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

F G Hawkes (Western) Limited (“the Company”) was incorporated on 2 March 1987 and entered into administration on 3 October 2011. Throughout that period its directors were the defendants, Mr Geraint Hawkes and his mother Mrs Janis Hawkes.

In these proceedings, which were commenced on 2 October 2013, the claimant, the Secretary of State for Business, Innovation and Skills, claims disqualification orders against Mr Hawkes and Mrs Hawkes pursuant to section 6 of the Company Directors Disqualification Act 1986 (“the Act”). The conduct that is alleged against the defendants and said to render them unfit to be involved in the management of a company may be summarised shortly as follows:

The claim was supported by two affidavits made by Susan MacLeod, Chief Investigator of the Company Investigations Directorate of The Insolvency Service. Each defendant made an affidavit in response. Ms MacLeod and Mr Hawkes gave oral evidence at the trial. Mrs Hawkes did not give evidence or attend the trial; this was said to be on account of ill-health and infirmity, although no medical evidence was produced in support of that assertion.

In this judgment, I shall set out the relevant law and then summarise some relevant background facts, before considering in turn the particulars of alleged unfitness. I am grateful to Mr Cole and Mr Harris for their helpful written and oral submissions and for the manner in which they conducted the case.

The Act contains the following material provisions.

“1 Disqualification orders: general

(1)

In the circumstances specified below in this Act a court may, and under sections 6 and 9A shall, make against a person a disqualification order, that is to say an order that for a period specified in the order—

(a)

he shall not be a director of a company, act as receiver of a company's property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of the court, and

(b)

he shall not act as an insolvency practitioner.

(2)

In each section of this Act which gives to a court power or, as the case may be, imposes on it the duty to make a disqualification order there is specified the maximum (and, in section 6, the minimum) period of disqualification which may or (as the case may be) must be imposed by means of the order and, unless the court otherwise orders, the period of disqualification so imposed shall begin at the end of the period of 21 days beginning with the date of the order.”

“6

Duty of court to disqualify unfit directors of insolvent companies

(1)

The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied—

(a)

that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and

(b)

that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.

(2)

For the purposes of this section and the next, a company becomes insolvent if … (b) the company enters administration, and references to a person’s conduct as a director of any company or companies include, where that company or any of those companies has become insolvent, that person’s conduct in relation to any matter

…

(4)

Under this section the minimum period of disqualification is 2 years, and the maximum period is 15 years.”

“9 Matters for determining unfitness of directors

(1)

Where it falls to a court to determine whether a person’s conduct as a director of any particular company or companies makes him unfit to be concerned in the management of a company, the court shall, as respects his conduct as a director of that company or, as the case may be, each of those companies, have regard in particular—

(a)

to the matters mentioned in Part I of Schedule 1 to this Act, and

(b)

where the company has become insolvent, to the matters mentioned in Part II of that Schedule;

and references in that Schedule to the director and the company are to be read accordingly.”

Among the matters set out in Schedule 1 to which the court must have regard, pursuant to section 9, are “[a]ny misfeasance or breach of any fiduciary or other duty by the director in relation to the company” (paragraph 1), “[a]ny misapplication … by the director of … any money or other property of the company” (paragraph 2), “[t]he extent of the director’s responsibility for the causes of the company becoming insolvent” (paragraph 6), and “[t]he extent of the director’s responsibility for any failure by the company to supply any goods or services which have been paid for (in whole or in part)” (paragraph 7). However, the provisions of Schedule 1 are not exhaustive, and the court “takes each allegation of unfitness on its merits and considers it, irrespective of whether it falls within the schedule or not”: Re Amaron Ltd [1998] B.C.C. 264, 268, per Neuberger J.

The question to be decided in respect of each director is whether his or her conduct as a director of the Company makes him or her unfit to be concerned in the management of a company: section 6(1). The burden of proof is on the claimant and the standard of proof is the civil standard, namely the balance of probabilities. It may sometimes be that the court will require more cogent evidence of a serious allegation (such as dishonesty) than of a less serious allegation (such as carelessness) before it is persuaded on the balance of probabilities. There is however no rule of law or of logic to that effect; in each case the question is simply whether the evidence, viewed as a whole, is sufficient to establish the matter in question on the balance of probabilities. In assessing the evidence, the court “must be careful not to fall into the trap of being too wise after the event”: Re Living Images Ltd [1996] 1 BCLC 348, 356, per Laddie J. Although in this case the evidence against Mr Hawkes and against Mrs Hawkes is largely the same, the case against each of them falls to be considered separately.

As I have said, the Company was incorporated in 1987. It traded in the name RKL Plywood, and its principal business activity from at least the mid-1990s was the importation and supply of plywood and sheet materials in the UK and the Republic of Ireland. From modest beginnings, the Company expanded and became successful. Until its fortunes waned, it was achieving an annual turnover of the order of £40 million and directly employed more than thirty people, with up to 100 people being what Mr Hawkes called “indirect staff”. Roughly half of the employees were based at the head office in Swansea.

The defendants were the sole directors and shareholders. Mr Hawkes was born in 1966 and is now aged forty-eight years. He had responsibility for the trading and operational side of the business. Mrs Hawkes, who is now aged seventy-five years, was also the Company secretary. She was responsible for the sales ledger and debtor book. From 2007 until the Company entered into administration, each director was paid £5000 p.w. as remuneration. As Mr Hawkes made clear in his director’s questionnaire in 2012, the two directors “managed and oversaw every aspect of the business.” However, they were assisted by a management team of three or four other persons, who were either employees or engaged full-time on a self-employed basis. One of these was Mr Chris Jones, the sales manager. Another was Mr Brett Evans, the financial manager. Mr Evans had become involved with the Company in about 1997, when he was employed by Bevan & Buckland, the Company’s auditors. He went to work for the Company on a self-employed basis in 2000 and remained there until the Company entered into administration.

During the period of its success, the Company became involved in other ventures not directly related to its main business. Mr Hawkes is from Neath and wanted to do something to support his home town; he was also a keen rugby supporter. He judged that he could combine these passions with business advantage, and accordingly in 2002 the Company became a sponsor of NRL. The following year Mr Hawkes became a director and shareholder of NRL. Mr Hawkes held 50% of the issued shares in NRL. The remaining 50% shareholding was owned by Mr Michael Cuddy, though it was held in the name of his wife; she was a director, though it appears that she acted in that capacity on behalf of Mr Cuddy. After protracted litigation between Mr Hawkes and the Cuddys, which is subject of several judgments in the High Court and Court of Appeal, Mr Hawkes was granted a casting vote in NRL in the event of deadlock. The Company’s relationship with NRL and the way in which the moneys advanced to support NRL were shown in the Company’s accounts are one of the matters relied on by the claimant in these proceedings. Another such matter arises out of the Company’s relationship with ACL, which was a company incorporated in Cyprus and carrying on the business of letting holiday properties. From 2009 the Company owned all of the shares in ACL, to which it advanced considerable sums of money.

The downturn in the Company’s fortunes appears to have begun in 2008/9. The Company’s financial statements show that in the year ended 30 April 2008 it made a profit after taxation of £1,785,155; however, in the period 1 May 2008 to 31 July 2009 it incurred a loss after taxation of £2,175,636. The report of the directors in the financial statements for the latter period contained the following passage:

“The period to 31^st July 2009 has been one of the most challenging in the company’s recent history. The credit crunch and the associated decline in the markets which we supply has meant that for the first time in a number of years our turnover has fallen year on year. This fall has been as a result of market prices, underlying throughput volume however margins remained on par with the previous period (sic). The insolvency of a shipping company to whom we had paid a substantial sum for freight and the subsequent legal action has lead (sic) to a (sic) exceptional charge to the profit and loss account of £5,947,840”.

This exceptional charge was explained further in the notes to the financial statements:

“Additionally there is a sum of £5,947,840 which relates to the insolvency of David Orrells and Co / Alani Shipping. The company shipped large volumes of stock on 2 vessels that were on water when David Orrells / Alani Shipping ceased trading. It had also paid sums in advance for future shipments. Legal disputes against the company as a result of the above resulted in the company suffering a rule B attachment that prohibited it in transacting in US dollars for 8 months. This occurred at a time when the sterling/dollar exchange rate crashed due to the credit crunch. The company’s inability to book forward currency contracts and protect its currency position at a time of extreme unprecedented volatility compounded the losses.”

Mr Hawkes believes that the Company remained both viable and solvent; indeed, the financial statements for the year ended 31 July 2010 show that the Company made a profit after taxation of £493,620. Nevertheless, after the losses in 2009 the Company’s banker, Barclays Bank plc, became concerned about the level of its exposure and placed the Company into “business support”. Over the next two years the bank progressively reduced the borrowing facilities available to the Company. In April 2011 the bank engaged Grant Thornton to conduct an independent business review (IBR) of the Company. Grant Thornton’s Phase 1 report in June 2011 contained the following summary of the Company’s debt structure:

“• The Company currently has an overdraft facility with the Bank of £7 million and a facility cap with BSF of £8 million. …

• The Company had previously funded its stock purchases through Letters of Credit with the Bank prior to switching to the overdraft facility.

• The Company’s Chinese business partner, Shanghai East Best Foreign Trade Co Ltd (SEB), has recently entered into a revolving loan facility of $4 million on the Company’s behalf with a Chinese bank. Under the facility the Company must advance 30% of the purchase value to SEB which it will pay to suppliers once the stock is in its warehouse. SEB will then withdraw the balance under the facility with the Chinese bank and pay suppliers the remaining balances when cargo is loaded onto the vessel.

• The Company is expecting its first delivery under this facility in the w/c 20 May 2011 when the Company has to pay £1.9 million to SEB to enable it to repay the loan from the Chinese bank. This facility has funded the Company’s purchase of stock whilst in transit.”

Grant Thornton completed Phase 2 of the IBR and produced its report on 28 September 2011. The executive summary in that report provides the best available statement of how matters then stood:

“Relevant IBR findings

• As part of our review of the Company’s year end balance sheet (31 July 2011) we discovered that Management has not declared £1,350,000 of VAT payable in relation to the Company’s October ’10 to April ’11 quarterly VAT returns.

• Management has confirmed that it deliberately misstated the amount of VAT payable due to cash constraints impacting the business. Management has not yet informed HMR&C of this liability.

• The Company has confirmed that it also has Crown debt arrears totalling c. £700,000 comprised as follows:

- deferred duty £399,000

- corporation tax c. £301,000

• The Company does not have a time to pay arrangement in place with HMR&C.

Current situation

• As a result of the aforementioned findings, the Bank has made the decision to exit its relationship with the Company. BSF has frozen the Company’s invoice finance facility whilst the Bank arrives at its exit strategy.

…

Other summary draft IBR conclusions

• Despite a history of profitability at the pre-tax level in FY10 and FY11 [i.e. the financial years ending 31 July 2010 and 31 July 2011 respectively], the Company’s cash flow is under intense pressure due to

- high levels of non-core expenditure and directors’ drawings

- a reduction in the Company’s banking facilities

- the Company’s stock holding policy and the protracted retention of sections of slow moving stock

- the residual impact of the > c. £5 million of losses incurred in FY09 [i.e. the financial period ending 31 July 2009], stemming from the imposition of the rule B attachment and significant unfavourable foreign exchange movements.

• The Company’s cash position is now impacting on its ability to fund and clear the purchases necessary to generate sales.

• There is uncertainty over how long the Company will have access to its $4 million line of credit after 31 March 2012 when the agreement with its Chinese trading partner can be terminated unilaterally with two months notice. Withdrawal of the $4 million facility would likely result in the failure of the Company if no alternative funding could be found.”

The conclusions and recommendations in the report contain the following relevant passages:

“• If the realisations from stock and debtors are poor then the Bank is unlikely to recover its lending in full after costs.

• The Bank faces the risk that HMR&C could distrain for an amount between £2.1m to £3.45m.

• The directors’ behaviour to date suggests that they will do whatever is necessary in order to keep the Company trading and there is therefore a real concern that the directors could try to maximise cash generation to pay HMR&C at the expense of the Bank’s security.

• It appears unlikely that another provider will be prepared to take on this connection in light of the deliberate understatement of liability to HMR&C.

…

• In light of the above there appears little upside in the Bank continuing to support other than on a limited basis in order to reduce its exposure.

• We recommend that the Bank encourages the directors to file a notice of intention to appoint administrators to the Company to create the moratorium whilst the Bank considers its position further and the Bank uses that time to reduce its lending. …

• If the directors are not prepared to pursue this course of action we recommend that the Bank takes control and appoints administrators to the Company immediately.”

Pursuant to that report, on 3 October 2011 the directors caused the Company to cease trading and appointed Alistair Wardell and Nigel Morrison of Grant Thornton as joint administrators. At that date, the Company’s debt to Barclays Bank exceeded the value of the bank’s security by in excess of £19 million and the debt to BSF exceeded the value of its security by more than £5 million. There were trade creditors of more than £2 million, and the Company owed in excess of £900,000 in arrears to HMRC. The claimant’s evidence is that the total deficiency is in excess of £26 million. Mr Hawkes was adamant that the Company was not insolvent and could have continued to trade if given the opportunity. He also maintained that the realisations for BSF were seriously reduced by the administrators’ incompetence and by their refusal to permit Mrs Hawkes to be involved in the collection of book debts. However, the best evidence available to me in respect of the Company’s financial position comes from the administrators, and even if the shortfall in realisations for BSF is entirely ignored the total deficiency still exceeds £20 million.

In the context of this summary of the background, I turn to consider the particular matters relied on by the claimant as demonstrating that Mr Hawkes and Mrs Hawkes are unfit to be involved in the management of a company.

The claimant’s case in this respect is based on what are said to be materially misleading statements in the following three documents:

In the 2009 accounts, the balance sheet showed that current assets included debtors in the sum of £7,449,151. The notes to the accounts stated:

“Included within other debtors above is £537,360 (2008 £57,740) which is due from Neath RFC Limited (sic), no interest is accruing on this balance.”

In the 2010 accounts, the balance sheet showed that current assets included debtors in the sum of £12,126,773. The notes to the accounts stated:

“Included within other debtors above is £742,805 (2009 £537,360) which is due from Neath Rugby Limited, no interest is accruing on this balance.

The directors are of the opinion that the balance due from Neath Rugby Limited is fully recoverable. Neath Rugby Limited was insolvent at the year end, however, the directors feel that this debt can be met with the transfer of assets into F G Hawkes (Western) Limited together with Neath Rugby Limited increasing its trading revenue moving forward. Therefore the directors are confident that this increased trading revenue will allow full repayment of the debt.”

The letter of representations was prepared by the auditors and given to the directors to sign by way of confirmation of the representations that had been made to the auditors in the course of the audit of the 2010 accounts. Above a sequence of thirty numbered representations, the letter stated:

“During the course of the audit of your accounts for the period ending 31 July 2010, the following representations were made to us by the management and directors. Please read these representations carefully and if you agree with our understanding please sign and return a copy of this letter to ourselves as confirmation of this.”

The first representation was a general one:

“1.

You acknowledged as directors your responsibility for making accurate representations to ourselves and for the accounts which we have audited for the Company.”

The claimant relies on two particular representations:

“4.

You confirmed that there had been no events since the balance sheet date which required disclosing or which would materially affect the amounts in the accounts.”

“20.

You confirm that the debtor balance of £742,805 from Neath Rugby Limited is fully recoverable. Neath Rugby Ltd was insolvent at the year end, however you feel that the debt can be met with the transfer of assets into FG Hawkes. You stated that it is the intention of Neath Rugby Limited to realise their assets by the selling of debentures at up to £10,000 each from their WRU ticket allocation. Neath Rugby Limited has an allocation of circa 400 tickets and once Mr Geraint Hawkes has full ownership of the company he intends to trade the debentures and repay the intercompany debt in full. You acknowledge, no provision for the debt is necessary in the financial statements.”

The claimant contends that the evidence as a whole shows the position in the accounts and the letter of representations to have been entirely misleading, so far as concerns the moneys advanced to NFL. The first matter relied on is a document dated 9 April 2009, which was on the Company’s headed paper and was signed both by Mr Hawkes and by Mrs Hawkes. It reads as follows:

“Agreement between F G Hawkes (Western) Ltd T/A RKL Plywood and Neath Rugby Limited dated 9^th April 2009

The directors acknowledge that the business operated by Neath Rugby is not related to the operations of F G Hawkes (Western) Limited and the monies advanced give no benefit to F G Hawkes (Western) Ltd. The directors also confirm that they understand that Neath Rugby is not in a position to repay any funds now or is likely to in the future.

The directors are in agreement that all funds advanced to Neath Rugby Limited from F G Hawkes (Western) Limited T/A RKL Plywood in the past or in the future are to be deemed as a donation and written off in the accounts of FG Hawkes (Western) Limited when the directors deem appropriate.”

The claimant refers, second, to written responses given by Mr Hawkes in March 2013 to the Company Investigations section at the Insolvency Service; it relies particularly on responses 2 and 5, but it is convenient to set out two further responses also.

“2.

My intention along with the intention of [the Company] at the time of payment to NRL was always that these monies be treated as donations and there was never any prospect of repayment by NRL.

…

5.

There was never any intention on the part of [the Company] that these monies should be repaid.

6.

Periodically, any monies shown on the accounts as loans to NRL would be written off as donations and the accounts would then reflect the proper position (i.e. no money was owed).

7.

Most recently, in April 2008 the sum of £211,462 was written off in the accounts in respect of monies advanced prior to that date. The intention was to carry out this exercise annually. However, in the lead-up to the preparation of the final accounts in April 2009 it became apparent that [the Company] would have a significant exceptional item making a dent in the balance sheet to the tune of £4.5m. As a result, [the Company] could not afford to affect the balance sheet any further and therefore we as a board of directors allowed the ‘loan’ to roll over in the accounts. Due to the pressures since, there has never been a good time for the balance sheet to take the hit associated with writing off this sum of money and therefore this has not been done. However, it was always the intention that the sums would never be repaid.”

The third particular matter relied on by the claimant, with respect to the 2010 accounts and the letter of representations, concerns an Asset Purchase Agreement dated 10 September 2010—more than seven months before the signing of the 2010 accounts and the letter of representations—and made between (1) NRL as Seller and (2) Neath Rugby Football Club Ltd (“NRFC”) as Buyer and (3) Mr Hawkes and (4) the Company. The Agreement recorded that NRFC was a wholly-owned subsidiary of NFL and had agreed to purchase the business and assets of NFL as a going concern with effect from the close of business on the date of the Agreement, namely 10 September 2010 (cf. clauses 2.1 and 1.1). Clause 3.1 provided that NRFC should with effect from the date of the Agreement assume responsibility for the Assumed Liabilities, which were defined in clause 1.1 as including all amounts owed to the Company. The purchase price for the sale of the business was “the value of the Assumed Liabilities” (clause 5.1) and was payable “by the payment and discharge by the Buyer of the Assumed Liabilities in accordance with clause 3.1 (clause 5.2). Clause 3.3 contained an agreement by Mr Hawkes and the Company to the “assignment” from NRL to NRFC of all debts owed to them (except for one debt that is not relevant for present purposes) and agreed that NRL should not be liable to them in respect of any of the debt so assigned, “such liability being solely that of the Buyer as from Completion”. Clause 3.4 provided: “Mr Hawkes and [the Company] each hereby agree to guarantee the obligations of the Buyer pursuant to this clause 3.” Other provisions of the detailed Agreement provided for such matters as the transfer of assets, where that was conditional on third-party consent, and of employees.

It would appear from the Asset Purchase Agreement, therefore, that any debt formerly owed by NRL to the Company was on 10 September 2010 transferred by tripartite agreement to NRFC. The Asset Purchase Agreement was not mentioned in the 2010 accounts or in the letter of representations.

There are two nearly contemporaneous commentaries on the Asset Purchase Agreement. The first is contained in a minute prepared by HMRC of a meeting on 26 October 2010 between its own Inspectors, Mr Hawkes, Mr Brett Evans and a representative of the Company’s auditors. The minutes show that Mr Hawkes was invited to explain why further moneys had been advanced to NRL after £211,000 had been written off in a previous year (see response 7 in paragraph 21 above), and that he explained that, had he sued NRL for the debt, the reputation of the Company would have been ruined. Instead the existing debt was written off and further moneys were invested to keep the club afloat. There was a “restructuring” going on (that is, the Asset Purchase Agreement), which would “ensure that the subsequent loan can be paid in full.” It was hoped that the transfer of “assets and liabilities” would be completed by 25 November 2010. The new company (that is, NRFC) “would make profits and indeed it has a property worth £250k which will be used to make payment once it had been transferred into the new company.” Mr Hawkes suggested in his evidence that the minute was an inaccurate record of what transpired at the meeting, that he made clear to the Inspectors that the loans were not to be repaid, and that one Inspector positively advised that it would be contrary to the Company’s interests to call in the loan from NRL. However, I accept the minute as the best and most reliable evidence of what was said at the meeting.

The explanation given at that meeting for the write-off of the loan of £211,462 is essentially the same as the explanation given in a letter on 10 August 2010 by the Company’s auditors when explaining why the consequent loss was for an allowable purpose. The letter said that the loan was written off as it was “clearly irrecoverable”; there would not be any repayment on account of NRL’s “financial position”, and any attempt to recover the money through the courts would have had “major adverse implications for the Company’s business”. The claimant contends that the explanation there given treats the write-off of the earlier loan as exceptional, rather than as reflecting the very purpose of what was intended as a donation to the Company.

The second early commentary on the Asset Purchase Agreement is contained in an email dated 7 December 2011 to the Company’s administrators from Mr Alun Jones, a solicitor of DJM Solicitors, which acted for NRFC, and is to the following effect. Although the outcome of his dispute with the Cuddys was that Mr Hawkes had a casting vote in NRL, the continuing dispute between them meant that he was unwilling to continue his and the Company’s support for Neath Rugby Club unless its assets and liabilities (except for certain specified liabilities) were transferred to a new company. As NRL could not survive without the continued support of Mr Hawkes and the Company, its board agreed to the demand. The email explains that, although the agreement was concluded on 10 September 2010, everyone understood that the “rugby-playing assets” could only be transferred to NRFC with the consent of the Welsh Rugby Union (“WRU”) once NRFC had become a member of the WRU; until then, those assets would be held by NRL on trust for NRFC in accordance with clause 7 of the Asset Purchase Agreement. Writing in December 2011, Mr Jones expressed the belief that the admission of NRFC to membership of the WRU and the consequent transfer of the “rugby-playing assets” from NRL to NRFC would be finalised shortly. However, he invited the administrators to the view that the guarantee in clause 3.4 of the Asset Purchase Agreement meant that the debt was no longer recoverable from NRL, because the Company itself had guaranteed the debt, with the result that if payment were required from NRL “NRL could then call for the money immediately back from [the Company].”

The evidence of Mr Hawkes in his affidavit and orally at trial, supported by that of Mrs Hawkes in her affidavit, was generally to the effect that the moneys advanced to NRL were and remained repayable loans; they would have been written off and thereby converted into donations as and when the Company’s financial position permitted, and the realities of sponsorship of a local sports club meant that repayment would not have been pursued unless necessary, but until they were written off they remained debts owed by NRL. Moreover, the loans could have been repaid, if necessary, because, although NRL did not have the ability to repay the loan from its cash or income, it did have assets that could be used for repayment. In parts of his oral evidence, however, Mr Hawkes moved from saying that the moneys were loans but there was no intention to enforce repayment to saying that he actually intended that they be repaid. When he was asked in cross-examination why in August 2013, in his Response to Notice of Intention to Commence Proceedings to Disqualify, he had stated, “It was the intention of all involved that the loans would be ‘written off’ in the 2010-2011 accounts”, he replied that the loans were not to be written off: “It was always my intention that the loan be repaid.” He explained the purpose of the Asset Purchase Agreement variously as being to protect Neath Rugby Club or as being “to secure the loans”, and he said that the profits to be made by NRFC would have paid off the loans. He said that the Asset Purchase Agreement had never been completed, and the profits anticipated from the sale of debentures, as mentioned in the letter of representations, could not be realised, because of stipulations imposed by the WRU. My understanding is that, despite the confidence expressed in late 2011, the transfer of the “rugby-playing assets” to NRFC never took place and that it remained a dormant company. In the course of his oral evidence, Mr Hawkes emphasised the significant benefit obtained by the Company by its association with an old and famous rugby club and the harm that would have been done to its reputation if, by calling in the loans at a time when NRL could not afford it, it had been perceived as bearing responsibility for the demise of the club.

I make the following observations and findings in respect of the complaint regarding the NRL debts and the statements in the accounts and the letter of representations.

The 2010 accounts, signed by Mr Hawkes on 28 April 2011, showed that the current assets of the Company included debtors in the total sum of £16,525,094. The notes to the accounts showed that this sum included £4,518,127 (2009: £4,162,941) in respect of money loaned by the Company to Amadora, “a company which is part of the group and is 100% owned by [the Company]”. The notes to the accounts also showed that the Company’s financing facilities were secured by inter alia “Unlimited guarantee given by Amadora Co Limited dated 17/05/2010”.

The letter of representations, signed by Mr Hawkes and Mrs Hawkes on 28 April 2011, contained the representations numbers 1 and 4 (paragraph 19 above).

The case for the claimant is that the 2010 accounts failed to disclose the fact that the value both of the debt owed by Amadora and of the inter-company guarantee had been significantly adversely affected by the liquidation of Amadora in November 2010, after the end of the financial period to which the accounts related but before they were signed by Mr Hawkes.

In support of this case, the claimant refers to a letter dated 9 January 2012 from Mr Wardell, one of the Company’s joint administrators, to the Department of the Registrar of Companies and Official Receiver in Nicosia. The letter said that the administrators’ solicitors had ascertained that Amadora was placed into liquidation on 18 November 2010 and that the Official Receiver in Cyprus had been appointed as liquidator. The letter gave notice of a provisional claim of £3,253,838 in the liquidation.

The case advanced by Mr Hawkes and Mrs Hawkes, in their Response to Notice of Intention to Commence Proceedings to Disqualify in August 2013, in their respective affidavits, and in more detail in Mr Hawkes’ oral evidence, was to the following effect. Amadora did not go into liquidation and did not cease trading. It was subject of a judgment in 2010—Mr Hawkes said it was a default judgment—and was accordingly put into what he called administration, from which it was released approximately one year ago after the judgment debt had been discharged. Thereupon Amadora was “reinstated”; it was never struck off. The events of 2010 did not affect Amadora’s solvency or ability to carry on business and it was proper not to mention them in the accounts.

It might have been thought that the factual issue as to the status of Amadora would be capable of simple proof by reference to official records and, if necessary, some evidence of Cypriot corporate or insolvency law. However, the evidence adduced at trial was sketchy, to say the least.

The claimant did not adduce any records from Cyprus’s counterpart to Companies House. Nor did it adduce any evidence of the enquiries made by the administrators’ solicitors (paragraph 32 above) or of the response if any received to the administrators’ letter of 9 January 2012 or the notice of claim in the liquidation. It did adduce a report made by Barclays Bank to South Wales Police in respect of alleged fraud on the part of the defendants, which stated: “The Cypriot Companies House records show that Amadora Co. Limited was … placed into liquidation on 18/11/2010.” On the first morning of the trial, I refused the claimant permission to rely on some very lately disclosed documents, written in Greek and accompanied by translations of uncertain provenance.

Other evidence regarding Amadora may be summarised as follows.

The state of affairs indicated by these facts is not easy to work out, at least in the absence of evidence regarding Cypriot insolvency and corporate law. But it is clear from Mr Hawkes’ own evidence that, as a result of legal proceedings brought against it, Amadora was placed into some court-based regime, which he called administration. He also said that VRA Ltd was used for the purpose of taking the loan from the Cypriot bank because Amadora could not repay the loan—I took him to mean the loan made to it by the Company—as it was in administration. This and Mr Hawkes’ evidence that he had to go to court in order to secure the loan indicate that Amadora’s ability to raise money and deal freely with its own assets was restricted by the procedure to which it was subject, whether it be called administration or liquidation.

In these circumstances, I agree with Mr Cole that it is not critical to identify the precise nature of the procedure to which Amadora was subject. The position as it appears from Mr Hawkes’ own evidence was clearly such as to make the value both of the debt and of the guarantee doubtful, though they may not necessarily have been bad. The absence of any mention of the events of late 2010 in the 2010 accounts rendered those accounts misleading. As Amadora was a wholly owned subsidiary of the Company, which was itself wholly owned by Mr Hawkes and Mrs Hawkes, and as Mr Hawkes was present in person at the AGM in March 2011, it is not plausible to explain the omission in the accounts as a matter of oversight. I find that the omission was deliberate and, as in the case of the NRL debt, was for the purpose of avoiding the inclusion of information that would place a question-mark against the financial status of the Company. I accept that the directors’ conduct in respect of the treatment of Amadora in the Company’s accounts makes them unfit to be concerned in the management of a company.

False VAT returns

It is not in dispute that in the period April 2010 to April 2011 the Company made under-declarations of VAT in a total sum of £1,523,452.50, as follows:

It is relevant to consider the context in which the under-declarations were made.

The working papers of Bevan & Buckland in respect of the audit of the Company’s financial statements for the year ended 31 July 2010 include a note of a conversation with Mr Brett Evans on 20 April 2011 concerning the under-declaration of £131,065.05 in April 2010. The note records:

“[Brett Evans] said the following[:] ‘adjustment done was probably due to cashflow’. I asked on what return was this adjustment reversed and he said, ‘It probably has not been’. I then said oh, and he replied, ‘that’s for the VAT man to find’. He then asked me whether the accounts would show the VAT liability separately in the notes, as he could not allow for this.

Conclusion

The accounts are stated correctly with regards to the above issue, however the VAT due has not been declared to HMRC—Point for Partner—Inclusion in Letter of Rep.”

The under-declarations were not disclosed to HMRC until after the Company had entered into administration. Insofar as the letter of representations dated 28 April 2011 stated that the under-declaration of £131,065.05 in April 2010 had been disclosed after 31 July 2010, it was false; a letter dated 16 December 2011 from HMRC to the administrators shows that HMRC learned of all the under-declarations, including the first one, on 15 November 2011. When Mr Hawkes was asked in evidence why he signed the letter and thereby confirmed the truth of paragraph 19 of it, he replied that his belief that the under-declaration had been declared was derived from paragraph 19 itself, which had been prepared by the auditors. That is not a credible response, because the representations in the letter do not constitute assurances given by the auditors but a record of assurances they had received from the directors. In other words, the letter amounted to a request by the auditors, “Please confirm that you have disclosed this”, and a confirmation by the directors that they had done so. Mr Hawkes, as an intelligent and astute businessman, would have been perfectly well aware of that. I have no reason to suppose that Mrs Hawkes was not also aware of it.

Grant Thornton recorded their discovery of the under-declarations of VAT in their Phase 2 report in the IBR; see paragraph 19 above. The report stated: “Management has confirmed that it deliberately misstated the amount of VAT payable due to cash constraints impacting the business.” The glossary to the Phase 2 report defined “Management” as the Company’s management and accounting team. The glossary to the Phase 1 report had defined “Management” more specifically as Mr Hawkes, Mrs Hawkes and Mr Brett Evans. An internal Grant Thornton email dated 23 September 2011 from Mr James Roberts, manager of the Recovery & Reorganisation section, to Mr Wardell recorded that Mr Roberts had spoken by telephone to Mr Hawkes and Mr Evans together that day. According to the email, it was apparent that both Mr Hawkes and Mr Evans knew of the under-declaration: “Mr Hawkes commented that ‘we reduced the VAT payable on the October return due to the drop in the bank facilities’.” The email records that Mr Hawkes made a further telephone call that day to Mr Roberts, saying that it was the Company’s intention to pay the outstanding moneys as soon as it had secured additional bank funding, pointing out that the liability was included in the Company’s management accounts produced to Grant Thornton and the bank, and asking whether Grant Thornton would mention the under-declaration in its report to the bank. When Mr Roberts said that the matter would indeed be included in the report, Mr Hawkes asked that the report make clear the circumstances in which the under-declarations had been made and the fact that the liability had not been concealed from the bank.

In the course of its investigation into the Company’s affairs, the Insolvency Service wrote to Mr Brett Evans on 6 November 2012. The letter recorded that Grant Thornton had told the Insolvency Service that Mr Evans had told them on 20 September 2011 “that VAT had been understated on recent VAT returns as the company was experiencing cash constraints and could not afford to settle its ‘true’ VAT liability.” The letter said: “Please will [you] advise me of the identity of the director(s) who instructed you to carry out this policy of under-declaration.” On 29 November 2012 Mr Brett Evans replied:

“The decision to adjust the vat returns was a joint decision between the directors Janis and Geraint Hawkes. They assured me that the adjustments would be unwound in the following quarter.”

On 31 January 2013 the Insolvency Service wrote again to Mr Brett Evans, asking whether he had raised concerns with the directors and advised them as to the legality of what was being done. On 3 February 2013 he replied:

“I did indeed raise concerns, the directors assured me that the ‘adjustments’ would be reversed as a large amount of cargo would be cleared through customs in the January quarter which would generate a vat repayment, this would allow an unwinding. Mr Hawkes was also convincing when saying he could delay future stock shipments and clear outstanding arrears. All sales were factored, two or three days sales would generate enough funds to reverse the adjustments, this had occurred in the past to meet overdraft reductions.

I did not advise them of the legality of altering the returns as I believed that they were fully aware of the implications. I did advise them of the financial implications which would occur at the time of the next vat visit.”

Mr Hawkes’ evidence in his affidavit was that the incorrect VAT returns were the sole responsibility of Mr Brett Evans, who actually completed the returns. Mrs Hawkes’ affidavit was to similar effect. In his oral evidence Mr Hawkes said that he had always trusted Mr Evans, who was an experienced chartered accountant and ran the financial side of the business. There was no decision on the part of the directors to under-declare the Company’s VAT liability; such a decision would have been dishonest. Mr Evans had acted unilaterally and without telling the directors. The first that Mr Hawkes knew of any under-declaration was when he signed the 2010 accounts in April 2011. He thereupon demanded an explanation from Mr Evans, though his evidence was that he could not remember what Mr Evans had said. Mr Hawkes’ evidence was that he had severely reprimanded Mr Evans and received his assurance that there would be no repetition of his conduct. He was ignorant of any further under-declaration until September 2011, when it was brought to his attention by Grant Thornton; he immediately sought advice from KPMG. (In fact, his meeting with KPMG was on 30 September, three days before the Company entered into administration.) There was no reason for the Company to have under-declared its VAT liability, because it would always have been in a position to raise sufficient money to discharge its liability to HMRC. Mr Hawkes said: “We could have paid the VAT if I had known of it.” He also said of Mr Evans: “I do not know why he did what he did.”

For the defendants, Mr Harris pointed out that Mr Evans was not called as a witness and that he had a motive for protecting his own position by casting the blame onto the directors. He also referred to the unattractive stance taken by Mr Evans in his comments to Bevan & Buckland (see paragraph 41 above). He submitted that the claimant had failed to discharge the burden of proof in respect of what was a very serious allegation.

Even if Mr Hawkes’ evidence were true, the directors would have been guilty of a serious dereliction of their duty. They would have failed to maintain proper oversight of the Company’s financial position and its conduct towards HMRC; they would have failed to report the under-declaration in the April 2010 return; they would have failed, on learning of that under-declaration, to ascertain that similar under-declarations had been made in two subsequent returns; they would have failed to exercise supervision in respect of the next return, for April 2011.

However, I regard Mr Hawkes’ evidence as wholly incredible and have no hesitation in rejecting it as deliberately false.

The false VAT returns amounted to the use of deception to prefer other creditors to the Crown. In paragraph 77 of his affidavit, Mr Hawkes admitted that the Company operated such a policy of preference, though he denied knowledge of false returns. He deposed: “It should be noted that there is a difference between not being able to meet a company’s liabilities and putting creditors in order of importance. … Trade creditors were being paid regularly … If HMRC had issued a petition on the company then the company could have met the demand in full within the time allocated to pay.” The position is the more serious because this discrimination in favour of trade creditors was being aided by deception of HMRC.

Moreover, the position regarding the VAT returns must be seen in the context of the Company’s support for other companies with which Mr Hawkes was connected. In the year to 31 July 2010, the Company’s loans to NRL increased by £205,445. According to the Company’s management accounts for the year to 31 July 2011, the loans to NRL had increased by a further £343,879 during that year; they had increased by £319,743 since 1 October 2010, a period in which the Company had under-declared its VAT liability by £1.35 million. The first affidavit of Susan MacLeod shows that in April, May and June 2011 the Company paid a total of £333,302 in respect of NRL’s wage and PAYE liability. The affidavit also shows that in the period March to July 2011 the Company paid £98,010 to Neath Football Club Ltd, a company of which Mr Hawkes was a director and the 99.9% shareholder and which was subsequently wound up in May 2012 with no assets and liabilities of £603,473. These payments out of the Company, at a time when the directors were continuing to deceive HMRC as to the extent of the Company’s liability for VAT, aggravate the already serious nature of their conduct.

In conclusion, I accept that the directors’ conduct in respect of the false VAT returns makes them unfit to be concerned in the management of a company. There is no basis for distinguishing between the involvement of Mr Hawkes and Mrs Hawkes in respect of this allegation.

Breach of BSF’s invoice-discounting service

The claimant’s third head of complaint against Mr Hawkes and Mrs Hawkes arises out of a Sales Ledger Finance Agreement (“the SLF Agreement”) dated 17 February 2000 between (1) Barclays Bank Plc (acting through its Sales Financing division, BSF) and (2) the Company and (3) Mr Hawkes and Mrs Hawkes as Indemnifiers, as amended by a letter of amended terms signed on 14 May 2002 by Mrs Hawkes on behalf of the Company and by Mr Hawkes and Mrs Hawkes respectively as Indemnifiers.

The SLF Agreement was for finance to the Company by way of advance payment by BSF of a proportion, either 80% or (as Mr Hawkes states) 75%, of the value of the Company’s invoices, on the security of an assignment of the invoices to BSF; this was referred to as a Confidential Invoicing Service (“CID”). A “Briefing Report” prepared by Barclays Bank Plc in respect of the Company’s performance of its SLF Agreement explained: “Monies are provided to the customers by BSF rather than they (sic) having to wait for payment under their normal credit terms. On receipt of the invoice BSF will release a percentage of the invoice total … to the company who has applied for the facility (customer). The invoices issued by the customer details (sic) the bank account details of a BSF Collection account. When the debtor makes the payment to the bank account stated they are unaware that they are repaying BSF. On receipt of the payment, the remainder of funds, less BSF charges for providing the facility are then paid over to the customer.”

Condition 13.2 of the Terms and Conditions of the SLF Agreement provided:

“The inclusion of a Debt in an Offer or a Notification Schedule delivered to us shall be treated as including all of the following warranties from you, namely that:

…

(d)

the Goods have been Delivered or the services have been completely performed and the Goods are owned only by either you or the Debtor free from encumbrances or any third party tracing right;

(e)

the Debt represents an existing, enforceable and undisputed obligation of the Debtor;

(f)

the Notified value of the Debt represents its Contracted Value;

…

(k)

no right or claim of rescission, contra accounting, defence, set-off, counterclaim, adjustment or other right or claim (whether valid or alleged) exists to reduce or extinguish the Notified Value of the Debt or affect our ability in our name to collect the Debt;

(l)

except as otherwise approved by us in writing (including the giving of a Credit Line in response to an application referring to your credit terms), the debt is payable in accordance with your payment terms set out in the Schedule, which are endorsed on every invoice, and which do not allow the Debtor to claim a prompt settlement or trade discount exceeding 5% (five per cent) and is not subject to retrospective discount;

…”

The Briefing Report records:

“The most common types of reductions made to invoices are:

Contra Agreements – Invoices issued by the customer to debtors where the same debtor also provides goods or services to the customer. These types of agreements often result in some form of offset to the original invoice submitted by the customer.

Rebates – These are financial incentives offered by the customer to debtors, most commonly used for volume or bulk orders made and for prompt/early repayment.

Credit Notes – Are notes raised by the customer to either void or reduce an invoice value after it has been issued. Common reasons for these are faulty goods, returns or administration errors.”

After the Company entered into administration, BSF suspended the CID facility and, for the purpose of getting in the Company’s outstanding trade debts, engaged Atlantic Risk Management Services Ltd (“Atlantic”), which had undertaken two reviews of the Company’s sales ledger in the preceding eighteen months. Mr Hawkes blames the shortfall that resulted to BSF after the debt-collection exercise on the fact that Mrs Hawkes, who had sole responsibility for the sales ledger and for debt collection while the Company continued to trade, was not permitted to participate in the effort to realise debts after 3 October 2011. At all events, it is the information provided by BSF to the claimant that forms the matters of complaint advanced against Mr Hawkes and Mrs Hawkes under this third head of the claim.

The first particular of this complaint is that, as Atlantic discovered, the Company had since at least 2010 been trading with more than twenty different customers under arrangements that provided for those customers to have payment rebates, although those rebates had not been disclosed to or approved by BSF. Mrs MacLeod’s first affidavit contains a tabular summary of the Company’s previously undisclosed records of rebate agreement and amounts. This shows that twenty-four customers were recorded to have rebate agreements. Of these, three had percentage rebates in excess of 5%; however, the rebate agreement with one of those three, Grafton Plc, was known to BSF, and another of the three, Selco, had received no discount—and therefore, presumably, done no business with the Company—in 2011. The total rebate recorded on those documents for 2011 was £596,499, of which the rebate to Grafton accounted for £405,144. The Briefing Report records that the total amount of rebates owed to customers other than Grafton was £295,000. Further, the total amount of rebates owed to Grafton was £596,000, as compared with a reserve of only £414,000, which was the figure that Mr Brett Evans had provided to BSF in September 2011 with the Company’s Month End Reconciliation report for August 2011.

In his affidavit, Mr Hawkes dealt with this complaint at paragraphs 8, 9 and 89:

“Janis Hawkes and I were not aware of any additional rebate agreements other than what was in place with the Grafton Group. The Debtor book was audited by the bank every quarter, which would demonstrate over 40 audits by Barclays Bank since 2000. There were also a number of audits undertaken by external auditors such as the Atlantic Auditors over the 11 year term. This issue was never raised as a result of these audits. There were prompt payment discounts in place with discounts of between 2.5 – 3%. The bank was aware of this. …

“As part of the monthly reconciliation with BSF, a full purchase ledger listing was provided. BSF would issue a reserve against contra-trading every month. Copies of the monthly reconciliations demonstrate that this was the position.”

“Barclay’s (sic) Sales Financing were fully aware of all contra-trading which the company had. The purchase ledger was always provided as part of the monthly reconciliation and Barclays made adjustments to the facility so that any contras were not funded.”

When he was cross-examined, Mr Hawkes said that, although there were monthly settlement agreements with several customers, neither he nor Mrs Hawkes was aware of the existence of rebate agreements; the Company had no interest in issuing rebates, and any agreements in that regard must have been made by the sales manager, Mr Chris Jones, without reference to the directors. When asked whether Mr Jones ought to have referred the matter to the directors, Mr Hawkes replied that there was no need for him to have done so, because the rebates with customers other than Grafton were not significant. Mr Hawkes said that he understood the obligation to inform BSF of any rebates. He also said that rebates could not possibly be hidden, because they would be apparent from a shortfall in the payments received.

I make the following observations and findings in respect of this particular of complaint.

The second particular of complaint under this head is set out in the Briefing Report:

“In addition, Atlantic also reported that [the Company] had failed to disclose to BSF that they had supplied timber to some of their debtors via a Bill and Hold style agreement which was in breach of the Terms and Conditions of the CID facility. In such agreements [the Company] agreed a bulk price with a debtor and agreed to deliver the timber over a period of time, typically 6-8 weeks. [The Company] had raised the invoice for the full amount of the order and presented it to BSF for funding at the time the agreement was made rather than when all goods were delivered. This is a form pf pre-invoicing and is contrary to the Terms & Conditions of the BSF agreement which stipulates that invoices must only be presented to them for funding only (sic) when the total value of the goods have (sic) been received by the debtor. When Atlantic contacted these debtors for payment they disputed the amount owed stating that they had only received part of the goods invoiced. A further bad debt of circa £97k has been incurred by BSF as a result of the directors’ actions in failing to supply al the goods in this contact (sic).”

Details of the allegation are set out in a statement dated 17 June 2003 from Mr Paul Taylor, an internal Fraud Investigations Manager with Barclays Bank, and the documents that he exhibits to it, including a report dated 24 October 2011 from Atlantic. One of the documents exhibited to the statement is an email dated 3 November 2011 from a customer called Caledonian Plywood Ltd, which identifies five invoices with a total value of £73,800 in respect of which the goods were “never supplied”. Another such document is an email dated 26 October 2011 from another customer, Lawcris Panel Products Ltd, which identifies five invoices with a total value of £56,328 and states: “I’m afraid to say that we have not received any goods against these invoices. Previously [the Company] have been guilty of invoicing us for goods early.”

Mr Hawkes responded to this allegation in general terms in paragraph 8 of his affidavit:

“There was no ‘Bill and Hold’ agreement in place. Title to goods was transferred to the buyer against a release/invoice. Goods were often sold on a ‘free on truck’ basis at any stock holding which the company had across the country. This was normal practice and was discussed with BSF on many occasions and was agreed with them.”

On the limited state of the evidence before me, I am unable to conclude that there was any “bill and hold” agreement in place, contrary to the terms of the SLF Agreement, far less that any such breaches of contract that might have taken place indicate the unfitness of the defendants to be involved in the management of a company. Far greater exploration of the general trading practices and specific commercial transactions of the Company, both in themselves and by reference to the information provided over the years to BSF, together with more specific cross-examination of Mr Hawkes, would have been required before I should have been prepared to accept these matters as supportive of the claimant’s case.

The third particular of complaint in respect of the SLF Agreement concerns contra-trading. An internal audit report prepared for Barclays Bank and dated 16 December 2011, though with reference to an audit visit conducted on 14 and 15 June 2011, identified as one of the main issues identified on the audit: “Contra offsets noted against the purchase ledger of £124,309”; and it recommended a reserve at that level. The body of the report noted that the stated level of contra offsets was identified as at the end of January; “the main contra debtor continues to be Caledonian Plywood at £108k.” The Briefing Report refers to the existence of £420,000 of uncollectable debts on account of contra trading claims. The gist of the complaint is that, unknown to BSF, invoices due from the Company’s customers were subject to netting arrangements, whereby only the balance after taking of accounts would be paid. Particulars of those claims are set out in Mr Taylor’s statement, which shows that Atlantic found evidence that the Company had entered into contra agreements totalling £420,184.01, virtually all of which (£418,420.41) was with Caledonian Plywood Ltd.

Mr Hawkes responded to this allegation as follows in his Response of 5 August 2013:

“Contra-accounting provisions were made by BSF for any contra dealings as they were shown on a monthly basis when they received a copy of the purchase ledger.

The Contra-trading was identified to them on regular occasions in the audits. If we had contra trading they would take that money off us. The contra-agreements were discussed, in the purchase ledger, orally with our Relationship Manager and were also visible in the audits.”

There is good evidence that invoices assigned to BSF as security were subject to contra-trading and that this was contrary to the letter of condition 13.2(k). There is also good evidence from the audit documentation and from Atlantic’s report to BSF that the bank was not expecting the scale of contra-charges that it faced. Yet the Atlantic report shows that contra charges were anticipated and acknowledges that this is “a difficult area in which to have good visibility when a business is trading.” There is evidence in the form of an email that in June 2011 Mr Evans provided to BSF statements of account for Caledonian Plywood; precisely what those statements showed is not clear, because the attachment to the email is not definitively identified. I think it not unlikely that BSF was aware that contra-trading was taking place and was merely surprised at the level of contra-charges. Without more intensive focus on these matters in the course of evidence and cross-examination of Mr Hawkes, I am not satisfied that the claimant has made out the ground of claim in this regard.

For the reasons set out above, and in particular in paragraphs 28, 37-8 and 47-51, I am satisfied that Mr Hawkes and Mrs Hawkes are unfit to be concerned in the management of a company. I shall accordingly make a disqualification order against each of them and shall hear counsel further regarding the length of the order in each case.