The Secretary of State for Business, Innovation and Skills v Akbar & Ors

The proceedings before me are brought pursuant to section 6 of the Company Directors Disqualification Act 1986 (“CDDA 1986”). They relate to the conduct of each of the defendants whilst a director of the company now named Greentabs Limited, but which for many years was named Mumtaz Food Industries Limited (“MFIL” or the “Company”)).

MFIL was incorporated on 22 December 1997. The First Defendant, Dr Gul-Nawaz Khan Akbar (“Dr Gul-Nawaz”) was appointed a director on incorporation and remained a director thereafter. According to records at Companies House, the Second Defendant (Mr Mumtaz Khan Akbar, “Mumtaz”), the Fourth Defendant (Mrs Fameeda Akbar, “Fameeda”) and the Fifth Defendant, Mrs Kauser Akbar (“Kauser”) were appointed directors on 7 April 1999. They remained directors thereafter. Mrs Gazala Kauser Akbar was also appointed a director on 7 April 1999 but she ceased to be a director on 2 March 2012 before the matters of which complaint is made in this case. Again according to records at Companies House, the Third Defendant (Mr Rab Nawaz Khan Akbar (“Rab Nawaz”) was appointed a director on 22 December 1999. As Counsel did during the trial, I have referred to the Defendants by their given names for convenience and intend no disrespect in so doing.

As will be clear from the names of the defendants, MFIL was at all material times a family companyowned and operated by members of the Akbar family. Dr Gul-Nawaz, Mumtaz and Rab Nawaz are brothers. Kauser is the wife of Dr Gul-Nawaz. Fameeda is the wife of Mumtaz.

So far as the shareholdings in MFIL are concerned, the position is not entirely clear from the contemporaneous documents.

It is common ground that for some considerable time there were 3,000 issued Ordinary Shares of 1 pound each, which were held as to 1,000 shares by each of Dr Gul-Nawaz, Mumtaz and Rab Nawaz. This is confirmed by a letter dated 28 February 2012, from the Company’s auditors and accountants, Henton & Co (“HC”). seeking tax clearance in respect of the transfer of such shares to a proposed new holding company, Mumtaz Holdings Limited (“MHL”), in consideration of MHL issuing 1,000 Ordinary Shares to each of the three brothers. MHL was incorporated on 22 February 2012. The clearance sought was given by letter dated 2 March 2012. What has been confirmed in evidence to be the final but unsigned audited accounts for MFIL for the year ended 31 March 2012 show the directors as holding no shares in MFIL. A note to the accounts refers to the parent company being MHL A dividend tax voucher produced by MFIL dated 30 June 2012 shows MHL as a shareholder holding 3,000 shares and receiving a dividend totalling £2.6 million (£866.67 per share).

However, the statement of affairs for MFIL, following its going into liquidation, shows, as at 24 May 2013, the three brothers as each holding 1,000 Ordinary Shares. In addition it shows there being 12 Ordinary Shares in issue held by other members of the Akbar family and lettered from B to M. These “alphabetical shares” appear to have been created by a board resolution dated 25 May 2012. The lettered shares were non-voting, with no right to share in a distribution on a winding up, but with a right to dividends.

For the purposes of these proceedings I am prepared to assume that the transfer of shares was given effect to by being registered in the company’s register of members, having been properly authorised.

During most of its life MFIL was primarily concerned with running two separate, but connected, businesses. One was the famous Mumtaz restaurant on Great Horton Road, Bradford. The other was the processing and sale (wholesale and retail) of Indian foods. This business, including a factory, was also based at the Great Horton Road site. The family had, as I understand matters, conducted business from there since the 1980’s and then effectively transferred the businesses to MFIL in about 1997. By 2012, the Great Horton Road site comprised the Mumtaz restaurant, a head office block and a processing and packaging factory with associated warehousing and offices.

Also under the effective ownership of members of the Akbar family (not necessarily the same members in each case), at the relevant time were a number of other companies, including Mumtaz (UK) Limited, Mumtaz Ventures Limited, Mumtaz Food Products Limited (“MFPL”) and Mumtaz Leeds Limited. As at 31 March 2011 each of those named companies were debtors of MFIL. At all material times, Mumtaz Food Products Limited was owned by Dr Gul-Nawaz. It was incorporated in 2008. At some later date, Mumtaz Food Products Limited acquired a subsidiary, Mumtaz Foods plc.

A further relevant Akbar family company was Mumtaz Bradford Limited. This company was incorporated in 1995. The three Akbar brothers were directors. It too became a subsidiary of Mumtaz Holdings Limited.

In 2012, a major reorganisation of the MFIL businesses was planned and took place. A number of elements were involved which I shall have to return to. A main mover behind the proposals seems to have been an earlier identification, in about 2010, that the Great Horton Road site was no longer suitable for the business of processing and selling prepared food and a decision to move the food processing and sale business to new premises on other land owned by Mumtaz Food Products Limited, where a new factory was to be built. Another mover seems to have been to separate out the various businesses of MFIL and the three brothers’ involvement in them. In this respect, Dr Gul-Nawaz (and his son, Bilal) was more involved in the food processing business and Mumtaz and Rab Nawaz in the restaurant business. During the second part of 2012, various assets of MFIL were transferred:

I have referred to a distribution to Dr Gul-Nawaz through the mechanism of purchasing gold bullion for his benefit. As I shall go on to explain, in my judgment the latter arrangement was in effect a return of capital to Dr Gul-Nawaz which, for tax reasons under a tax savings scheme, was devised as being part of the operation of an employee benefit scheme. The relevant purchases took place in three tranches in the period November-December 2012. The gold bullion was purchased in large part by MFIL directly and in part indirectly. The indirect purchase was by contributing to the assets of an employee benefit trust whose trustees then decided to use such monies in joining in to buy gold for Dr Gul-Nawaz at the same time that MFIL did.

The Secretary of State asserts that the conduct of each of the Defendants in causing or allowing these transactions to take place is such as to make them unfit to be concerned in the management of a company within the meaning of s6 of the CDDA 1986. In substance the complaint is that the financial position of MFIL was such that that the transaction should not have gone ahead, creditors being prejudiced.

As I shall explain, the main issues under that Act which I have to deal with are, in the case of each defendant looked at separately, (a) whether the conduct of each such defendant as director is such as to make him or her “unfit” in the sense that I have outlined and (2) in circumstances where the other conditions of s6 are agreed to be satisfied, if his or her conduct does make him or her unfit, what period of disqualification I should impose: s6 CDDA 1986 laying down a minimum period of disqualification of 2 years and a maximum of 15 years.

Following the re-organisation in 2012, MFIL did not last for long. As part of the reorganisation, as I have explained, its businesses and assets were sold to other Mumtaz companies. Some, but not all, of its creditors were also transferred, or, more accurately the economic liability to pay the same was transferred by way of an obligation to pay the debts, and to indemnify MFIL in respect thereof. However, other debts were not so transferred.

It had been intended that MFIL would carry on a new business providing management services labour and equipment to other companies owned by Akbar family members. However, on 24 May 2013, following creditor pressure, MFIL entered creditors’ voluntary liquidation.

There is a doubt as to debts asserted to be owed by MFIL to the Defendants, but the Statement of Affairs shows a deficit as regards creditors of just over £802,000. More recent estimates estimate the deficiency as regards creditors to be between just over £856,000 and just over £1.6 million. Of the creditors at liquidation, some seven were also creditors at the time that the gold bullion was purchased for Dr Gul-Nawaz’s benefit. They had then been owed, and were still owed at liquidation, just over £465,600.

The allegation of unfit conduct made in this case is that each of the Defendants failed to act in the best interests of MFIL when they respectively caused and/or allowed MFIL to enter into the gold bullion arrangements. At the time, it is said and as I understand it, not denied, MFIL owed the seven creditors a sum of £465,634.27. The precise relevance of the latter statement in the allegation has given rise to some uncertainty which I shall consider further later in this judgment.

The Secretary of State was represented by Ms Wilson-Barnes. The Defendants were represented by Miss Eleanor Temple. I am grateful to both of them for their written and oral submissions and their management of the case as it progressed.

The first mention in the documents before me of the proposal that eventually was given effect to by way of the bullion purchases is a list of action points following on from a meeting on 15 March 2012 between MFIL’s then fairly newly appointed auditors and accountants, Henton & Co (“HC”) (Mr Ahmed and Mr Gray), with, from the Mumtaz group, Dr Gul-Nawaz and Mr Bilal Akbar. As I have mentioned, Mr Bilal Akbar is Dr Gul-Nawaz’s son.

The main points being considered included the transfer of the freehold and intellectual property of MIFL to the new holding company; the conduct of the retail and wholesale business through Mumtaz Food Products Limited (“MFPL”) (the evidence is that at some later stage, MFPL’s subsidiary Mumtaz Foods plc was substituted for MFPL in this respect); the proposed new factory and the examination of a number of tax planning issues. One of the action points was listed as being that HC would provide “an update on the possibility of MFIL doing a £1m tax scheme after the Budget on 21.3.12”.

On 21 June 2012, there was a further meeting between Mumtaz (Dr Gul-Nawaz, Mr Bilal Akbar and Mr Zamir) and HC (Mr Ahmed and Mr Howitt). The agenda for the meeting shows that the prime consideration was the accounts for the year ended 31 March 2012. A review of the accounts was said to show a balance sheet of £2.1m of worth. Also apparently considered at about this time were management accounts for the period 1 April 2012 to 30 June 2012. These included a balance sheet showing net assets of just over £2.2 million. However, an “amended” balance sheet showed net assets of some £208,887 taking into account a dividend payment to MHL of £2.6 million. This dividend was used to settle the price payable by MHL for the transfer of freehold properties to it from MFIL.

It is notable that the net assets said to be shown by the accounts prior to the dividend were less than the £2.6million dividend, let alone the proposed further distribution of about £1million to Dr Gul-Nawaz, though it should be pointed out that about £500,000 of the latter sum had been accrued for as, in effect, a director’s bonus, in the accounts for the period ended 31 March 2012.

The dividend of £2.6 million seems to have been paid: see the dividend tax voucher I have referred to earlier. The relevant land transfer (of the site at Great Horton Road registered under various title numbers) appears to have been for a total stated consideration of £2.6 million, satisfied in effect by the dividend. The dividend was off-set against the purchase price. The transfer of the relevant land titles was registered on 16 August 2012. Written valuations justifying the prices paid were produced some months later.

By a series of documents dated 2 November 2012, the persons listed below agreed to waive repayment of the sum set against their name below in consideration of “the company issuing to me £1 ordinary shares to the value of” the said sum “within the next 12 months”. The letter went on to state:

“Unless the number of shares to be issued can be agreed between us, the company will instruct its retained firm of accountants to calculate the number of shares to which I will be entitled to.

In the event that the shares are not issued to me by 1 December 2013, the company agrees that it shall pay to me forthwith the sum of” (and the same sum was there set out).

As I understood it, in oral evidence Mr Ahmed, accountant and partner in HC, sought to suggest, at least at some point, that the agreement was that the shares to be issued had simply to carry a combined nominal value equal to the value of the debt being waived (for example, in the case of Dr Gul-Nawaz, 184, 842 of ordinary Shares of £1 each). I am satisfied that this is not the correct interpretation of the waivers. The waiver only took effect once shares with a market value of the loan waived were received. This was not simply a capitalisation of the loans by receipt of shares with equivalent nominal value but required a receipt by the loanholder of assets (shares) with an equivalent value to the face value of the loan being waived. It is difficult to see why else the loan waivers envisaged possible non agreement as to the number of shares to be issued which might require expert involvement to be resolved.

The finalised (but unsigned) MFIL accounts for the year ended 31 March 2012 are stated to have been approved by the board on 20 November 2012. They describe the company as “Greentabs Limited” (formerly known as MFIL) even though the change of name does not appear to have occurred until some months after the accounts were signed off, namely in February 2013. They were, or were to be, signed by Dr Gul Nawaz. Note 1.9 to the accounts is as follows:

“1.9

Employee Benefit Trusts

The Company has created a trust whose beneficiaries will include employees of the Company and their dependents. Assets held under this trust will be controlled by trustees who will be acting independently and entirely at their own discretion.

Where assets are held in the trust and these are considered by the Company to be in respect of services already provided by employees to the Company, the Company will account for these as assets of the trust when payment is made to the trust. The value transferred will be charged in the Company’s profit and loss account for the year to which it relates.”

The 2012 accounts also show an accrual of £500,000 in respect of the EBT.

In fact the employee benefit trust had not been set up, either by 31 March 2012 or by 20 November 2012 (the date such accounts are stated to be approved). However, the relevant tax planning scheme eventually implemented had clearly been under consideration by then. The Scheme in question was a commercially marketed tax avoidance scheme devised by a tax consultancy company called Qubic Tax Limited. The Scheme is of a type often referred to as a “disguised remuneration scheme”.

An email from Mr Mitchell of Qubic Tax, setting out the relevant “schedule of events” to effect payments under the tax saving scheme that Qubic Tax was effectively marketing and selling, was sent to Mr Ahmed (copied to HC) on 15 October 2012. A brochure describing the tax scheme refers to the scheme being one that:

“allows a company to obtain tax relief on the reward that it provides to a key individual whilst not triggering any immediate personal tax charge in the hands of the recipient.”

The brochure suggests that, as regards a hypothetical reward of £500,000, if structured as salary the return, after tax, would be some £253,000; if structured as a dividend would result in net cash of £278,000 after tax and if structured in accordance with the Qubic tax saving scheme, would attract no tax and simply transactional costs resulting in a net payment of £432,000.

A more detailed letter dated 15 November 2012 explains the scheme in more detail. In substance, the advice is that an “opportunity” has been identified to reward employees and officers “in a tax efficient manner”. In broad terms, the arrangements are said to allow

“the company to attract corporation tax relief for a value equal to the asset(s) purchased to incentivise the particular employee, yet without any simultaneous income tax and/or NIC charge arising, since a related obligation to the trust would arise on the individual at the same time.”

The letter is also relevant in (at least) two respects:

The scheme documentation makes clear that the recipient will have to promise to repay the sums received to the trustees of the EBT. Although nowhere spelled out my suspicion is that it was envisaged that this debt would, in reality, not be called in. It also calls into question the reality of the independence of the trustee and indeed the reality of the trust as such.

In evidence before me is an unchallenged expert report dated 11 May 2016 from Mr Ian Grant, managing partner in the firm Grants Chartered Accountants. That report is put into evidence by the Defendants. He sums up the scheme marketed by Qubic Tax as follows:

“3.8

The crux of the scheme is the notional bonus is an allowable deduction for corporation tax purposes and there is no Employers National Insurance. The ultimate recipient pays no income tax or national insurance at the time that the asset is transferred.”

Mr Grant also points out that the scheme was one that was not guaranteed to “work” from a tax saving perspective. As Qubic Tax said in their letter of 15 November 2012, the scheme was not HMRC approved and “it is likely that HMRC may wish to enquire into these arrangements.” Further, there was a history of the government being unhappy about the avoidance of PAYE/NIC on bonuses, with legislation with retrospective effect having been introduced in the past. As Mr Grant identifies in his report, from 2015 onwards the government has made various announcements suggesting that PAYE and NIC will be levied against the employer (and failing that, the employee receiving the benefit) under schemes such as these.

The scheme was adopted by MFIL. A board minute of a meeting said to have been held on 21 November 2012 at which were said to be present Dr Gul-Nawaz, Mumtaz and Rab Nawaz records, among other things, the “particular interest” of the board in structuring the arrangement “in a manner such that would provide an immediate reward to particular employees at the company’s discretion, albeit whilst still ensuring a wider class of beneficiaries could potentially be incentivised longer term according to the sole discretion of the trustees of the trust”. I am satisfied that this minute, as with others giving effect to the gold bullion scheme, was a pro forma board minute, or “template documentation” as it is referred to in the letter from Qubic Tax dated 15 November 2012, provided by Qubic Tax and adapted to meet the particular transactions decided upon by Dr Gul-Nawaz. The minute also reflects a decision to obtain a trust deed from Mortons solicitors, to sign Mortons’ engagement letter and delegating responsibility to Dr Gul-Nawaz to return the engagement letter to Mortons.

Neither this minute, nor any of the other minutes set out below nor any of the other minutes in evidence recording decisions giving effect to the EBT scheme or payments under it, makes reference to the financial position of MFIL or to there there having been any consideration of the same.

A further board minute of a further meeting said to have been held on 21 November 2012 is also in evidence. The minute records the approval of a trust deed then produced and the decision to make a payment of £1,000 to set up the Mumtaz Food Industries Limited Employee Trust 2012 (“EBT”). It then goes on to record the decision to increase the trust funds by the sum of £25,000 (on confirmation that the trust had been established). Receipt of such sum was acknowledged by Qubic Trustees by letter dated 28 November 2012.

The EBT was set up by Deed of Settlement dated 27 November 2012. The Trustee, being one of the parties to the Deed, was Qubic Trustees Limited. The other party was MFIL. The Settlement Deed is in wide terms setting up a discretionary trust for employees and their spouses, surviving children, remoter issue and dependants (and spouses and surviving children of such children and remoter issue) and a default beneficiary, being a charitable entity. There are common provisions enabling the trustees to exclude or add to the relevant class of beneficiaries.

Also on 27 November a document purporting to be minutes of a board meeting of MFIL held on 27 November 2012 records the decision to use an approach “advised by Qubic Tax, whereby the Company could purchase assets for the employee(s) as reward and/or incentives for their performance. This would allow the employee(s) to have the flexibility to sell or retain the asset(s) as they wished, albeit with the employee(s) having an obligation to the EBT, such obligation vesting with the trustees and allowing a wider class of employees to benefit generally”. The decision to buy gold with a value of £300,000 for the benefit of Dr Gul-Nawaz is then recorded.

By letter dated 28 November 2012, Qubic Trustees indicated an interest in using funds in the EBT to contribute towards the purchase of assets in question being gold with a value of £7,500. However, this would be subject to an obligation on Dr Gul-Nawaz to repay the EBT an equivalent value on deferred terms.

A document purporting to be minutes of a board meeting of MFIL held on 29 November 2012 refers to the letter of 28 November and approved a draft form of letter giving effect to the obligation on Dr Gul-Nawaz referred to by Qubic Trust in its letter of 28 November 2012. Each of the relevant board minutes in relation to the setting up of the EBT and the subsequent decisions to buy gold bullion show the directors present as being each of the three brothers.

The agreement in question appears to have been an agreement made between Dr Gul-Nawaz, MFIL and Qubic Trustees. The copy in evidence is signed twice by Dr Gul Nawaz, once in his personal capacity and once as director of MFIL (for and on behalf of MFIL), and by Qubic Trustees on 29 November 2012. It records the decision of MFIL to contribute a sum of just over £298,400 and Qubic Trust contributing just over £7,400 to buy gold which will pass beneficially to Dr Gul-Nawaz. In return, Dr Gul-Nawaz agreed to pay the Trustees £305,887.73 on 29 November 2022, with the possibility of that obligation being accelerated in the event the trustees were not satisfied, on any one of a number of given dates, of Dr Gul-Nawaz’s ability to pay the relevant sum.

Although the EBT scheme as marketed stresses the need for the trustee of the EBT to be independent of the company (in this case MFIL), it seems unlikely that any independent decision making was in reality being undertaken by Qubic Trustees in the process that I have outlined.

A similar pattern is disclosed by the documents in evidence as regards:

As I have indicated, MFIL did not have the cash to fund the payments made under the scheme. Accordingly, they were funded by MFPL providing cash, which payments were set off against the debt owed by MFPL to MFIL. It appears from the evidence that MFPL itself was put in funds by Dr Gul-Nawaz, such funds increasing the amount owed to him on his director’s loan account with MFPL. Looking at the available documentary evidence, Mr Grant reaches the conclusion that the relevant monies (apart from an initial £189k in relation to which he is unable to identify the source):

“were recirculated by [Dr Gul-Nawaz] to [MFPL] to [MFIL] to Bullion dealer and then back to [Dr Gul-Nawaz] at least three times….I speculate that this circular use of the same monies is probably because the parties were unable to carry out the transaction in one stage due to a lack of liquidity”.

On various assumptions, Mr Grant calculates that in liquid cash terms, at the end of the process MFIL had a net increase in the cash available to it of £68,318. However, as I understand his report, standing back the truth is that this increase in cash is met by a corresponding reduction in inter-company debt owed by MFPL. In other words, one asset, inter-company debt, was exchanged for another, cash. In my estimation that could have been effected at any time and there is no evidence that had MFIL desperately needed £68,328 in cash it could not have demanded repayment of MFPL’s loan to that extent and that repayment in that sum would not have been made accordingly.

By 16 December 2012 the available figures show that MFPL still owed MFIL some £87,330. This was after a management charge made by MFLP to MFIL of some £400,000 in December 2012, to which I shall have to return. Without that management charge the result would have been that the outstanding inter-company loan account owed by MFP would have been some £487,330. This contrasts with an outstanding loan account as at November 2012 of over £2million (or if accruals, the debtors’ ledger and the suppliers’ ledger are taken into account, over £1.3m).

Again on various assumptions, Mr Grant also concludes that, subject to subsequent challenge, the operation of the scheme in this case probably saved MFIL corporation tax of some £250,000, in that the relevant payments would be treated as being wholly or exclusively for the purposes of the trade (see s54 Corporations Tax Act 2009) and not falling within the provisions regarding EBTs and disguised remuneration schemes under the Corporation Tax Act 2009, Part 20 Chapter 1 (ss1288 to s1305 and especially s1290 and 1294).

The Secretary of State did to seek to argue that the relevant sums were prevented from being valid deductions under that legislation and so I do not need to address that issue further but assume, in the Defendants’ favour, that the corporation tax savings identified by Mr Grant (to some extent speculative because figures for the purposes of accounts for the year ending 31 March 2013 are not available after December 2012) were achieved.

In short, the effect of the operation of the overall re-organisation, including the tax saving scheme, was to enable value to be shifted from the reserves of, and therefore at the expense of, MFIL to other entities controlled by the Akbar family. In the case of the freehold properties, this was achieved by declaring a dividend equal to the purchase price. In the case of the inter-company debt owed to MFIL from MFPL, this was considerably reduced by the device of paying bonuses or sums towards the EBT arrangements for the benefit of Dr Gul-Nawaz. Taking the overall sum distributed to Dr Gul-Nawaz in this way as being about £1 million, the net cost to MFIL can be treated as reduced by the tax benefit achieved of £250,000, so that the overall “cost” to MFIL was, in effect, and on the face of things, about £750,000. In fact, as I understand it, HMRC have since refused to accept that the payments should be permitted to be treated as validly giving rise to any corporation tax saving.

According to Mr Grant’s figures and analysis, Dr Gul-Nawaz personally received a net sum of approximately £210,700 under the scheme, without any tax liability, though subject to the possibility that there would be a successful challenge by the government to the scheme and a consequent tax liability later. According to Mr Grant, that tax liability could include about £138,000 of employer’s NIC and £515,000 of employee income tax and NIC.

The balance sheet as at 16 December 2012 apparently prepared by the company’s former accountants and auditors and forming “draft management accounts April 2012 to December 2012” and relied upon by Mr Grant and exhibited to his report, shows the company at that point to be in a net liability position of £299,655.

I should add that the figures relied upon by Mr Grant are largely sourced from HC. Thus, as is clear to his answer to questions put by the Secretary of State, he did not see many of the underlying documents. Further, Mr Howitt of HC is said to have assisted him in the preparation of his report. He also says, as regards the financial position, that information about MFIL “ceases in around December 2012.” The liquidator has made complaints about the absence of adequate accounting records. I am satisfied that, in large part, financial records for MFIL after December 2016 either did not exist or they were not handed over to the liquidator.

For present purposes, I accept the unchallenged evidence of Mr Grant in all material respects.

Within days of the final payment out by MFIL under the EBT scheme, the businesses and various, but not all, assets and liabilities of MFIL were transferred (in the case of the liabilities, economically, if not as a matter of law) to Mumtaz Foods plc and Mumtaz Bradford Limited. The contemporaneous documents available to me are sparse. According to Mr Grant, acting on instructions from the Defednants’ solicitors, the transfer took place on 16 December 2012.

In evidence, there is a draft unsigned agreement between Mumtaz Foods plc (“MFL”) (the then wholly owned subsidiary of MFPL) for the sale by MFIL to MFL of the “factory business” defined as being the “factory manufacture and supply of food and/or drink excluding the Service Business and the Restaurant Business” (the “Factory Business Sale Agreement”). The Restaurant Business is defined as being the restaurant business carried out at the Mumtaz Restaurant on Great Horton Road. The Service Business is defined as being the business of providing management or other services for the business needs of any restaurant (and/or any food and/or drink manufacturer and supplier). Under the agreement MFL undertook to fully assume and discharge the relevant liabilities intended to be transferred, and also recorded the right of such creditors to enforce their rights under the Contracts (Rights of Third Parties) Act 1999. The purchase price was stated as being £1 (one pound). Employees allocated to the service business prior to completion were not intended to transfer with the business but in the event that TUPE had that effect the agreement provided that they would be employed by MFL.

There is also a draft unsigned service agreement between MFL and MIFL. Although the front of the agreement refers to the agreement as one for the supply of management and services for the Factory Business of MFL, the inside of the agreement appears to deal with the supply of services for the restaurant business. It is unclear to me whether there were further agreements between MIFL and Mumtaz Bradford Limited, one for the transfer of the restaurant business to Mumtaz Bradford Limited and the other for the provision of services to the restaurant. I suspect that the draft services agreement that I have between MIFL and MFL is based on a draft service agreement between MFIL and Mumtaz Bradford Limited which has not been properly conformed. As I read the draft Services Agreement, the services to be provided are those of employees, the price to be paid is the cost to MIFL of the employee in question plus an extra sum based on an hourly rate. The employees to be provided and for what time periods is left to be negotiated as is the extra sum that I have referred to (essentially the turn to be made by MIFL). Of course, in the event that employees transferred under TUPE then the service agreements would have been otiose.

So far as the transfer of the Bradford restaurant business is concerned, It was not suggested by the Defendants that any creditors were “transferred” to Mumtaz Bradford Limited under the sale agreement dealing with the sale of the restaurant business by MIFL to Mumtaz Bradford. I find that if any liabilities were transferred (being a restaurant there were probably few if any long-term liabilities) the business was transferred on similar terms to that of the food production and sale business, i.e. at a nominal value of £1, with (at most) an obligation to pay off, and indemnify MIFL against, a number of specified debts. I am satisfied that for present purposes none of the debts of MFIL in existence at its liquidation were “transferred” (economically or in legal terms) to Mumtaz Bradford Limited.

I was provided at the start of the trial with invoices raised by Greentabs to Mumtaz Food Plc in January to April 2013. They show the charges made by Greentabs as being a 2% charge over and above the reimbursement costs of the costs of the labour provided (including in these costs employer NIC). The invoices and 2% sums charged are as follows:

These sums have to be taken into account in the context of debts said to be owed by MFIL at liquidation to Mumtaz Foods plc of £67,571; MFPL of £81,779 and Mumtaz Bradford Limited of £41,441. These sums are set out in the Statement of Affairs.

I am satisfied that no business projections were prepared and considered estimating the likely income and profit of the new business, in the context of considering the financial position of MFIL and whether the payments under the EBT scheme could safely be made.

In evidence, there was also a schedule of creditors said to have been “transferred” to Mumtaz Foods plc. That schedule bears in manuscript the heading “Appendix 3”. I am satisfied that it was the schedule annexed to the relevant business sale agreement, or at least the schedule that was the schedule setting out the transferred creditors under that agreement. The creditors in question had debts totalling some £184,472.14.

A number of creditors were either not included in the management accounts for MFIL as at 16 December 2012 or were included in a lower sum than the liability of MFIL was later fixed with. I shall come on later in this judgment to the explanations for this given by the Defendants but now turn to the position as disclosed by the contemporaneous documents.

Mr Javed was an employee of MIFL who presented a claim against it to the Employment Tribunal asserting unfair dismissal and disability discrimination. On 26 April 2012, the Tribunal concluded the issue of liability in Mr Javed’s favour finding his dismissal to have been unfair and the claim for disability discrimination to have been well founded. Case management directions were then given and the case adjourned for the issue of quantum to be determined. On 16 October 2012 the judgment of the court (following a hearing on 16 October 2012) was sent to the parties. The sum awarded was just over £80,231. After applying an uplift pursuant to s207A Trade Union and Labour Relations Act 1992, the final award was £102,615.73.

MIFL appealed the judgment of the Employment Tribunal regarding liability. On 30 January 2013, the Employment Appeal Tribunal allowed the appeal with regard to the disability related discrimination claim and directed that the matter be remitted for rehearing on that issue. As is clear from the judgment of the Employment Tribunal on remission, the matter was remitted because the Appeal Tribunal was led to believe that MFIL had dealt with the case on the basis it was being put as a direct discrimination claim and not, as it had been before the tribunal, an act of disability related discrimination. On the re-hearing, and by judgment sent to the parties on 30 July 2013, the earlier judgment on liability was confirmed. The second ground of appeal, rejected by the Employment Appeal Tribunal, again related to the disability discrimination claim and what was said to be insufficient consideration given to the absence of a comparator. This ground was considered at the resumed hearing and, again, rejected.

This claim was not included in the creditors contained in the managemnet accounts as at 16 December 2012. It remained outstanding as at liquidation.

Two matters that emerge from the judgements in the light of oral evidence given by Dr Gul-Nawaz can conveniently be dealt with at this point. First, there is the question of video evidence that had been obtained for use by MFIL and the general approach of MFIL. These matters are dealt with in the judgment of the Employment Tribunal of 16 October 2012, dealing with the issue of quantum.

Having referred to the act of dismissal being a “cynical dismissal process, the claimant being called to attend what he believed to be a grievance meeting to be faced effectively with disciplinary charges which we then concluded were a sham and he was then dismissed”.

The Tribunal decided that there should be an award for injury to feelings but that there were aggravating features that it should take into account in enhancing the level of injury to feelings that it was required to compensate. The first matter taken into account was the “complete failure” on the part of the Respondents to acknowledge the seriousness of their conduct and the failure to apologise.

“[10] The second matter which we take into account in enhancing the injury to feelings award is the fact that the Respondents thought it appropriate to subject the Claimant to covert surveillance. After his dismissal, when these proceedings were brought, we are told by Mr Armitage, the private investigator involved, that he had a meeting with the director of this business, Dr Akbar, and he was simply told to mount a surveillance operation upon the Claimant to see what could be revealed. As a consequence, observations were taken outside the home of Mr Javed’s wife, Mrs Shah, the Claimant was followed by motorcar through the streets of Bradford, photographs and video recordings were taken and, at one stage, an electronic tracker device was covertly attached to the vehicle belonging to Mrs Shah. If that device was attached or subsequently removed at a time that the vehicle was on private property that would amounts to an unlawful trespass. We do not know whether it was or not because Mr Armitage did not attach or remove the device himself.

[11] We accept that employers are fully entitled to take such steps as they consider necessary to defend proceedings brought against them and where, for example, an employer has a genuine reason to believe that the employee bringing a claim against them is working elsewhere while mounting a claim of loss of earnings, that employer cannot be criticised for taking such steps as are necessary and proportionate to secure the evidence that they need in order to defend that loss of earnings claim. However, in this case, if we accept the evidence of Mr Armitage, Dr Akbar had no such information. This was just an operation mounted to see what matters, if any, could be found to discredit the Claimant. Mr Bailey-Gibbs relies upon that evidence to show either that the Claimant was working at a local food factory in Bradford or, if he was not, he was spending sufficient time within the factory so as to demonstrate that he could have worked had he chosen to. That would have perhaps been a legitimate reason for mounting the surveillance operation but for the fact that Mr Armitage informed us that, when he specifically sought instructions as to whether or not he should pursue other types of investigation which could have revealed that the Claimant was in fact working he was told not to do so. In those circumstances, it seems to us that the surveillance operation was mounted in order, effectively, to harass the Claimant for bringing this claim. When he discovered what was happening it certainly had that effect. That aggravates the injury to feelings award that we propose to make.

----

[13] Mr Armitage had no intention of giving evidence to suggest that the Claimant was working. He accepted that his evidence did not justify that conclusion and that he was specifically told not to pursue investigations that could have led to him expressing a view as to that issue. He also accepted that he could not give such evidence in relation to the apparent alternative purpose behind the surveillance, which was to demonstrate (for whatever reason) that the Claimant was once again living with his wife…

[14] Finally, we take into account the fact that this was the clearest of unfair dismissal and yet, until the first day of the Liability Hearing, that was in dispute. That increased the anxiety of a Claimant believing that all matters are in issue. Those are all, in our view, aggravating features which would justify an increase to the award for injury to feelings from the figure previously mentioned to the top of the middle band and we award £18,000.”

The figure previously mentioned was in the order of £10,000 to £12,000, being towards the middle of the band.

“[37] We are also mindful of the fact that there is an outstanding appeal in relation to our finding of Disability Discrimination. Were that appeal to be successful it may be of assistance the parties to be aware that in addition to the compensation already awarded for unfair dismissal and the loss of earnings we would consider that a full 25% uplift would be appropriate in the light of the reduced level of compensation that would then be being awarded.”

The lost of earnings award in respect of past and future losses amounted to £44,678.90. The unfair dismissal award was £987.46. 25% of the combined award would be some £11,416.59, a total award of £56,095.49.

The second matter that will need consideration in due course, because of the oral evidence before me, is the history of Dr Gul-Nawaz’s involvement as party in the tribunal proceedings. Again, the matter is explained most clearly by citing from the decision of the Tribunal, this time on the remitted hearing. At that hearing the Tribunal had before it an application by Mr Javed explained as follows:

“[2] The Claimant seeks a review of the decision of the Employment Tribunal of 24 January 2011 whereby Employment Judge Johnson dismissed the claims against the then Second Respondent, Dr Gul Nawaz Akbar upon those claims having been withdrawn. It is noted that the basis of that application would be that the claims were withdrawn only on the basis that the Claimant was given an assurance by both the respondents and by the Judge that the First Respondent would be liable to meet any compensation award arising out of those proceedings. It is the Claimant’s contention that after receiving a Judgment against the First Respondent, Dr Akbar took steps to transfer assets away from the First Respondent and then caused the First Respondent to become insolvent to avoid having to pay that Judgment.”

The review hearing was adjourned with directions to 27 September 2013. The outcome is unclear on the papers before me.

This creditor was provided for in the books of account as at 16 December 2012 in the sum of £28,490.20. In March 2011, Tim’s issued proceedings in respect of an unpaid debt for yoghurt supplied in the sum of £37,164 plus interest and costs. The goods the subject of the invoices in question were supplied between October 2009 and April 2010. In the proceedings MFIL lodged a defence and counterclaim asserting, in effect, that the yoghurt had been used to manufacture a Lassi drink which had gone off more quickly than it should have done and that this was the fault of Tim’s which had failed to supply the yoghurt, as promised, according to MFIL’s specification. In September 2013, following liquidation of MFIL, judgment was obtained by Tim’s, there being no appearance by MFIL. On the basis of the judgment eventually entered, the debt to Tim’s was underprovided for in the company’s records by some £8,669.80. I assume for present purposes that the same is true of the balance sheet, comprising part of the Company’s management accounts, as at 16 December 2012.

BHP Law LLP had taken over a law firm that had been instructed by MFIL. In January 2013 it issued two sets of proceedings against MFIL claiming in respect of unpaid invoices for sums totalling £12,746.90 and £3,480 (being the combined values of various invoices). MFIL filed acknowledgements and notices of intention to defend. It also sent a letter to the Court referring to the company telling that it was not getting the correct level of service and that it had asked for time sheets to see how the invoices were calculated but had never received the same. Judgment in default of defence appears to have been entered in respect of both claims on 5 March 2013.

Assuming the debt was as eventually established by the judgments, then the debt was underprovided for by £15,530 in the balance sheet, comprising part of the Company’s management accounts, as at 16 December 2012.

By letter dated 17 January 2013 Walker Morris solicitors sent a letter before claim to MIFL making formal demand for £72,176.30 comprising an invoiced sum of £63,719.07 and interest thereon. The sum was said to arise from work carried out by Raw for MIFL to complete fit out works to two properties at Manchester and Bingley which were due to be fitted out as take-away restaurants. The invoices were issued in June and July 2011. The letter refers to numerous demands having been made for full payment (only part payment having been made), numerous promises on behalf of MFIL to make payment and (as regards the contact itself) a letter dated 26 March 2011 and a document headed “approval of fit out work Mumtaz Food Industries Limited, Unit E, 111 Piccadilly Manchester” dated 31 March 2011. The debt was said never to have been disputed by MFIL despite several demands for payment.

The evidence of Dr Akbar was that any work that Raw had undertaken was not work for MFIL and there was no contract with MFIL. Rather the work was contracted to be carried out for Rab Nawaz’s business and any contract was with the relevant corporate entity owned by Rab Nawaz.

MFIL entered into a lease as guarantor of premises demised by a company called NOS 2 Limited to Mumtaz (UK) Limited. Mumtaz was a director of Mumtaz (UK) at all material times. Mumtaz (UK) Limited went into compulsory liquidation on 13 March 2012 and the lease was disclaimed by Mumtaz (UK) Limited’s liquidator on 6 September 2012. Under the terms of the Lease the landlord was entitled to require MFIL as guarantor to enter into a new lease. Rent was accruing at a rate of £3,600 per quarter (including VAT of £600).

Notice of disclaimer dated 6 September 2012 (the “Disclaimer”) and addressed to MFIL at its Great Horton Road address was sent by one of the joint liquidators. The Disclaimer, at the bottom, set out the addressees. The 4^th addressee was MFIL described as “(Tenant Guarantor”). A statutory demand was served on MFIL on 18 February 2013. This was followed by a winding up petition presented on 8 April 2013. The debt then relied upon stood at just over £16,420.

This claim was not taken into account in the value attributed to creditors in the balance sheet, comprising part of the Company’s management accounts, as at 16 December 2012.

According to the directors’ report to creditors for the creditors’ meeting on 24 May 2013 and set out under the title “History of the Business as Provided by Dr Gul-Nawaz Khan Akbar”:

“As the tenant company was in liquidation and the premises vacant it was apparent that this liability could be a continuing and significant drain on the company. The lease had around 12 years to run.

In April 2013 solicitors acting on behalf of the landlord presented a winding up petition against the company. The company did not have the funds to meet the petition debt. In addition the company was also in dispute with a firm of solicitors in relation to monies outstanding and a supplier- these additional but disputed debts totalled some further £60,000. Consideration was given by the directors to injecting further funds into the company to deal with the petition debt but given all of the circumstances they decided against this.

The directors approached Beesley Corporate Solutions for advice as to the company’s position and it was decided that meeting of members and creditors should be called with a view to placing the company into liquidation.”

This importance of this debt is also confirmed by the affidavit of Dr Gul-Nawaz who said:

“[27] It was only when we became aware of the liability on the lease guarantee that the board of directors became aware that the Company might have financial difficulties in continuing to trade at which time we took our accountants advice upon the position. Having been advised that the company was likely to be insolvent in the circumstances we then took professional advice concerning the continuation of trading”.

As expanded upon in oral evidence, the Mumtaz family were not prepared further to support MFIL with the result that liquidation followed.

The allegation against Dr Gul-Nawaz is that:

“Between 30 November 2012 and 11 December 2012 Dr Akbar failed to act in the best interests of the Company when he caused it to enter into agreements to purchase gold bullion with a value of £976,055 for his sole benefit. At the time of the agreements, the Company owed £465,634.27 to seven creditors which remained outstanding at liquidation.”

The allegations against the other defendants essentially allege the same matter in that it is said that each of them failed to act in the best interests of the company in causing or allowing (in the case of Mumtaz and Rab Nawaz) or allowing (in the case of Fameeda and Kauser) the Company to enter into those agreements at that time.

The seven creditors are as follows. The amounts shown are those which were due both as at 30 November 2012 and on liquidation. In some cases the debts had increased by liquidation (eg the debt of NOS2 was in respect of rent under a lease which was continuing to accrue unpaid).

The core allegation was clarified by a letter from Howes Percival, solicitors for the claimant, dated 20 April 2015, so far as material it provided:

“The allegations as set out in the section of our client’s affidavit headed “Statement of Matters Determining Unfitness” are clear. The pleaded case does not assert, nor is the claimant required to prove, that [MFIL] was insolvent or that there were insufficient distributable profits to fund the arrangements when they were entered into. Nor does our clients say that having creditors outstanding when the EBT arrangements were made (or at Liquidation) is itself a breach of your clients’ duties as Directors.

3.

Rather the allegation of unfitness is that the Directors failed to act in the best interests of [MFIL] when entering into arrangements which a) removed substantial cash assets from the company and replace that cash with the debt the Liquidator could not realise in the Liquidation (and may yet be unable to realise at all) and b) were such that existing creditors would remain unpaid at liquidation.

4.

Also relevant is the fact of the directors ceding control over any claim for a return of the cash from the EBT to [MFIL]. The arrangements that put that control in the hands of EBT’s trustee, who in turn would make payments in the interests of EBT’s beneficiaries.”

In fact, the “clarification” might be said to be a little confusing. The case is primarily that the inter-company debt owed to MFIL by MFPL was reduced by way of a distribution, in effect from reserves, to Dr Gul Nawaz. The cash payments were part of the mechanics by which this was done. The asset removed was, at the end of the day, the MFIL debt. The company did not have substantial cash assets other than for certain very brief periods as they circulated under the scheme. They were the product of a loan from MFPL, which loan was set off against the indebtedness of MFPL to the Company. Looked at another way, the end economic result was that the benefit of the asset which was the debt owed by MFPL was distributed to Dr Gul Nawaz.

Further, the distribution finally disposed of assets of the Company. The distribution did not replace cash in the Company’s hands with a debt. There was an outright distribution. The Company was owed no debt at all under the EBT scheme in respect of the distribution to Dr Gul-Nawaz.

A trial of these proceedings originally commenced in the County Court at Bradford before District Judge Hickinbottom on 27 June 2016. In discussion with counsel he very quickly identified the case of the Secretary of State as being that the effect of the gold bullion transaction was to reduce the amounts due from MFPL to MFI by about £900,000, but leaving other creditors in the same position and the effect of it on the assets of the company and the consequential effects on creditors. He also identified a need to consider whether professional advice was taken and if so what its significance was and that there might be an issue as to the true position in relation to creditors at the time the transaction took place. He identified that the question of a cash flow advantage of £68,000 was not really relevant to the case, either way, nor was a potential tax saving. Miss Temple who acted then, as she did before me, for the defendants accepted that the issues as they then appeared to be were correctly identified by the District Judge and submitted that that was not the case as originally put forward or which the defendants had prepared to defend. Apparently with the encouragement of the District Judge and having taken instructions, Miss Temple then made an application to strike out the claimant’s claim which the District Judge acceded to. The Secretary of State appealed.

His Honour Judge Behrens gave permission to appeal on 16 April 2016. The appeal came on before His Honour Judge Raeside QC who allowed the appeal on 16 November 2016 and transferred the proceedings to the Leeds District Registry.

Before me, it was accepted that the parties were operating on the basis of the Secretary of State’s case in effect being along the lines identified by District Judge Hickinbottom. Broadly, the question is whether the responsibility of each director for the distribution effected through the gold bullion scheme was one that makes the director “unfit” within the meaning of s6 CDDA, given its effect on company creditors, then and in the future, and taking into account the director’s then state of knowledge and any advice he or she received. As regards the state of the company’s finances as a result of and following the distribution, the Secretary of State had said that the financial position was “uncertain” given both the available figures and the disposal of its existing business and the uncertainty regarding its new business. Miss Temple for the Defendants, and by reference to cases such as West Mercia Safetyware v Dodd [1988] BCLC 250 and BTI 2014 LLC v Sequana SA [2017] 1 BCLC 463 submits that this is not the same as asserting insolvency or doubtful solvency (precarious financial position or brink of insolvency) such that a duty to creditors arises. However, as I understand matters, she does not resist the proposition that I need to consider the relevant financial position and come to my own view on the matter and that the descriptive term used by the Secretary of State is not dispositive as a pleading matter. Her point is that objectively, when properly understood and on the basis of what was known to the directors, the financial position was not so serious that creditors’ interests intruded or intruded sufficiently as to make the directors conduct “unfit conduct” in relation to causing or allowing the gold bullion transactions to go through.

There is a further point of confusion. The duty to promote the interests of the company (the statutory replacement for the fiduciary duty to act in the best interests of the company) is a “subjective” duty. If a director bona fide considers the position and acts, bona fide, in what he considers promotes the interests of the company then it is not for the court to gainsay that position. If his judgment is sufficiently badly wrong then it may be that it is one that can be attacked as being taken negligently, even recklessly, in breach of the duty of care and skill. It seemed to me in the correspondence about the allegations in this case that the Secretary of State sometimes confused the question of whether decisions were “objectively” in the best interests of the company with the question of whether they were taken in the bona fide belief that they were in the best interests of the company. Both threads appeared to be relied upon before me. As regards the duty under s172, the subjective nature of it is important.

As regards the duty under s172, the subjective nature of it is important. As has been said:

“'The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director's state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company's interest; but that does not detract from the subjective nature of the test.' (see Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 and, in relation to the duty under s172 Companies Act 2006, see e.g. GHLM Trading Ltd v Maroo [[2012] EWHC 61 (Ch).)

However, the directors may come under a duty to consider the interests of creditors and to act to promote their interests rather than the interests of the shareholders. As helpfully summarised by Newey J (as he then was) in the GLHM Trading case:

“[164] While the interests of a company are normally identified with those of its members, the interests of creditors can become relevant if a company has financial difficulties. In West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, 4 BCC 30, Dillon LJ (with whom Croom-Johnson LJ and Caulfield J agreed) approved (at 252-253) the following statement of Street CJ in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722:

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

[165] It has been said that the interests of creditors can “intrude” even when a company may not strictly be insolvent. For example, in Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153, [2003] BCC 885 Mr Leslie Kosmin QC (sitting as a Deputy High Court Judge) put the position as follows (at para 74):

“Where a company is insolvent or of doubtful solvency or on the verge of insolvencyand it is the creditors' money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.” (The emphasis has been added.)

[168]….. A director of a company has a duty to act “in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole” (see s 172 of the Companies Act 2006). Where creditors' interests are relevant, it will similarly, in my view, be a director's duty to have regard to the interests of the creditors as a class. If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty”.

I add that it will, of course, be a breach of duty if the director acts to advance the interests of its shareholders without believing that action to be in the interests of its creditors, if the company is then in a position where this duty to consider creditors’ interests arises.

However, as Rose J has made clear in BTI 2014 LLC v Sequana SA [2017] 1 BCLC 453, the situation in which the risk of insolvency is such that a duty to consider and act in the interests of creditors will arise must not be pitched too low.

“[477]…Having reviewed the authorities I do not accept that they establish that whenever a company is “at risk” of becoming insolvent at some indefinite point in the future, then the creditors’ interest duty arises unless that risk can be described as “remote”. That is not what the cases say and there is no case where, on the facts, the company could not also be accurately described in much more pessimistic terms, as actually insolvent or “on the verge of insolvency” “precarious” in a parlous financial state etc.

[478] The essence of the test is that the directors ought in their conduct of the company’s business to be anticipating the insolvency of the company because, when it occurs, the creditors have a greater claim to the assets of the company than the shareholders…..

[479]…It cannot be right that whenever a company has on its balance sheet a provision in respect of a long term liability which might turn out to be larger than the provision made, the creditors interests duty applies for the whole period during which there is a risk that there will be a insufficient assets to meet that liability. That would result in directors having to take account of creditors’ rather than shareholders’ interests when running a business over an extended period. This would be a significant inroad into the normal application of directors’ duties.”

As with all judgments it is, of course, important to consider these dicta in the factual context in which the point arose.

So far as material to this case, s6 of the Company Directors Disqualification Act 1986 (“CDDA 1986”) provides as follows:

 Duty of court to disqualify unfit directors of insolvent companies

For the purposes of this section . . ., a company becomes insolvent if—

It is common ground that the issue under s6 that I have to determine is whether the conduct of each of the defendants as director and as relied upon by the Secretary of State is such as to make them unfit to be concerned in the management of a company. It is common ground that each defendant was a director at the relevant time and the MFIL has become insolvent within the meaning of s6 CDDA 1986.

The Small Business, Enterprise and Employment Act 2015 (the “2015 Act”) makes various wide-ranging changes to the CDDA 1986. For present purposes, the most significant is the insertion of a new section 12C which, among other things, requires the court under section 6 to take into account the matters set out in a new Schedule 1 to the CDDA 1986 (as also inserted by the 2015 Act) when determining under s6 (a) whether the relevant person’s conduct makes them unfit to be concerned in the management of a company and (b) if it does, what period of disqualification is appropriate. The new s12C and new Schedule 1 are inserted by s106 of the 2015 Act with effect from 1 October 2015. However, those inserted provisions do not apply in the case of conduct which occurred prior to 2015 (see Small Business, Enterprise and Employment Act 2015 (Commencement No 2 and Transitional Provisions) Regulations 2015, SI No. 1695 of 2015, regulation 2 and 5 and Schedule, paragraph 3).

The provisions which therefore apply in lieu of the new s12C and the new Schedule 1 are agreed by Counsel to be the previous s9 and Schedule 1. In my judgment, and at least as regards these proceedings, s106 of the 2015 Act makes little real difference to the position applying under the preceding provisions. Section 9 only required the former Schedule 1 to be taken into account when determining whether particular conduct makes the director unfit to be concerned in management. However, seriousness of misconduct goes not only as to whether it is serious enough to make the director “unfit” but, if it does, also as to how serious is the “unfit” conduct which will be relevant to setting the period of disqualification. Thus, the old Schedule 1 would have been a factor in determining any applicable period of disqualification. Further, for present purposes, the new Schedule 1 is little different in effect to the old Schedule 1. Finally, even if there were no s9 (or new s12C) and no Schedule 1: the matters which for present purposes are relevant matters set out in each of the versions of Schedule 1 would be highly relevant in determining both the question of whether the director’s conduct makes him unfit and secondly whether how serious it is for the purposes of determining any period of disqualification.

The Secretary of State also refers me to the duty of a director under s172 of the Companies Act 2006 to act in the way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and also the duty to consider the interests of creditors which can intrude when the company reaches a certain stage on the way to insolvency. I have dealt with these matters above.

On the two areas of law of the CDDA 1986 and the director’s duties that I have mentioned I have been referred to 29 authorities by the Defendants and 15 authorities by the Claimant. Taking out duplication I believe that the authorities referred to amount to over 35. There was not, however, much if any disagreement as to the relevant principles applicable to the CDDA. The authorities are well known to me. For present purposes I can use an amalgam of the principles, tailored to this case, as stated by Lawrence Collins J (as he then was) in Re Bradcrown, Official Receiver v Ireland [2001] BCLC 547 at [4] to [14] and Hildyard J in Re UKLI Ltd, Secretary of State for Business Innovation and Skills v Chohan [2013] EWHC 680 (Ch);[2015] BCC 755. I have in some citations simplified or reduced the Law Report references to the authorities cited in the two judgments.

“[4] The combined effect of the 1986 Act, ss 1, 6 and 9 and Sch 1 is as follows: where a company has become insolvent, the court must make a disqualification order of between two and 15 years against a director if it is satisfied that his conduct as a director of that company makes unfit to be concerned in the management of a company; in making that determination it is to have regard to a number of matters, including any misfeasance or breach of any fiduciary or other duty by the director in relation to the company [and] the extent of the directors responsibility for the causes of the company becoming insolvent…” [Re Bradcrown].

“[5] The purpose of the 1986 Act (and its predecessors) is to raise standards in the conduct and responsibility of those who manage companies incorporated with the privilege of limited liability: Secretary of State for Trade and Industry v Ettinger, Re Swift 736 Limited [1993] BCLC 896 at 899; Re Westmid Packing Services Ltd [1998] 2 BCLC 646 at 652-653, [1998] 2 All ER 124 at 129.” [Bradcrown]

“[6] Where the court determines that a director is unfit to be concerned in the management of a company, disqualification is mandatory and at that stage the court is not entitled to look at evidence which shows that, despite the defendant’s shortcomings in the past, he’s unlikely to offend again. The purpose of making disqualification mandatory was to ensure that everyone his conduct had fallen below the appropriate standard was disqualified for at least two years, whether or not the court thought that this was necessary in the public interest: Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276 at 284, sub nom Re Grayan Building Services Ltd [1995] Ch 241 at 253-254.” [Bradcrown]

“[9] Whether a director is unfit to be concerned in the management of a company is a question of fact” [Bradcrown] or “[171](3) …“ What used to be pejoratively described in the Chancery Division as “a jury question”; but, as the authorities demonstrate, are less pejorative and possibly more accurate description may be a “value judgment” (see Re Grayan (supra) at 255D) as such, that determination of unfitness involves a comparison with a standard of behaviour against which the conduct complained of maybe measured. (4) Accordingly, as explained by Hoffmann LJ (as he then was) in Re Grayan at 254G: “the judge is deciding a question of mixed fact and law in that he is applying the standard laid down by the courts (conduct appropriate to a person fit to be a director) to the facts of the case.”[Chohan]

“[171] (5) It being a major concern of the CDDA to raise standards and protect those who deal companies which have the benefit of limited liability from directors who have in the past departed from such standards, a finding of unfitness does not depend upon a finding of lack of moral probity; the touchstone is a lack of regard for compliance with proper standards, and breaches of the rules and disciplines by which those were themselves of the great privileges and opportunities of limited liability must abide (see per Henry LJ in Re Grayan).

“[10] where the allegation is incompetence without dishonesty it is to be demonstrated to a very marked degree or a high degree: re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 at 184; Re Barings plc (No 5) [1999] BCLC 433 at 484 paragraph A7” [Bradcrown]. “Nevertheless the degree of incompetence should not be exaggerated given the ability of the court to grant leave, as envisaged by the disqualification order as defined” (per Morritt LJ, as he then was, in Re Barings (No 5) on appeal [2000] 1 B.C.L.C. 523, paragraph 35.

“[7] The matters listed in Sch 1 are not exhaustive of the matters which may be taken into account in determining unfitness: Re Bath Glass Ltd [1988] BCLC 329, approved in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 at 183. Accordingly, a finding of breach of duty is neither necessary nor of itself sufficient for a finding of unfitness; Re Barings plc (No 5) [2000] 1 BCLC 523 at 535.”[Bradcrown]

“[12] The fact that a director had professional advisers who failed to draw attention to the impropriety of transactions may negative a finding of unfitness or be a mitigating factor in the period of disqualification to be imposed: see e.g. Re Bath Glass Ltd [1988] BCLC 329; Re McNulty’s Interchange Limited [1989] BCLC 709, Re Aldermanbury Trust plc [1993] BCLC 598.” [Bradcrown].

“[171] (9) In each case the court must consider the director’s personal responsibility: it is his personal conduct which is in issue, and it is not sufficient to assume responsibility for some departure from required standards in the management of the company from the fact of his being a director.” [Chohan]

“[171] (10) Nevertheless, a “broad brush” is not inappropriate (see Re Barings plc (No 5) [1999] 1 BCLC 455, 483, approved by the Court of Appeal [2001] BCC 273, 283)” [Chohan].

“[171] (10)… “responsibility” is not confined to direct executive responsibility for the particular misconduct, and a failure to engage in proper supervision, review or scrutiny of the activities of delegates or fellow directors may suffice (see Re Skyward Builders plc; Official Receiver v Broad [2002] EWHC 2786 (Ch) at [393]).” [Chohan]. “[11] Each director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them; a proper degree of delegation and division of responsibility is permissible and often necessary, but not total abrogation of responsibility, and the Board of Directors must not permit one individual to dominate them and use them: Re Westmid Packing Services Ltd [1998] 2 ALL ER 124 at 130-131; Re Barings plc (No 5) [2000] 1 BCLC 523 at 536; Bishopsgate Investment Management Ltd v Maxwell (No 2) [1994] 1 ALL ER 261 at 265” [Bradcrown].

“[8] the standard of proof is the civil standard of balance of probabilities… (Re Living Images Ltd [1996] 1 BCLC 348 at 355-356)” [Bradcrown]. The statement that “the more serious the allegations, the more the court will require cogent evidence” has to be read against more recent pronouncements of the House of Lords, for example in In re B (Children) (Care Proceedings: Standard of Proof )(CAFCASS intervening) [2008] UKHL 35; [2009] 1 AC 11.

“[13] The Court of Appeal has laid down guidelines for the periods of disqualification, consisting of three brackets, the top bracket of over 10 years disqualification for particularly serious cases, the minimum bracket of 2 to 5 years where the case is relatively not very serious, and the middle bracket of 6 to 10 years for serious cases which do not merit the top bracket: Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 at 174.” [Bradcrown].

“[14] The length of the disqualification period is a matter for the discretion of the court. In determining the appropriate period of disqualification: (i) the court should not take into account the fact that the director may be making an application for leave under s17 to act as a director in respect of one or more specified companies; (ii) the period of disqualification must reflect the gravity of the offence; (iii) the court may take into account evidence of the general conduct in the discharge of the office of director, his age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors which may have been ordered: Re Westmid Packing Services Ltd [1998] 21 All ER 1124 at 135.” [Bradcrown]. “[178] …although disqualification is not strictly a punishment, the court is engaged in something akin to a sentencing exercise, requiring it to determine the appropriate period according to a sliding scale of culpability. With the assistance of those guidelines, the court is, however, to adopt a broad brush” [Chohan, referring to Sevenoaks and Westmid Packing].

I heard oral evidence from Ms O’Hara who was cross-examined on the four affidavits that she had made, setting out the Secretary of State’s case. I considered her to be a truthful witness who gave fair and balanced evidence. However, not surprisingly, she had little if any knowledge beyond what was set out in the contemporaneous documents that were in evidence and was thus unable to provide much assistance in the disputed areas of fact that arose.

Mr Nadeem Ahmed, the managing partner of HC, was cross-examined upon the two affidavits that he had made on behalf of the Defendants. He made a number of assertions about meetings that had taken place, consideration that had been given to various matters and advice that had been given based on that. This evidence was weakened by an absence of contemporaneous documentation, not least attendance notes or notes of the advice that was said to have been given (and on what basis). The almost complete absence of any such records was surprising. At various points in his evidence, he suggested that relevant documents were on his firm’s files but he had not produced them to the court. I am satisfied that if they had existed and had been helpful to the defendants’ case they would have been produced.

One particular part of Mr Ahmed’s written evidence that troubles me was his having focussed on the management profit and loss accounts for the period June to 16 December 2016, to demonstrate profit, without mentioning or discussing in any detail the balance sheet to those accounts relied upon by Mr Grant and which showed on their face an insolvent position as at 16 December 2012.

Although this balance sheet was exhibited by Mr Grant and although the Defendants, and, to some extent, (relying on what he had been told by one or more of the Defendants) Mr Ahmed. sought to explain why the position was not one of insolvency (primarily because of the waiver of the directors’ loans that I will come onto) it was surprising that this document was not focussed upon by Mr Ahmed and relevant explanations given by him in his affidavit evidence. His affidavit was in effect the lead affidavit evidence for the Defendants, only Dr Gul-Nawaz adding (a limited) amount of further evidence. On the face of things it was, at the least, potentially misleading in only telling part of the picture to focus on the management profit and loss accounts and assert as he did in his first affidavit, that “The management accounts to 16/12/12…show a rolling profit and loss reserve balance on the last line, showing that the Company never went into a negative position either when the properties were transferred to the holding company, when the dividend was issued or when the remaining £500k contribution to the EBT was made”, but not to refer to the balance sheet comprising such management accounts which on their face showed net liabilities as at 16 December 2012 of £299,655.

Overall, I am unable to accept at face value Mr Ahmed’s general assertions to the effect that the financial position of MFIL was properly considered in detail at each relevant stage that distributions were decided upon and/or those decisions implemented or his evidence that, at the time, there appeared to be no reason why the EBT scheme should not proceed, and that HC advised accordingly. In my judgment, it is necessary to look at the matter in more detail.

I also heard evidence from Kauser and Fameeda. Each was a straightforward witness whom I judge to be truthful in their evidence and seeking to assist the court. Each of them were quite frank that they had no knowledge of the affairs of MFIL and that, in effect, they were straw directors. The matter is shortly summarised (in identical terms) in their respective affidavits where they say that they had no knowledge of the matters giving rise to the decision to invest in the EBT, that they were not involved in the day to day running of MFIL and that they did not attend any board meetings where the EBT was discussed.

Fameeda confirmed, among other things, that she had no real understanding of directors’ duties; she did not attend board meetings; she did not know what the statement of affairs was; she did not understand what a creditor was; she had no idea how she had come to be owed over £70,000 by MFIL and that, in effect, she signed relevant company documents or documents relating to the company (such as a liquidators questionnaire filled in for her by another) because she was asked to and that she simply trusted Dr Akbar in this respect. The oral evidence of Kauser Akbar was very similar.

Businessmen do neither their companies, the public nor the individual concerned, any service when they appoint such an individual family member, who is in this situation, to be a company director. The truth is that individuals should not be appointed company directors, as Dr Gul-Nawaz says in paragraph 4 of his first affidavit Fameeda and Kauser were in this case, “only…due to their relationship” [stress provided]. In this case the relevant relationship was marriage with another company director.

Affidavit evidence was provided by Mumtaz which confirmed the truth of what was set out in the affidavit evidence of Dr Gul-Nawaz and Mr Ahmed. His affidavit was said to be made from his own knowledge information and belief. He said that where it was made from information or belief he would identify the source of the same and he did not do so. It became clear to me, in the course of his cross-examination, that he was relying on little more than belief and that his belief was that the two gentlemen who had given substantive evidence in question were honest and had given accurate evidence.

I consider that Mumtaz was a truthful witness. The bottom line is that he regards himself as a chef and a developer of recipes rather than a businessman. He largely left business matters and decisions to Dr Gul-Nawaz as that was Dr Gul-Nawaz’s forte and Dr Gul-Nawaz dealt with such matters. His evidence included the following: it would be rare that there would be formal board meetings though in general terms there would be family discussions from time to time. Although not entirely consistent, I am satisfied that his evidence properly understood was to the effect that he did not attend any of the board meetings that I have referred to above regarding the EBT scheme, even though the minutes purport to show a number of formal meetings at which he was present.

Mumtaz thought he must have seen the 2012 year end accounts in about June 2012. He would occasionally be shown or see management accounts for MIFL but he wasn’t a “finance guy”. He didn’t remember anything about waiving his director’s loan to MFIL nor, though he was the sole director, anything about the lease entered into by Mumtaz UK Limited with NOS 2 and which was guaranteed by MFIL and eventually brought it down. That lease, he confirmed, was of premises that were used in the business of his brother, Rab Nawaz. He too signed the liquidator’s questionnaire filled in by another.

Although, therefore I find that Mumtaz had a slightly greater involvement in MFIL than Fameeda and Kauser, like them he relied implicitly in Dr Gul-Nawaz as regards any financial or business matters and had little knowledge, or understanding of the same and no real grasp of any detail.

Rab Nawaz also gave evidence. His affidavit evidence, like that of Mumtaz, Fameeda and Kauser, simply adopted the evidence of Dr Gul-Nawaz and Mr Ahmed.

His knowledge of the financial position of MFIL was summed up in oral evidence as being “not much” and that he too placed reliance on Dr Akbar. Rab Nawaz’s position was that he ran restaurants and that Dr Akbar had responsibility for financial matters concerning MFIL.

On the two topics that he was directly involved in: the signing up to the lease of premises with NOS 2for which MFIL was the guarantor and the contract with GK Raw, Rab Nawaz was extremely vague. I will return to these topics below.

I am satisfied that Rab Nawaz took refuge in saying that he did not remember things rather than honestly trying to assist the court with his general recollection as to events. In my assessment, as regards the details of the MFIL reorganisation, the true position is that he had minimal involvement because that was all decided upon and carried out by Dr Akbar and it was Dr Akbar and his son Bilal who in practice ran that company. In broad terms Dr Akbar’s brothers had some idea of the overall plans but no real involvement in any of the detail.

I deal with the evidence of Dr Gul-Nawaz in connection with the relevant topics as I come to them.

The first question is the role and responsibility of Dr Gul-Nawaz within MFIL. I can take this shortly. Although MFIL was involved in the restaurant business as well as the food processing and sale business, the latter being particularly Dr Gul-Nawaz’s line of business within the family, I am satisfied that in practice MFIL, and certainly its strategic and overall financial planning, was run by Dr Gul-Nawaz with the assistance of his son Bilal.

My assessment is confirmed not only by all the oral evidence that I heard but also by the various pieces of evidence set out by Ms O’Hara in her first affidavit from an employee, MFIL’s former solicitors, and the liquidator’s questionnaires submitted by the directors.

Secondly, I can deal with the gold bullion scheme. It is clear that this was a scheme to enable a distribution to be made in the context of the company ceasing to operate its current businesses and transferring its freehold properties and existing businesses. This is confirmed by the evidence of Mr Ahmed and the underlying marketing of the tax saving scheme. I accept that the proposed method of distribution was chosen because it had tax advantages over the obvious alternatives, such as a distribution by way of dividend or by way of director’s bonus. However, the underlying motivator was the making of a distribution not the placing of MFIL in some better tax position. The latter was a by-product.

There was also of course a tax advantage for Dr Gul-Nawaz personally. The distribution was also primarily for the benefit of Dr Gul-Nawaz. Not only did he personally receive a net cash benefit, calculated by Mr Grant to be some £210,701, but the debt owed by his company to MFIL was substantially reduced.

In his affidavit, Dr Gul Nawaz said that:

“The reason that I was the beneficiary of the EBT was purely for administrative reasons in that I was generally available for execution of the documentation provided by Qubic Tax. The administration of the EBT was undertaken by Bilal Akbar who was working in the administration offices of the Company and is, in fact, my son. I was readily available to assist in the necessary execution of all relevant documents. As such, I was to be merely the conduit for the workings of the EBT and the benefits to the employees/shareholders of the company would have been operated through myself”

In my judgment, this is to underplay both the role of Dr Gul-Nawaz in the planning for and decision-making relating to the gold bullion scheme and the distribution to him and the purpose and benefit to him of the EBT scheme as put into operation.

I am also satisfied that the distribution effected pursuant to the EBT Scheme was planned as an integral part of the overall reorganisation being carried out at that time. Although the sale of the businesses may have taken place a few days after the last transaction effecting the last part of the EBT distribution, the key terms of those sales and the creditors that were, in economic terms, to be transferred and those that were to be left behind and the relevant principles by which this categorisation was reached were all well-known to Dr Gul-Nawaz and Mr Ahmed (even if the latter did not know the identity and amounts of each and every creditor that would be left behind) at the time that the EBT scheme was given effect to.

Further, I am satisfied that Dr Gul-Nawaz considered the financial position of MFIL in the context of the EBT scheme. Even though the document showing the position immediately prior to the sale of the businesses as at 16/17 December may not have been available as at the time of the first transaction effecting the EBT scheme, the relevant information was to hand. I am satisfied that that information was considered. Even if I am wrong about that I am satisfied that acting properly it should have been considered by the directors and was capable of being considered by them.

Dr Gul-Nawaz said in oral evidence that he had both November and December figures when considering the EBT transactions. He also referred to a document which he said showed various “scribblings” to the October 2012 management accounts and which showed, on the bottom line, a solvent position. Precisely what scribblings were made and what they showed was not clear. This apparently key document has not been located nor put in evidence. On what I have been told I am satisfied that I need not be concerned about that document, even if it ever existed. In short, it is possible to consider the position on the basis of the balance sheet as at 16 December 2012, comprising part of the balance sheet accounts, as I will go on to explain. The apparent “solvent position” relied upon by Dr Gul-Nawaz as being shown by the “scribblings” was one that, as he accepted, left out of account various claims that were also left out of account or not provided for in full in the 16 December balance sheet including, among others and crucially, the directors’ loans and matters such as the Javed claim.

I am also satisfied that although Mr Ahmed was assisting Dr Gul-Nawaz, the latter is a financially astute businessman. He was well able to understand the significance of the transactions that were being carried out and their financial ramifications. Accordingly, this is not a case where there was technical advice that a distribution could be made that Dr Gul-Nawaz was entitled to rely upon. He was himself able to consider the relevant facts and figures and assess the position.

Dr Gul-Nawaz was asked why there was no record of advice given by HC required by him to be given or kept. His answer was that at the time he didn’t think that this was important. On the other hand he did, albeit some months after the relevant transactions had occurred, obtain written advice regarding the valuations of the properties transferred by MFIL and was aware, for example from the material produced by Qubic Tax, of the desirability of keeping proper records justifying decisions made in relation to the EBT Scheme.

In my assessment, there is no record of advice either retained by the Company or produced by HC because such “advice” was minimal. Assistance in identifying figures and in presenting them may have been obtained from HC but advice was not needed as to the financial effects on MFIL of the various transactions: Dr Gul-Nawaz was well able to assess that himself. Similarly, general assertions by Mr Ahmed that at every stage HC advised MFIL are of little worth when the detail of such advice is now unable to be given. What I am satisfied did not take place was any detailed assessment of (a) the debts disputed by Dr Gul-Nawaz, largely left behind in MFIL, and the likelihood and risk that they would be found to be due and (b) the ability of MFIL, looking to the future, to continue trading and paying its remaining debts after it had disposed of its existing businesses.

So far as a tax advantage to the company is concerned, the relevant tax computations only appear to have been prepared on 28 March 2013. That is the evidence of Mr Grant when he was asked at what date the tax computations were prepared. Mr Ahmed referred in general terms to a broad calculation as to the likely tax saving in fact being more than that identified in the tax computations and by Mr Grant in his report. No contemporaneous written materials were produced to support the assertions of Mr Ahmed that the greater tax benefit that he refers to had in fact been properly calculated or even communicated to MFIL. In my judgment, either calculations were done, broadly producing the sort of figures put forward by Mr Grant or if they were not and higher figures were put forward then these were unsubstantiated and should not have been relied upon. I regard this absence of contemporaneous records as also reflecting the fact that any corporation tax saving was a bonus. The real mover was benefitting Dr Gul-Nawaz and removing assets from MFIL to the advantage of the Akbar family.

So far as the decision taken as to which creditors should be economically transferred and which ones should remain with MFIL, Dr Gul-Nawaz confirmed that the decision was taken by him and Bilal. Although this was said to be on the advice of Mr Ahmed it is again difficult to understand what relevant advice Mr Ahmed gave or could give. Mr Ahmed did not suggest that he gave any such advice regarding the principle or the selection of particular creditors. The decision was effectively a business decision and no relevant accountancy or financial advice given by HC was identified to me in this particular context. Mr Ahmed’s evidence was that what Dr Gul-Nawaz (he referred to the “directors” but in practice this must have meant Dr Gul-Nawaz) wanted to effect was that only “true” liabilities of the business should transfer with the business. Those that were not accepted as correct were not included in the sale-purchase agreement with Mumtaz Foods plc. I am satisfied that there was no detailed consideration of individual disputed debts as between Dr Gul-Nawaz and Mr Ahmed. Nor was there any consideration as a board: had there been then the claims relating for example to the NOS 2 lease would in my assessment, almost certainly have raised and considered.

So far as advice from lawyers is relied upon with regard to particular claims mounted against MFIL I am satisfied that it did not exist in the form asserted by Dr Gul-Nawaz and Mr Ahmed.

I turn now to some of the creditors that were not economically transferred under the business sale agreement with Mumtaz Foods plc.

The explanation for the non-transfer of Barclays Bank was that it was said that it had been intended that a proper legal transfer of the liability would be made and that it transpired that Barclays Bank would not consent to a relevant assignment or novation without directors’ personal guarantees which Dr Gul-Nawaz was unwilling to give. Although this may explain why the debt was not transferred across as a matter of law it does not explain why the debt was not transferred across economically under the Mumtaz Foods plc business sale agreement.

In my assessment, and taking into account the evidence regarding other debts “left behind”, I consider that the Barclays Bank debt was not considered necessary to the continued operation of Dr Gul-Nawaz’s part of the Mumtaz group and that accordingly he was not prepared to carry it across economically with and at the time that the business in relation to which it had built up was transferred. In any event, in assessing the debts remaining with MFIL post 17 December 2012, this debt would have had to have been taken into account unless and until agreement had been reached with Barclays on the issue. A hope that it might be later be transferred was not something that enabled the directors to assume that that would occur.

It was said that the plan was that the loan would be serviced and paid off from the new business and from sales of MFIL’s remaining assets. I am satisfied, as I have said, that there was no proper analysis and consideration of what sums, by way of profits, would realistically be earned from the new business. I am also satisfied that there was no real consideration, and certainly no proper valuation exercise, in respect of the values that might be obtained in respect of the disposal of remaining unrequired assets (plant machinery etc)..

Notwithstanding the history that I have set out above, no provision was made in the management accounts of MFIL for the judgment in favour of Mr Javed made on 16 October 2012 and communicated to Dr Gul-Nawaz by letter from his solicitors within days thereafter. Nor was such debt taken into account in considering the financial position of MFIL in the context of the EBT distribution. I am satisfied that it should have been taken into account.

Various excuses were given to me in oral evidence as to why it was not. These emanated both from Mr Ahmed and from Dr Gul-Nawaz.

One thread was that there was video evidence which the solicitors for MFIL advised was strongly in favour of MFIL’s case. Both Mr Ahmed and Dr Gul- Nawaz went so far as to suggest that the video evidence demonstrated that Mr Javed was under no disability at all and that the solicitors for MFIl were advising this in about November 2012. Mr Ahmed also suggested that there was written evidence on his firm’s audit files of such advice. The explanations for not producing the same were unconvincing, including assertions that he had not compiled the exhibits to his affidavit but that a partner had, that he had only cursorily looked through the relevant files and that the directors had not asked him to exhibit it. I conclude that there is no such record of advice on file. There is clearly a close ongoing business relationship between Mr Ahmed and Dr Gul-Nawaz and his companies and I consider that Mr Ahmed’s evidence generally cannot be accepted without some satisfactory corroboration where it amounts to the sort of assertion that I have just been considering.

Leaving aside the actual findings of the Tribunal about the surveillance material, the video evidence was irrelevant to the grounds of appeal on liability. If it was thought, later, that there were grounds to appeal on the quantum judgement, no appeal seems to have been launched, although the proceedings continued to be defended in 2013 and the company represented at hearings. Had there been advice that there were good grounds to appeal the quantum judgment, I am confident that an appeal would have been launched. Further, on this issue, the findings of the tribunal are damning: it is difficult to see what grounds of appeal there would have been. Other than assertion, no evidence was produced of any advice of the solicitors in this respect, Dr Gul-Nawaz was extremely vague as to what the basis of any such advice was and in my view it is simply implausible that any such positive advice such as he asserts was given with regards to any appeal.

This view, that there was not strong advice as to prospects of success, even before the tribunal decision and certainly after it, is strengthened by the Tribunal’s assessment of the defence put forward and the conduct of MFIL in the proceedings. It is further clear that Dr Gul-Nawaz was closely involved in defending the Javed claim.

Secondly, and in any event, the Tribunal made clear in its award on quantum that even if the appeal (which was limited to an appeal on the finding of liability regarding disability discrimination) was set aside, there would have remained liability of over £56,000 for unfair dismissal and loss of earnings.

Dr Gul-Nawaz said that in any event there was always a safety net for Mr Javed, being his, Dr Gul-Nawaz’s liability as 2^nd respondent but of course that does not stand up to scrutiny given the procedural history that I have outlined whereby Dr Gul-Nawaz had been removed as respondent from the proceedings. Further, it would not be a ground for discounting any liability of MFIL, because if liability of MFIL and Dr Gul-Nawaz was joint and several then, although Mr Javed would not have been prejudiced by an inability of MFIL to pay him, MFIL would have been on the receiving end of a claim from Dr Gul-Nawaz if he had discharged the entire judgment debt.

In short, I am satisfied that any step that could be taken to avoid liability or satisfaction of any judgment debt owed to Mr Javed would be and was taken at Dr Gul-Nawaz’s instigation. I am satisfied that the debt was economically “left behind” so that it was insulated from the business effectively transferred to Dr Gul-Nawaz’s company. I am also satisfied that as at the time of the EBT scheme the debt was one that was known by Dr Gul-Nawaz to have been established and that he should take into account when considering the financial position of MFIL.

The evidence of Dr Gul-Nawaz on the above points was an example of evidence that made little sense and was inherently implausible. In my assessment he was not a truthful witness to the court.

One worrying aspect of the Tim’s claim is that MFIL relied on a counterclaim in defence of the debt that it owed to Tim’s. However, the debt owed to Tims’ Dairy, leaving aside the counterclaim, does not seem to have been fully reflected in the sage accounts of MFIL. Thus, on the face of things the invoices were not all on the system. I am unable to draw any conclusions adverse to Dr Gul-Nawaz on this aspect but am satisfied that he did know the full size of the actual debt. On the question of the counterclaim, Dr Gul-Nawaz again asserted every confidence that the counterclaim was a good one and that advice to this effect had been received. Again, no contemporaneous record of such advice has been produced in evidence.

Further, according to an email from the solicitors who acted for Tim’s Dairy, and who eventually obtained judgment in Tim’s favour after a trial but without any role being played by MFIL, his client had put into evidence an expert report that was extremely favourable to their case. MFIL did not have its own expert report, only produced documents after an order was made that the defence would be struck out for failing to do so and failed to provide any witness statements. In the circumstances, although I am unable to say what value should have been placed on this claim, I am satisfied that in assessing the ongoing financial position of MFIL this claim could not simply have been left out of account, as it was.

Dr Gul-Nawaz gave a long explanation as to how he was concerned that there had been double charging. I am unpersuaded that a positive case of double charging was ever made out, as opposed to an attempt to delay payment by requiring BHP law to “demonstrate” that there was not double charging. In the light of the other evidence in the case I am satisfied on the balance of probabilities that it was known by Dr Gul-Nawaz that there was, on the most favourable view to him, a serious risk that the dispute would be resolved against MFIL.

The evidence relied upon by the Defendants was that the work carried out by Raw was for Rab Nawaz’s business carried out through Mumtaz Jaldi Jaldi Limited, which went into liquidation on 9 February 2012. That may be correct but does not conclusively answer the question of the entity with which Raw contracted and to which it was entitled to look for payment.

In light of the defendants’ case it is surprising that the debt was not included in the statement of affairs of Mumtaz Jaldi Jaldi Limited by Rab Nawaz. This was an area where Rab Nawaz hid behind a lack of recollection which I was unconvinced by in the sense that it appeared a knee jerk convenient answer throughout his evidence to questions rather than, in my assessment, an honest answer given after careful thought.

Dr Gul-Nawaz asserted that the alleged debt only came to the attention of MFIL in about February 2013 and referred to a letter sent by MFIL dated 19 February 2013 disputing the alleged debt on the basis that the work had been carried out by Mumtaz Jakldi Jaldi Limited and that the individual whom Raw said it had been involved with on behalf of MFIL, Mr Mingay, was not employed by MFIL and had no authority to bind it. However, the letter being replied to was from January. Dr Gul-Nawab said that this letter had only been drawn to his attention in February. He said that he did not ask to see the correspondence referred to in the Walker Morris letter. He also said that he was not concerned that, on the face of things, the existence of the claim (whether or not it was good) had been kept from him. I am satisfied that if truly this had been a claim coming to his attention out of the blue he would have investigated further and been more concerned.

I have referred above to the letter dated 17 January 2013. It was said in evidence and in submission that the attachments referred to in the letter are not in evidence. I accept that that is true. However, on the balance of probabilities I am satisfied that a letter from Walker Morris solicitors referring to attachments and describing them would have been accurate in both respects. If nothing else, I am satisfied that the letter referred to of 22 June 2011 from Raw to MFIL making demand for payment existed and was sent.

No legal advice to MFIL seems to be relied upon in this respect. I am satisfied that as at November 2012 the existence of this claim was known about by Dr Gul-Nawab and that it needed to be considered in considering the financial position of MFIL. Even if I am wrong about this, I am satisfied that had there been proper consideration of the company’s financial position, as there should have been, involving at least all three brothers rather than just Dr Gul-Nawaz, Bilal and, to some extent, Mr Ahmed, the existence of the claim would have come to light.

Dr Gul-Nawab’s position was that this claim had only come to his attention in 2013. According to the answers to the liquidator’s questionnaires the directors answering said that they realised that MFIL was insolvent in “early 2013”. In my assessment, it was clear to the directors that the company would fail in February 2013 once the statutory demand was served in respect of the guarantee under the lease.

I am satisfied that Dr Gul-Nawaz was aware of the guarantee liability of MFIL under the lease granted by NOS 2 at the time of the decisions regarding the EBT distribution scheme in October-December 2012. On the evidence that I heard it was unlikely that he would not have been kept informed by his brothers and there is no suggestion that there was any particular anger directed at his brothers or that they had done things behind his back. Rab Nawaz also gave evidence that Dr Gul-Nawaz knew about the guarantee liability in late 2012, although he later back tracked and appeared to confuse the issue in the answers that he gave. The documents following on from the notice of disclaimer were served on the company and again I am satisfied that the general position came to Dr Gul-Nawaz’s attention prior to the EBT scheme distributions. Even if I am wrong about this, I am satisfied that had there been a proper review of the company’s liabilities the matter would have come to light.

Rab Nawaz gave a lot of evidence about how an alternative tenant was being sought and it was hoped that the matter would be resolved without liability on the part of MFIL. Although this was not put to Dr Gul-Nawaz, my assessment is that it was hoped that the matter would be resolved along the lines explained to me by Rab Nawaz and that for that reason the claim was ignored at the time of the assessment of the financial situation of MFIL, such as there was one, prior to effecting the EBT distribution.

The balance sheet as at 16 December 2012 includes a provision of £400,000 for a management charge to be paid to MFPL. I am satisfied that this charge was sufficiently decided upon as a liability of MFIL in November 2012 and that it had to be taken into account in deciding whether the EBT arrangements could safely be entered into. Dr Gul-Nawaz gave evidence to this effect and that it was taken into account at the time.

A key question is the waivers of the relevant directors’ loans. The evidence of Dr Gul-Nawaz and Mr Ahmed was that the waivers were effective and that they had the effect of a complete waiver. Of course, this is not what the waivers provided for and such position is inconsistent with the conduct of the directors (supported by HC) in subsequently providing for such loans in the Statement of Affairs they each signed and in proving in respect of such loans.

The waivers only operated, according to their terms, in the event that shares with an equivalent value were provided to the directors. Although it was suggested that everyone assumed the lawyers had issued or would issue such shares, first it needed board resolutions to do this and everyone must have been aware there were none. More significantly, however, there would have needed to be an exercise to work out how many shares needed to be issued which would have the requisite value. Given that the company as at 16 December, according to the available management accounts, had a negative balance sheet and only a new business of providing management services it is difficult to see how it could have been assumed that relevant shares had been issued or even could be issued which would have the effect of waiving the loans.

I do not know whether Mr Ahmed actually considered the terms of the loan waivers. Had he done so properly it is difficult to understand how he could have thought at the time that the issue of shares was, as he put it in oral evidence, just an “administrative process”. By the time of the trial he had seen such terms. He maintained the position that the loans were waived, in his and Dr Gul-Nawaz’s view, when the waivers were signed. He was unable to explain on that basis why proofs had been submitted in the liquidation in respect of such debts, other than that of course no shares had in fact been issued. Dr Gul-Nawaz’s evidence suffered from the same difficulties.

I take into account the unusual terms of the waivers (in the sense that they were not straight waivers or an immediate capitalisation of the loans for a specific number of shares that could be effected as an administrative matter) and the other evidence in this case. I am satisfied that they were structured as they were to provide some evidential basis for Dr Gul-Nawaz to treat the loans as waived, when considering the financial position of the company and the EBT scheme, and at the same time to retain the right to debt claims against the company (if the company did not become sufficiently solvent by December 2013 to enable the terms of the waiver to be complied with). That is precisely what happened.

There is no evidence that any exercise was carried out to demonstrate that there was even a realistic prospect that the company would acquire a value such that it would be possible to issue shares to the requisite value in the timeframe required under the loan waivers. In these circumstances, I am satisfied that Dr Gul-Nawaz knew that the loans had not been waived and that he could not rely on such waivers as a basis for ignoring the loans as debts of MFIL. Finally, I should mention that the waiver of the loans does not seem to have been relied upon at the time in assessing the financial position of MFIL. As Mr Ahmed says in paragraph 12 of his second affidavit, the loans were taken into account in the management accounts and the waivers were not. It is only after the event that Mr Ahmed asserts that the financial position was stronger than as set out in the management accounts available to management.

On a balance sheet basis, the balance sheet as at 16 December 2012, forming part of the management accounts, contains information that was available to Dr Gul-Nawaz prior to that date. It showed a balance sheet insolvent position of £299,655. If the obligation on MFIL to repay directors’ loans of about £385,000 had indeed been waived, then the net assets on a balance sheet basis would have been about (but under) the “about” £100,000 positive position that Dr Gul-Nawaz said was the result of the “scribbles” on the October management accounts to take account of post October events. However, for the reasons that I have given, that liability could not properly be considered to have been waived.

Even if £184,000 or so removed as liabilities (representing liabilities “transferred” to Mumtaz Foods plc), that would only reduce the deficit on the balance sheet to a negative figure of £100,000 or so. In addition, the liability to Mr Javed of over £100,000 needed to be taken into account, as did the other debts that I have discussed earlier.

The only evidence as to what was considered at the time regarding solvency seems to have been net asset or balance sheet solvency. However, the position also had to be considered going ahead. Dr Gul-Nawaz’s evidence was that the judgment was that MFIL could service its remaining debts (including crucially the bank overdraft) out of the receipts made from its new management business and by selling its remaining assets. Although there was a suggestion that it was thought that such assets would realise more than book value, there is no evidence that any proper consideration was given this at the time or that there was any objective valuation evidence or other reasonable grounds to justify any such assumption. It was not a factor relied upon in the affidavits but emerged in oral evidence. I have already dealt with the sparse evidence regarding management charges to other Mumtaz companies. The sums in fact earned by way of management charge were extremely small in the first few months.

Mr Ahmed majored on the profits made to date (as of late 2012) but of course the relevant businesses were to be transferred. Those profits were irrelevant. The bottom line was the balance sheet and the position going ahead.

The fact that the company was purportedly brought down by a debt of £3,600 a quarter, (unexpectedly on the defendant’s case) falling due for payment, confirms the shaky financial stability of MFIL following the overall 2012 reorganisation, including the EBT distribution.

In short, I am satisfied that on the evidence the position that MFIL would be rendered net asset insolvent and that, even leaving that aside, though the two are interconnected, the fact that there must have been a very serious risk that it would be cash flow insolvent, are enough in my judgment to have engaged the duty to act in the best interests of creditors. In the circumstances, MFIl was, as a result of the overall reorganisation, at the very least “on the brink of insolvency” and in a parlous financial position. To distribute £1million or so of assets under the EBT Scheme was not acting bona fide in the best interests of creditors. Even if I am wrong about that, it was clearly at the least grossly incompetent such as to make the person responsible, having the relevant knowledge, unfit to be concerned in the management of a company.

In my judgment, taking into account all the relevant circumstances, Dr Gul-Nawaz’s conduct in arranging and effecting the EBT distribution payments was conduct which makes him unfit to be concerned in the management of a company.

So far as Mumtax and Rab Nawaz are concerned, taking into account all relevant circumstances, I am satisfied that their conduct in failing to engage properly as board directors in terms of playing an active role in and in supervising and monitoring Dr Gul-Nawaz regarding the EBT scheme distributions is such as to make them unfit in cauising or allowibng the payments to be made. I consider that they carry more responsibility than Fameeda and Kauser because they did play some role in the affairs of MFIL, they are businessmen and they were involved in two of the relevant creditor claims that I have considered, NOS 2 and Raw.

As regards Fameeda and Kauser, their conduct as directors is abysmal in the sense that there was a complete dereliction in the performance and understanding of their duties. They are not being disqualified because of that in itself but because of the connection between that dereliction and the consequence, which is that the EBT scheme distribution went ahead.

It was submitted on their behalf, in a characteristically brave and bold submission by Miss Temple, that they were unable to assert any influence on the company in any event and that therefore they should escape any finding of unfit conduct, relying on dicta of Chadwick J (as he then was) in Secretary of State v Gash [1997] 1 BCLC 341 at 347-8. I leave aside the fact that in this case there was no evidence that they, or a director properly carrying out his or her duties, would not have influenced the position. The main point, for present purposes, is that the sort of circumstances envisaged by Chadwick J where disqualification might be avoided, were entirely different. He was dealing with a case where the director in question remained in office trying to carry out his duties and to use his influence to try and bring (in effect wrongful) trading to an end. As Chadwick J pointed out, staying as director to do nothing (other than draw fees or preserve status) would not be a circumstance in which an unfit finding might be avoided. In any event, the MFIL case was not one where the question of resignation arose: Fameeda and Kauser should never have been directors in the first place and they never sought to discharge any directors’ duties: not least because they never realised they owed any.

Having considered all the circumstances I consider that the correct periods of disqualification in this case, given respective responsibilities and involvement, are as follows: Dr Gul-Nawaz: 6 years; each of Nawab and Mumtaz: 3 years and each of Fameeda and Kauser: 2 years.

I invite the parties to agree a form of order in the light of this judgment, which will be handed down without the need for attendance. In the event that a draft form of order cannot be agreed either at all or only as to part of the matters outstanding from this judgment, then I will adjourn such matters to be dealt with by a further hearing which can be by telephone if the parties are content. If a form of order dealing with all matters cannot be agreed by 4pm on Friday 17 November then the parties shall apply for the fixing of a further hearing to deal with such matters, providing the court with availability for a 10am hearing between then and the end of January 2018. In the first instance, I adjourn all matters arising from this judgment and I extend the time for filing a notice of appeal, and for applying for permission to appeal to me, so that the relevant periods will not begin to run until a final order dealing with all outstanding matters is agreed or until after judgment on the hearing which would then have to take place.

So far as the disqualification orders themselves are concerned, those should be capable of being agreed. If not then I will hold a very short telephone hearing to resolve any dispute separate from any hearing dealing with other matters. At the moment, I am minded to order that the periods of disqualification will begin at the end of 21 days starting with Friday 17 November.