, however, that Mr Swan himself ever signed or saw cheques drawn on AEW or EW or an account in the name of the EW Business, as a division of AEW, which were for a genuine or proper purpose and were not handwritten. Even if he had done so, I see no reason why the fact that the June Cheques were handwritten should have raised any query or concern. No evidence was adduced as the normal practice within the Group, and in particular within EW or AEW, of completing cheques by hand or in print which could assist in drawing an inference against Mr Swan in this connection.

Notwithstanding my conclusion on those aspects and notwithstanding the attractive presentation of the other points made on Mr Swan’s behalf in relation to the June Cheques, I find that there is no credible defence to the SoS’s claim that the June Cheques should have prompted Mr Swan to make enquiries, which would have disclosed cheque kiting within the Group.

The overwhelming probability is that all four of the June Cheques were signed by Mr Swan at the same time on 1 June 1999. In cross-examination, Mr Swan conceded that it was likely that the June Cheques were indeed signed on that day. Cheque kiting required the crossing of cheques of equal amounts between AEW and EW, and the natural inference must be therefore that the second signature was added to all four Cheques on the same day and on the same occasion. Although Mr Clifton accepted in cross-examination there was a possibility that not all the June Cheques were signed on the same day, he said that was not “the norm”. A written analysis of the cheque kiting between AEW and EW over an 18 month period between 1998 and 2000, which was carried out on behalf of the SoS, supports the conclusion that all the June Cheques were indeed signed on 1 June 1999.

Mr Clifton’s evidence was that the cheque kiting cheques had to be banked by 3.30 pm on the day they were required. Usually they would be taken into town at about 12.30 pm to be banked. This would not have been possible on 1 June 1999, however, since Mr Reddy was away on holiday, and the only other Panel A signatory, Mr Swan, was out of the office all morning.

Mr Swan’s diary indicates that there was a period between about 3.00 pm and 3.30pm on 1 June 1999 when he would have been available to sign the June Cheques. In the circumstances, the overwhelming probability is that all four June Cheques were signed at about 3.00 pm on 1 June 1999 and were then banked by 3.30 pm on that day.

I reject the suggestion, made on behalf of Mr Swan, that the June Cheques were probably part of a much larger batch of cheques. Mr Clifton was not able to explain the reason for the numbers of the two EW cheques being 103 apart. His evidence was clear, however, that he would not normally bother Mr Swan to sign cheques. That was confirmed by Mr Swan in his evidence. That is understandable in view of the pressure on Mr Swan’s time, and the importance of many operational matters requiring his attention as chairman and CEO. It was only necessary to request Mr Swan to sign cheques if they exceeded £5,000.00 and none of the Panel B signatories nor Mr Reddy was available.

In the light of those matters, I view with considerable scepticism Mr Swan’s evidence that, from time to time, he signed cheques of all values. Even if true, however, it would have been a very rare occurrence indeed. In fact, it is clear that on 1 June 1999 other Panel signatories were present and available to sign cheques of a lesser amount than £25,000, and actually did so. Accordingly, the weight of the evidence is overwhelmingly against the likelihood of Mr Swan being asked to sign any cheques of a lower value than £25,000 on that day. The records indicate that a very small number of cheques over £25,000, other than the June Cheques, may have been prepared for a second signature on 1 June 1999.

In any event, what is critical is that the face value of the June Cheques, namely two of them for £1m and two of them for £4m, were substantially in excess of the Group’s materiality level, and were so far in excess of the other cheques which may have been presented for Mr Swan’s signature on that day, and so far out of line with anything that could have been to do with ordinary trading activities between AEW and EW, that they cried out for enquiry and explanation.

The evidence was that trading between EW and AEW, or, more accurately, between the EW Business and the rest of AEW, was relatively modest, and could not have created a liability for the amount of the June Cheques.

Seeking to undermine that clear evidence, or the impact of it, Mr Davies drew attention to a document within one of the monthly management packs showing an inter-company balance as at the end of June 1999 of £11.651m due from Autela to EW. I cannot see that any assistance to Mr Swan is provided by that document. It shows an inter-company indebtedness at the end of June 1999, whereas the June Cheques were signed at the beginning of June 1999. The figure of £11.651 was not explained or explored in the evidence. Part of that figure is presumably the amount of £5.544m left outstanding to EW on the transfer of the EW Business to AEW at the end of June 1998. In the course of his evidence Mr Swan suggested that he may have thought that the June Cheques in favour of EW were something to do with that outstanding consideration for the sale of the EW Business. That is pure reconstruction, and is entirely improbable. The outstanding consideration was not in fact paid in or before the end of June 1999. Mr Swan gave no reason why he should reasonably have supposed that on the particular day in question, 1 June 1998, he was signing cheques to discharge part of that long outstanding liability.

Further, the evidence was that requisition slips would have accompanied all cheques presented for signature, other than those prepared for the purpose of cheque kiting. The June Cheques would, therefore, not have been supported by any requisition slip relating to inter-company balances or, indeed, any other indebtedness or liability. That, in itself, should have given rise to enquiry by Mr Swan.

Further, and crucially, any such explanation or excuse as has been suggested by Mr Swan is wholly undermined by the fact that the June Cheques were not just the two cheques from AEW to EW: they comprised matching sets of cheques for equal and extraordinary amounts.

In any event, even if Mr Swan had held such a suspicion or belief, that would not explain or excuse the absence of a suitably rigorous enquiry by Mr Swan in order to verify the actual reason for the June Cheques.

The fact that there are in evidence two large cheques for £4m each on Finelist’s account, signed by Mr Swan, which are not the subject of an allegation of cheque kiting, is neither here nor there. It is not conceded by the SoS that those cheques were not cheque kiting cheques. Mr Swan was unable, in cross-examination to give any credible explanation for them. Whatever the explanation for them might be, I can see no reason for saying that in some way they explain or excuse Mr Swan’s conduct in signing the June Cheques and in failing to pursue a rigorous enquiry to verify the reason for the June Cheques.

Mr Swan could not have made any such rigorous enquiry because, if he had done so, I am satisfied that he would have been told exactly why they were needed, that is to say as a way of generating notional funds in order to keep within the banking covenants. Mr Clifton’s evidence was that there was no secrecy, within the Group’s accounting department and treasury section, about the cheque kiting process. I therefore do not doubt that, if requested to do so, Mr Clifton or someone else within the finance team, would have disclosed to Mr Swan precisely why he was being asked to sign the June Cheques.

I reject, as incompatible with the weight of the evidence, and in particular that evidence of Mr Clifton, a late suggestion by Mr Davies that, if Mr Swan had asked any questions about the June Cheques prior to signing them, persons within the finance department might have wished to hide the existence of the cheque kiting policy from Mr Swan.

Mr Swan, in his evidence, and Mr Davies, in his submissions, suggested that it was quite possible that the June Cheques might have been brought to Mr Swan for signature by Mr Swan’s secretary or by someone else who would or might have been unable to answer any query raised by Mr Swan about the purpose of the Cheques. The short answer to that point is that the June Cheques so cried out for enquiry and explanation that Mr Swan should not have signed them unless and until he received a full and comprehensible explanation. If, as he postulated in his evidence, he had been told that they were part of a standard treasury function, he should not have accepted that answer as sufficient

The same short answer applies to Mr Davies’ observation that the June Cheques involved the payment of money between Group companies, and did not involve any third party outside the Group. There was, he submitted, nothing that might reasonably have indicated to Mr Swan that any fraud was being committed. Irrespective of any indication of fraud, the fact remains that the June Cheques were on their face extraordinary, exceeded the Group’s materiality level, and called out for enquiry; and if a proper enquiry had been made the true reason for the June Cheques, which was an improper purpose, would have been revealed. The purpose of requiring either Mr Swan or Mr Reddy to be a second signatory in respect of cheques greater than £25,000 was to ensure that a proper scrutiny of the largest cheques would be made by those at the very top of the Group’s management, the Chairman and CEO and the finance director. That simply did not happen in the case of the June Cheques.

Mr Kaye rightly emphasised the contrast between Mr Swan’s conduct in signing the June Cheques and the reaction of those in charge after the sale of the Group in 2000 when presented for the very first time with a cheque kiting cheque. Mr Clifton’s evidence was that the person in charge of the English companies, Peter Joyner, was asked to sign a cheque kiting cheque, as second signatory of cheques over £25,000.00, but was uncomfortable with doing so. Having consulted his French counterpart, he refused to do so.

In my judgment, the overwhelming likelihood is that Mr Swan asked no questions about the June Cheques because, as I have explained, he was not interested in and did not regard it as his responsibility to monitor the payment of money into and out of the bank accounts of the Finelist Group. He considered that was the responsibility of the Group’s finance teams, the auditors and others. His concern was with operational matters and profit and loss. The probability is that he signed the June Cheques automatically, without giving any consideration to their purpose, amount or propriety.

I do not accept the SoS’s case that, if Mr Swan had acted with reasonable prudence and competence in connection with the sale of Maccess, he would have discovered about the Group’s cheque kiting policy.

In broad terms, the SoS rests her case in relation to the Maccess Circular on four grounds.

First, as a general and over-arching point, Mr Kaye emphasised that the Listing Rules required the directors of Finelist to accept full responsibility, collectively and individually, for complying with the Listing Rules as to the circular required to be sent to shareholders in a Class 1 transaction. In Finelist’s case, direct responsibility for the Maccess Circular was delegated to a committee of two, comprising Mr Swan and Mr Reddy. The personal responsibility of the directors was further made clear, Mr Kaye submitted, by the Verification Notes and what was recorded in the minutes of the Completion Meeting. Further, he submitted, PwC’s Comfort Letter made plain that PwC was relying on the directors as to the accuracy of the Indebtedness Statement, since PwC’s Comfort Letter stated that the information in the cash Schedule obtained from the banks had not been reconciled by PwC to the accounting records.

Underpinning this first point made by the SoS lies the proposition that, in all those circumstances, Mr Swan accepted a personal and individual responsibility for the accuracy in the Maccess Circular of the continuing Group’s stated cash balances at close of business on 14 June 1999 and the stated outstanding borrowings, both of which were, in the event, inaccurate: he could not absolve himself from responsibility for the accuracy of those figures by leaving to Mr Reddy the task of verifying them.

Second, the SoS contends that Mr Swan, having seen the handwritten alteration of the Group’s cash balance on the draft Circular by the increase of £8m from £2.363m to £10.363m, was bound to enquire into and investigate the reason for the alteration, and could only do so by reference to the cash Schedule.

Third, if, as the SoS submits he should have done, Mr Swan had read PwC’s Comfort Letter and the cash Schedule, he would have seen, and been surprised by, the large credit balances for AEW and EW. If he had questioned them rigorously, he would have discovered that AEW’s account and EW’s account were inflated by cheque kiting.

Fourth, as I have said earlier, the SoS claims that, by the time of Finelist’s board meeting on 21 July 1999, Mr Swan would have been aware that the cash in the Group had swung from being overdrawn by £4.15m on 31 May 1999, to a positive balance of £11.6m on 14 June 1999, and then to a reduced balance of £4.46m on 30 June 1999. The SoS’s case is that the striking peaking of cash on 14 June 1999 should have struck Mr Swan as most odd, and he should have made rigorous enquiries into it. If he had done so, he would have discovered that the stated cash balance on 14 July 1999 was inflated by cheque kiting.

The SoS’s original position (as stated, for example, in closing written submissions) was that, if Mr Swan had asked the questions and pursued the investigation he should have done in connection with the Maccess Circular, whether before or after it had been finalised, he would have had to look at the bank statements of AEW and EW, which, when set alongside the management accounts, would have led him, or any reasonably intelligent and experienced chief executive of a public company, to the discovery of cheque kiting if he did not know about it before. In his closing oral submissions, Mr Kaye retreated from the proposition that it was Mr Swan’s personal obligation to look at bank statements. At the end of the day, the SoS’s proposition was that, by asking the questions which he should have asked, Mr Swan would, one way or another, have discovered the truth about the Group’s cheque kiting policy and that the Indebtedness Statement was incorrect.

In my judgment, the SoS’s case against Mr Swan on the Maccess Circular rests too heavily upon hindsight and an unrealistic analysis of what Mr Swan could and should have done.

Although the directors of Finelist, and Mr Swan in particular, had a personal responsibility under the Listing Rules to ensure that the information in the Circular, including the Indebtedness Statement, were correct, that personal responsibility could only in reality be discharged by doing what was reasonably practical and would have been done by any reasonably competent and experienced person in their position.

The Responsibility Statement required by the Listing Rules, and contained in paragraph 1 of Part IV of the Maccess Circular, makes that clear enough when it refers to “the best of the knowledge and belief of the Directors” and to the fact that they “have taken all reasonable care to ensure that such is the case.” That is also reflected in the Verification Notes which speak of the directors having taken “appropriate steps” to ensure the accuracy of the facts and the bases for the opinions given in the answers to the questions set out in the Verification Notes, and of the directors having to “believe and have reasonable grounds for believing” that each material statement of fact or opinion in the Maccess Circular was true and not misleading.

It was not unreasonable or improper of Mr Swan, who was extremely busy with other matters, to leave to Mr Reddy, and those financial and accounting personnel and professional advisors assisting Mr Reddy, to establish or check and confirm financial details like the figures in the Indebtedness Statement, unless and until something occurred which should have alerted Mr Swan to take some personal interest in those matters. It is entirely unrealistic to suppose, for example, that it is the standard responsibility of the chairman and the chief executive of every listed company to check individual bank statements as part of a normal Class 1 transaction.

I do not accept that the late amendment of the Group’s stated cash balance in the draft Maccess Circular from £2.363m to £10.363m was something which should have caused Mr Swan to question the propriety or competence of Mr Reddy or those advising and supporting him or to alert Mr Swan that there was something seriously amiss which required his personal intervention.

Even if, however, the case of the SoS to the contrary is accepted, I reject the SoS’s assertion that, if a proper enquiry had been made by Mr Swan, he would, on the balance of probabilities, have discovered the Group’s cheque kiting policy and that the Indebtedness Statement was incorrect.

The reason for the alteration was that an account of Finelist had initially been overlooked, and the adjustment had to be made when the oversight was discovered. Mr Swan had no reasonable grounds for rejecting that explanation or for causing further investigations to be made. Any reasonably competent and experienced chairman and chief executive in Mr Swan’s position would have been similarly satisfied with that explanation.

So far as concerns the cash Schedule, I do not accept that Mr Swan was bound to scour the schedules to PwC’s Comfort Letter and to scrutinise and investigate the stated bank balances of EW and AEW for the purpose of verifying them. I consider that he was, in all the circumstances, entitled to leave that task to Mr Reddy and those supporting and advising him. I do not consider that any reasonably competent and experienced chairman and chief executive in the position of Mr Swan would or should have acted differently.

So far as concerns the swings in the cash position of the Group as at 31 May 1999, 14 June 1999 and 30 June 1999 respectively, I accept the evidence of Mr Swan and Mr North that such a mid month peaking of cash would not have excited particular comment since such peaking was often the case and was consistent with normal patterns of trading.

In the alternative to the SoS’s case that Mr Swan’s conduct at and following the meetings on 6 December 1999 shows that he had actual knowledge of the Group’s cheque kiting policy, the SoS contends that, as a result of what he was told and knew on 6 December 1999, Mr Swan ought to have ordered a full and proper investigation and, if he had done so, he would have learned of the Group’s cheque kiting policy.

There was disagreement between Mr Kaye and Mr Davies as to whether the SoS was entitled to rely upon that alternative case.

The SoS stated expressly at the pre-trial review in December 2004 (“the PTR”) and in subsequent correspondence that it was the intention of the SoS to rely upon Mr Swan’s conduct in December 1999 solely as evidence from which it could be inferred that he was actually aware of the cheque kiting policy, and that she was not relying on such conduct to support an alternative case that Mr Swan ought to have known about the cheque kiting by making further enquiries as a result of what he was told on 6 December 1999.

In his final submissions, Mr Kaye said that those acting on behalf of the SoS had made it clear, at the outset of the trial, that, notwithstanding what the SoS had previously said, reliance would now be placed upon Mr Swan’s conduct in December 1999 to support the alternative “ought to have known” case.

I agree with Mr Davies that neither Mr Kaye nor anyone else acting on behalf of the SoS made clear, or sufficiently clear, at the outset of the trial that the SoS intended to make a strategic change as the extent and nature of the reliance of the SoS on the events in December 1999 as against Mr Swan. In view of what had been expressly stated in court, as part of a contested issue, at the PTR and what had been expressly communicated in subsequent correspondence by the SoS to those acting for Mr Swan, any such strategic change ought to have been communicated and expressed in the clearest terms. It was not.

Further, I am satisfied that, were I to permit the alternative case to be advanced, a serious injustice might be suffered by Mr Swan. As Mr Davies pointed out in his closing submissions, in reliance on the SoS’s assurance that the alternative “ought to have known” case was not to be run with reference to the events in December 1999, no evidence was adduced on behalf of Mr Swan, and there was no cross-examination by Mr Davies of any of the witnesses for the SoS, on the various allegations of financial impropriety or irregularity which were said by the SoS to have been raised in the meeting with Mr Swan on 6 December 1999. I am satisfied, from what Mr Davies has told me, that such evidence would have been led and such cross-examination would have taken place if Mr Swan, and those acting on his behalf, had been made clearly aware at the outset of the trial that the alternative case was to be advanced.

In those circumstances, SoS is not entitled to rely on the events in December 1999 to advance an alternative “ought to have known” case against Mr Swan.

For the reasons I have already given, I reject the SoS’s case against Mr Swan based solely on his responsibility for the Indebtedness Statement in the Maccess Circular.

The only conduct of Mr Swan alleged to make him unfit within s.6(1) of the Act which has been proved by the SoS is that he ought to have known of the Group’s cheque kiting policy by reason of the June Cheques.

The question which then arises is whether, taking into account any contemporaneous extenuating circumstances, and all other relevant facts and matters, his conduct is such as to make him unfit to be concerned in the management of a company within s.6 of the Act, bearing in mind the policy and the purposes of the legislation.

It is necessary to weigh in the balance the fact that no lack of probity on Mr Swan’s part has been established; no other instance of his signing or knowledge of cheque kiting cheques has been established (or alleged); and it has not been established (or alleged) that the Group’s cheque kiting policy was for a dishonest purpose or has actually caused any person any loss or has played any part in the insolvency of Finelist or other companies within the Group.

I find that the SoS has established a case of unfitness within s. 6 of the Act by reason of Mr Swan’s conduct.

Mr Swan’s failure properly to enquire into the reason for the June Cheques, and his signing of those Cheques, thereby permitting the Group’s cheque kiting policy to continue and indeed actually assisting its implementation, was a serious dereliction of his duty as a director of Finelist.

For the reasons I have given earlier in this judgment, the June Cheques cried out for comment and enquiry by Mr Swan: comp. City Equitable Fire Insurance Company Limited [1925] 1 Ch.407,451-453.

No contemporaneous extenuating circumstances have been established. I have explained the probable reasons why Mr Swan acted as he did.

Whether or not the purpose of the Group’s cheque kiting policy was a dishonest one, it is common ground that it was a wholly unacceptable and improper practice, particularly so for a listed company. Leaving aside any deception of NatWest (which has not been proved), it would plainly have been material for investors and potential investors to know that the Group was not in fact trading within its banking covenants; and to know that, in order to create the illusion that the Group was complying with those covenants, the Group was resorting to a policy of cheque kiting.

It is clear that, on at least one occasion, namely the issue of the Maccess Circular in connection with the sale of Maccess, the Group’s cheque kiting policy led to shareholders being positively misled.

Mr Swan suggested in his evidence that there would have been no difficulty, if he had known of the cheque kiting policy, in obtaining an increase in the level of the gross banking covenants. Notwithstanding the absence of cross-examination on the point, I view such a suggestion with scepticism in the absence of corroborating evidence, particularly from NatWest. Even if true, however, for the reasons I have just given, it does not detract from the commercial impropriety of the cheque kiting policy.

The same answer applies equally to a submission by Mr Davies that there was nothing on the face of the June Cheques, or the circumstances known to Mr Swan, to indicate that fraud might be involved.

The same answer also applies to the observation that the Group’s cheque kiting policy caused no loss to NatWest and is not said or shown to have contributed to the insolvency of Finelist or other companies within the Group. Cheque kiting, as I have said earlier in this judgment, has the potential to cause grave financial loss to a company’s bank or banks. That it did not do so in Finelist’s case was the result of the fact that, purely fortuitously, the Receivers were appointed only after the sale of the Group in 2000 and one of the terms of the sale was that the indebtedness to NatWest be discharged.

The bottom line is that Mr Swan was the chairman and CEO of a listed company, in whose shares the public at large were able to and did invest. He was one of only two people mandated to act as second signatory of the highest value cheques. In relation to the June Cheques, which exceeded the Group’s materiality level, and were extraordinary on their face and called out for comment and enquiry, he wholly abdicated his responsibilities of care and control, and thereby both allowed the commercially improper practice of cheque kiting within the Group to continue and indeed participated in its implementation.

In my judgment, such conduct falls so far below the level of competence to be expected of a director in Mr Swan’s position as to amount to unfitness within s. 6(1) of the Act.

Mr Swan’s conduct plainly does not fall within the most serious of the three categories specified in Re Sevenoaks Stationers (Retail) Ltd (11-15 years). Nor was that suggested by the SoS.

In judging whether his conduct falls within the lowest category (2-5 years) or the middle category (6-10 years), I consider the following facts, which I have already mentioned in the context of unfitness, to be material: namely, no want of probity on the part of Mr Swan has been established; no other instance of his signing or knowledge of cheque kiting cheques has been established; and it has not been established that the Group’s cheque kiting policy was for a dishonest purpose.

I also bear in mind the length of the disqualification undertakings given by Mr Reddy and Mr Ritchie; and the fact that Mr Swan’s want of competence relates to an absence of vigilance rather than any active role in the formulation or promotion of the Group’s cheque kiting policy.

Taking those and all other relevant factors into account, I consider that the appropriate category is the lowest of the three categories.

In determining where Mr Swan should fall within that category, I also take into account that it has not been alleged or shown that the Group’s cheque kiting policy has actually caused any person any loss or played any part in the insolvency of Finelist or any other company within the Group.

In all the circumstances, and bearing in mind the policy and purposes of the Act, I consider that the appropriate period of disqualification for Mr Swan is 4 years.

The case against Mr North is that, in the light of what took place in the meetings with Mr North on 3 and 6 December 1999, Mr North knew of the Group’s cheque kiting policy. The SoS’s alternative case is that Mr North failed to take appropriate action, when financial impropriety and irregularities were reported to him on 3 December 1999, to ensure that those matters were properly investigated. If a proper investigation had been undertaken, the policy of cheque kiting would have come to light.

I reject the SoS’s case that Mr North knew of the cheque kiting policy. There is no cogent evidence that he was told of any such policy.

Mr Reeve’s evidence was that he did tell Mr North about revolving or balancing cheques between AEW and EW. I do not accept that evidence. Mr Reeve’s meeting with Mr North on 3 December 1999 took place a considerable time in the past. The most reliable guide as to what Mr North was told at that meeting is to be found in the contemporaneous notes taken by himself and also by Mr Grourk. Neither of those sets of notes contains any reference to the passing of matching cheques between subsidiary companies or of other transactions which constitute the practice of cheque kiting. Further, Mr Reeve’s computer “mind map”, to which I referred earlier in this judgment, makes no mention of any such statements by Mr Reeve to Mr North.

Mr Blackburn and Mr Reeve gave evidence that Mr Blackburn did discuss in his meeting with Mr Reeve and Mr Grourk earlier on 3 December 1999 matters concerning the payment of cheques between companies within the Group. Having heard Mr Blackburn’s oral evidence, which was often expressed in technical language and a manner that was difficult to follow, I am extremely doubtful whether he communicated to Mr Reeve and Mr Grourk, in language and in a manner that they were likely to understand, the way in which cheque kiting was undertaken and the purpose for which it was undertaken within the Group. Indeed, Mr Reeve himself accepted, in cross-examination by Mr Biggs, that there were certain matters mentioned by Mr Blackburn which Mr Reeve did not understand, but which he nevertheless passed on to Mr North. In any event, whatever Mr Blackburn may have said to Mr Reeve and Mr Grourk, I find, for the reasons I have given, that it is probable that no allegations concerning cheque policy or cheque practice within the Group were communicated to Mr North, or, at any event, communicated to him in a comprehensible manner on 3 December 1999 or at any time on 6 December 1999.

On the other hand, I find that Mr North fell seriously below the standard of conduct to be expected of someone in his position and with his experience in his reaction to the allegations of financial and accounting irregularities that were communicated to him by Mr Reeve on 3 December 1999.

I accept Mr North’s evidence that Mr Reeve appeared to be in an agitated state when Mr Reeve and Mr Grourk met Mr North on 3 December 1999, and that a number of the allegations communicated by Mr Reeve to Mr North appeared to Mr North to be incomprehensible or plainly unsustainable.

I also accept, as I have indicated earlier, that Mr North had no concerns at that time as to the honesty or integrity of Mr Reddy, or as to any marked degree of incompetence on Mr Reddy’s part. Mr Grourk gave evidence that he understood Mr North at the meeting on 3 December 1999 to acknowledge that there had been concerns about Mr Reddy in the past. Mr Grourk accepted, however, that Mr North thought those concerns had been resolved.

What is clear, however, from the contemporaneous notes of the meeting with Mr North on 3 December 1999 is that Mr North was told that both Mr Ainsworth and Mr Blackburn had communicated to Mr Reeve a range of serious allegations of financial and accounting impropriety and irregularity, including allegations that there was a £20m under-declaration of indebtedness in the published accounts, the Group was operating in reality in breach of its banking covenants, the auditors had not been told all relevant information and, in that connection, ledgers were being kept by Mr Reddy “off site”. It is also clear, in my judgment, that Mr North understood that serious allegations of dishonesty and fraud were being made against Mr Reddy.

The case advanced on behalf of Mr Swan and Mr North was that, at a meeting at about 7.30 am on Monday 6 December 1999 at Finelist’s head office attended by themselves, Mr Reddy and Mr Reeve and, in part, Mr Ritchie, all the matters which Mr Reeve or Mr North thought appropriate to raise were answered by Mr Reddy to the satisfaction of Mr North and Mr Reeve.

That was, in my judgment, a wholly inappropriate, unsatisfactory and inadequate way of dealing with extremely serious allegations against the Group’s finance director concerning financial and accounting malpractices within the Group, on information provided by senior managers, including the relevant divisional finance director. Mr North knew of Mr Ainsworth, and he knew Mr Blackburn and that his position within the Group was divisional finance director. There is no evidence that Mr North believed or had any reason to believe that Mr Blackburn was anything other than perfectly competent. Mr North had been told by Mr Reeve that Mr Blackburn was concerned about his employment security if it was discovered he had made the comments he did to Mr Reeve. That should have alerted Mr North to the fact that this was, as I find it to be, a serious “whistle-blowing” incident by an employee well placed to know the truth.

In particular, it was wrong, and manifestly so, in my judgment, for Mr North to have failed to discuss those allegations with his fellow non-executive directors, or to communicate with the auditors, or to ensure that Mr Blackburn was given the means and opportunity of explaining or amplifying the allegations, particularly those that appeared to Mr North to be incomprehensible or manifestly unsustainable, before they were put to Mr Reddy.

I also agree with Mr Kaye that it was simply unacceptable for serious allegations of the kind that had been made, involving the finance director of a listed company, to be disposed of in a meeting lasting only 30 to 40 minutes, without any of those steps having been taken.

I am satisfied that, if all or any of those steps had been taken, the policy of cheque kiting would ultimately have come to light. The evidence of Mr Butcher, who had been a Member of Parliament, a junior minister at the Department of Trade and Industry, and in December 1999 was chairman of the Institute of Directors, was that, if he had been aware of the matters mentioned to Mr North, he would have ensured that they were raised at a board meeting. I accept that evidence. I also find that, if Mr Blackburn had been given the opportunity to amplify to Mr North or the auditors his allegations concerning the £20m under declaration of debt, he would have disclosed the cheque kiting policy since it is clear from his oral evidence that he considered them to be linked.

It is difficult to understand why someone with Mr North’s considerable experience and knowledge acted in the way he did; particularly since his immediate reaction at the meeting on 3 December 1999 was entirely correct, namely that he viewed the accusations of a substantial under declaration of debt and the possible breach of banking covenants as extremely serious, and that the next step would be for him to call a meeting of the directors in the absence of Mr Reddy. Mr North denied, in his evidence, that he made any such suggestion; but I accept the evidence of Mr Reeve and Mr Grourk on the point, corroborated as it is by the contemporaneous notes they took of the meeting. Further, Mr North accepted in his oral evidence that, with hindsight, he should have informed the other non-executive directors of the allegations.

Further Mr North’s own evidence, in cross-examination, was that, if someone had alleged fraud against Mr Reddy, he would have wished to question the person making that allegation. Yet he never sought to question Mr Blackburn. He gave evidence that he was aware, after the meeting with Mr Reddy on 6 December 1999, that Mr Swan intended to speak to Mr Blackburn; but that was after Mr North and Mr Swan had expressed themselves satisfied with the answers given by Mr Reddy, and was in the knowledge that Mr Blackburn was concerned about his job if it should be disclosed he had made the accusations which he had.

It is possible that, acting in good faith, and having thought about the matter further over the weekend, Mr North took the view that, in the light of the negotiations then underway for the sale of the Group to the management, and in the light of the many aspects of what he had been told which appeared to him to be plainly unsustainable or incomprehensible, the best course was to try to give as little publicity or airing as possible to the allegations.

Whatever the reason was, the lapse in judgment was a very serious one, at precisely the moment and in the type of situation in which decisive, courageous and independent action is required by a non-executive director.

In December 1999 Mr North was, as I previously said, a highly experienced non-executive director, deputy chairman of Finelist and the chairman of the audit committee. He was regarded as the senior non-executive director of Finelist.

As I have also said, the manner in which he dealt with what was, and he should have appreciated was, a serious “whistle blowing” incident in December 1999, with the COO of a listed company passing on information from a divisional finance director, was wholly inappropriate, unsatisfactory and inadequate.

In deciding whether his conduct is such as to make him unfit within s. 6 of the Act, I bear in mind, as in the case of Mr Swan, that no lack of probity on Mr North’s part has been established, and there is no other instance of lack of competence which has been established against him. I also take into account the same considerations concerning the purpose and effect of the Group’s cheque kiting policy as in the case of Mr Swan.

Mr North has now retired completely from business life, but, as I have previously explained, that is, as a matter of law, an irrelevant consideration in deciding whether a case of unfitness has been made out.

In my judgment, in all the circumstances, and bearing in mind the purposes and the policy of the Act, Mr North’s conduct fell so far below the level of competence to be expected of a director in Mr North’s position as to amount to unfitness within s. 6(1) of the Act.

Bearing in mind all the circumstances I have mentioned in relation to unfitness, and also the length of the disqualification undertakings given by Mr Reddy and Mr Ritchie, and the disqualification period I have ordered in relation to Mr Swan, and the fact that Mr North’s want of competence relates to the failure to pursue an enquiry with sufficient vigour rather than a blanket refusal to investigate the concerns mentioned by Mr Reeve, I consider that the appropriate category in relation to Mr North is the lowest of the 3 categories specified in Re Sevenoaks Stationers (Retail) Ltd.

In determining where Mr North should fall within that category, I also take into account Mr North’s full retirement from the management of any company

In all the circumstances, and bearing in mind the policy and purposes of the Act, I consider that the appropriate period of disqualification for Mr North is three years.

In addition to the matters I have considered so far in this judgment, a range of other facts and matters were in dispute and were the subject of written and oral submissions and oral evidence, but I have not found it necessary to reach any decision on them. They include the following: whether Mr Swan’s management style was domineering, aggressive or otherwise such as to promote a “culture of fear”; the circumstances in which Mr Reeve came to be appointed COO; Mr Reeve’s competence as COO; the terms on which Mr Reeve sold his business, PDP, to Finelist, and, in particular, the sale price; the circumstances in which KPMG ceased to carry out consultancy services for the Group in 1998; the circumstances in which Mr Ainsworth was dismissed, and, in particular, whether Mr Swan or Mr Reeve was primarily responsible for the decision to dismiss him; the precise sequence of events on Monday 6 December 1999; the precise content of any discussion between Mr North and Mr Swan between the time of Mr Reeve’s meeting with Mr North on Friday 3 December 1999 and Mr North’s meeting with Mr Swan on Monday 6 December 1999; whether Mr Blackburn and Mr Reeve were in fact, that is objectively speaking, intimidated by Mr Swan on 6 December 1999; the reason for Mr Grourk’s dismissal on that day; the treatment of Mr Reeve by Mr Swan after 6 December 1999; Mr Reeve’s state of mind from time to time after 6 December 1999; the reason or reasons why Mr Reeve absented himself from work in January 2000; the state of Mr Reeve’s health in January 2000; the reason or reasons for, and the propriety of, the dismissal of Mr Reeve; and whether Mr Reeve handled his company expenses in a proper manner.

For the reasons I have given, I order, pursuant to s.6 of the Act, disqualification of Mr Swan for a period of 4 years, and the disqualification of Mr North for a period of 3 years.