Secretary of State for Trade & Industry v Carr & Ors

This is an application by the Secretary of State for a disqualification order against Richard Carr under the Company Directors Disqualification Act 1986 (CDDA 1986). The application is made under section 8, following a report under section 437 of the Companies Act 1985 by Hugh Aldous FCA and Roger Kaye QC of their investigation into the affairs of TransTec Plc (the company).

Mr Carr has not resisted the application for a disqualification order and has not filed evidence dealing with the allegations against him. Agreement was reached between him and the Secretary of State as to the costs of the application on the basis that this was Mr Carr’s position. He was represented at the hearing by Mr Parkinson, to explain his reasons for not resisting the application and to make submissions in mitigation. Mr Parkinson stated that Mr Carr recognised that, as a result of his position on the application, a disqualification order would inevitably be made. However, it was made clear that Mr Carr does not accept any of the Secretary of State’s allegations. In consequence, the onus remained on the Secretary of State to establish the case against Mr Carr.

Mr Carr’s reason for not resisting the application, as explained by Mr Parkinson, was that he was concentrating his time and resources on preparation for the trial of criminal charges against him, which was due to start in January 2006. In early August 2005, I had refused his application for a stay of the disqualification proceedings, directing that he should state by 30 September 2005 whether he intended to contest the application and, if he did, that he should file evidence by 1 December 2005. In those circumstances, the disqualification proceedings would not have come to trial until after the completion of the criminal proceedings against him. The criminal trial started in January 2006 and ended with his acquittal towards the end of March 2006. The seven charges against him all related to the accounting treatment of the settlement of a claim against the company by Ford and to statements concerning the settlement to the auditors. Issues relating to the Ford claim and its settlement form the major part of the case against Mr Carr in the disqualification proceedings.

In the light of Mr Carr’s acquittal and the evidence given at his trial, his solicitors wrote to the Treasury Solicitor on 5 May 2006 inviting the Secretary of State to review the transcripts of the trial with a view to deciding whether or not he wished to maintain the case as it had been presented to me. By a letter dated 15 May 2006 from the Treasury Solicitor, I was informed that the Secretary of State would conduct the suggested review and stated that he was content that I should not deliver judgment in the meantime. I was informed by the Treasury Solicitor in a letter dated 10 July 2006 that the review, undertaken with the assistance of two leading and two junior counsel, had been completed. The Secretary of State had concluded that it remained in the public interest that Mr Carr should be disqualified on the basis of the matters of unfit conduct set out in the evidence in support of the application and that no application would be made to withdraw or amend any part of the Secretary of State’s case. A copy of a letter to Mr Carr’s solicitors was enclosed and I was later sent by them a copy of their reply dated 20 July 2006, taking issue with certain points.

Mr Carr has not sought to alter his position that he does not resist the application for a disqualification order, but equally does not accept any of the allegations against him.

As will appear, the Secretary of State’s case was, and continues to be, based on allegations of deliberate and dishonest conduct on Mr Carr’s part, with allegations of recklessness and negligence in the alternative. Notwithstanding Mr Carr’s acquittal, the Secretary of State is entitled to maintain this case. This would be so even if the criminal charges and the allegations of unfitness in support of the present application were identical. There are significant differences between the proceedings, in addition to the difference in their underlying purposes. First, the standard of proof in disqualification proceedings is the civil standard, although the more serious the allegation, the more cogent the evidence required to overcome the unlikelihood of what is alleged (Re H [1996] FLR 80 at 96 per Lord Nicholls). Secondly, the rules as to the admissibility of evidence differ. For example, in proceedings under section 8 of the Company Directors Disqualification Act 1986, the Inspectors’ report is admissible as evidence of any fact stated in it: section 441 (1) of the Companies Act 1985. Thirdly, Mr Carr did not give evidence in the disqualification proceedings, whereas he did so at his criminal trial. Moreover, in the present case, there is not in relation to most of the allegations against Mr Carr a complete match with the charges against them. This is a point best made when dealing with the detail of the allegations.

Mr Carr was a director and the chief executive of the company from November 1994 to 23 December 1999. He qualified as a chartered accountant in the late 1970’s and is a member of the Institute of Chartered Accountants in England and Wales. He joined the corporate finance department of SG Warburg in 1979 where he worked until 1985. He worked for the Tomkins group, a diversified industrial group, from 1987 to 1994, responsible for much of that time for the development of its operations in the United States. He joined the company in 1994 as a director and chief executive. In that capacity, Mr Carr pursued an ambitious programme of acquisitions. He particularly focused on financial reporting and acquisitions, delegating much of the management of operations to others.

The application, as issued, also sought disqualification orders under section 8 of the CDDA 1986 against other former directors of the company and certain subsidiaries. William Jeffery was finance director from 1 August 1995 to 22 March 1999, having been group financial controller from June 1992. He continued as an executive director until his resignation on 23 December 1999. He moved to Australia in early 1998, where he was the chief executive of a newly acquired subsidiary. At the time of the hearing before me, discussions were continuing with Mr Jeffrey for the possible disposal of the application against him by a disqualification undertaking. An order was therefore not sought against him at that time. I have since been informed that on 18 January 2006 the Secretary of State accepted a disqualification undertaking from Mr Jeffrey for 9 years.

Philip London was a director of five subsidiaries from December 1997 to April 2000, and was the financial controller for the manufacturing division. Anthony Sartorius was a director from 1994 to August 1999 of a subsidiary acquired by the company in 1996. He was the finance and accounts manager for the automotive division. Christopher Snazzell was a director of two subsidiaries from 1986 to August 1999 and of a third from 1994 to September 1999, and had responsibility as the sales and marketing director of the automotive division. These three respondents gave disqualification undertakings and the proceedings were discontinued against them.

The TransTec group was formed in 1991 by a combination of companies controlled by the late Robert Maxwell and a company owned and run by Geoffrey Robinson. Mr Robinson became chairman and chief executive of the combined group and he was instrumental in expanding the group by the acquisition of other businesses. The group’s businesses were in the engineering sector, particularly in manufacturing products for the automotive industry where companies in the Ford Motor group (Ford) were its principal customers. Of particular relevance to the present application is that one of the company’s subsidiaries successfully tendered for the production of a cylinder head for a new engine for the Ford Explorer. The contract was awarded in November 1993 at a price which significantly undercut the competition. A new production facility for the cylinder head was built at Campsie in Northern Ireland.

Mr Carr was recruited as chief executive in 1994 when it was decided to split the roles of chairman and chief executive. Mr Robinson remained as non-executive chairman until his resignation in May 1997 on his appointment to the Government. Mr Carr continued the expansion of the group by acquisition, building up its automotive components and other businesses while seeking to lessen its dependence on Ford. Ford nonetheless remained a major source of business.

By the latter part of 1997, the group faced major problems, partly as a result of difficulties with the cylinder head production at Campsie and the settlement of a substantial claim made by Ford. The non-disclosure of both the claim and the settlement, and the accounting treatment of the settlement, form a major part of the Secretary of State’s case against Mr Carr. The group’s expansion continued, leading to high gearing while at the same time its share price declined. This combination of high gearing and a low share price made it difficult for the group to fund the radical action, and the investment at Campsie, which was required. Sales declined in 1998 and did not recover in 1999. By May 1999 it was clear to the board that banking covenants would be broken and in August 1999 Arthur Anderson were appointed reporting accountants at the request of the banks. Negotiations continued over an extended period with banks and bondholders, which were hampered by the management’s continued failure to forecast its cash requirements adequately or to develop any convincing operational solution for the group. In December 1999 Mr Carr and Mr Jeffrey resigned, in part as a result of the discovery of the Ford claim and its settlement. On 29 December 1999, receivers were appointed by the banks at the request of the board.

The case against Mr Carr is made in respect of two separate matters. The first relates to the Ford claim: the non-disclosure of the claim and the subsequent settlement, and the accounting treatment of the settlement. The second relates to what is called the Rover payment, to which I shall return later in this judgment.

The contract for the supply of the cylinder heads to Ford for the new Explorer engine was awarded to a subsidiary of the company in 1993-94 and the cylinder heads were manufactured at a new facility at Campsie. There were significant problems with production and it proved impossible to supply cylinder heads in the numbers required by Ford. In May 1996, Ford became aware of serious production difficulties. In letters sent in July, August and September 1996, Ford wrote of its intention “to pursue financial recompense”. Ford was at that time in the process of calculating its estimates of losses, running into many millions of dollars. At least one member of the group’s senior management, Dr Peter Summerfield, who was then head of the manufacturing division, was aware of these estimates by late 1996.

Ford recognised that it had no legal basis for claiming anything but a small sum by way of damages for breach of contract. The contractual liability was later quantified by Ford at $140,000. It nonetheless decided to seek substantial recompense on what was seen by TransTec executives as a commercial rather than a legal basis.

On 17 April 1997 a meeting with representatives of Ford was attended by Mr Jeffrey and Mr Snazzell. The Ford representatives stated that its additional costs had been of the order of $100 million and that if the company did not make an offer of recompense Ford would consider taking away its business. A formal demand was made in a letter dated 23 April 1997, which stated Ford’s costs as $101.7 million, including $35.9 million (about £22 million) of costs incurred at Ford’s Cologne plant, and demanded the company’s proposals as regards these latter costs. This letter was immediately brought to the attention of Mr Carr, who had previously been kept informed of earlier letters from Ford regarding its claim. Mr Carr gave evidence to the Inspectors that he did not believe that Ford was putting forward a serious claim for compensation but he has not, of course, given evidence to the court on this application to that effect. I am satisfied on the evidence before me that Mr Carr did realise that Ford was serious about its claim, not least because of the terms of a letter dated 24 April 1997 to Ford signed by Dr Summerfield and approved by Mr Carr.

In the letter dated 24 April 1997 the company offered a compromise of “significant value”, comprising (a) a sum of £6.4 million payable by way of a cost-down (price reduction) on supplies made in 1997-1999, (b) a sum of £2.5 million to be paid for new tooling when required, (c) free measuring machines up to a value of £1 million and (d) a commitment to purchase £3.4 million of new Ford vehicles over three years. At a meeting on 25 April 1997, Ford rejected this proposal.

The company’s consolidated accounts for the year ended 31 December 1996 (the 1996 accounts) were formally approved at a board meeting on 25 April 1997 and signed by Mr Carr and Mr Robinson. Mr Carr did not disclose the Ford claim to the board or to the auditors. No disclosure or provision was made in those accounts in respect of the claim. At its meeting, the board approved a letter of representation to the auditors, which was sent on the same day and stated:

“Full provision has been made for all liabilities at the balance sheet date, including guarantees, commitments and contingencies where the items are expected to result in significant loss. Other such items, where in our opinion provision is unnecessary, have been appropriately disclosed in the financial statements.

We are not aware of any pending or threatened litigation, proceedings, hearings, claims or negotiations which may result in significant loss to the company.”

The failure to disclose the claim forms the subject of the first set of allegations against Mr Carr, to which I shall return.

Following Ford’s rejection of the offer of compensation contained in the letter dated 24 April 1997, negotiations continued between Ford and the company. The negotiations led to a settlement contained in a letter dated 13 August 1997 from the company signed on behalf of Mr Carr in the following terms:

“Further to your discussions with Bill Jeffrey today, I am writing to confirm that the following proposals are acceptable to TransTec.

The total payment of US $18.0 million will be made by way of deduction from our account against part numbers yet to be nominated by TransTec, i.e. the methodology will be additional cost down allowance. The payments will be made as follows:-

November 1997 US $2.0 million

December 1997 US $3.0 million

January 1998 US $1.0 million

Thereafter commencing March 1998 an amount of US $1.5 million will be paid and repeated at each quarter date with the final payment to bring the total sum agreed to US $18.0 million made in December 1999.

This offer is on the understanding that TransTec receive an order equivalent of 50% of the DPV for the SOHC cylinder head and recognising the participation of Teksid, the other provider.”

Mr Carr recognised that there was no commitment by Ford to maintain volumes of orders with the company, only that it would receive half the overall requirement. Mr Carr was in the United States at this time but he was informed by Mr Jeffrey of the agreed terms and he approved the letter.

Neither Mr Carr, nor any other executives who knew about the settlement terms, at any time took steps to inform the board or the Stock Exchange about the claim or the settlement. These failures form the second group of allegations against Mr Carr.

On 22 September 1997, the company published its interim accounts for the six months ended 30 June 1997. They neither disclosed nor provided for the liability under the settlement with Ford. This forms the third group of allegations against Mr Carr.

A meeting took place on 31 October 1997 between Ford and the company to finalise the arrangements for the price reductions. The company asked Ford to allocate the reductions to a number of different parts supplied to Ford by four subsidiaries. On 6 November 1997 Mr Jeffrey sent Ford a schedule giving specific part numbers and indicating how the first instalment of $2 million should be allocated. 20% was to be allocated to the cylinder head and the balance among five other parts. It was agreed that in its invoices Ford would describe the payments as “cost contribution”. In the same letter, Ford was asked to end its invoices direct to Mr Snazzell marked strictly private and confidential “to maintain a degree of confidentiality and ensure expediency” [sic]. The first batch of debit notes issued by Ford did not comply with these various requests in a number of respects but, following complaints by Mr Snazzell, Ford agreed to proceed as requested by the company.

Ford debited the company with $5 million in 1997. It issued debit notes with a total of DM 8.4 million (equivalent to approximately $4.7 million) in November and December and the balance was made up by previously issued debit notes. Mr Carr claimed to the Inspectors that he was not aware of the receipt of any debit notes in 1997, but believed that they all went through in 1998. He has not supported that claim with evidence on this application. It is the Secretary of State’s case that Mr Carr knew that they were issued in 1997. It is submitted that because of their size and because of Mr Carr’s close involvement in the settlement of the claim, it is likely that he was informed of them. The Secretary of State also relies on documentation relating to the audit of the 1997 accounts which shows that he was aware of their issue in 1997. I accept the Secretary of State’s case and find that Mr Carr knew of the issue of the debit notes in 1997.

The company requested Ford to address the debit notes to four separate subsidiaries, although they arose exclusively out of the claim relating to cylinder head production by TransTec Automotive (Campsie Limited) (TransTec Campsie). In the case of two subsidiaries, the debit notes were not accounted for at all in the 1997 accounts, while in the others (including TransTec Campsie) they were treated as debtors, i.e. amounts owed to the subsidiary by customers or others. There was therefore no charge for any of the compensation in the consolidated accounts of the group for 1997. The sum of $5 million payable in 1997 was material in the context of the group’s profit and loss count for the year.

In the course of their audit of the accounts for 1997, the auditors queried the treatment of the Ford debit notes received by two of the subsidiaries. At a meeting with the auditors on 10 March 1998, attended by Mr Carr, Mr Jeffrey explained that the company had entered into a highly confidential deal with Ford under which, in order to secure additional orders for the cylinder head, the company had agreed to give cost downs in the future. He said that Ford had billed the amounts early, but the payments related to 1998 and would be treated as an expense in that year. Neither Ford’s claim nor the settlement agreement under which payments would continue until December 1999 were mentioned. Mr Carr admitted to the Inspectors that he would have supported Mr Jeffrey’s explanation.

The accounts for 1997 were approved at a board meeting on 23 April 1998 attended by Mr Carr, at which there was also approved a letter of representation to the auditors. The letter, which appears to have been signed by Mr Carr, did not disclose the Ford claim or settlement and contained the following:

“Full provision has been made for all liabilities at the balance sheet date, including guarantees, commitments and contingencies where the items are expected to result in significant loss. Other such items, where in our opinion provision is unnecessary, have been appropriately disclosed in the financial statements.”

Mr Carr signed the accounts for 1997.The fourth group of allegations concern the 1997 accounts and the explanation given to the auditors.

During 1998 a further $7 million was debited to subsidiaries of the company, in accordance with the settlement agreement. The sums paid or payable in respect of the debit notes were carried forward in the balance sheets forming part of the internal accounts of the subsidiaries and they were left as an asset in the group’s interim accounts for the six months to 30 June 1998.

The position by 31 December 1998 was that the compensation paid to date to Ford, amounting to some £7.2 million, was held as assets in the balance sheets of four subsidiaries. The correct treatment of these payments already appeared by early January 1999 on the auditors’ agenda of items for discussion. In the course of 1998 Mr Jeffrey had given consideration to the accounting treatment of the payments. He had suggested, first in an internal memo to Mr Carr dated 28 April 1998, that they should be treated “as effectively a recontribution towards the tooling of Ford incurred programme costs.”

Tooling is the equipment which is specific to the manufacture of a particular component. At the start of a project to produce a new component, the supplier will obtain, or be provided with, the appropriate tooling. It was usual for the tooling to be paid for and owned by the vehicle manufacturer under arrangements designed to give it the right to remove the tooling and install it elsewhere in the event of the supplier’s default. In the late 1990’s Ford changed the arrangements for tooling and required suppliers such as the company to fund new tooling themselves. The supplier was then permitted to recover its investment by increasing the price of the component. In these circumstances the investment in tooling would be capitalised and treated as an asset in the supplier’s accounts, which would be depreciated over the period in which the tooling was used, thus being matched against the revenues generated by it. This treatment would be appropriate, provided that the expenditure was genuinely for tooling and provided that there was a reasonable expectation that the profit from future sales of the relevant components would exceed the carrying value of the tooling in the accounts.

A decision was taken to account for the compensation paid to Ford as tooling in the 1998 accounts. Mr Jeffrey gave instructions that the debit notes should be allocated to existing tooling on particular projects. Some was allocated to old tooling on Ford projects which had little or no life left and were to be written off immediately, while others were allocated to present Ford projects where there was significant product life. In the latter case, they would be capitalised as fixed assets. Mr London was responsible for drawing up schedules showing the allocation. As there was nothing to link the debit notes to particular items of tooling or to tooling at all, he allocated the amounts of the debit notes to the four subsidiaries on the basis of tooling revenues received from Ford in the past.

At the year-end, entries were made in the accounting records of subsidiaries as follows. A sum of £1,941,656 was allocated to tooling on Ford projects at Coventry (principally the Puma and Lynx projects) and was capitalized as fixed assets in the accounts of Coventry Apex Engineering Company Limited (Coventry Apex). A total of £5,114,919 was treated in the accounts of TransTec Campsie, Coventry Apex and two other subsidiaries as if it had been a payment for tooling but one that was of no lasting value and was therefore disclosed as an exceptional write-off of that asset.

Accordingly, in the consolidated accounts, nearly £5.3 million was written off as an exceptional item and £1.9 million was carried forward as a fixed asset. The only reference to this exceptional item was in the following note:

“In manufacturing exceptional costs of £14,099,00 principally comprise the write off of foundry development costs and tooling expenditure of £9,288,000, redundancy and reorganisation costs of £4,061,000…”

The Ford compensation was included in the figure of £9,288,000. There was no provision for the compensation of $6 million (£3.6 million) payable in 1999. The accounts were signed by Mr Carr on 12 April 1999.

The payments, described to the auditors as cost contributions, and their proper treatment were raised by the auditors at a meeting on 3 March 1999. The auditors were referred to Mr Carr or Mr Jeffrey for an explanation of the reason behind the payments. At the audit team’s first meeting with Mr Carr and Mr Jeffrey, on 8 March 1999, the auditors requested sight of internal documentation supporting the cost contributions. A further meeting with Mr Carr and Mr Jeffrey took place on 12 March 1999. According to evidence given by Mr Lander of PricewaterhouseCoopers, his understanding of the explanation given by Mr Carr and Mr Jeffrey was that the tooling contributions were TransTec’s way of dealing with the need “to help Ford reduce its cost base”. The company had responded to that need and had taken the initiative in proposing that the contributions it was required to make should be treated as contributions for tooling. The auditors understood that the tooling in question was equipment for which Ford had already paid and which Ford owned and continued to own. In other words, no tangible assets were being acquired. Rather, the contributions were to ensure that the company continued to have the use of the tooling in order to generate revenue.

The auditors were told that there was no correspondence with Ford dealing with the payments but they were shown various internal documents which apparently supported the treatment of the payments as contributions to Ford for tooling. The auditors presented their report to the audit committee of the board on 18 April 1999. They referred to the tooling contributions as a material judgment made in the accounts and, on the basis of the information provided to them, stated:

“Tooling contributions to Ford by way of Ford debit notes of £7.3 million have been made in the year. £5.4 million has been expensed in the profit and loss account being Campise related tooling costs not considered by management as being recoverable from future income and £1.9 million capitalised in respect of specific tooling and capital projects in relation to the Lynx and Puma projects. We have reviewed notes of discussions with Ford and other internal discussions which support the treatment adopted in preparing the Group Accounts and understand that the Board have discussed the overall strategy adopted for negotiation with Ford and the treatment of these tooling costs.”

It is the Secretary of State’s case that Mr Carr misled the auditors as to the true nature of the payments to Ford and took no steps to inform the board of the correct position. As he knew, neither the overall strategy nor any detail of the treatment of “tooling costs” had been discussed by the board, which was at all times kept in the dark about it. It is, further, the Secretary of State’s case that Mr Carr deliberately caused the payments to be misdescribed in the 1998 accounts. These matters comprise the fifth group of allegations.

Trading conditions for the group had become poor in the second half of 1998 and this continued in 1999, with lower than expected sales, including sales to Ford. This led to serious financial difficulties. The group’s principal bankers agreed an increase in the overdraft in March 1999. It became apparent over the following months that the group required considerable further funding. In June 1999 the company realised that it was going to breach the financial covenants in relation to its US loan notes and a syndicated loan, and it sought a relaxation of the covenants in the latter. In August 1999 Arthur Anderson were appointed by the group’s lenders to conduct a review of the group.

Due to an oversight by Ford, the company received no debit notes during the first quarter of 1999. Ford sent debit notes totalling $1,050,000 in June 1999 and $1,950,000 in July 1999, with further debit notes, each for $1,500,000, on 9 September and 18 November 1999. Trading conditions were poor, with sales to Ford and others being lower than expected. The group finance director did not think that the company would be able to pay the debit notes and negotiations took place with Ford in July and August with a view to a cancellation of the notes. However, Ford informed the company on 15 September 1999 that no deferral of payment could be accepted. Mr Carr replied on 21 September 1999 expressing surprise and disappointment at Ford’s decision. He referred to the company’s negotiations with its lenders and said “Any move by Ford to take any of the $6.0 million referred to in the letter [over the period in which the automotive division would be sold], and indeed during the review period to March 2001, will push us through our borrowing limits and will make our position with the lenders completely untenable.” He offered to pay interest on the outstanding amount until it could be settled. Mr Carr wrote again on 23 September 1999, urging Ford to confirm that it would not insist on payment. Mr Carr stated that the company required this confirmation to enable it to reach agreement with its lenders for the provision of further support.

On 23 September 1999, the company announced its interim results for the six months to 30 June 1999, reporting a loss before tax of £5.7 million. The announcement of the results was approved on 21 September 1999 by a board committee chaired by Mr Carr. The interim results made no provision for the compensation of $6 million payable in 1999 and they continued to show £1.9 million of “tooling” as fixed assets, being the debit notes capitalised and not written off in the 1998 accounts. The sixth group of allegations against Mr Carr relate to these accounts.

In respect of the period from September 1999 to Mr Carr’s resignation in December 1999, the Secretary of State alleges that Mr Carr deliberately failed to disclose the Ford claim, its settlement and the outstanding debit notes to the full board of the company, the company’s lenders or its advisers. They are the final group of allegations arising in relation to the Ford claim and settlement.

Following Mr Carr’s letter dated 21 September 1999, Ford agreed to defer payment of the outstanding debit notes until November 1999. In early October, Mr Carr informed Arthur Anderson that his plan for the group was to sell the entire business. He had by then approached Close Brothers to assist in the negotiations with lenders and in the disposal of businesses. Arthur Anderson presented an unfavourable report to the lenders in early October, to which the company responded with proposals which required additional short-term funding, and medium term funding of up to £16.5 million over 18 months. The company appointed PricewaterhouseCoopers (PwC) to provide financial advice and assistance. By 6 November 1999 Arthur Anderson were advising the lenders that it was not in their best interests to continue support for the disposal strategy and was recommending a different approach including financial support from Ford and other major customers.

On 11 November 1999 Mr Carr and another executive attended a meeting with Ford. Ford requested that the company confirm the debt of $6 million and insisted that it be accepted by any successors to the group. Mr Carr argued that disclosure of the debt might make the group less attractive to buyers and lenders might walk away completely. Mr Carr refused to agree the draft minutes of the meeting sent to him on 12 November 1999 because they referred to the outstanding $6 million and he was afraid they might be circulated to others. According to Ford, on 25 November 1999, in a telephone conference with Ford in which Mr Carr and others participated, Mr Carr asked Ford to change the minutes to remove the reference to the outstanding $6 million.

On 1 December 1999, the lenders refused the company’s request for short-term funding to be increased above £9 million, although they were prepared to grant this level of funding, on various conditions, until 31 January 2000. They were unwilling to commit to the medium-term funding requested by the company.

In the meantime, one company within the Group, namely Earby Light Engineers Ltd (Earby), had been put up for sale and, by mid-November 1999, two offers had been received for the business. The leading offer was subject to the condition that there should be no deficit in Earby’s pension fund. On 23 November 1999, Mr Parkin, an executive director of the company, was informed that there was a £2.8 million deficit in the pension fund. He did not tell Close Brothers or the lenders of this until a week later. The Group’s lenders then asked Mr Parkin and Mr Carr whether there were any other undisclosed liabilities of which they ought to be aware. Mr Parkin and Mr Carr said that there were none. They did not mention the fact of the outstanding US $6 million due to Ford.

In early December 1999, Ford agreed to assist the company in relation to the required investment in Campsie. Cash-flow improved, and on 16 December 1999 Close Brothers reported that they had been informed orally that the lenders were willing formally to extend the £9 million additional funding until the end of January 2000, with medium-term funding to be discussed during that period.

However, Ford was still requiring confirmation of the US $6 million due to it as compensation. Mr Carr prepared a revised version of the minutes of the meetings on 11 November 1999, which described the US $6 million due as compensation as “tooling cost contributions”.

On 14 December 1999, PwC learnt from Ford of the existence of the Ford claim. PwC’s note of the meeting records that a representative of Ford asked a representative of PwC, “…whether PwC was aware of Ford’s claim for 6 million (no currency was specified). Jessica Ma also explained that the claim was originally for 18 million but that 12 million had already been paid.”

Mr Palios (of PwC) raised the matter with Mr Parkin who, according to Mr Palios, claimed not to know much about it and referred him to Mr Carr, although after further questioning Mr Parkin admitted to being aware that a claim had arisen in 1997 and that Ford had collected the money by way of debit notes. Mr Carr, when confronted by Mr Palios about the debit notes, admitted that they related to a compensation claim made by Ford in 1997 for difficulties at Campsie. On Wednesday 15 December 1999, Mr Carr prepared a note for the non-executive directors in which he described the payments as contributions to tooling and effectively denied that there was still a liability for US $6 million (although, as mentioned above, he had just confirmed, to Ford, the company’s liability for the “tooling cost contributions”).

The company’s non-executive directors were furious that the matter had not been disclosed before. They, Close Brothers and PwC felt let down by Mr Carr and Mr Jeffrey. At the board meeting on 16 December 1999, the view was expressed that the Ford claim represented a liability that should have been disclosed to the board and the auditors at the time. The lenders were informed on 16 December 1999 and they were, according to Mr Thompson and Ms Brassington (of HSBC) “incandescent” at the news. Close Brothers and PwC felt they could not continue to work with the company’s management. It was decided that Mr Carr and Mr Jeffrey should leave the company.

The lenders met on 17 and 20 December 1999. Mr Thompson of HSBC told the Inspectors that, with the revelation of the Ford claim and the consequent destruction of the last vestiges of confidence in management, it had become impossible to hold the lender group together. At a meeting on 22 December 1999, the lenders, particularly the US loan note holders, decided that they were no longer prepared to support the group and concluded that insolvency was inevitable. However, they wanted the decision to put the group into insolvency to come from the board. They decided to reduce their offer of funding.

On 22 December 1999, the lenders gave their formal response to the company by way of a letter to Close Brothers. They stated:

“As you will have gathered from our meetings and telephone conversations, the recent developments concerning the claim by Ford in respect of Campsie and the related accounting irregularities have come as a very unwelcome shock to the Lending Group and have severely damaged the Lender’s confidence in the Group…

In all the circumstances, given the current doubts over the viability and value of the business, and the uncertainties created by the recent revelations about the problems with Ford, the Lenders are not in a position to confirm the continuation of support until the 31^st January 2000, nor at this stage are the Lenders in a position to give any comfort, moral or otherwise, as to the level of facilities which might be available to the proposed new management team.”

In the short term, the lenders were prepared to continue to provide the existing facilities to the Group until 7 January 2000, but only up to the level of some £3 million that had already been drawn.

Mr Carr and Mr Jeffrey resigned on 23 December 1999. Their resignations and the disclosure of the claim were announced the following day. On the same day, the company received an indicative offer from Alchemy Partners. It would be seeking a £4 million “haircut” for the lenders and would seek to offer 1 penny per share to the shareholders. The offer was presented to the lenders the next day, but they rejected it.

With some improvement in the group’s cash flow, the group needed only an extra sum of up £750,000 in addition to the £3 million facility in order to continue trading through to mid-January 2000. A request was made to the lenders on 24 December to extend the £3 million facility by that amount, but the lenders refused. They would also not allow the group time for Alchemy or others to firm up their proposals.

Left with no option, on 24 December 1999, the board formally resolved to ask the lenders to appoint administrative receivers over the Group. HSBC made formal demand on 29 December 1999 and receivers were appointed that day in respect of the company and on 30 December 1999 in respect of most of its subsidiaries.

The Inspectors concluded that:

“9.132: The disclosure of the Ford claim was the last straw for the lenders. Even with Mr Carr and Mr Jeffrey gone, the lenders had apparently lost their desire to deal any further with TransTec, declining even to explore a seemingly genuine offer to buy the whole Group. They turned to Arthur Anderson instead.

9.133: Had the Ford claim not been disclosed to PwC by Ms Ma when it was, it is likely that the lenders would have confirmed the £9 million additional facility up to the end of January 2000 and, with Ford willing to support the Group, would have commenced discussions about medium term funding. In simple terms, then, it was the disclosure of the Ford claim that de-railed the process of orderly disposal – although of course it may simply have accelerated the appointment of receivers rather than caused it. In any event, TransTec was already facing its end.”

The allegations against Mr Carr in relation to the Ford claim are broken down by reference to the final and interim accounts approved between April 19997 and September 1999 and to failures to disclose it to the full board, the stock exchange, the auditors, advisers and lenders at various times between April 1997 and December 1999. Taken as a whole, they amount to an allegation that throughout that period, Mr Carr deliberately concealed the Ford claim, its settlement and the settlement payments and in the process misled the board and the auditors and was party to false accounting treatments designed to conceal the true position from creditors, shareholders and investors at large. In doing so, he enabled the company’s accounts to present a substantially more favourable picture than was warranted. Alternatively it is alleged that he acted recklessly or negligently in these respects.

I will take each group of allegations against Mr Carr in turn.

The final accounts for the year to 31 December 1996 were approved on 25 April 1997, two days after Ford made its formal claim for $35.9 million (of which $31.9 million was stated to relate to 1996) and the day after the company made a substantial proposal for settlement. Neither at this time nor at any time until December 1999 was the claim disclosed to the full board. In the context of the group’s business it was clearly a highly material matter. Among the matters which were reserved to the board by its own resolution each year (the latest being on 21 March 1997) were contracts of the company or any subsidiary not in the ordinary course of business, contingent liabilities amounting to the lower of £500,000 or 20% of the contract price, and the defence and settlement of litigation above £500,000 or being otherwise material to the interests of the company. In my judgment, it was so obviously a matter which should have been disclosed to the board that the only reasonable inference is that Mr Carr deliberately chose not to do so. There is, of course, no evidence from Mr Carr, so that no alternative explanation is available. I find the allegation established that Mr Carr deliberately concealed from the board the Ford claim and its subsequent settlement, throughout the period to December 1997.

As regards the final 1996 accounts, the Secretary of State’s case is not that a provision against the possible liability should have been in the balance sheet but that it should have been disclosed as a contingent liability by way of a note, and that Mr Carr deliberately failed to ensure that it was disclosed and therefore knew that the accounts for which he, with others, was responsible were materially misleading. In accordance with Statement of Standard Accounting Practice 18 (SSAP 18), replaced in September 1998 by Financial Reporting Standard 12 (FRS 12), a company should recognise a loss in its accounts if and when it is probable that it will arise. There will be a loss for these purposes if the company has to pay out money or give value without receiving anything (or anything of equivalent value) in return. As soon as it is likely to occur, and an estimate can be made of it, a provision against it should be made. Likewise, a contingent liability, that is, a liability arising out of past events but where the amount is uncertain and dependant on future events (such as the resolution of a claim), should be accounted for in the same way. If no reliable estimate can be made, details should be given in the notes to the accounts, if the effect is material in the context of the accounts. These are elementary accounting principles which must have been well-known to Mr Carr, as a chartered accountant and as a director with many years of business experience.

The Inspectors concluded that the Ford claim should have been at least disclosed in the notes to the 1996 accounts and that failure to do so meant that the accounts did not show a true and fair view. With Mr Carr’s knowledge of the relevant accounting principles, it is highly likely that he knew that it should be disclosed in the 1996 accounts. While he has given no evidence in these proceedings, he did suggest in evidence to the Inspectors that he did not believe that Ford was making a claim or that it was likely that the company would suffer any significant loss as a result of the claim. The Inspectors had no difficulty in rejecting this evidence. Mr Carr was plainly aware that Ford was advancing a claim for very substantial sums and, given not only that the company’s opening offer in its letter dated 24 April 1997 was for £6.4 million over three years but also that Ford immediately rejected it on 25 April 1997, he must have known that a significant loss was likely. It appears that in purely legal terms Ford could probably not advance a substantial claim because of the terms of the relevant contract. However, as a matter of commercial reality, the claim was serious, as shown by the company’s initial offer. In my judgment, it should be inferred from the evidence that Mr Carr knew that disclosure should have been made in the accounts and I so find. In consequence, I am satisfied that he deliberately did not disclose the claim to the auditors and that the company’s letter of representation dated 25 April 1997 to the auditors was, to his knowledge, materially false by reason of its failure to disclose the claim.

Accordingly, I hold that the allegations made against Mr Carr in relation to the 1996 accounts are established, as follows:

The Ford claim was settled on the terms contained in the company’s letter dated 13 August 1997. Mr Carr did not inform the full board. Just as he knew that the claim was material and should have been disclosed to the board, so equally I find that, as an inevitable inference from his knowledge of the settlement and its impact on the company, he knew that he should disclose it to the board.

The Secretary of State alleges that the settlement should have been disclosed to the Stock Exchange. As a listed company, the company had obligations under the Listing Rules to make disclosure of information likely to affect its share price. Paragraphs 9.1(a) and 9.2 of the Listing Rules at the relevant time stated:

“9.1

A company must notify the Company Announcements Office without delay of any major new developments in its sphere of activity which are not public knowledge which may:

(a)

by virtue of the effect of those developments on its assets and liabilities or financial position or on the general course of its business, lead to substantial movement in the price of its listed securities…

9.2

Where to the knowledge of a company’s directors there is such a change in the company’s financial condition or in the performance of its business or in the company’s expectation of its performance that knowledge of the change is likely to lead to substantial movement in the price of its listed securities, the company must notify to the Company Announcements Office without delay all relevant information concerning the change.”

The Secretary of State relies on the Inspectors’ opinion that disclosure of the settlement would have affected the share price, although acknowledging that it is a matter of judgment. The Inspectors’ view is tentatively expressed (“we are inclined to think”) and it is not a matter within their respective areas of expertise nor does it appear that they received evidence on it. I would be reluctant to accept their opinion on this point, if it was necessary to establish that disclosure would definitely have affected the share price. However, under paragraph 9.1 of the Listing Rules, it is enough that the relevant development may lead to a substantial movement in the price. Both the nature of the claim, resulting from serious difficulties at Campsie, and the size of the settlement are almost self-evidently facts which might have that effect. In the absence of any evidence from Mr Carr, I am justified in finding, as I do, that he knew that the information might have that effect and deliberately refrained from notifying the Stock Exchange. Without question, as it seems to me, the lesser allegations, that he was reckless or negligent as to whether the settlement ought to have been disclosed, are made out. He did not discuss it with the company’s brokers, in circumstances where undoubtedly he should have done so. This allegation was not the subject of a criminal charge against Mr Carr.

A further allegation made by the Secretary of State relates to a representation letter, signed by Mr Carr on 2 July 1997. No disclosure of the Ford claim is made in the letter. It is alleged that the letter was accordingly false and that Mr Carr signed it, either knowing that it being false or was reckless or negligent in that respect.

The representation letter was given to Kleinwort Benson Securities Limited (KBS) in the context of a placing of 10 million new ordinary shares in June 1997. In the placing agreement dated 30 June 1997 between the company and KBS, the company warranted, among other things, that:

(a)

there were no legal proceedings against the group and “nor is there any claim or any fact likely to give rise to a claim, which…may have or has had during the 12 months preceding the date hereof a significant effect on the financial position of the Enlarged Group”; and

(b)

no group company has, since 31 December 1996, “entered into any contract or commitment …of an unusual or onerous nature which, in the context of the Placing, might be material for disclosure…there has been no material adverse change in the financial or trading position or prospects of the Group”.

In the representation letter, Mr Carr stated that none of the warranties was untrue or misleading. At that time Ford and the company were still in the course of negotiations in relation to Ford’s claim. The most recent offer by the company, made on 1 July 1997, was worth $14 million over three years.

In my judgment, Mr Carr must have realised that the Ford claim might have a significant effect on the financial position of the group. A sum of $14 million represented more than half a year’s profit. In the absence of any contrary evidence from Mr Carr, I find that he signed the letter knowing it to be false. This matter was not the subject of a criminal charge against him.

The interim accounts for the six months to 30 June 1997 were announced on 22 September 1997, several weeks after the settlement of Ford’s claim had been agreed. The Secretary of State relies on paragraph 7.69 of the Inspectors’ report:

“In our view, TransTec should have treated the compensation as a loss in respect of the period from May 1996 to 31 March 1997, as advised by Ford in its letter of 23 April 1997. Since none of the compensation had been charged against profits for 1996, the whole amount (not just the £3 million falling due in the year) should have been charged against profits in 1997.”

They continue that the compensation should have been accounted for in full in the interim accounts, which would have turned a reported profit before tax of £7.6 million into a loss of over £3 million. Reported group net assets of £68 million would have been reduced by an estimated £7.5 million (the additional charge of nearly £11 million less tax relief).

I have not found this aspect of the Secretary of State’s case straightforward. I would have no difficulty in following it if the settlement provided for the payment of $18 million in any event, i.e. simply created a debt of that amount payable by the instalments set out in the company’s letter of 13 August 1997. This is how the agreement is summarised by the Inspectors in paragraph 7.49 of their report. However, the letter does not in terms provide that $18 million is to be in any event payable, but that:

“The total payment of US $18.0 million will be made by way of deduction from our account against part numbers yet to be nominated by TransTec, i.e. the methodology will be an additional cost down allowance.”

The Inspectors regarded this as the mechanics for payment of a debt which was in any event payable (para. 7.51 of the report) whereas it appears to me that the instalments would be payable only if there were amounts otherwise due from Ford to the company for the supply of parts, and payment would be made by way of deduction from the amounts due. If there was already a balance due to the company on the account with Ford available for set-off, clearly the liability would to that extent have to be recognised, but there is no evidence as to this. The company could not bring into account anticipated earnings. If it nonetheless had to recognise a liability arising under the settlement payable only against anticipated earnings, recognition of one without the other would seem to produce a distorted result. I do not in any way cast doubt on the expert accounting opinion expressed by the Inspectors, but I am not entirely satisfied of the legal analysis of the settlement which appears to underpin it. It may be that the group’s dependence on Ford was such that without further business from Ford, which would have been very doubtful without the settlement, the going concern basis of the accounts would have been called into question and, in order to avoid other write-downs, it was necessary to recognise immediately a liability under the settlement. This, however, is no more than speculation and it is not how the case has been put.

The Secretary of State’s case against Mr Carr in relation to the 1997 interim accounts is that he deliberately, or recklessly or negligently, caused or permitted them to be produced without accounting for the Ford claim and its settlement in full (or at all) and as a result was responsible for the production of interim accounts which he knew, or ought to have known, were materially misleading. I am unable to accept this part of the case against Mr Carr for the reasons given above. However, the failure to make any disclosure of the claim and its settlement, which I have found to be established as regards the claim in the 1996 final accounts, continued in the 1997 interim accounts. The allegation that Mr Carr deliberately failed to disclose the settlement to the board at the time of the settlement or at any time prior to the board meeting which approved the 1997 interim accounts is established, for the same reasons as my finding that he deliberately did not disclose the claim and because the terms of the settlement were plainly material as regards the group’s business and financial position and prospects. The only criminal charge in relation to the interim accounts for 1997 was of false accounting in that there was no accounting for the settlement sum of $18 million. I have rejected essentially the same allegation made in these proceedings by the Secretary of State.

By the end of 1997, debit notes amounting to $5 million had been received and were paid or payable. I have already found that Mr Carr knew that the debit notes had been issued.

The debit notes were not accounted for as liabilities in the 1997 final accounts. As previously detailed, some were not accounted for at all and the others were held in debtors. Mr Carr knew that the auditors had raised the debit notes as an issue and he was present at the meeting on 10 March 1998 when Mr Jeffrey gave the auditors an entirely false explanation. It is almost inconceivable that Mr Carr had not ensured that he knew how the debit notes were being accounted for. He had been, and continued to be, concerned that the settlement should not be disclosed, and the accounting treatment of the agreed debits was inevitably a matter of equal concern. I find that Mr Carr knew that the debit notes were falsely accounted for in the 1997 final accounts, allowed Mr Jeffrey to give a false explanation to the auditors and signed the letter of representation to the auditors dated 23 April 1998, from which I have earlier quoted, knowing it to be untrue.

In relation to the final accounts for 1997, I therefore find to be established the Secretary of State’s allegations that:

There were two criminal charges relating to the 1997 final accounts. As with the 1997 interim accounts, one was based on the allegation that they should have accounted for the full sum of $18 million, which I have rejected. The other was that Mr Carr signed the letter of representation to the auditors, knowing it to be false. On the evidence before me, I am satisfied that the allegation to the same effect made by the Secretary of State is established.

Debit notes with a total value of $7 million were rendered to the company during 1998. The Secretary of State’s allegations relate to their treatment in the 1998 accounts. As earlier explained, the full amount of debit notes rendered since November 1997, which totalled $12 million (£7.2 million) were treated as fixed assets (tooling), of which £5.3 million were immediately written off as an exceptional item and the balance of £1.9 million was carried forward.

I accept the Secretary of State’s case that this treatment was entirely wrong and misleading. The debit notes from Ford were nothing to do with tooling. The amounts due under those debit notes were not payments for assets of any kind. They were liabilities payable as deductions from amounts due from Ford by way of settlement of Ford’s claim for compensation for the company’s earlier failures. Addressing the point that £5.3 million was immediately written off in the 1998 accounts, so lessening the impact of this treatment to the bottom line, the Inspectors said at para 7.103 of their report:

“It might be thought that, in one way or another, a large part of the compensation (nearly half of it) was written off in 1998 and that this would lessen the seriousness of our concerns about the failure to account for it properly in 1997. That would be, and is, quite unacceptable. The 1996 and 1997 accounts are misleading. The notes to the 1998 accounts further mislead the reader into believing that something had happened when it had not happened. Fixed assets in 1998 contained a material bogus item. It is not and was not in any way acceptable that some of the false debtors carried in the balance sheet during the fourteen months to 31 December 1998 eventually got written off, described within exceptional items.”

It is clear that Mr Carr was well aware of this treatment of the debit notes. He had received Mr Jeffrey’s memo in April 1998 putting forward a proposal to treat the payments as contribution to tooling and he was directly involved in the discussions with the auditors in March 1999 as regards this treatment. Mr Carr did not explain the true circumstances of the payments to the auditors, and in particular did not explain that they were paid in settlement of Ford’s claim for compensation. They were said to be agreed contributions towards the cost of tooling already owned by Ford, paid to ensure that the company continued to have the use of the tooling in order to generate revenue. Mr Carr must have known that this explanation was untrue. Mr Carr told the auditors, or knew that the auditors were told, that this treatment had been discussed by the board. The auditors reported in these terms to the audit committee of the board, which included the non-executive directors. In fact, neither the full board nor the audit committee had been given a full explanation of the true circumstances of the debit notes, as Mr Carr knew.

In relation to the 1998 final accounts, I am satisfied that the Secretary of State’s allegations are established as follows:

The only criminal charge against Mr Carr in relation to the 1998 final accounts was of false accounting, in that (a) they did not account for the full sum of $18 million, (b) they falsely accounted for £7.3 million of payments as tooling expenditure, writing off £5.4 million as an exceptional item and carrying the balance forward as an asset, and (c) they failed to account for the outstanding balance of $6 million. I have rejected the first and third of those points. On the evidence before me, I am satisfied that the allegation of falsely describing the payments is established.

As earlier explained, Ford did not render any debit notes in the early part of 1999, but between June and November 1999 debit notes with a total value of $6 million were sent, of which notes to a value of $1,050,000 were rendered before 30 June. The interim accounts for the first six months of 1999 were approved by a board committee including Mr Carr on 21 September 1999 and were announced the following day, by which time further debit notes to a value of $3.45 million had been rendered. The interim accounts did not include any liability in respect of any of the debit notes due in 1999, including in particular those already sent in June 1999. They also continued to show the sum of £1.9 million in respect of contribution to tooling as fixed assets. Mr Carr’s previous conduct in concealing the true position therefore continued and I find the following allegations as regards the interim accounts for 1999 to be established against him:

I have set out above a summary of the relevant events in the latter half of 1999, leading ultimately to Mr Carr’s resignation and the appointment of receivers in December 1999. Agreement with Ford as to the cancellation, reduction or deferral of amounts due under debit notes rendered in 1999 was of critical importance to the company’s position. Nonetheless Mr Carr failed to disclose the true position to the board. It had at all times been his duty to do so, but the importance of doing so was in even sharper relief during this final period. It was equally of central importance that the company’s advisers should be apprised of the full facts and true position of the company, if they were to be able to fulfil properly their duty and function of providing advice. Mr Carr failed to disclose the facts of the Ford claim and its settlement to them and, in my judgment, this was a clear breach of his duties as a director and as chief executive. Moreover, he misled the lenders when he told them that there were no undisclosed liabilities, without disclosing Ford’s debit notes.

I find that the allegation of the Secretary of State that Mr Carr deliberately failed during the period of September to December 1999 to disclose the Ford claim, its settlement and the outstanding debit notes to the full board, the company’s advisers or its lenders to be established. There were no criminal charges against Mr Carr as regards these matters.

In respect of all the allegations of deliberate wrongdoing, the Secretary of State advanced alternative cases that Mr Carr acted recklessly or negligently. In my judgment, the evidence before the court on this application fully justifies conclusions of deliberate wrongdoing by Mr Carr. If I had not been satisfied that the evidence was sufficient for that purpose, the same evidence and factors to which I have referred would have established the alternative cases of recklessness or negligence.

Rover was the group’s second largest customer after Ford.

In November 1996, Rover held a seminar for its suppliers at which it spoke of its need to cut its purchasing costs. Rover advised the company of the price reductions it wanted for 1997. For example, from BSK Aluminium Limited (BSK) it sought a reduction of 5.5 per cent of turnover. These price reductions were higher than in previous years and Rover was prepared to threaten the removal of business from its suppliers if they did not reach an acceptable settlement.

Discussions between Rover and the company took place throughout the first few months of 1997. By early April 1997, the negotiations had reached a stage where the company had offered price reductions equating to some 2.5% on added value, amounting to a total of £500,000. However, Rover wanted reductions equating to 4.5% on added value, or £900,000. Rover agreed that if the company paid the £400,000 difference, BSK’s high pressure die casting facility at Bourne would be nominated as supplier for a new component, a sump for the NG4 programme.

On 7 July 1997, Mr Jeffrey wrote the following memorandum, which was copied to Mr Carr:

“Subject: Rover Payment - £400,000

Every effort should be made to construct an arrangement with Rover so that the £400,000 inducement to obtain the new generation sump order is capitalised and not shown as an expense against this year’s profits. Two ways this could be achieved are as follows:-



TransTec Bourne [i.e. BSK] makes a contribution of £400,000 towards new tooling in addition to an already commercially agreed deal i.e. where the piece part price and related tooling contribution are already determined



TransTec now pays for tooling already in existence at Bourne to the tune of £400,000

In regard to ownership, TransTec could separately provide Rover with a letter waiving any economic interest in the tooling to convince Rover that they have full right and title to the property.

Phillip London will assist in clarifying what is required.”

On 11 July 1997, there was a meeting to finalise the 1997 settlement with Rover, which was not attended by Mr Carr. Rover’s representatives were given a cheque for £400,000. They were also shown a list of points for discussion, which included a reference to the payment being classified as tooling as follows:

“….

•

Costdown agreement 2.77% on A.V.

•

Advance Payment Assumed £400k.

•

Tooling payment in June – Dec. 1997 period allocated against £400k advance payment by TransTec Bourne.

•

Agreement to select certain tooling (June – Dec 97) as part of economics agreement. Capitalise in Bourne Balance Sheet.

•

Tooling remains property of Rover Group”.

However, it would appear that this issue was not raised at the meeting. In any event, Rover did not agree to any treatment of the payment as being for tooling.

At the meeting on 11 July 1997, Mr Sartorius on behalf of BSK had told Mr Fawdry of Rover that he would want Rover to incorporate some particular wording on its debit note, although the wording itself was not discussed. Nonetheless, Mr Fawdry prepared the debit note with a description in his own words and after the meeting, Rover Group issued an invoice (or debit note) dated 11 July 1997 for £400,000 and stating as follows:

“97 ECONOMICS LUMP SUM

In line with the transtec automotive group deal for 1997 economic reductions a lump sum of £400000 would be paid on nomination of the n.g. sump.”

According to Mr Fawdry, Mr Sartorius subsequently telephoned him several times to ask him to change the wording, which he was reluctant to do.

On 17 December 1997, Mr Sartorius wrote to Mr Fawdry to ask him formally to reissue Rover’s debit note for the £400,000 with the legend “Advance payment for tooling on NG4 sump”. Mr Sartorius stressed that he wanted this for “year-end accounting purposes”.

Mr Fawdry issued a revised debit note, although without any reference to the NG4 project. The new debit note, dated 5 January 1998, read as follows:

“97 ECONOMICS LUMP

ADVANCED PAYMENT FOR TOOLING”

The £400,000 payment was capitalised as tooling and reported as fixed assets in the accounts of BSK and in the consolidated accounts of the group for 1997. A doctored debit note, deleting the line “97 economics lump”, was shown to the auditors to support that treatment.

The opinion of the Inspectors was that, as shown by Rover’s original debit note dated 11 July 1997, the £400,000 was part of the economics settlement which should therefore have been treated as a charge against profits of the group. In the Inspectors’ view, the £400,000 should not have been capitalised as tooling as it did not relate in any way to tooling. Their view was that the payment could have been carried forward in the balance sheet as a payment, but only if it was clearly refundable in the event that the contract for the NG4 sump did not go ahead. Given the absence of any documentation referring to circumstances in which the payment would be repaid, the Inspectors think that it could realistically have been assumed at the time that the prospects of recovering the money were slim. On that basis, it should have been written off against profits in 1997. The Secretary of State relies upon these views, which I accept.

In short, on any basis the 1997 BSK accounts were misstated: the payment did not relate to tooling at all (let alone to tooling in existence which could properly have been capitalised in the accounts). Instead, the payment should have been written off against profits as part of the overall 1997 Rover “economics” (i.e. price reductions), or written off on the basis that it was unlikely to be recovered. This misstatement carried through to the group accounts. The true position should have been disclosed to the auditors and the payment should not have been described as “tooling”.

Mr Carr described the Rover Payment to the Inspectors as being, “effectively…a prepayment up front to secure [the NG4 sump] order.” Mr Carr knew about the payment as a result of a meeting with Mr Jeffrey. Mr Carr’s own Chief Executive’s Report for March/April 1997 stated: “If we win the order for the NG (New Generation) sump in July, worth £2.0m in annual sales, a further lump sum payment will be due”.

As set out above, Mr Carr was a recipient of Mr Jeffrey’s memorandum of 7 July 1997, which clearly showed the intention to misstate the Rover payment as a tooling asset in the accounts.

At different times Mr Carr gave different explanations to the Inspectors of his understanding of this payment and its accounting treatment. His final explanation was that he was satisfied that the payment was properly treated in the accounts, because it was repayable in the event that the contract was not awarded to BSK. Mr Carr has not given any explanation in these proceedings.

The Secretary of State alleges that Mr Carr deliberately permitted BSK’s management accounts in 1997 and its statutory accounts for 1997 (and, as result, the group accounts) falsely to represent the payment of £400,000 to Rover as an asset (tooling) when it was not, or alternatively that he was reckless or negligent in this respect. Mr Carr was given notice by Mr Jeffrey’s memorandum that “the £400,000 inducement to obtain the new generation sump order” was to be made and that every effort should be made to conclude an arrangement with Rover so that it was capitalised and not shown as an expense against profits. Mr Jeffrey’s suggestions were that it should be treated as a contribution towards new tooling “in addition to an already commercially agreed deal” or “tooling already in existence at Bourne”. The payment was in fact capitalised as tooling, which was entirely unjustified. There was in truth no proper basis for doing anything other than treating it as an expense. Clearly Mr Carr took no steps to prevent its false treatment. In the absence of any evidence from Mr Carr, I consider it right to infer that he knew of the accounting treatment and knew that it was false. Accordingly, I find the Secretary of State’s allegation to be established. This was not the subject of any criminal charge against Mr Carr.

The allegations which I have held to be established amount to deliberate and dishonest conduct on the part of Mr Carr in the performance of his duties as a director of a listed company. They were not isolated acts but amounted to a sustained attempt over an extended period to conceal and misrepresent the true position as regards the claim by Ford and its settlement by the company. Both were highly material in the context of the group. It involved concealing information which, as I find, he knew should be disclosed to the board, the auditors, the Stock Exchange, and others and should be disclosed in the accounts. It further involved the use of false accounting treatments, leading to the approval and publication of accounts which he knew to be false, achieved only by misleading the auditors as to the true position. Similarly improper conduct is shown by the treatment of the Rover payment.

These are, in my judgment, very serious matters, which make a substantial period of disqualification inevitable. The top bracket of disqualification for 10 to 15 years is invoked in particularly serious cases, of which in my view this is one. My starting point is that the period of disqualification in this case should be in that bracket, subject to any counter-balancing circumstances.

Submissions were made to me on behalf of Mr Carr as to matters which I should take into account in fixing the period of disqualification. There are some to which I attach no weight. First, I attach no weight to the fact that Mr Carr lost the value of his shareholding, which over a period had cost him approximately £2 million, exceeding, as was submitted, the total value of his remuneration over his period of employment. All other shareholders also lost the value of their shares, but they were deprived by Mr Carr’s conduct of the timely provision of highly material information to which they were entitled. If the group had been able to survive, the concealment of the Ford claim and settlement might well have benefited him in terms of the value of his shareholding. Mr Carr’s personal financial loss does not lessen the seriousness of his conduct or the need to protect the public. At most, it can be said that he did not make money from his misconduct.

Secondly, attention was drawn on Mr Carr’s behalf to the periods of disqualification for those former directors who had given undertakings at the date of the hearing. I do not regard these periods, which range from 3 to 6 ½ years, as providing any useful guidance. Their misconduct, as summarised in the schedules to their undertakings, is not comparable in terms of the duration, scope or, save in some instances, seriousness of the case against Mr Carr. I have not seen Mr Jeffrey’s undertaking or the schedule of allegations to which he has admitted. Mr Carr was not only himself closely involved in the matters which I have established against him, but he was also, as chief executive, senior to Mr Jeffrey.

There are other factors which, to a greater or lesser extent, I do take into account. First, while not agreeing to give an undertaking, his decision not to defend the application has saved time and expense for the court, the Secretary of State and witnesses. I should however note that this is not motivated by any apparent recognition of wrongdoing on Mr Carr’s part, and it is in the circumstances a factor of only very slight significance. Secondly, there is no evidence or suggestion of other misconduct and he had previously enjoyed a successful career. Thirdly, and significantly, following his resignation from the company and its collapse in December 1999, both of which were well-publicised, he has had no significant management responsibilities. The disqualification proceedings did not commence until August 2004, following delivery of the Inspectors’ report in January 2003. I should also take account of the period since the hearing of this application. Fourthly, before the issue of the disqualification proceedings, the Secretary of State was prepared to accept an undertaking for a period of 9 years.

In all the circumstances, I consider that a period of disqualification for 9 ½ years is appropriate.