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Judgments and decisions from 2001 onwards

Kotonou v Secretary of State for Business, Enterprise & Regulatory Reform

[2010] EWHC 19 (Ch)

Neutral Citation Number: [2010] EWHC 19 (Ch)
Case No: CH/2008/PTA/0752
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 15/01/2010

Before :

MR JUSTICE NORRIS

Between :

ANGELI LUKI KOTONOU

(Otherwise Angelos Luki Kotonou

Appellant

- and -

THE SECRETARY OF STATE FOR BUSINESS, ENTERPRISE AND REGULATORY REFORM

Respondent

Mr Isaac Jacob (instructed by Bates NVH) for Mr Kotonou

Ms Sarah Harman (instructed by Howes Percival LLP) for the Secretary of State

Hearing dates: 7 December 2009

Judgment

Mr Justice Norris :

1.

Olympic Central Services Limited (“Olympic”) was incorporated on 3 June 1996 and commenced trading in January 1997. The nature of its business was the provision of management services to associated companies within a group of which the holding company was Olympic Resources and Services PLC (“Holdings”). The underlying business of the group was the incubation of IT companies (with a view to their being floated on an exchange or being sold to other market participants or to private equity purchasers). Mr Kotonou was the prime mover in the group and at all material times a director of Olympic. On 28 September 2001 Olympic entered into creditors’ voluntarily liquidation. According to the Statement of Affairs sworn by Mr Kotonou, as at 28 September 2001 Olympic had a deficiency of over £1.7 million. Of this deficiency over £570,000 was due to HMRC in respect of unpaid PAYE and NIC, and £19,347 was due to trade creditors.

2.

This was not the first such liquidation in the Olympic Group. Mr Kotonou had also been a director of Olympic Resources Limited (“Resources”) which had been incorporated in June 1988 and had gone into creditors’ voluntarily liquidation on 4 February 1999 with an estimated deficiency of £740,767 (including a liability to the Inland Revenue for £577,000).

3.

On 29 May 2003 the Secretary of State commenced proceedings for the disqualification of Mr Kotonou under CDDA 1986. In summary the charges were:-

(a)

That Mr Kotonou caused Olympic to trade at the risk and to the detriment of the Crown from (at the latest) July 1999 at a time when it was loss making, and balance sheet insolvent, leading to a deficiency on liquidation that was (ignoring intra group liabilities) 97% attributable to the Crown:

(b)

That Mr Kotonou caused Olympic to pay him remuneration from 1999 that Olympic could not reasonably afford and that he received £166,069 in the nine months preceding Olympic’s liquidation:

(c)

That in breach of his fiduciary duty to Olympic Mr Kotonou caused Olympic to fund another group company called Netsiren Limited (“Netsiren”), even though Olympic was failing to pay its debts when due and Netsiren itself was insolvent, so that on liquidation Netsiren owed Olympic £800,000, none of which was recoverable:

(d)

That in breach of his fiduciary duty to Olympic Mr Kotonou caused Olympic to incur the costs (amounting to £310,000) of significant improvements to a property interest that belonged to Holdings:

(e)

That Mr Kotonou had allowed Resources to trade to the detriment of the Crown and to incur a tax liability of £577,000 (representing 99% of Resources’ third party liabilities at the date of liquidation):

(f)

That there were sundry failures to file accounts and returns.

4.

On 20 May 2008 Mr Registrar Jaques found Mr Kotonou unfit to be a director and disqualified him for a period of eight years. The proceedings had taken over five years to reach that conclusion because Mr Kotonou had secured several lengthy adjournments of the proceedings.

5.

On 31 October 2008 Mr Kotonou issued an Appellant’s Notice seeking to set aside that order of Mr Registrar Jaques and seeking an order either that the claim against him be dismissed or alternatively that there be a new trial before a different Registrar. On 13 February 2009 Mr Justice Briggs granted Mr Kotonou permission to appeal against the length of the period of disqualification, but refused permission to appeal on any other ground.

6.

Mr Kotonou then made an oral application for permission to appeal on the broader grounds, which came before me on 16 October 2009. Mr Kotonou had been acting in person: but immediately before that hearing he instructed Mr Isaac Jacob of Counsel. Counsel was plainly afforded insufficient time to master the material in the many lever arch files and in the ten days of transcripts, and an adjournment was sought. On 16 October 2009 I ruled that all of the grounds of appeal which related to the admission of evidence or to the conduct of the trial were plainly unarguable: and I refused permission on all such grounds. But there remained certain challenges to the judgment itself which (by reason of his late instruction) Counsel was unable to argue. I therefore directed that the application for permission to appeal on these surviving grounds should be listed together with the appeal against the period of disqualification (with the appeal on these surviving grounds to be dealt with at the same hearing if permission was granted).

7.

Having now conducted that further hearing I hold as follows:-

(a)

I will grant permission to appeal in relation to the surviving grounds:

(b)

I will dismiss the appeal:

(c)

I dismiss the appeal against the period of disqualification.

8.

In reaching these conclusions I have sought to follow the guidance to an appellate court in such cases given by Hoffmann LJ in Re: Grayan Building Services Limited [1995] Ch 241 at 254 in these terms:-

“The [trial] judge is deciding a question of mixed fact and law, in that he is applying the standard laid by the courts (conduct appropriate to a person fit to be a director) to the facts of the case. It is in principle no different from the decision as to whether someone has been negligent…On the other hand, the standards applied by the law in differing contexts vary a great deal in precision and generally speaking, the vaguer the standard and the greater the number of factors which the court has to weigh up in deciding whether or not the standards have been met, the more reluctant an appellate court will be to interfere with the trial judge’s decision…I agree with the way in which the matter was put in Re Hitco 2000 Ltd [1995] BCC 161 .. “Plainly, the appellate court would be very slow indeed to disturb such conclusion as to fitness or unfitness. In many, perhaps most, cases the conclusion will have been so very much assisted and influenced by the oral evidence and demeanour of the director…that the Appellate Court will be in nowhere near as good a position to form a judgment as to fitness or unfitness than was the trial judge. But there may be cases where there is little or no dispute as to the primary facts and the Appellate Court is in as good a position as the trial judge to form a judgment as to fitness. In such cases the Appellate Court should not shrink from its responsibility to do so, and, if satisfied that the trial judge was wrong, to say so”…”.

The question for decision by the trial judge was, of course, whether the proved conduct, viewed cumulatively and taking into account any extenuating circumstances, had fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.

9.

The position take by Mr Jacob in his skeleton argument was that this appeal could effectively be determined on the documents: but in his oral argument he made significant use of the transcripts of the evidence. That oral argument focused upon the following themes:-

(a)

Inadequacy of reasons (grounds 13, 14 and 32):

(b)

The finding that Olympic was allowed to trade whilst insolvent at the risk and to the detriment of the Crown was wrong, against the weight of evidence and illogical (ground 9):

(c)

The Registrar wrongly rejected the appellant’s defence that the Crown debts were payable by other companies in the group and wrongly relied on the Statement of Affairs (ground 10 and 11):

(d)

The findings that the appellant drew remuneration that Olympic could not reasonably afford and that he received salary payments totalling £166,069 in the nine months preceding liquidation were wrong and against the weight of evidence and “were stated out of context to the group’s situation” (ground 12):

(e)

That the Registrar failed to give proper weight to the advice taken by the appellant (grounds 15, 16 and 17):

(f)

That the finding that the appellant was in breach of his fiduciary duty to Olympic in permitting Olympic to fund Netsiren was against the weight of evidence and unreasonable (ground 18):

(g)

That the finding that the appellant was in breach of his fiduciary duty in causing Olympic to incur £310,000 in respect of the costs of improving a building that belonged to Holdings was against the weight of the evidence and unreasonable (ground 18):

(h)

That the rejection of Mr Kotonou’s explanation for some of the late filings was unreasonable: and the late filings themselves would not have justified disqualification:

(j)

That the finding that the appellant had allowed Resources to trade to the detriment of the Crown was against the weight of the evidence.

In addition, of course, there was the appeal against the period of disqualification: and in relation to that Mr Jacob relied (without the point being taken by either the Secretary of State or me) on some matters that were not in the notice of appeal.

10.

First, the absence of reasons. At the hearing Mr Kotonou represented himself. As Mr Jacob frankly acknowledged, Mr Kotonou then insisted upon taking points that were not open to him and upon seeking to rely on material which Mr Justice Evans-Lombe, the Chief Registrar and Mr Registrar Jaques had all ruled was inadmissible. This undoubtedly created real difficulties for the judge in trying to discern what good points Mr Kotonou was making. When dealing with Mr Kotonou’s evidence and arguments the judge expressed himself in trenchant terms. For example, at paragraph 26 of his judgment he held:-

“Mr Kotonou sought to justify his decision to allow Olympic to continue to trade on a combination of factors, including the availability of bank and other loans, a standby letter of credit, cross guarantees to the bank and advice from professionals. With respect to him the evidence on these matters, which was certainly extensive, amounted to little more than hot air. The loans were to Largehive not to Olympic, the standby letter of credit and cross guarantees are wholly irrelevant and there was no relevant professional advice. As I say, nothing more than hot air”.

Elsewhere the judge described Mr Kotonou as “blustering”, “not lacking in imagination”, making “extravagant assertions” and indulging in “an attempt…to rewrite history”. Mr Jacob submits that this is not legal reasoning, it is abuse.

11.

I do not regard that criticism as fair, especially where the judge has not been invited to deliver a supplemental judgment to address matters upon which it is said that his reasoning is not understood. The judge had conducted a trial spread out over a protracted period with a litigant in person who would not accept the rulings of the court. The case had taken over five years to come to trial (because of many applications for adjournments by Mr Kotonou). The judge produced his judgment with commendable speed: and he produced it for the parties. It was not directed at the general reading public or an appeal tribunal who would have to consider it in wholly different circumstances. Perhaps with a little distance between the conclusion of the trial and the delivery of judgment some of the descriptions might have been toned down. But the collection of them together in Mr Jacob’s skeleton argument does not present an accurate picture of the judgment read as a whole.

12.

I certainly do not accept that there is an absence of legal reasoning. As the quoted paragraph shows the judge set out his reasons for rejecting Mr Kotonou’s case. He did so with perhaps greater brevity than I would regard as ideal. But the reasons do emerge. Mr Jacob relied on observations by the Court of Appeal in Flannery v Halifax Estate Agencies Limited [2000] 1 All ER 373 that the duty to give reasons is a function of “due process” and therefore of justice, its rationale being that the parties should not be left in doubt as to the reasons why they had won or lost. He also referred to English v Emery Reimbold & Strick Limited [2002] 3 All ER 385 for the proposition that whilst a judge need not identify and explain every factor that has weighed with him in the appraisal of the evidence, he should identify the issues the resolution of which had been vital to his conclusion, and explain the manner in which he had resolved them. But it is important to bear in mind the observation made upon those cases by Buxton LJ in Hemeng v Home Office [2007] EWCA Civ 640 that:-

“…it is not required of a tribunal of fact, particularly one that has heard witnesses, to say more than that it fully accepts the evidence of the one witness. This court did not intend, in either Flannery or English to go further than that, and more particularly it was careful to emphasis in English that the reasoning necessary to be set out by the tribunal of fact depends very largely on the nature of the dispute before it…”.

As a consideration of the individual grounds of appeal in the course of argument demonstrated it is with relative ease possible to see exactly what the judge had in mind in his terse statement of reasons. I would therefore reject this as a general ground of appeal. It rightly did not have the prominence in Mr Jacob’s oral submissions which it had in the grounds of appeal.

13.

I turn to the attack on the Registrar’s findings relating to Olympic’s trading at the risk of the Crown. It is important at the outset to identify the real thrust of the Secretary of State’s case. There was no general charge of wrongful trading or trading whilst insolvent. The case was that in the situation in which Olympic found itself its management chose to use as the company’s effective working capital money taken from its employees (by deduction from their salaries and wages) which it was the duty of Olympic to pay over to HMRC: and in making that choice those responsible for the management of Olympic chose to discriminate against one particular creditor.

14.

At trial Mr Kotonou’s great theme had been that the liability to HMRC was not that of Olympic but of other companies in the group. He could only run that argument by contradicting all the earlier evidence he had filed and by introducing documents which had been ruled inadmissible. Nonetheless, he kept trying. The Registrar ruled against him holding (in paragraph 18 of his judgment) that the submission was the product of confused thinking.

“Mr Kotonou has confused the primary liability of Olympic to pay for the services provided to other companies in the Olympic group on the one hand, with the secondary liability of those companies to reimburse Olympic for those services, on the other hand”.

On appeal this holding was attacked. Mr Jacob submitted that whilst Mr Kotonou had concentrated on legalities at the hearing (which was a dangerous thing for a layman to do) the Registrar had failed to regard the reality of the position as opposed to the legality.

15.

By this Mr Jacob meant that Olympic functioned as a service hub for a whole group of companies. The original structure of the group was straight forward with Holdings at the head of a pyramid of subsidiaries. But in March 2000 the IT incubation companies (which in essence were in their non-profit making “cash burn” phase) were made the subsidiaries of an intermediate holding company (“Largehive”) in which Holdings had (directly or indirectly) a 51% shareholding. Largehive and the companies in which it had an interest (varying from 100% to 29%) were known as “the red companies”, because they traded in the red. The other subsidiaries of Holdings were called “the black companies” because they were trading and in theory capable of earning profits. Olympic provided central services (payroll administration, personnel services, payment of suppliers, preparation of management accounts etc) and its costs were recovered through a “recharge matrix”. Mr Jacob submits that this function and this funding mean that it is impossible to look at Olympic in isolation from the other companies.

16.

Mr Jacob goes on to submit that it was the duty of the Registrar to go through the evidence submitted on behalf of the Secretary of State and to see to what extent it supported Mr Kotonou’s case; and that had he discharged this duty he would have found a helpful passage in the evidence of Mr Bullen (one of the Secretary of State’s witnesses). Mr Bullen was from July 1999 until January 2001 the finance director for “the red companies”. In his first affidavit on behalf of the Secretary of State he deposed:-

“I would also point out that at the time of my departure in January 2001, none of the companies had any outstanding short term creditors, (including the Inland Revenue) and they had funds available for future costs…At the time of my departure, Largehive and the red and black companies had paid all short term and trade creditors, had no legal cases pending and had management accounts prepared up to date”.

In cross examination Mr Bullen confirmed that Olympic was totally reliant on providing services to other companies in the group and drawing back down monies from those companies, having no separate form of income of its own other than inter-company trading: and that it used a recharge matrix to recover funds from the companies to whom it supplied services. Mr Jacob submits that this proves the existence of the recharge matrix, demonstrates that it worked, eliminates the difference between the primary liability of Olympic and the secondary liability of group companies (to which the Registrar referred) and makes untenable the submission that operating in this way demonstrates unfitness.

17.

This submission illustrates the dangers of picking out sentences here and there in the evidence placed before the trial judge in the course of a ten day hearing and saying that in the light of that material his conclusions are perverse or illogical. I have no idea what reliance (if any) Mr Kotonou placed on this material in his submissions to the Registrar. I do know:-

(a)

That it was Mr Bullen’s evidence that before he became finance director matters were in a complete shambles:

(b)

That he was able to rectify the position following the March 2000 restructuring (which involved the injection of £20 million outside capital into Largehive) by using £7 million of it to repay historic liabilities:

(c)

That by the time he left Largehive had only £5 million left, that Mr Bullen wanted to reduce costs but Mr Kotonou was not keen to do so:

(d)

That Mr Bullen says that the finance director for the black companies had also resigned:

(e)

That the recharging matrix of which Mr Bullen spoke operated quarterly in arrears, so that he could only speak as to what the position was in late 2000, and can say nothing about how the recharging matrix operated between then and the company going into liquidation in September 2001 with a deficiency of £1.7 million (although there was other material before the Registrar apparently demonstrating a deficiency on profit and loss account as at 31 December 2000 in excess of £350,000):

(f)

That Mr Kotonou’s case at trial was that Mr Bullen was incompetent, was in fact to blame for some of the key events that led to the downfall of the group, and “in particular…seemed reluctant to grasp the nettle on the issue of recharging” (Mr De Souza’s affidavit of 25 January 2007 paragraph 31).

18.

In the light of this to make a handful of sentences culled from Mr Bullen’s written evidence the bedrock of an appeal is, to put it no higher, curious. It was not the trial judge’s job to seek out these nuggets and to say that they counted for more than the other evidence he received (including that from Mr Kotonou himself) and that they represented “the reality”, so that Olympic did not really owe HMRC anything and that it was really the other group companies who owed the PAYE and NIC under the recharge matrix. This ground of appeal is not made out.

19.

There was next an attack on the judge’s holding that Olympic traded at the risk of the Crown from at the latest 1999. It was said that the documents demonstrated this finding to be incorrect because the arrears due to HMRC in 1999 had been paid off. The documentary reference was to a schedule of liabilities and payments prepared after the liquidation. Mr Jacob pointed out that the PAYE liability for the tax year 1999 to 2000 was discharged in full as was the NIC liability: so how, he asked, could it be said that Olympic traded at the risk of the Crown? The answer is to be found on the schedule itself and in the other evidence which the Secretary of State had placed before the Registrar. The schedule shows that the PAYE and NIC payments in 1999/2000 were indeed made, but had been made late so that substantial interest charges were incurred (which were not paid in full and constituted arrears to be carried forward). This analysis is supported by the direct evidence of Mr Swaden adduced on behalf of the Secretary of State which established that Olympic had failed to settle all amounts as and when due to the Revenue from before April 2000, in respect of which distraint proceedings were issued and which produced post dated cheques which (when presented) constituted the payment shown on the schedule. Again, this demonstrates the danger of seizing upon one document in the many lever arch files of documentary material and saying that it demonstrates the trial judge misunderstood the position when he said that Olympic traded at the risk of the Crown from 1999. This ground of appeal is not made out either.

20.

The third ground of appeal was that the Registrar rejected Mr Kotonou’s defence that the PAYE and NIC liability was payable by other companies, and that even though he was not allowed to adduce his own evidence to this effect, it could be demonstrated from the Secretary of State’s documents. Insofar as the Registrar relied on the Statement of Affairs he was wrong to do so.

21.

It is incontrovertible that the Statement of Affairs showed a very substantial liability to HMRC owed by Olympic. Mr Kotonou certified the Statement of Affairs as being true. He later swore to its truth. In none of his five affidavits did he gainsay it. For the purposes of the disqualification proceedings the burden lay on the Secretary of State to establish on the balance of probabilities that the liability to HMRC existed. The Secretary of State was able to discharge that burden by adducing the Statement of Affairs. Mr Kotonou was under a statutory duty (Section 99 Insolvency Act 1986) to prepare such a statement showing particulars of Olympic’s debts. Such a statement constitutes an admission by him that the debt was due to HMRC: see section 433 Insolvency Act 1986. Before trial it had been established that he was not allowed to resile from that admission (which he had stood by in his five affidavits): and at the commencement of the trial that was re-established. In my judgment that is an end to the matter. For the purposes of judging whether Mr Kotonou is fit to be a director it is to be taken as a fact that when Olympic went into liquidation it owed the Revenue £575,565 - having made default in payment when due in 1999, having made payments late and as the result of enforcement steps during 2000, having failed to make substantial payments (£98,450 plus arrears of accrued interest) in the tax year 2000/2001, and having failed to make any payments in the tax year 2001/2002. The judge’s finding that such arrears existed and his holding that such conduct rendered Mr Kotonou unfit to be a director seem to me unimpeachable: and I fully understand why the judge should describe Mr Kotonou’s attempt to say that the liability fell elsewhere was an attempt “to rewrite history”.

22.

The fourth ground of appeal related to the judge’s finding that Mr Kotonou drew remuneration that Olympic could not reasonably afford (in particular for the period from 1 January 2001 to 30 September 2001 when he received salary payments totalling £166,069). This was said to be wrong and against the weight of the evidence and not to have sufficient regard to the context of the group’s situation.

23.

In addressing this ground of appeal it is again important to understand the thrust of the complaint. The Secretary of State does not complain that £166,000 was, by reference to some unstated bench mark, “too much” for Mr Kotonou to receive in return for what he did. So the (inadmissible) opinion evidence adduced by Mr Kotonou from Mr De Souza (to whom he turned for accountancy advice in early 2001) is not in point. The thrust of the case is that Mr Kotonou’s service contract was with Largehive (not Olympic), that at the time Olympic volunteered to pay his salary (in place of Largehive) it was itself insolvent, and if the argument was that there was a recharge matrix in place then there was no evidence (after late 2000, to which Mr Bullen spoke) that the recharge matrix actually worked (for merely establishing the existence of a system would not of itself suffice). On the evidence each of these matters is beyond dispute. Mr Jacob’s riposte was that Mr Kotonou had set up a procedure, and the fact that it did not (in the event) work does not mean that Mr Kotonou is to be judged unfit to be a director, because one cannot judge his conduct at the time with hindsight.

24.

In my judgment the Registrar correctly assessed the position. Mr Kotonou must have known that Olympic was not his employer. He must have known he was being paid by Olympic. He must have known that neither the black companies nor the red companies had finance directors. The finance function was therefore the direct responsibility of board of Olympic (of which he was a member). On the assumption that he was seeking to do his job as a director of Olympic properly he must be taken to have known that Olympic had built up substantial arrears at HMRC and in the tax year 2001/2002 was making no payments to HMRC (although it was deducting tax from the salaries that it paid). He therefore must have known that Olympic was paying remuneration which it could not reasonably volunteer to pay in view of its financial position. If Mr Kotonou was relying upon the recharging matrix he must have known that it was not working because of the build up of the indebtedness to HMRC. Insofar as Mr Kotonou sought to rely on some supposed value elsewhere in the group, that too does not avail him. The fact that IBM was prepared to lend Largehive £10 million to provide working capital for Largehive and its subsidiaries (the red companies) cannot justify the payment of Mr Kotonou’s salary by Olympic (a black company). In my judgment the Registrar’s decision was neither against the weight of the evidence nor was it in any other respect wrong.

25.

The fifth ground of appeal was that Mr Kotonou had taken advice and that this exonerated him because taking advice of itself constituted a complete defence. Mr Registrar Jaques said in his judgment (at paragraph 27) that he had “not overlooked” such advice. But he held first that the exact advice tendered was unclear on the evidence (was it that “the group” would be able to trade out of temporary difficulties? or was it that if there were realistic prospects of obtaining future funding then Mr Kotonou could not be accused of wrongful trading?). Second, the Registrar held that such advice was only given in July or August 2001 “just before the balloon went up”. Mr Kotonou argues on this appeal that that treatment of the advice which he received was “illogical and wrong”.

26.

I do not agree. The Secretary of State does not make a generalised complaint of wrongful trading. The Secretary of State says that Olympic used one particular creditor (HMRC) as an involuntary lender. There was no evidence that anyone advised that this was a proper course for Mr Kotonou to adopt. The only advice ever tendered was given after the unlawful taking of credit had already occurred, and the advice was directed to dealing with the situation thereby created. Taking such advice could never demonstrate fit conduct when the unfit conduct relied on was taking unlawful credit in the first place.

27.

The sixth ground of appeal related to the Registrar’s finding that Mr Kotonou was in breach of fiduciary duty to Olympic in causing it to fund Netsiren to the tune of £800,000. On this appeal Mr Kotonou complains that that was against the weight of the evidence and was unreasonable. The core of his complaint is that it ignores the group’s structure.

28.

I reject this argument. It was Mr Kotonou’s own case that Olympic had paid expenses for Netsiren (which was a subsidiary of Largehive which was itself a 51% subsidiary of Holdings). Mr De Souza’s evidence (adduced by Mr Kotonou) was that as at the end of 1999 Olympic had failed to recover from Netsiren some £253,970. Furthermore by March 2001 there was further expenditure which had not been collected, and Mr De Souza’s firm was involved in “an objectively justifiable apportionment…of the costs incurred [by Olympic] in providing group functions and logistical and administrative support facilities”. So as at March 2001 there was no subsisting agreement between Olympic and Netsiren as to how payments made by Olympic on behalf of Netsiren should be recovered: and on the evidence adduced by Mr Kotonou there never was formal agreement. The result was that when Olympic went into liquidation it had as an asset on its books a debt due from Netsiren in the sum of £800,000 which was expected to realise nil. Given that Olympic was itself throughout this period insolvent it is difficult to do other than conclude that for Olympic to pay Netsiren’s bills from sometime before 1999 until September 2001 without having in place any agreement for their repayment and without (apparently) effecting recovery was a breach of fiduciary duty. I cannot see that the judge’s finding was against the weight of the evidence and I do not consider that his conclusion that it demonstrated unfit conduct was unreasonable. It certainly is no answer to say that they were all part of the same group. The creditors of Olympic (who suffered) were not the same as the creditors of Netsiren (who benefited).

29.

The seventh ground of appeal related to the Registrar’s finding that it was a breach of fiduciary duty (demonstrating unfit conduct) for Mr Kotonou to countenance the spending by Olympic of £310,000 on property which belonged to Holdings. Mr Kotonou says again that this was against the weight of the evidence and was unreasonable. I once again disagree. There was about this arrangement the same lack of clarity that obtains in relation to other arrangements. According to Mr Kotonou’s evidence the money was spent by Olympic on Holdings’ property, but there was an unwritten understanding that if Holdings ever sold its lease then the cost of the improvements would be repaid by Holdings to Olympic: accordingly, for accounting purposes, the cost of the improvements was treated as an asset in Olympic’s books and depreciated annually. As Mr De Souza understood it “the depreciation would then be charged out to the operating companies on a suitably apportioned basis”. Mr Kotonou relies on Mr De Souza’s opinion that this “was an entirely acceptable way of dealing with the matter”. But this confuses the correctness of the accounting treatment with the propriety of the arrangement in the first place. The Secretary of State does not complain that this transaction was not properly recorded in the books of Olympic. The Secretary of State complains that the arrangement was an improper one for Olympic to have entered. Olympic was spending money on a property it did not own with no formal agreement in place as to how or when it would recover its money. In the meantime Olympic and its creditors gained nothing from the expenditure: and when Olympic went into liquidation the improvements were estimated to realise nil. Once again, the reliance upon the group context is without point. The money was spent by one company and the benefit accrued to another. The “recharge matrix” did not (even in theory) apply to the expenditure, but only to the depreciation: and it did not in practice operate (because essential parts of the recharge scheme were created only in March 2001).

30.

The eighth ground of appeal relating to disqualification itself concerns the Registrar’s finding that Mr Kotonou had caused or allowed Resources to trade to the detriment of the Crown (resulting in a shortfall to the Revenue of £577,000, representing 99% of the company’s third party liabilities at liquidation). The underlying facts could not be disputed. The Registrar found that this was as a result of a conscious decision by Mr Kotonou not to pay the Crown. In his appellant’s notice Mr Kotonou says that this was “wrong, against the weight of evidence and took no account of…advice received…[and]…the Revenue’s agreement…”.

31.

The argument that the holding was against the weight of the evidence is untenable. Mr Kotonou’s own written evidence had acknowledged that “a difficult decision had to be made” about retaining Resources’ staff or paying the Revenue. He was cross examined about that in these terms:-

“Q. Now what you are accepting there, I think, is that the decision was taken to carry on employing staff, notwithstanding that you weren’t paying the Revenue and weren’t able to afford to pay the Revenue.

A.

Yes…well there was a commercial decision that had to be made, a commercial judgment call”.

That is really an end of the matter. But insofar as advice may have been relevant, there was no evidence that Mr Kotonou had ever been advised to pay staff and not to pay the Revenue. Insofar as the Revenue’s “agreement” was relevant the evidence was only that once the arrears had arisen the Revenue agreed to a payment plan (which, when broken, led to the liquidation). That is very different from the Revenue agreeing to allow tax to go unpaid so that staff could receive their salaries.

32.

The final ground of appeal related to the Registrar’s findings as to late filing of accounts and returns. On the evidence there was no doubt that, in relation to group companies of which Mr Kotonou was the sole director, there were twenty instances of late filing of accounts. There were other instances of late filing where Mr Kotonou was a member of the board. On the appeal Mr Kotonou submits that the Registrar’s treatment of these breaches as “serious” is “insupportable” and that “had an allegation of some late filings been the sole matter of complaint it is inconceivable that any application would have been made to disqualify”. Far from being insupportable the conclusion seems to me to be surely founded, and rightly treated as “serious”. As Mr Jacob recognised, prompt filing of accounts is necessary to enable those who deal with companies to know the basis on which the dealing is to take place. As a director it is not open to Mr Kotonou to say “it was not my job to do it or to see that it was done”.

33.

For these reasons I would dismiss Mr. Kotonou’s appeal against disqualification.

34.

I turn to deal with the appeal against the period of disqualification. Here there is no doubt that the Registrar had well in mind the approach to sentencing that has been applied ever since the decision in Re: Sevenoaks Stationers (Retail) Limited [1991] Ch 164 at 174 E-G. He exercised his discretion as to sentence guided by those principles. On appeal I am not entitled simply to tinker with the sentence upon which the Registrar fixed. I must identify in relation to it some error of law, whether that be taking into account an irrelevant matter, leaving out of account a relevant matter, or reaching a conclusion that is so far outside the range of reasonable difference that it must embody some error of legal reasoning. It is necessary to restate those fundamental matters because the application of the familiar principles to the facts of a particular case is essentially a matter for the trial judge.

35.

On the appeal Mr Kotonou submitted that whilst, in deciding whether disqualification was appropriate, the Registrar had said he had not overlooked the fact that Mr Kotonou took advice, when it came to assessing the period of disqualification the Registrar did not expressly say that he had taken into account the taking of advice as a mitigating factor. Mr Jacob submitted (and I accept) that in relation to Holdings and its group of subsidiaries Mr Kotonou had taken advice in 1996 as to the group’s structure and as to the proper management of inter company dealings within the group. It is plain on the evidence that these systems did not, in fact, function as intended but that between mid 1999 and the end of 2000 Mr Kotonou had in place two finance directors (one for the red companies and one for the black companies) who between them restored some sort of order. I also accept that when those finance directors left Mr Kotonou turned to his accountants for advice and (when insolvency became an inevitability) was introduced by them to specialist insolvency practitioners. But I do not accept that Mr Kotonou was ever advised that he could properly use money for which Olympic was due to account to HMRC as a source of loan capital for Olympic (including the funding of his own salary). That was the conduct of which complaint was made and it was not conduct which in any sense derived from any advice he had been given.

36.

On balance it seems to me unlikely that this experienced Registrar overlooked (in assessing the period of disqualification) a matter to which he had made express reference in the judgment he handed down on the same occasion; but if he did, it was not a factor which would in any event have operated significantly to reduce the period of disqualification.

37.

Mr Kotonou further submitted that the Registrar, in fixing the period, “completely disregarded” the fact that Olympic was part of a much larger group. I do not consider that the judge “disregarded” that fact in the sense that he overlooked it. I sense that the judge “disregarded” the fact because he did not consider it a matter of mitigation when it came to fixing the period of disqualification. Nor do I. One cannot use the assets of company A in the business of company B unless it is in the interests of company A (and for the benefit of its members and creditors) that they be so used. That is so whether A and B are completely independent companies or whether they are members of the same group. It remains a matter of deep concern that Mr Kotonou continues to contest this basic principle. I do not consider that the Registrar erred in principle in this respect.

38.

Mr Kotonou argued, thirdly, on the appeal against the period of disqualification that the Registrar failed to give sufficient weight to particular factors which he did take into account. Questions of the weight to be attached to particular factors are matters for the trial judge: an Appellate Court can only interfere if the resulting period of disqualification is manifestly wrong. Having analysed Mr Kotonou’s grounds of appeal (both when refusing permission for those that were without hope and in ruling upon those that were argued) I am not persuaded that Mr Registrar Jaques, who had conducted the trial, fixed a period that was manifestly wrong.

39.

The matter that gave me most pause for thought was whether sufficient account had been taken of the fact that in May 2005 Mr Kotonou had given an undertaking to the Court not to act as a director. If that is added to the disqualification period of eight years (commencing May 2008) the total period for which Mr Kotonou will be unable to act as a director (subject to an application under Section 17) will be eleven years, which would put Mr Kotonou into the top bracket of cases (which the Registrar said was not appropriate). I therefore approached the appeal with the possibility in mind that I might reduce the disqualification period by two years.

40.

Having now heard the arguments advanced on the appeal I realise that this initial view was wrong. First, Mr Kotonou gave the undertaking as the price for obtaining yet another adjournment; I agree with Miss Harman that to allow it also to count in full towards the disqualification period would be, in effect, to reward Mr Kotonou for his procedural delays. Mr Kotonou gave the undertaking to gain the adjournment: he has obtained full value for the undertaking given. Second, having heard the arguments on the application for permission to appeal on the “fair trial” issues and upon the appeal itself, it is plain that Mr Kotonou still does not understand that he has done anything that falls below the normal standards of commercial probity or warrants the description of serious misconduct. In the light of that I am by no means satisfied that Mr Registrar Jaques did not have the measure of the man with whom he was dealing when it came to the period of disqualification. I can well understand why the view might be held that the protection of the public required an eight year period. For these reasons I will dismiss the appeal against the period of disqualification also.

Mr Justice Norris………………………………………………………..15 January 2010

Kotonou v Secretary of State for Business, Enterprise & Regulatory Reform

[2010] EWHC 19 (Ch)

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