Secretary of State for Trade & Industry v Aviss & Ors

Something of Mr Aviss’ background is given in a draft report prepared in March 2000 with a view to the flotation of Mea on AIM:

“John Aviss joined his father’s electrical contracting business from school, and completed an electrician’s apprenticeship. He began running the business from the age of 20. He developed a specialism in heating systems and acquired a heating company, Davis & Rutherford … He set up [Mea] in 1981 (as Aviss Heating Limited) and transferred Davis & Rutherford’s business into the new company. He diversified into pet product distribution in 1981, with the acquisition of Woodpecker Pet Products Ltd … and is now Chairman and majority shareholder of companies with turnover totalling in excess of £50 million. In November 1999 Woodpecker was demerged into Zoa Corporation plc, which was admitted to … [AIM].”

Mr Aviss was interested in a number of different companies. These included:

In addition Mr Aviss owned the entire issued share capital in Mea, consisting of 10,000 shares of £1 each.

I know little about Mr Berry’s background. However, what is significant for present purposes is that on 16 March 1999 he pleaded guilty in the Crown Court at Nottingham to an offence of trading with intent to defraud creditors and to another offence of being concerned in the management of a company while an undischarged bankrupt. He was sentenced to two years’ concurrent imprisonment on each count (in each case suspended for two years) and disqualified for five years under the 1986 Act. The period of disqualification was still running during the events with which I am concerned.

The claim form was issued on 28 July 2003, together with a lengthy affirmation of Mr Mark Bruce in support of the Secretary of State’s case. At that stage there were four defendants. On 29 September 2003 the Defendants were ordered to file evidence in answer by 10 November 2003. They did not comply with that order. Mr Berry filed a witness statement on 14 January 2004. On 19 January 2004 an order was made that unless Mr Aviss filed and served evidence by 16 February 2004 he be debarred from adducing any evidence. On 13 February 2004 time was extended to 26 March 2004. Mr Aviss served an affidavit on 20 March 2004. The other two defendants also served evidence; and all defendants were given liberty to comment on each other’s evidence provided that they did so by 21 June 2004. Neither Mr Aviss nor Mr Berry took up that permission. After a number of extensions of time, the Secretary of State served evidence in reply by the summer of 2005. On 25 July 2005 Chief Registrar Baister gave directions for trial. Those directions included:

A listing appointment took place on 14 September 2005. On 20 September 2005 the listing office notified the parties that the trial would take place in a three day window from 10 July 2006. At that stage Mr Aviss was represented by solicitors, to whom the notification was sent (although it may not have been received by them). Mr Berry was then representing himself.

Mr Aviss and Mr Berry were duly notified that they were required for cross-examination.

On the first day of the trial (10 July 2006) Mr Aviss appeared in person and asked for an adjournment. His application was supported by Mr Berry, who did not attend, but who wrote a letter. The grounds on which the application was based can be summarised as follows:

I refused the application for the following reasons:

At the conclusion of the application I adjourned until the following morning. This was partly to allow me to pre-read material that Mr Westwood had asked me to read; partly to allow Mr Aviss the opportunity to consider his position, and partly to give Mr Berry the opportunity to attend court.

On the following day I received a letter from Mr Aviss saying that he intended to take no further part in the trial. Mr Berry did not attend. In his letter Mr Aviss also asked for permission to appeal against my refusal of the adjournment. I refused permission, because my decision was a case management decision; and no error of principle had been identified. Mr Westwood therefore presented the Secretary of State’s case.

The fact that the disqualification order made in the Crown Court was still running against Mr Berry led to his written submission that the current proceedings were an abuse of process by the Secretary of State. In essence, Mr Berry’s point was that if he were in breach of the disqualification order, he would have committed a criminal offence under section 13 of the 1986 Act. If that was the allegation against him, then the Secretary of State should have proceeded by way of a criminal prosecution, in which the burden of proof would have been higher, rather than by way of a civil application under the 1986 Act. To proceed in the civil courts was therefore an abuse of process.

I reject this submission for a number of reasons, which I summarise as follows:

As I have said none of the witnesses who gave evidence in support of the Secretary of State’s case were required to attend for cross-examination. Their evidence therefore stood unchallenged. Although Mr Aviss and Mr Berry were required to attend for cross-examination, they did not do so. I did, however, read their statements as part of my pre-reading and I have taken them into account (although the weight that I can attribute to them is plainly limited in the light of their non-attendance for cross-examination).

Apart from Mr Bruce and his colleagues within the Insolvency Service (whose evidence was based mainly on documents) the witnesses were as follows.

Mr David Bartley was a director of CJB (which began life as his grandfather’s business in 1921 and was incorporated in 1930). He was also appointed as a director of Mea in April 2000 in anticipation of Mea’s acquisition of CJB. He resigned as a director of CJB at the same time. He resigned as a director of Mea in June 2001.

Mr Simon Bartley is Mr David Bartley’s son. He was also a director of CJB and also appointed as a director of Mea in April 2000. He resigned in March 2001.

Mr Evans is a qualified chartered accountant. On 1 July 1999 he was appointed as the company secretary of Mea. He was a director of Mea between November 1999 and February 2001. He was also the company secretary and a director of Zoa. Following the acquisition by Mea of Projects and CJB he was appointed the company secretary to both of them. He resigned in February 2001.

Mr Fitzpatrick was a director of CJB, and had been since 1973.

Mr Rennison was a director of Projects, and had been since 1989.

Mr Walker worked with Mr Aviss from the beginning of the 1980s. He was a director of Mea between August 1992 and June 2001. He was also a director of CJB between October 2000 and June 2001.

The acquisition of Projects and CJB was part of the strategy towards the eventual flotation of Mea on AIM. The strategy was developed in late 1999. It was thought that Mea was not big enough on its own to sustain a listing; and that the acquisition of further businesses would add to its attraction to potential investors. Mr Walker, who was a director of Mea at the time, said that neither he nor Mr Tonkin (another of Mea’s directors) made the decision to acquire either company: “We were simply told by John Aviss and Bill Berry that it was happening.” In his affidavit Mr Aviss says that “Bill Berry was ... instructed to find acquisitions to grow the volume of [Mea’s] business.” He did not say by whom Mr Berry was instructed; and he did not challenge Mr Walker’s evidence. I find that the overall strategy was devised by Mr Aviss and Mr Berry.

Due diligence was entrusted to Pridie Brewster, Mea’s accountants and auditors. They reported in January 2000. They expressed concern about the cashflow forecast that the company had produced. Even after reworking, they were not convinced of its credibility. However, based on the information they had received, they considered that, with a further borrowing facility of £750,000 to £1 million, the company could achieve the forecast turnover and remained an attractive acquisition target.

Mea exchanged contracts for the acquisition of Projects on 10 May 2000. It was completed in June 2000.

Mr David Bartley and Mr Simon Bartley were directors of CJB well before its acquisition by Mea. Mr David Bartley attended a meeting with Mr Berry and Mr Aviss on 7 January 2000, in order to discuss the acquisition of CJB by Mea. Mr Simon Bartley made notes. They were told at that meeting that Mr Aviss would be the Chairman of a holding company, of Mea and of all the companies in the group. Messrs Bartley dealt principally with Mr Berry. Although Mr Aviss was present at some meetings, he took no substantive part in the discussions. No other director of Mea was involved, although Mr Simon Bartley paid a visit to Mea’s offices in Croydon in November 1999 where he met (and had dinner with) Mr Tonkin. Initially Mr Berry described himself to Mr David Bartley as a “marriage broker”; but in a later conversation he said that Mr Aviss did everything that he suggested to him. Contracts were exchanged for the acquisition of CJB in May 2000 and the acquisition was completed in October 2000. Between contract and completion Mr Simon Bartley attended a meeting in September 2000 at Mr Berry’s offices in Mayfair. Mr Berry took a central role at that meeting. He explained the group’s short term strategy, the revised date for Mea’s flotation and the possibility of further acquisitions.

Mr Aviss and Mr Berry both attribute the collapse of Mea to misleading financial information given to them when Mea acquired its two subsidiaries, Projects and CJB. In the case of Projects there is some evidence which does indeed suggest that that company was in a worse financial state than was shown by its accounts. At the time of the acquisition Mr Robert Clinch was the Finance Director of Projects. He was dismissed in September 2000. On 25 September 2000 he wrote to Mr Robson complaining about his dismissal. In his letter he said:

“You stated that you would not wish to raise my hopes but would speak to John Aviss and Bill Berry on Thursday and let me know whether they would be willing to reconsider the terms of their offer.”

In wake of Mr Clinch’s dismissal, in the autumn of 2000 Mr Aviss and Mr Berry requested Mr Evans to report on the financial systems and controls employed at Projects. He set about compiling a set of management accounts. In the course of his investigations he discovered in about October 2000 (among other things):

Mr Evans immediately reported his discovery to Mr Aviss and Mr Berry. As a result, Mr Evans and Mr Tonkin were asked by Mr Aviss and Mr Berry to take remedial action at local level.

At the meeting of the board of Mea on 13 September 2000 the meeting was informed that a decision had been taken “at group level” to centralise the accounts of all companies within the group; and to centralise administration functions. The board itself does not appear to have taken that decision.

Mr Simon Bartley says that shortly after Mea’s acquisition of CJB a central treasury system was introduced. Under this system payments received by CJB were transferred into a central fund controlled in Croydon, where Mea had its offices. Thus the directors of CJB itself lost direct control over its funds. This led to CJB being unable to meet its commitment to the Inland Revenue in December 2000. Mr Simon Bartley’s request for funds was answered by Mr Walker who said:

“There are no immediate funds to meet the Revenue payment. I would point out that the funds you refer to are Mea Corporation funds and for part of the Group treasury function.”

At about the same time, Mr Bartley unsuccessfully requested Mr Walker to release a large cheque, representing part of a stage payment on a contract in which CJB was involved, to enable it to pay its mechanical partner, which was an important customer. When told by Mr Walker that no cheque would be available until after the Christmas break, Mr Bartley wrote to protest, and copied his fax to Mr Aviss and Mr Berry. At Mr Simon Bartley’s request his father, Mr David Bartley, spoke to Mr Aviss. Mr Aviss was angry that Mr Simon Bartley had copied his fax to so many people and said that Mr Walker was “a loyal servant following instructions.” In the course of the same conversation Mr Aviss said that there was less cash than he would like; and that he had heard all about Projects, which had cashflow problems.

In early January 2001 Mr Walker sent Mr Bartley a form for transferring CJB’s bank account from NatWest to Barclays. The transfer of the account had not been the decision of the board of CJB. However the form was completed and the account transferred. From then on the board of CJB ceased to receive bank statements. Mr Bartley was sent a paying in book for the new account in February 2001 (but not, it seems, a cheque book). The effect of this was that the board of CJB did not know which creditors had been paid; nor what automated payments were being made out of the account. Mr Simon Bartley protested about this from time to time; but to no avail.

Mr Ian Rennison was a director of Projects from its incorporation. Following the acquisition of Projects by Mea, he gives a similar account of the central treasury function. He says:

“When I had to get creditors of [Projects] paid, I would telephone David Walker or Phil Tonkin and explain why a particular creditor needed to be paid as a matter of urgency. They would say to me that they would do their best and see what they could do but that they would have to speak to Bill Berry.”

According to Mr Evans by this time:

“Bill Berry … was issuing instructions on treasury control and totally managing the relationship with the company’s bankers. This situation was supported by [Mr Aviss].”

On 5 January 2001 Mr Aviss sent a memo to all directors and staff in “the Aviss group of companies”. He said:

“I have decided to centralise our stationery purchases. … With effect from Friday 5^th January none of our companies will pay any bills to any stationery supplier, including any petty cash expenditure on what may be considered “emergency” type stationery, except as above.”

Stationery was to be supplied by another of Mr Aviss’ companies: Red Dot Ltd.

On 1 February 2001 Mr Aviss sent a fax to Mr Evans (copied to, among others, Mr Walker, Mr Simon Driscoll and Mr Tonkin, all of whom were directors of Mea). It said:

“Electronic banking has been installed today.

The circular to your suppliers needs to go out forthwith.

We will cease making payments by cheque on Friday 2^nd February. No cheques thereafter will be issued.”

On 9 January 2001 Mr Simon Bartley attended a meeting at Mr Berry’s request. Mr Berry informed him that Mea was to be acquired by Zoa, which was already listed on AIM. Zoa would change its name to Wolverstone. In fact Mr Aviss had already decided this. In a memo of 4 January 2001 he said:

“From Wednesday 10^th January onwards the companies will operate as one single unit to be called the Wolverstone group … I am pleased to announce the new board of Wolverstone Group is as follows…”

He added:

“It is important that we further formalise, as the business grows bigger, the structure of the management teams.

To effect this, I will work as part of a team comprising …

I will have a direct responsibility for driving forward the profitability of the distribution and engineering businesses and for monitoring their performances.

I have delegated to Bill the continued task of the development of the group with an additional responsibility for the media and creative interest.

Working closely with Bill will be Bob Evans with a remit ranging from corporate governance to control of overheads and capital expenditure.

Similarly David Walker, Deputy Chairman, will work closely with Bill in managing the treasury function for the entire company.”

However, it does not appear that the “Wolverstone project” was taken any further. Nevertheless, this episode does, in my judgment, reveal how Mr Aviss perceived himself as being in overall charge of the group, and Mr Berry’s role in controlling the treasury.

All three companies were experiencing increasing pressure from creditors as time went on.

Unpaid debts began to accumulate towards the beginning of 2000, although at that stage they do not seem to me to have been out of the ordinary. However, the number of unpaid debts grew during the summer of 2000. By May of that year Mea had stopped making payments of PAYE and national insurance on time. In August 2000 Mea stopped making VAT payments in full, resulting in unpaid VAT of £496,000 by the time it went into liquidation. From April 2001 Mea made no payments of PAYE or national insurance contributions at all. The unpaid amount was £394,000. In the summer of 2001 six of Mea’s creditors issued proceedings against it for unpaid debts; one served a statutory demand and yet another issued a winding up petition. Ten county court judgments were entered against Mea between February 2000 and September 2001.

The situation so far as Projects was concerned was worse. It is fair to say that even before Mea acquired Projects it was being chased by creditors, five of whom had issued proceedings for unpaid debts before the acquisition. But the rate at which proceedings were issued accelerated after the takeover. The proportion of debts over three months old rose from 13.6 per cent at the end of August 2000 to 63.4 per cent by July 2001. No fewer than 137 sets of proceedings claiming unpaid debts were issued against Projects, claiming an aggregate of £1.4 million; and over fifty county court judgments were entered against it in the aggregate sum of £438,000, of which all but three were unsatisfied. The vast majority of proceedings were issued in 2001, well after the “hole in the accounts” had been discovered. Like Mea, Projects also stopped paying tax and national insurance contributions on time; and also fell into arrears of VAT.

Until its acquisition by Mea CJB had been in reasonable financial health. It began to be pressed by creditors in February 2001, in respect of debts incurred since November 2000 (after the acquisition). Seven creditors issued proceedings against it from March 2001 onwards and nine county court judgments were entered against it. Eight of the judgments remained unsatisfied. CJB stopped paying tax and national insurance contributions on time in December 2000 and at about the same time stopped paying VAT.

Mr Berry was aware of creditor pressure as it took place. As early as 26 July 2000 the minutes of a meeting about Projects record:

“[Mr Robson] requested [Mr Berry] to reconsider the level of bank facility made available to [Projects] as the current limit was now impacting on the company’s performance and standing with suppliers. [Mr Berry] advised that with the flotation now being put back, [Mr Berry] will have to leave the current facility in place as Mea is committed to the above purchases. The [Projects] facility will need to remain as it is until the flotation which is predicted for 15 September 2000 …”

He was also aware of financial pressure at Zoa. On 21 November 2000 he sent a memo to those who dealt with the companies’ financial affairs, with a copy to Mr Aviss. The memo included:

“Debtors Cover Reporting

We continue to be late with debtor cover reporting in the engineering business. A consolidated report will henceforth be provided for Barclays for October on Friday 25^th November and or November on Tuesday 5^th December and for December on Tuesday 9^th January. Copies of these reports are to be on my desk at the same time.”

On 8 March 2001 Mr Walker wrote to the Inland Revenue about Projects’ financial position. He said in his letter that:

“Mr Berry has the right to negotiate on behalf of this board and is empowered to commit the board at his discretion in this matter.”

Mr Aviss was also aware of creditor pressure. In December 2000 Mr Evans reported to Mr Berry and Mr Aviss at a meeting. He outlined the measures that had been taken at Projects in order to improve cashflow. He said that Projects needed repayment of the funds that had been paid to other Aviss companies; that it required further investment of £1 million and that it needed minuted support from the holding company because it was insolvent. He repeated these points at a meeting with Mr Berry and Mr Aviss in January 2001; and said that the arrears of PAYE and VAT needed urgent attention.

On 12 March 2001 Mr Aviss sent a fax to all directors and accounts department heads. He referred to a recent court judgment that had been entered, and instructed all the addressees to send copies of any legal proceedings to the “admin department”.

Mr Aviss accepts in his affidavit that he became aware of cashflow difficulties in February or March 2001; but says that he did not then appreciate the scale or urgency of the problem. However, I find that he knew of the difficulties and their extent at least two months earlier.

From the inception of the group treasury system large amounts of Mea’s cash were used to support other companies in which Mr Aviss had an interest, but which were outside the Mea group. In the course of his investigations into Projects, Mr Evans discovered that £1 million of Projects’ cash had been removed from the company. The money had gone to other companies in the Aviss group, to pay Mr Berry’s fees and to pay for other debts, even though they had not been incurred by projects. Mr Evans raised his concerns with Mr Bayne (Projects’ financial director) and Mr Walker. Mr Walker told Mr Evans that he had had no option but to make the payments; as he had been instructed to make them by Mr Aviss and Mr Berry. Mr Evans then spoke to Mr Berry and asked him why £1 million had been taken from a struggling company and not used for its benefit. Mr Berry replied that that was normal in these situations. If a parent had paid £500,000 for a company, you took £500,000 out of the company to give back to the parent. Mr Evans told Mr Berry that Projects was insolvent and that liquidity needed to be restored. It was not.

These movements of cash can be traced through Projects’ accounting documents. Projects had become a subsidiary of Mea in June 2000. It had not previously been part of a group of companies. By the end of July, its inter-company balance (i.e. money owed to it) was £371,000. By the end of the following month it had risen to £431,000; to £750,000 by the end of September and to over £1 million by February 2001. By the end of May 2001 it had reached £1.6 million.

Mr Walker protested about the level of support that was being given to other companies: particularly the support of Holcot. He, Mr Tonkin and Mr Evans repeated their concerns over support being given to other companies in which Mr Aviss had an interest. According to Mr Walker, Mr Aviss and Mr Berry said that the money would be repaid out of the proceeds of flotation and debt refinancing. A schedule of debts compiled as at 28 February 2001 showed Mea as being owed nearly £2.25 million by a combination of Woodpecker Pet Products Ltd, Aviss Holdings Ltd, Plantagenet Press Ltd, Holcot Press Ltd and Bau Corporation. These debts were shown in draft accounts presented to Barclays Bank shortly afterwards. The bank was concerned about the level of inter-company debt and commented:

“If this were repaid, the Co would have no cash flow pressure at all!”

The same schedule of debts as at 28 February 2001 also showed that Mea owed Projects £1.1 million and owed CJB £285,000. There can be little doubt that cash generated by Projects and CJB was paid to Mea and used by Mea to lend to other companies associated with Mr Aviss, but outside the Mea group. In his own evidence Mr Aviss attempted to suggest that Projects was a net debtor of Mea; but all the contemporaneous evidence points the other way.

However, none of these payments appears to have been discussed by the board of Mea as a whole. As early as 21 December 2000 Mr David Bartley was complaining about the lack of board meetings; and about “being kept entirely in the dark”. On 12 February 2001 he formally requisitioned a meeting of the board. He said in his letter that he had become increasingly concerned about the lack of information relating to Mea’s affairs that had been provided to him. He was concerned about the company’s solvency and about the legality of its continuing to trade. He spoke to Mr Berry two days later. He made notes of the conversation. The notes record that Mr Berry told him that:

“Mea will have to learn to operate under the (malign) influence of himself and John Aviss.”

Mr Evans attended a meeting with Mr Aviss and Mr Berry on 7 March 2001. Mr Berry gave a presentation. According to Mr Evans the thrust of the presentation was that Zoa’s liquidity position was critical and that money would have to be taken out of the Mea group to support Zoa. Mr Evans explained that if this happened it would be to the detriment of the creditors of the Mea group and would result in their non-payment. It would also kill Projects stone dead. Mr Berry replied that Mr Aviss would not let that happen; and that the companies would recover in the long run. Mr Evans suggested that one way to keep Zoa afloat would be to effect a sale and leaseback of its warehouse; but Mr Aviss and Mr Berry rejected this. Mr Evans tendered his resignation. In conversation with Mr Berry afterwards Mr Evans said that the proposal was illegal and immoral; and that money could not simply be pulled out of one company to be put into another one, to the detriment of creditors. In a subsequent memorandum to the liquidators Mr Evans commented:

“It was clear that [Mr Aviss] and [Mr] Berry had made their decisions prior to this meeting and essentially required the majority of collections from trade debtors at [Projects] to be used to satisfy Zoa creditors.”

At a meeting on 9 March 2001, attended by Mr Aviss and Mr Berry (among others) Mr Berry was asked whether any money had been taken out of Mea for other companies. Mr Berry replied that no money had been taken out of Mea for “other group companies”. This was patently untrue; and Mr Aviss did not correct him. However, in response to the question whether it was the intention to take out money in the future he replied that:

“[He] would do this as and when it was appropriate to the benefit of the group of John Aviss’ companies.”

Mr Berry also explained that “all of John Aviss’ companies need financing” and that Mr Aviss did not have spare personal money to finance Mea. Mr Fitzpatrick summarised the meeting in a fax that he sent to Messrs Bartley on the following working day. He told them that Mr Berry had said that there had been no cash transferred out of Mea for any other business; not Zoa nor for anyone else. Mr Fitzpatrick recorded that he had told Mr Berry that CJB was profitable and had had money in the bank. His note continued:

“Bill Berry explained that in his capacity as a banker he had to advise John Aviss that money had to be disbursed where it was most needed and if this meant taking money from [CJB] to assist [Projects] so be it.”

Mr Fitzpatrick also recorded:

“Bill Berry said priority for paying moneys is being decided by John Bayne for [Projects] projects and Phil Tonkin for [CJB] projects, with the overriding instruction from Bill Berry that money is to go where non-payment would mean most risk.”

Mr Fitzpatrick’s assessment of the situation in his fax was that:

“[U]nless we can persuade Bill Berry and John Aviss that [CJB’s] suppliers and sub-contractors are a special case and should have some priority over [Projects’] suppliers and sub-contractors then things are going to be extremely difficult for us in the next few weeks.”

On 16 March 2001, at the insistence of Mr Aviss and Mr Berry £525,000 was transferred from Mea’s bank account to Woodpecker/Zoa. Mr Berry also instructed Mr Walker to make monthly payments from Mea’s account to fund the monthly salary bill at Holcot. Mr Walker followed those instructions. Mr Evans also says that Mr Aviss and Mr Berry took money out of Mea in order to meet Zoa’s need for working capital.

A board meeting of Mea took place on 23 March. Mr Berry and Mr Aviss were present. The meeting was shown the draft accounts for the year to 28 February 2001. Minutes of the meeting were prepared. Mr David Bartley had a number of questions arising out of the meeting which he set out in writing (probably some time in May 2001). Among his points was the following:

“The “published accounts” show that 3 associated Companies owe the Mea Corporation a total of £2,249,000. Could I please know:

(i)

On what terms these “loans to associated companies” have been made

(ii)

When was this out flow of cash was approved by the Directors of the Mea Corporation (I, and I believe Simon, have previously been told that no Mea money has been used to support companies outside Mea, this has been told to suppliers, clients and CJ Bartley Staff – this is plainly not the case)

Since there is a liquidity problem with the Mea Corporation is it not our duty as responsible Directors of the Mea Corporation to demand this money back so that we can reduce our reliance on short term overdraft borrowing and/or improve the desperate payment situation with our creditors.”

Mr David Bartley’s questions are, in my judgment, symptomatic of the way in which the board of Mea were kept in the dark about the destination of its funds. Mr Bartley’s reference to the duty of responsible directors produced no results.

On 27 March 2001 Mr Simon Bartley met Mr Berry. He said that he had no faith that CJB’s requirements for creditors’ payments would be listened to and wanted to “take back the role of paying creditors”. Mr Berry proposed that CJB be allowed to keep 80 per cent of its collections for payment, through the central treasury system. Mr Bartley was sceptical. Mr Berry said that although he was not a director, Mr Tonkin and Mr Walker “will do what they are told”. In relation to certain payments to CJB’s most important creditors he said that the payments would be made immediately or Mr Tonkin and Mr Walker “would be out of a job on Friday”. Mr Bartley said that a couple of small cheques had been raised including one for missed wages. Mr Berry said that “these were authorised in arrears in advance by him.” He also told Mr Bartley that central banking had been his idea and was due to the Projects’ situation and “his arrangement with Barclays Bank”.

In a memo to Mr Berry on 1 April 2001 Mr Walker commented that £256,000 had recently been transferred from Mea to cover Holcot and Woodpecker account excesses; and that the likelihood of recovery was either limited or nil. He pointed out that Mea itself was not in a healthy state, and that supporting peripheral businesses was not helping. He repeated his concerns (although by then the figures had risen) on 14 June 2001 when he tendered his resignation.

Another board meeting of Mea took place on 11 May 2001. Again, Mr Aviss and Mr Berry were present. Mr Simon Bartley asked what the £2.249 million associated company loans were for and whether the amounts were recoverable. Mr Berry replied that they were not formalised loans and represented transactions made on a demand basis and that they were all recoverable. Mr Berry also said that Projects was not insolvent from a technical point of view, but that it could not meet all its debts. Mr Simon Bartley suggested calling in an insolvency practitioner. Mr Berry, however, said that there was additional bank borrowing 10 to 14 days away and that Mea might be reversed into an AIM company on 25 June. The minutes record Mr Berry as saying that it would be fairly easy to contest a winding up petition as a creditor had to prove his debt and that “he had no other alternative to offer” for the next 10-14 days. He then outlined financial and borrowing proposals that “he had been working on on behalf of the board”. These included the acquisition of two further companies and the reversal of the companies into a dormant AIM company. He asked whether the board would like him to proceed with completing on the two acquisitions and the board agreed. The minutes then record that “Bill Berry then changed the creditors payment policy to the following” and set out an order of priority for payment. Mr Simon Bartley’s notes of the meeting recorded that Mr Berry chaired it throughout.

On 13 May 2001 Mr Simon Bartley wrote a long letter to Mr Berry. In it he said:

“For reasons I understand, and perhaps on Friday accepted, two new policies were put in place. First, and you will recall that I disagreed with it, was that the payment of the Group’s Creditors should be carried out centrally at Croydon under your control. … I suppose that it is the first and last of these that I can not now accept namely that Croydon will determine who gets paid and when …”

Mr Berry telephoned Mr Bartley in response to the letter, and said that he was not a director and could not be responsible for payments out of the company; but that otherwise the letter was correct. However, in the course of the conversation Mr Bartley noted Mr Berry as saying:

“Bill said that because of the circumstances in the group he needed to keep central control of the money for the time being but that once refinancing of the group was in place the original plan to make each company responsible for its own financial dealings would be re-stated.”

Mr Simon Bartley went on holiday in May 2001. On his return at the end of the month he was disturbed to discover that payments which he had assured creditors of CJB would be made had not been made. He protested to Mr Tonkin and Mr Walker and called a meeting with Mr Berry and Mr Aviss (among others). It took place on 5 June. In the course of a stormy meeting, Mr Aviss lost his temper and told Mr Bartley to “shut up or take the alternative”. Mr Bartley resigned on 20 June.

By July 2001 the level of indebtedness to Mea had risen to £3.2 million, with the bulk of the increase being attributable to an increase in borrowings by Zoa/Woodpecker.

The statement of affairs prepared for CJB as at July 2001 showed it as being owed over £1 million by group companies. An earlier review by Levy Gee (insolvency practitioners) concluded that “cash has been squeezed out of the company up to [Mea] of somewhere in the region of £0.7m to £1m.”

In a meeting with Barclays Bank relating to the financial problems at Zoa the Bank also recorded their concern about Mea; and in particular the use of Mea’s monies (estimated at £3.2 million) to fund other associated companies outside the group.

A meeting was held at the Landmark Hotel on 11 July 2001. Mr Aviss and Mr Berry attended as representatives of Mea. No other directors of Mea, Projects or CJB were present. The others at the meeting included representatives of Levy Gee and Barclays Bank. The notes of the meeting recorded that Mr Berry and Mr Aviss “have concluded that” neither Projects nor CJB could continue to trade. Mr Moses of Levy Gee concurred with that view.

It is clear from the narrative that although Mea, Projects and CJB were all under increasing pressure from creditors, and were each unable to pay their debts as they fell due, available cash was paid into the central treasury, and thence paid out to other companies, Woodpecker/Zoa in particular, in which Mr Aviss had a substantial interest. This pattern cannot, in my judgment be attributed to the hole in Projects’ accounts. Even after the hole had been exposed, cash generated by Projects was not used to fill the hole, but was still paid into the central treasury from where it went to the other associated companies.

The next question for me to decide is the extent to which responsibility for this state of affairs is that of Mr Aviss or Mr Berry. This also necessitates consideration of the question whether either or both of them fall within the ambit of the 1986 Act as having been directors of any of the companies and, if so, which.

As I have said, although Mr Aviss accepts that the documents show that he was formally appointed as a director of Mea, he says that he was unaware of that. I leave aside, for the moment, the stark conflict of evidence between Mr Aviss, on the one hand, and Mr Evans (who says that he explained the position to Mr Aviss) on the other. The contemporaneous documentation is all consistent with Mr Aviss’ having been appointed as a director of Mea and as having been aware of that fact.

The first, and most significant, document is that statutory form (Form 288a) itself. This was signed by Mr Aviss on 1 November 1999 and recorded his consent to act as a director. Second is a confidentiality agreement dated 25 October 1999. This agreement was prepared in connection with the proposed acquisition of Projects by Mea. It was signed by Mr Aviss under the rubric “signature of director for and on behalf of the purchaser”. Although this ante-dated the signature of Form 288a it reflects Mr Aviss’ participation in the management of the company from before his formal appointment as a director, as outlined in the brief history I have quoted. The placing and admission to AIM document relating to Zoa, a public document prepared in November 1999, lists Mr Aviss as the Executive Chairman of Zoa, and lists, among his current directorships, that of Mea. That document must have been approved by the board of Zoa (which included Mr Aviss). The draft report on Mea, to which I have referred, records Mr Aviss’ length of service with Mea as having been 18 years, and describes him as Chairman. It also specifies his basic remuneration rate. The Directors’ Report for the year to 31 August 2000 accompanying Mea’s filed accounts for that year lists Mr Aviss as one of Mea’s directors, and gives details of his appointment and his beneficial interest in shares. It is signed by the company secretary. So does the company’s annual return made up to 31 October 2000. The latter was signed by Mr Walker, who was indisputably a director of Mea. On 30 August 2000 Mr Aviss sent a memo to all engineers at Projects. He began by saying that “my company” had recently purchased the shares in Projects. This was clearly a reference to Mea. He signed the memo as “Chairman Aviss Group of Companies”. On 19 July 2001 Mr Aviss wrote to Barclays Bank complaining about a refusal by the Bank to honour an undertaking to retain the level of Mea’s overdraft. He signed the letter: “For and on behalf of Mea Corporation Limited.” When, on 3 August 2001, Mea requested the Bank to appoint an administrative receiver, the request was signed by Mr Aviss “Director”. He signed the minutes of the meeting of the directors of Mea held on that day, also under the title “Director”.

There is also the evidence of Mr Evans, which stood unchallenged. Mr Evans says that at the time of the flotation of Zoa he was told by Mr Berry that because Mea had a substantial interest in Zoa and because Mr Aviss controlled both companies, the professional advisers had said that investors would not be content unless Mr Aviss became a director of Mea. So, at Mr Berry’s request, Mr Evans prepared Form 288a appointing Mr Aviss as a director of Mea. Mr Evans says that, having prepared Form 288a, he explained to Mr Aviss that he needed to be appointed as a director of Mea. Mr Aviss did not query this. He signed the form and Mr Evans counter-signed it.

In my judgment Mr Aviss’ formal appointment as a director reflected the reality of his position. I also find that Mr Aviss knew that he was a duly appointed director of Mea.

Section 22 (4) of the 1986 Act makes it clear that the jurisdiction to make a disqualification order extends to a person occupying the position of a director, by whatever name called. Persons who undertake the functions of directors, even though not formally appointed as such, are called de facto directors or directors in fact. In Re Hydrodam (Corby) Ltd [1994] BCC 161 Millett J described a de facto director as:

“a person who assumes to act as a director. He is held out as a director by the company, claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could probably be discharged only by a director. It is not sufficient to show that he was concerned in the management of a company’s affairs or undertook tasks in relation to its business which can probably be performed by a manager below board level.”

In considering whether a person “assumes to act as a director” what is important is not what he calls himself, but what he did. In Secretary of State for Trade and Industry v. Tjolle [1998] 1 BCLC 333, 343, Jacob J cited with approval the following passage from the judgment of Judge Cooke in Secretary of State for Trade and Industry v. Elms (unreported 16 January 1997):

“At the forefront of the test I think I have to go on to consider by way of further analysis both what Millett J meant by “functions properly discharged only by a director”, and Mr Lloyd QC meant by “on an equal footing”. As to one it seems to me clear that this cannot be limited simply to statutory functions and to my mind it would mean and include any one or more of the following: directing others, putting it very compendiously, committing the company to major obligations, and thirdly (really I think what we are concerned with here) taking part in an equally based collective decision process at board level, i.e. at the level of a director in effect with a foot in the board room. As to Mr Lloyd’s test, I think it is very much on the lines of that third test to which I have just referred. It is not, I think, in any way a question of equality of power but equality of ability to participate in the notional board room. Is he somebody who is simply advising and, as it were, withdrawing having advised, or somebody who joins the other directors, de facto or de jure, in decisions which affect the future of the company?”

Jacob J concluded:

“It may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (e.g. management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks "was this individual part of the corporate governing structure", answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.”

This passage was approved by the Court of Appeal in Re Kaytech International Ltd [1999] 2 BCLC 351, 423-4.

Section 6 (3C) of the 1986 Act makes it clear that the jurisdiction to make a disqualification order extends to a shadow director. A “shadow director” is defined by section 22 (5) of the Act as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. But a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity. The meaning of the definition of shadow director was considered by the Court of Appeal in Secretary of State for Trade and Industry v. Deverell [2001] Ch. 340. Morritt LJ summarised the law in a number of propositions as follows:

In addition, Morritt LJ said that:

It has been suggested, notably by Millett J in Re Hydrodam (Corby) Ltd that the two concepts of de facto director and shadow director are mutually exclusive. In ReKaytech International Ltd at 424 Robert Walker LJ said that while this is so in most cases the two concepts do have in common:

“that an individual who was not a de jure director is alleged to have exercised real influence (otherwise than as a professional adviser) in the corporate governance of a company. Sometimes that influence may be concealed and sometimes it may be open. Sometimes it may be something of a mixture, as the facts of the present case show.”

Now that Morritt LJ has explained that the role of a shadow director does not necessarily extend over the whole range of the company’s activities, it seems to me that there is no conceptual difficulty in concluding that a person can be both a shadow director and a de facto director simultaneously. He may, for example, assume the functions of a director as regards one part of the company’s activities (say, marketing) and give directions to the board as regards another (say, manufacturing and finance). In each case, it is necessary to examine the facts, bearing in mind that, as Morritt LJ explained, the purpose of the legislation is to “identify those, other than professional advisers, with real influence in the corporate affairs of the company”.

There is one further point that I must deal with, in the light of Mr Aviss’ contention that he was doing no more than acting as principal shareholder in defence of his investment. In Re Richborough Furniture Ltd [1996] 1 BCLC 507 Mr Timothy Lloyd QC said that if there was doubt whether the acts of a person were referable to an assumed directorship “or to some other capacity such as a shareholder … the person in question must be entitled to the benefit of the doubt”. In Kaytech Robert Walker LJ warned against straining the facts in deference to this observation. In Secretary of State for Trade and Industry v. Jones [1999] BCC 336, 349 Jonathan Parker J said:

“If a substantial shareholder in a small company – a quasi-partnership company for example – wishes, as well he may, to take an active part in running the affairs of the company in order to protect his investment, that raises the very question whether in so doing he may not be constituting himself a de facto director of the company.”

I respectfully agree.

In his first affirmation Mr Walker said in relation to Mea:

“We [i.e. himself and Mr Tonkin] feel that the titles given to individuals were somewhat superfluous, and that to all intents and purposes Mr Aviss and Mr Berry were dictating strategy and policy.”

In his resignation letter of 14 June 2001 he wrote to Mr Aviss and Mr Berry:

“… I am afraid that I no longer feel able to carry out duties as a puppet director when I am constantly questioning the reasons and motives for the actions being taken…. Since January in general, October in specific issues, my view on the future prospects of the Aviss “group” seem to be at odds with the “majority” of the various boards. I have reached the point where I feel that I cannot continue as a director of any board where I am responsible for decisions over which I have effectively had no control or influence.”

In his second affirmation Mr Walker listed a number of areas in which Mr Aviss and Mr Berry were the decision makers:

Mr Walker added that his own actions “reflected the reality of the situation which was that whatever the formal titles were, ultimate power in the governing structure of the companies resided in John Aviss and Bill Berry”.

Mr Evans expressed the view that during his time with the companies concerned, which included Mea, Projects and CJB, both Mr Berry and Mr Aviss acted as directors. As he put it:

“The idea that significant decisions could be taken affecting any company controlled by John Aviss without reference to and approval from John Aviss and Bill Berry bears no relation to the reality of the situation while I was involved with those companies.”

Mr David Bartley said:

“I had been told by Bill Berry during the discussions about Mea acquiring CJB that John Aviss would be chairman of all the companies in the Mea group and that was the position that I understood him to hold throughout the time that I was a director of the company. As regards Bill Berry, whilst he had not been formally appointed as a director of Mea, based on my own experience, I saw him as the key person in the company in terms of overall strategy and policy. I consider (and considered at the time) that it was inconceivable that Dave Walker, Phil Tonkin, Simon [Bartley] and myself, as a board of directors could have acted independently of Bill Berry and John Aviss. As far as I was aware, no-one in the company would take any action of consequence unless Mr Berry or Mr Aviss first authorised it.”

Mr Simon Bartley said:

“I saw [Mr Berry] together with John Aviss, as the ultimate decision maker in terms of the overall strategy of the group and therefore of the individual companies within it, including CJB. If anything was to be changed then it was not going to come from Dave Walker or Phil Tonkin, at least not without their first having got the approval of John Aviss or Bill Berry. I basically saw John Aviss and Bill Berry as one; they had both said, on separate occasions, words to the effect that “you couldn’t get a fag paper” between them, that they spoke with one voice and that what one said should be taken as what the other one wanted. Even though I was nominally the managing director of CJB, I did not have the freedom to cause the company to do what I considered to be the right thing, particularly in relation to its financial affairs and its longer term strategy. Similarly, I did not consider that the formally appointed board of CJB was able to take and implement decisions without reference to Bill Berry and John Aviss; the idea that we could have acted on any significant matter affecting the companies of which I was a director (CJB and Mea) without the involvement of Bill Berry and John Aviss bears no relation to the reality..”

Mr Rennison said:

“On the basis of my own experience in [Projects] and Mea, the main decision makers in relation to the affairs of the companies were Bill Berry and John Aviss. They were not involved in most of the everyday aspects of running the businesses but in terms of decisions such as overall strategy, the payment of creditors and relations with the bank, no major decision would be taken without reference to them and without their approval.”

Mr Tonkin did not give sworn evidence. However, in his resignation letter of 19 June 2001 he wrote to Mr Aviss:

“I find myself in a position in which I can no longer support the Company in the role as Managing Director, as the decisions related to management, finance and the general running of the company have clearly been delegated by you, as Director and Shareholder, to Bill Berry.”

These are of course general statements. Mr Aviss dismissed them as self-serving statements. They are, however, remarkably consistent. Are they supported by the contemporaneous evidence?

Mr Bruce’s affirmation marshalled the allegations against Mr Aviss and Mr Berry separately, in order to show that each of them acted as a director or shadow director. The details of each allegation were, however, repetitive, and that repetition reflects the reality of the situation. Mr Aviss and Mr Berry acted together. In Mr Simon Bartley’s graphic words:

“I basically saw John Aviss and Bill Berry as one; they had both said, on separate occasions, words to the effect that “you couldn’t get a fag paper” between them, that they spoke with one voice and that what one said should be taken as what the other one wanted.”

It was Mr Berry who did most of the talking in meetings, but Mr Aviss was frequently present with him.

Mr Bruce sub-divided his allegations into a number of different categories. Some were of more significance than others. However, the key allegation, to my mind, was that Mr Aviss and Mr Berry dictated company policy and gave instructions to the directors of the three companies, on which they were accustomed to act. I have already mentioned a number of examples of this. Within that general allegation, the most significant feature is the decision to have a central treasury, the decision that Projects and CJB should pay their recoveries into that central treasury and the decision to pay monies out of that central treasury to other companies, outside the Mea group, in which Mr Aviss had a substantial interest. All the directors (including Mr Walker, who, as Mr Berry said, was a loyal servant and did as he was told) protested that control over payment of creditors had been taken out of their hands. Their protests were overridden by Mr Aviss and Mr Berry.

I have no doubt that the decision to adopt this policy was that of Mr Berry and Mr Aviss. Why would the other directors have independently decided to adopt such a policy? No one stood to benefit from it except Mr Aviss. There is no record of the board of Mea having discussed and agreed this policy. On the contrary, the paper evidence is of Mr David Bartley complaining about having been kept in the dark; and of Mr Simon Bartley (who was also a director of Mea as well as a director of CJB) also protesting. I also accept Mr Evans’ evidence that his unhappiness with this state of affairs caused him to resign. However, despite their protests and unease, the policy was complied with until the companies ceased trading. The boards of all three companies, however unwilling individual directors might have been, complied with Mr Berry’s and Mr Aviss’ instructions. Their unhappiness only goes to emphasise how strong was the control exerted by Mr Aviss and Mr Berry.

Does this make Mr Berry a shadow director of all three companies and Mr Aviss a shadow director of Projects and CJB? In my judgment it does. In an area of corporate affairs as critical as the application of trading income and the payment of trade creditors, the policy of all three companies was dictated by Mr Aviss and Mr Berry.

The concept of unfitness is not defined by the 1986 Act although there are a number of matters, set out in Schedule 1 to the Act that the court is required to take into account. But the essential allegation against both Mr Aviss and Mr Berry is that they caused or allowed each of the three companies to “trade to the detriment of creditors” from the summer of 2000 until July 2001.

The essence of an allegation of this kind is that:

The first five of these ingredients are amply made out on the facts. As in many cases, it is the last one that is controversial. In many cases that come before the courts, the facts are such that the directors take a decision to attempt to trade out of insolvency; and the question then is whether they were reasonable in trying. In a typical case, the company’s receipts are applied in its business, but they cannot keep up with its overheads, trade debts or tax liabilities. That is not this case. In this case the receipts of all three companies were diverted away from their respective businesses and applied for the benefit of other companies (outside the group) in which Mr Aviss had an interest. In economic terms, creditors’ money was being used to attempt to shore up other companies with which they did not do business and of whose very existence they may have been ignorant. That, in my judgment, is not a reasonable decision for a responsible director to take.

If I may repeat something I said in Secretary of State for Trade and Industry v Goldberg [2004] 1 BCLC 597, 606:

“Central to the concept of limited liability is the concept that a company has a separate legal personality. A company retains its separate legal personality even if it is a member of a group of companies. Every director of a company, whether executive or non-executive, owes fiduciary duties to that company. Respect for the separate legal personality of each company, and recognition of a director’s duty to exercise his powers in the best interests of the particular company of which he is a director are essential attributes of fitness to be concerned in the management of a company. These duties are personal and inescapable. .. [A] failure to understand or respect these fundamental principles could lead to the conclusion that a person was not competent to be a director.”

In my judgment both Mr Aviss and Mr Berry failed to respect this fundamental principle. That failure, resulting as it did in a very substantial increase in the deficiency of each of the three companies, to the detriment of their respective creditors, in my judgment makes them unfit to be concerned in the management of a company.

In the case of Mr Berry there is the additional, and aggravating, factor that in being concerned in the management of a company he was in breach of a disqualification order that had already been imposed upon him. That shows a disregard of the whole system of regulation of the conduct of directors.

Having reached the conclusion that I have, the Act requires me to disqualify Mr Aviss and Mr Berry for a minimum period of two years. The maximum period of disqualification is fifteen years. Within that range, periods of disqualification are conventionally divided into three “brackets” in ascending order of seriousness of the conduct giving rise to the disqualification. The three conventional brackets are:

In the present case I take into account the fact that neither Mr Aviss nor Mr Berry benefited personally from the misapplication of funds. Although I have concluded that they were guilty of a serious failure to respect the fundamental principles of corporate personality, they did so in a misguided attempt to keep other businesses afloat (and thereby to placate the creditors of other companies). Nevertheless, they overrode the protests of other directors, who drew to their attention the true responsibilities of directors, I must therefore treat their failure as wilful rather than as a mere product of incompetent commercial judgment. This, to my mind, is the most important feature. In addition Mr Berry (in the presence of Mr Aviss) untruthfully said that no monies had been taken out of the Mea group when he must have known that that was not the case. The combined deficiency of the three companies is substantial. Nor have they, even now, acknowledged any culpability. This does not give confidence that they have yet understood what responsibilities are assumed by those who manage companies.

In my judgment the starting point for both Mr Aviss and Mr Berry is a period of disqualification of seven years. In the case of Mr Aviss there is no reason for any departure from that point. I will therefore disqualify him for seven years.

In the case of Mr Berry, however, there is the additional factor that there was a disqualification order running against him at the time of the events in question. That is an aggravating factor; and, moreover, the only specific factor which, in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, was said to justify disqualification for a period falling into the highest bracket. I will disqualify Mr Berry for a period of eleven years.