OFFICIAL RECEIVER v STERN AND ANOTHER [2001] EWCA Civ 1787

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR. JUSTICE LLOYD
[2001] EWCA Civ 1787Case No Case No: A3/2000/2077 & 2077A &2078Venue Royal Courts of Justice, Strand,, London, WC2A 2LL, Wednesday 20th November 2001
Between
OFFICIAL RECEIVERAppellantSTERN AND ANOTHERRespondent
Before
Lord Justice BuxtonLady Justice ArdenMr. Romie Tager QC (instructed by Messrs Michael Conn and Goldsobel for the Appellant)Mr. David Richards QC and Mr. Richard Hill (instructed by The Treasury Solicitor for the Respondent)Date 20 November 2001
[1]THE VICE CHANCELLOR : This is the judgment of the court to which the members have made equal contributions. Introduction[2]The appellant, Mr William George Stern ("Mr Stern"), was the managing director of Dollar Land Management Ltd ("DLM") and Westminster Property Management Ltd ("Westminster"). DLM operated as the management company of a group of property companies called the Dollar Land Group ("the Group") from December 1986 to January 1993. DLM went into creditors voluntary liquidation on 17th February 1993 with a deficiency with regard to creditors then estimated to be £5.77m, but later increased to £10.186m. Westminster then took over the management of the Group in February 1993. On 26th October 1994 Westminster was compulsorily wound up. Its estimated deficiency with regard to creditors was £1.224m.[3]On 24th October 1996 the Official Receiver commenced proceedings against Mr Stern under the Company Directors Disqualification Act 1986 in relation to his conduct as a director of both DLM and Westminster. The matters by reference to which it was alleged that Mr Stern was unfit to be concerned in the management of a company, so far as still relevant, fell into two main groups. The first ("the Drawings Charges") concerned the alleged unauthorised drawings by Mr Stern from both DLM and Westminster. The second ("the Trading Charges") related to alleged trading at the risk of creditors by both companies. In addition there was a charge ("the Diligent Charge") of misapplication of the money of Westminster in payment of a liability of DLM, guaranteed by Mr Stern, at a time when Westminster was insolvent.[4]The application was heard by Lloyd J between 8th February and 1st March 2000. On 18th April 2000 Lloyd J gave judgment. He found the Drawings Charges, the Trading Charges and the Diligent Charge to be established. He concluded that the conduct of Mr Stern showed him to be unfit to be concerned in the management of a company. After hearing Mr Stern's submissions concerning the period of disqualification Lloyd J ordered that Mr Stern be disqualified for 12 years. He gave Mr Stern permission to appeal the order but in respect of the Trading Charges and the Diligent Charge only.[5]Mr Stern duly appealed in accordance with the permission granted to him by the judge. He contends that the judge was wrong to conclude that he was unfit to be concerned in the management of a company and wrong to impose so long a period of disqualification. In addition he has applied to this Court for permission to appeal in relation to the Drawings Charges and, in respect of those charges, for permission to adduce fresh evidence. Accordingly the issues are: a) whether to allow Mr Stern to adduce the fresh evidence he seeks in respect of the Drawings Charges; b) whether, with or without such evidence, to allow Mr Stern to appeal the judge's findings in relation to the Drawings Charges; c) whether Lloyd J was wrong to conclude that Mr Stern was unfit to be concerned in the management of a company in respect of the Drawings Charges, if permission to appeal is granted, the Trading Charges and the Diligent Charge; d) whether, in the light of the charges we consider to have been made out, the period of disqualification should be reduced.[6]We heard the issues separately in the order in which we have set them out. At the conclusion of the argument on each of issues a) to c) we told the parties of our decision. Accordingly this judgment contains the reasons for those decisions and our judgment on issue d). The background[7]Dollar Land Holdings plc is the holding company for the Group. It was incorporated in England. Formerly its shares were listed on the Stock Exchange. In June 1985 its issued share capital was acquired by a company incorporated in Panama called Keristal Investment and Trading SA ("Keristal"). Keristal was controlled by a Liechtenstein foundation called the Ahava Foundation ("Ahava"). The founders and beneficiaries of Ahava were Mr Joseph Neumann ("Mr Neumann") and Mr Israel Green ("Mr Green"). Mr Neumann and Mr Green were involved in the business of real estate. They had formed a consortium of private investors who operated through Ahava.[8]The acquisition of control of DLH by Keristal coincided with the discharge of Mr Stern from his bankruptcy on 28th September 1985. Mr Stern had been involved in property for many years. Following his discharge he helped to build up the Group. In 1990 he acquired 24.5% of the shares in DLH. Notwithstanding his obviously important role in the affairs of the Group Mr Stern was not formally a director of DLH.[9]The Group operated through subsidiary companies. Most of the subsidiaries held one property only. Some of them had outside minority shareholders. Mr Stern's role was to identify opportunities for the profitable acquisition of properties either for investment or trading. Such properties would be acquired with borrowed money repayment of which would be secured on that property. The properties so acquired were in the United Kingdom, Brussels, Lisbon and Antwerp.[10]DLM was a member of the Group and was set up as the management company for the Group as a whole. Mr Stern was its managing director. The other directors were his son Mr Mark Stern, Mr Abbott a non-executive director with a banking qualification, Mr Cutler who was involved in estate management, Mrs Smith who was concerned on the secretarial side and Mr Thomas, a chartered accountant and the finance director of the Group. The main function of DLM was to operate a current bank account through which credits and debits of all group companies would pass. In addition it ran the head office of the Group and employed the staff. DLM was financed by the credits received on behalf of other group companies and by money received from Keristal or at its direction. The income of DLM consisted of commissions charged to the property owning subsidiaries as a percentage of the rent collected or of the consideration for a purchase or sale.[11]The Group had two principal secured lenders GE Capital Corporation (Funding) Ltd ("GE") and Alliance and Leicester Building Society ("A&L"). In September 1990 GE insisted that the rents due on properties forming part of its security should be paid to GE rather than DLM and that the securities should be cross-collateralised so that each should be security for all the indebtedness of the Group. In 1991 the Group was required by A&L to enter into a similar arrangement. The effect of these arrangements was to deny to the Group and DLM a regular cash flow. Lloyd J concluded (para 47), and it is not disputed, that "In essence, from 1990 onwards DLM, and then Westminster, continued to trade with the benefit of such support as they were able to gain from within the group or from Keristal, and with the benefit of the forbearance that was extended, whether or not on an informed basis, by creditors. Mr. Stern knew that the company could not pay its debts as they fell due."[12]One of the major issues at the hearing before Lloyd J arose from the contention of Mr Stern, recorded by Lloyd J in paragraph 133 of his judgment, that "Keristal paid, or caused to be paid, substantial sums into the bank account of the management company from time to time, that the management company was not free to deal with these amounts as it chose but could only deal with them in accordance with directions received from Keristal, that Keristal was therefore entitled to have all or any part of these moneys paid out for its own benefit....and that he himself was entitled, under bilateral arrangements reached directly with Keristal, to draw sums out of the funds so paid in by Keristal, up to a limit agreed in December 1990 of £500,000 each year."[13]We will deal with that contention in more detail in relation to the second issue. For present purposes it is sufficient to record that it was not disputed that the sums drawn by Mr Stern, his son and Keristal from DLM and Westminster in the years 1990 to 1994 were as shown below: DLM DLM DLM Westminster 1990 1991 1992 1993-4 William Stern £441,000 £170,891 £168,216 £731,996 Mark Stern £49,500 £99,600 £62,000 £80,609 Keristal £1,181,088 £737,279 £409,510 £114,228[14]As we have already indicated DLM went into creditors voluntary liquidation on 17th February 1993. The debts then due to the Crown amounted to £5,287,944. Its role was then taken over by Westminster, another member of the Group, of which Mr Stern was also the managing director. Westminster went into compulsory liquidation on 26th October 1994. The debts then due to the Crown amounted to £3,676,791.[15]It was in these circumstances that the Official Receiver commenced proceedings under the Company Directors Disqualification Act 1986 against Mr Stern. The conduct of which the Official Receiver complained, referred to as charges, fell into the categories we have already mentioned. The Trading Charges, as summarised by the judge in paragraph 18, were "(1) [Mr Stern] traded in respect of DLM at the risk of creditors and/or knowingly continued the company's business when there was no reasonable prospect of all creditors being paid. (2) [Mr Stern] financed DLM's business with £5.2 million retained from revenues collected on behalf of the Crown. (3) [Mr Stern] drew undue remuneration and benefits having regard to the prospective turnover or profitability of DLM and the interests of creditors. (4) [Mr Stern] knowingly operated the business of Westminster when there was no real prospect of all creditors being paid. (5) [He] had no reasonable grounds for expecting that the business of Westminster would succeed, it having been carried on without any significant change in its financing or method of operation following the business which had previously been carried on unsuccessfully by DLM. (6) The operation of Westminster in a phoenix manner unfairly and improperly exploited the privilege of limited liability. (7) [Mr Stern] financed Westminster's business with sums retained from revenues collected on behalf of the Crown; having regard to the point on withholding tax that I have mentioned this point is still relied on but in respect of a smaller amount. (8) [Mr Stern] drew excessive remuneration from Westminster."[16]With regard to the Drawings Charges it was agreed that the drawings of Mr Stern's son should be aggregated with his own. The charge against Mr Stern, with regard to both DLM and Westminster, was that he "drew substantial sums from each company in turn in addition to [his] remuneration which drawings constituted either simply misapplication of corporate funds or unlawful loans to directors." The Diligent Charge was made against Mr Stern alone. It is that "he caused payments to be made by Westminster for purposes that were not in the interests of Westminster, this being a case of Westminster meeting a liability for interest which was not incurred by it but by DLM, by then in liquidation."[17]Though these proceedings were commenced in October 1996 the hearing was delayed by a contention of Mr Stern that the provision by him of evidence to the Official Receiver under the compulsion provided by s.235 Insolvency Act 1986 contravened the European Convention on Human Rights. He claimed that such contravention precluded the making of a disqualification order against him. This contention was dismissed by the Vice-Chancellor in November 1999 and permission to appeal was refused by this court in February 2000. Until 28th January 2000 Mr Stern was represented by counsel and solicitors not only in respect of the Human Rights contention but also in the preparation of his defence to the application for the disqualification order. Thus, although he appeared in person at the hearing before Lloyd J, his voluminous evidence in answer to the application was prepared when in receipt of legal advice. Such evidence included affirmations dated 15th July 1997 and 16th/17th June 1998 from Mr Stern, Mr Jezierski and Mr Angus in answer to the evidence in support of the application and as a rejoinder to the evidence in reply sworn by Mr Pickthall, the deputy Official Receiver and Mr Israelsohn, a partner in Grant Thornton. Mr Jezierski was a partner in Landau Morley, the auditors and accountancy and tax advisers for the Group. Mr Angus was an employee of Landau Morley from 1983 to 1992. In 1992 he joined the Group as its financial controller on the resignation of Mr Colin Thomas. Mr Stern, Mr Jezierski and Mr Angus gave oral evidence at the trial.[18]As we have already indicated, Lloyd J found all the material charges proved against Mr Stern and made a disqualification order against him. But another by-product of the judgment of Lloyd J was the commencement, on 23rd October 2000, of proceedings by the liquidator of Westminster for recovery of the moneys, the subject of the Drawings Charges in relation to Westminster. In connection with that claim the solicitors acting for Mr Stern in relation to those proceedings procured witness statements from Mr Neumann and Mr Angus in April 2001. The same solicitors have represented Mr Stern in relation to this appeal since 25th September 2001. We turn now to deal successively with the four issues referred to in paragraph 5 above. Fresh Evidence[19]The application was made on 10th October 2001, barely two weeks before the hearing of this appeal. The application is made in relation to the witness statements of Mr Neumann and Mr Angus referred to in paragraph 18 above. They are headed in the matter of the application by the liquidator of Westminster. The application is supported by a witness statement of Mr Stern. Mr Stern points out that he was unrepresented at the hearing before Lloyd J.[20]With regard to the fresh evidence Mr Stern says "5. When considering the evidence which I should be calling in support of my case during the trial before Mr. Justice Lloyd I had (wrongly as it turned out) assumed that my arguments and contentions regarding the audited accounts of the Dollar Land Group were so self-evident and corroborative of my case on the Drawings Charges that it did not occur to me that the matters specifically dealt with by Mr. Angus in his Witness Statement should have been included in the evidence upon which I was relying at that stage. 6. On the other hand, I did realise that Mr. Neumann was in a position to corroborate my evidence and to support my case on the Drawings Charges, but following the service of the Company Directors Disqualification Act proceedings on me (and indeed generally, so far as the consequences of the liquidation of the Company were concerned) he made it clear to me that he was unwilling to become involved in any way, or to assist either by giving evidence on my behalf or otherwise. This was made clear to me on more than one occasion, and in the circumstances I had little option to proceed with my defence to the disqualification proceedings without his help. 7. Having received advice from my Solicitors on the evidence which I should try to obtain for the purposes of my....defence to the drawings claim, I went to New York for the specific purpose of trying to persuade Mr. Neumann to change his mind, and to provide a Witness Statement in relation to the drawings claim. Quite frankly, I expected Mr. Neumann to react in the way that he had previously. However, I was able to persuade him to assist me, and on that basis he was prepared to make and sign the Witness Statement dated 19 April 2001."[21]Mr Stern contends that in these circumstances it would be unjust not to allow him to rely on this fresh evidence. We heard argument from both parties and refused permission. We now set out our reasons for that decision.[22]The application is made under CPR Rule 52.11(2)(b). The ambit of that provision has been considered by this court on several occasions. In Banks v Cox (17th July 2000 unreported) Morritt LJ pointed out that the permission of the Court of Appeal was still required but that, by comparison with RSC Ord 59 r.10(2), it was not necessary to show "special grounds". He considered (para 41), and May LJ and Forbes J agreed, that the principles reflected in the rules in Ladd v Marshall "remain relevant to any application for permission to rely on further evidence, not as rules but as matters which must necessarily be considered in an exercise of the discretion whether or not to permit an appellant to rely on evidence not before the court below." Those matters may be summarised as(1) whether with reasonable diligence the fresh evidence could have been adduced in the court below;(2) whether the fresh evidence is such that, if given, it would probably have an important, though not decisive, influence on the result and(3) whether the evidence is such as is presumably to be believed.[23]It is convenient to deal with the statement of Mr Angus first. He provided three witness statements for use at the trial. In addition he gave oral evidence. Lloyd J found him to be helpful and frank. It is clear not only that Mr Angus was available to give evidence at the trial but that he did so. At the time the written evidence in answer to the case for the Official Receiver was being prepared Mr Stern was represented by counsel and solicitors. The reason why Mr Stern now wishes to rely on further evidence from Mr Angus is because he failed at the trial on the issue to which he refers in his witness statement quoted in paragraph 20 above. This is not a sufficient reason. There is a considerable public interest in the finality of proceedings. If a litigant who lost could, on that ground alone, get the issue reopened by recalling one of his own witnesses litigation would never end.[24]We do not doubt, in the light of the judge's comments on the credibility of Mr Angus's evidence, that his evidence would be likely to be believed. Nevertheless we have great difficulty in understanding how the evidence of Mr Angus alone would be likely to affect the result given both the generality of his statements and the evident limit on the extent to which he can speak from his own recollection. For these reasons we refused permission to adduce the fresh evidence of Mr Angus.[25]The statement of Mr Neumann describes the formation and use of Ahava, its ownership of Keristal and its support of the Group by advancing it money. He indicates how Ahava and Keristal were represented on the board of DLH and the importance he attached to that fact. He relates how in the late 1980s it was realised that there were very considerable profits to be made from certain companies in which Keristal and Mr Stern, but not the Group, were interested and how Mr Stern wished to obtain money in anticipation of the realisation of those profits. He then refers to his understanding as to the proceedings brought by the liquidator of Westminster and the fact that he is also relying on the course of events relating to DLM. He continues:
"8. These payments out by DLM, and subsequently by the Company, both to Mr. Stern (and to his son, at his direction) and to Keristal were known to me at the time, and were paid out with my agreement. Whether paid to Keristal, or otherwise for Keristal's benefit, or to Mr. Stern (or his son, at his direction) or otherwise for their benefit, it was understood and agreed by me and Mr. Stern, that all these payments were to be regarded as a loan from Keristal to Mr. Stern, with the monies in question being debited to the Keristal-DLH loan account, or (if that loan account was overdrawn) would be covered by substantial monies which Mr. Stern and I had agreed would be advanced by Keristal to DLH from profits on non-DLH transactions which were about to be realised. 9. Having agreed to this arrangement in principle, Mr. Stern and I would discuss each year, and confirm, the maximum which he would be allowed to draw in this way (technically as a loan to him from Keristal) on account of his and his family's 24.5% share of the realised, and anticipated, profits from non-DLH transactions - including the profits received or anticipated by Hollandale and Remile from the sale of the Brussels properties."
[26]There are a number of reasons why we refused to allow Mr Stern to adduce this evidence. First, we are not satisfied that the evidence of Mr Neumann could not have been adduced at the trial. His evidence was obviously material. At the trial Mr Stern was asked why Mr Neumann had not given any evidence. He did not then, either in his evidence or his submissions, give the reason he now advances, namely that Mr Neumann refused to assist. Secondly, we are not satisfied that Mr Neumann is prepared to assist Mr Stern in these proceedings even now. His statement is headed in the matter of the liquidator's application. In the body of the statement he makes no reference to the disqualification proceedings. His statement is of little, if any, weight unless he is prepared to give oral evidence and be cross-examined on it. We were told by counsel for Mr Stern that Mr Neumann was not aware that his statement had been used in these proceedings, had not agreed to attend any trial here and that no thought had been given to whether and if so how he would give evidence by a video-link. Thirdly, the evidence of Mr Neumann is wholly unspecific on a crucial issue, namely when the arrangement regarding loans by Keristal to Mr Stern is said to have been made. The judge dealt in some detail [paras 141-145] with the variations in the accounts given from time to time by Mr Stern. Yet Mr Neumann gives no indication when, according to him, the arrangement was made. Fourthly, the statement of Mr Neumann is inconsistent with the evidence of Mr Stern in that the former stated that the agreement entitled him to draw up to £500,000 per year. But Mr Neumann states that the amount he could draw was discussed and agreed with Mr Neumann annually. Fifthly, the evidence of Mr Neumann goes only to some of the several separate points relating to the propriety of Mr Stern's drawings to which we refer in greater detail in connection with the second issue. Even if the alleged arrangement was established it could not justify the drawings of Mr Stern given the insolvency at all material times of DLM and Westminster. Sixthly, if the evidence were admitted, it could do no more than provide material for an application for a retrial. Given all the other circumstances of the case we do not consider that such an application could have any reasonable chance of success. Accordingly the evidence of Mr Neumann could have no sufficient impact on the result of this appeal.[27]For all these reasons we considered that it could not be right to permit the use of the statement of Mr Neumann either. Accordingly we dismiss the application to adduce fresh evidence. The Drawings Charges[28]The judge did not give Mr Stern permission to appeal in respect of the Drawings Charges. On the hearing of the appeal counsel for Mr Stern applied for permission to appeal in respect of those charges. We invited him to address the court fully on these matters since the Court was hearing an appeal on the trading charges. After hearing counsel for both parties, we indicated that we refused permission and would give our reasons in our judgment on the appeal in due course. That we now do.[29]We have quoted the Drawings Charges in paragraph 16. We have also recorded that it was agreed before Lloyd J that the drawings of Mr Stern's son should be aggregated with his own. That aggregate for the relevant years was DLM DLM DLM Westminster 1990 199l 1992 1993 –4 £490,500 £270,491 £230,216 £812,605 Accordingly, over the three years 1990 to 1992, Mr Stern drew £991,207 from DLM and, over the two years 1993-4, a further £812,605 from Westminster, making a total of £1,803,812.[30]The judge examined the evidence on the Drawings Charges in great detail at paragraphs 131-158 of his judgment. He concluded that the drawings were misapplications of corporate funds and unlawful loans to directors. He found that Mr Stern was thereby shown to be unfit to be concerned in the management of a company (para.159).[31]Before considering the grounds on which permission to appeal is sought, it is convenient to set out the principles which underlie the judge's conclusions regarding the misapplication of company funds and constitute the unspoken basis of that finding. It is well established that one of the primary duties of a director imposed by the general law is that he should act in what he considers to be the best interests of the company, and not for any collateral purpose (see, for example, the observations of Lord Greene MR in Re Smith & Fawcett Ltd [1942] Ch 304 at 306). Special considerations arise if a director acts in the interests not of the company of which he is a director but of the group of companies of which that company forms part (see Charterbridge Corporation Ltd v Lloyds Bank [1970] 1 Ch 62). However those considerations do not apply here since the drawings were not for the benefit of any group company but for the benefit of Mr Stern personally.[32]In normal circumstances the shareholders of a company can by acting unanimously waive or ratify a breach of duty by the directors. However, if the company is insolvent this principle no longer applies. Thus in West Mercia Safetywear v Dodd [1988] BCLC 250 at 252, this Court (Dillon, Croom–Johnson LJJ and Caulfield J) approved the following statement of the law by Street CJ in Kinsela v Russell Kinsela Proprietary Ltd (in liq) (1986) 4 NSWLR 722 at 730:
"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."
[33]Lloyd J concluded that from 1990 DLM was unable to pay its debts as they fell due (para. 35) and that it was dependent on group support (para. 64). DLH, in turn, was dependent on the support of its holding company, Keristal. The judge found that DLH could not rely on funds from Keristal (paras 55, 63 and 64). The position of Westminster was no better. Both companies were seriously insolvent at the date of their liquidations. There was no doubt about the position and Mr Stern was fully aware of it (para. 47).[34]In transactions where there may be a conflict between the interest of a director and his duty to the company, the duties of directors under the general law are bolstered by the provisions of Part X of the Companies Act 1985. Loans to a director are prohibited. S.341 Companies Act 1985 gives civil remedies for a breach of that prohibition. S.342 imposes criminal penalties for breach of section 330 committed by a "relevant company" or (in prescribed circumstances) by a director. "Relevant company" is defined by section 331(6). Both DLM and Westminster were within that definition because they were subsidiaries of DLH, a public limited company.[35]As we have already recorded, the receipts and payments of Group companies were credited to the bank account of DLM and, later, of Westminster. Keristal also used this account. Accordingly, at any one point in time it could contain monies paid in by a member of the group or Keristal. Mr Stern's evidence, as recorded by the judge, was that money paid in by any particular member of the group could only be used to meet liabilities of that particular company unless that company gave other directions (paras 30 and 66). Mr Angus, however, was not aware of this arrangement. Mr Stern's evidence was that the transactions represented by the payments in and out of DLM's account or Westminster's account were recorded in the accounting records of DLM or (as the case may be) Westminster and at the end of the year they were posted to DLH's account with DLM or Westminster (as appropriate) so that that company alone appeared as a debtor or creditor of DLM or Westminster.[36]Mr Stern's case was that Keristal had paid substantial sums into the bank account of DLM and then Westminster, that DLM or Westminster (as the case may be) might only deal with those amounts in accordance with directions received from Keristal and that he, Mr Stern, was entitled under an arrangement made with Keristal in December 1990 to draw against those amounts up to a limit of £500,000 per annum. After an exhaustive examination of the evidence the judge declined, on the balance of probability, to accept that there was any such arrangement as Mr Stern said was made in December 1990 or on any earlier date (para. 145).[37]The judge went on to hold that even if he had been so satisfied, the alleged arrangement would not have justified the drawings (para.146). There had from time to time been substantial indebtedness by Keristal or its group to DLH or to DLM/Westminster. The monies paid in by Keristal would first have to have been used to repay such debt. As respects the balance, the judge was satisfied that it was paid by Keristal for the general purposes of the group. Such funds were not in the judge's judgment available to Keristal or Mr Stern for drawings at any stage (para. 153).[38]In reaching his conclusions, the judge had to consider the state of account between Keristal and the group during the relevant period. He noted that there was not much evidence on this point. The principal evidence consisted of the audited consolidated accounts of DLH for the years ended 31 December 1989, 1990, 1991 and 1992. These accounts showed that: a) as at 31 December 1989 Keristal was a debtor of the Group in the sum of £3,675,000 and, after that date but before the date on which the 1989 accounts were signed, Keristal had paid £5,000,000 to DLH; b) as at the 31 December 1990 Keristal was a debtor of the Group in the sum of £2,680,000 but that the subsequent receipt, as recorded in a note to the 1990 accounts, of £3,600,000 after the year end discharged that debt; c) unless included under "other creditors", at 31st December 1991 and 1992 there were no balances due to or from Keristal.[39]Lloyd J noted that there was evidence that Remile, a subsidiary of Keristal but not of DLH, owed money to the Group during this period. However, as against that, he also observed that Mr Angus' evidence was that he had not been aware that Keristal was ever in debt to the Group.[40]Counsel for Mr Stern seeks to undermine the judge's conclusion that there was no arrangement between Mr Stern and Keristal which entitled him to draw on Keristal's account with DLM by reference to the audited accounts of DLM and to some extent of DLH. There were audited accounts for DLM for the year ended 31 December 1990 and 31 December 1991 and there were draft accounts (called memorandum accounts) for DLM for the year ended 31 December 1992. None of these, it is submitted, discloses that there were amounts due from Mr Stern to DLM. Counsel points out that if the Official Receiver was right, the drawings should have been disclosed under s. 232 and sch.6 Companies Act 1985. The auditors were bound to have investigated those drawings and if they were not duly disclosed in DLM's accounts the auditors of DLM would have to have provided the relevant information (so far as they could) in their reports (on the 1990 and 1991 accounts) (Companies Act 1985, section 237(4)).[41]Counsel contends that the arrangement described by Mr Stern is consistent with the consolidated accounts of the Group in that amounts shown as owed to/by Keristal would have been those as at the end of the year, that is net of Mr Stern's drawings. Accordingly, those figures could not form the basis of any conclusion as to the indebtedness of Keristal to the group before those drawings were set against it. Under the arrangement described by Mr Stern, the amount of the drawings would have been set against Keristal's account with DLH for the purpose of finding the balance sheet figure.[42]Counsel's argument receives some support from Mr Angus' oral evidence in cross-examination at the trial:- "Q. (Mr Richards QC) Would you not expect to see, if payments are being drawn by Mr Stern out of moneys provided by Keristal, that it reduces the amount due to Keristal? A. (Mr Angus) Absolutely correct. Q. And that is not to be found …. A. Yes. Q. … in the accounting records of Westminster? A. No, because the account with Keristal in the books of Holdings and Mr Stern's drawings would be debited to the account of Holdings at the year end following review, which would result in a reduction of the balance. Q. I think we have agreed that this is really all speculation, have we not, because there was not a year end audit either or Westminster or of Holdings? A. Correct. MR JUSTICE LLOYD: You drew a distinction a moment ago between drawings which might be debited to account 7741 in Dollar Land Holdings and other drawings which might be debited to account 7371 – WGS in Westminster? A. Yes, my Lord. Q. If they were drawings of the latter kind, would you expect that in the fullness of time, if matters had proceeded as one would have hoped, that they would reflect in any way on the amounts shown to the credit of Keristal? A. Yes, my Lord because they would have been debited to the account of Keristal en masse rather than individually posted there. Everything could have been individually posted there, it makes little difference."[43]However, Mr Angus did not become financial controller of DLM until July 1992. Before that date he had been employed by the auditors of DLH. He had been on the audit team dealing with the audit of the DLH group but had not in that capacity been immediately involved with DLM. As against this, he said in his evidence that he had been told of this arrangement by Mr Colin Thomas, who was finance director of DLH until September 1992.[44]In our judgment, there is no real prospect of success in this argument on appeal for the following reason. In order to follow the argument through, the court would have to have seen details of the intercompany accounts between Keristal and DLH, between Keristal and other members of the DLH Group and between other subsidiaries of Keristal (not being members of the DLH Group) and members of the DLH Group, in order to form a view as to whether or not there was a credit balance against which Mr Stern's drawings could be set.[45]It was for Mr Stern to produce this evidence. He remains a 25 per cent shareholder in DLH and there is no reason to believe that he could not have produced it if it had supported his argument. Without it (and the further evidence of Mr Angus did not supply it) the court would be unable to tell whether the allocation of Mr Stern's drawings to Keristal's account with DLH had ever taken place and whether there was any amount against which it could properly be set.[46]Much was made of the point that Mr Stern had not been represented at the trial. But, as we have already pointed out, at all material times down to 26th January 2001 he had solicitors and counsel acting for him. Counsel for Mr Stern makes no complaint about the way in which the trial was conducted by the judge or about the manner in which the case was put against Mr Stern. In the circumstances the responsibility for not producing the evidence has to rest with Mr Stern and the fact that Mr Stern was unrepresented at trial on these charges, which we accept had serious consequences for him, cannot be prayed in aid on any appeal.[47]The only evidence as to the accounting practices of the group was that of Mr Angus and Mr Jerzierski and the inferences which could be drawn from the published accounts. But Mr Angus' evidence was secondhand and (in the passage quoted) hypothetical and Mr Jerzierski knew no more than Mr Angus. Mr Stern did not call Mr Neumann, the controlling director of Keristal. Nor did he call any representative of the auditors who had been engaged on the audit of the group and would have known of the arrangement. Nor did he call Mr Thomas, whom Mr. Angus thought might have told him about the arrangement between Mr. Stern and Keristal.[48]In those circumstances, there was no reliable evidence on which the judge could conclude that Mr Stern's evidence as to the arrangement was supported by the way in which the accounting records of DLM and DLH were kept or by the way in which their respective annual accounts were drawn up. There could have been other explanations for the absence of reference to the drawings in the 1990 and 1991 audited accounts of DLM, such as the fact that the auditors overlooked these drawings or were provided with incomplete information by Mr Stern as to their nature and the circumstances. Such evidence as we were shown on this appeal suggests that the information about the drawings given to the auditors of DLM came from Mr Stern.[49]In addition there are a number of other reasons why counsel's submission cannot prevail. First, it can only apply to DLM and not Westminster. The Official Receiver does not have access to the accounting records of DLM, but he has access to the accounting records of Westminster. There are two detailed reports by Mr Israelsohn filed on behalf of the Official Receiver on the accounting records of Westminster. These show quite clearly that the drawings were recorded in the accounting records of Westminster and that these loan accounts were not transferred to DLH or Keristal. Second, to a large extent, if not wholly, the drawings could not have been allocated to a credit balance of Keristal with DLH because of the indebtedness of Keristal to the DLH Group as found by the judge. Third, the arrangement in the letter written in January 1996 on which Mr Stern principally relied at trial does not appear to cover the 1990 drawings.[50]The most compelling reason why an appeal against the judge's findings on the drawings charges could not succeed is that counsel's argument overlooks the fact that for Mr Stern to draw any sum for his own benefit from DLM or Westminster in excess of remuneration to which he was entitled for his own benefit was a breach of his duty as a director. If the arrangement had been as Mr Stern described, the drawings of Mr Stern (which were actual drawings of money from DLM's bank account), would have been transferred in the accounting records of DLM to DLH. There would then have been a corresponding debit to DLH in the records of DLM. Accordingly the mere transfer of Mr Stern's drawings to DLH or Keristal would not mean that DLM's financial position was put back to the position as if no drawings had ever been made. The fact is that cash was extracted by the drawings which remained extracted even if the arrangement took place as Mr Stern suggested. Indeed to the extent that the debtor substituted for Mr Stern (viz DLH) was less creditworthy that Mr Stern, DLM would be worse off.[51]On each occasion when Mr Stern made a relevant drawing, DLM and Westminster were insolvent. Moreover, no possible corporate purpose has been suggested for any of those drawings. They were drawings for Mr Stern's private purposes. The fact, if it be one, that the ultimate shareholders (Keristal and Mr Stern) agreed to this is nothing to the point (see West Mercia Safetywear v Dodd, above). For Mr Stern to extract the money in the circumstances was clearly a breach of duty and that conclusion is not in any way diminished by the type of arrangement which Mr Stern describes.[52]What Mr Stern contends happened is analogous (on a larger scale) to the sequence of facts which the Court of Appeal in West Mercia Safetywear v Dodd held to be a misfeasance. In that case Mr Dodd, a director of West Mercia, at a time when that company was insolvent, transferred £4,000 out of its bank account to a subsidiary, of which he was also a director and to which West Mercia was indebted, in part satisfaction of that debt. The sum transferred reduced the subsidary's overdraft which Mr. Dodd had guaranteed. The judge held that there was no breach of duty because of the pre-existing debt. The judge relied on an earlier decision of the Court of Appeal where the directors had acted at the bidding of shareholders at a time when the company was amply solvent. The Court of Appeal (having cited the passage from Street CJ set out above) distinguished that earlier case on that ground and held that the director had acted in breach of duty. He knew that the company was insolvent and made the transfer solely for his own benefit. (There was a separate ground of liability for breach of duty, namely that the transfer constituted a fraudulent preference, but that does not apply in this case.)[53]Similarly we conclude that Mr. Stern acted in breach of his duty as a director in this case. Mr Stern was in control of the funds of DLM. DLM was insolvent. It was a plain breach of his duty as a director of DLM to apply these monies for his own benefit in that situation; so also in the case of Westminster. The judge's conclusion that Mr Stern had misappropriated monies of the companies was justified. The judge went on to hold that they were unlawful loans. There has been no real challenge to that further conclusion.[54]Given the knowledge of Mr Stern as to the financial position of the paying companies and the size of the drawings, in our judgment the judge was correct to find on the basis of the Drawings Charges alone that Mr Stern was unfit to be concerned in the management of a company. The Trading Charges and the Diligent Charge[55]We have summarised the salient facts, not disputed by Mr Stern, in paragraphs 11 and 33 above. Both DLM and Westminster were insolvent to the knowledge of Mr Stern at all times in and after 1990. They were dependent on support from the Group and Keristal on which they could not rely.[56]Counsel for Mr Stern emphasised that at no time had Mr Stern sought to minimise his involvement in and responsibility for decisions taken in the management of DLH and its subsidiaries. He drew our attention to paragraphs 10 and 11 of Mr Stern's first affirmation in these proceedings, in which he said:
"Holdings' policy is to have all management functions - including the purchase and sale of properties - carried out through the medium of a management company which has always been based in London, essentially under my direction and control...Although I am not a registered director of Holdings I execute all major decisions over its activities and that of its subsidiaries"
The responsibility of Mr Stern was not in issue. It is unsurprising that it is not discussed in the judgment.[57]Nor did counsel for Mr Stern challenge the judge's findings as to the faults laid at the door of DLM and Westminster: trading when insolvent; financing the businesses with Crown monies; and the phoenix creation of Westminster. The combination of these factual admissions or findings makes it extremely difficult to see how the conclusion that the judge drew from them, that Mr Stern was unfit to be concerned in the management of a company, could be challenged.[58]Counsel submitted that the judge's approach, and thus his conclusion, was vulnerable because, in carrying out the necessary assessment of the degree and seriousness of Mr Stern's conduct, the judge had overlooked, or given inadequate weight to, two factors. The first was the serial negotiations that Mr Stern had conducted with the Inland Revenue as to the payment of the companies' debts, which in counsel's submission had encouraged Mr Stern to continue to trade in the hope of trading out of insolvency. The second was the presence within DLH, and their concurrent responsibility with Mr Stern, of other directors. It was not suggested that they had ordered or influenced Mr Stern in directions that he otherwise would not have taken, but, rather, that their willingness to concur in his actions and policy gave him grounds for thinking that that policy was a reasonable one; or, at least, not so obviously unreasonable as to invite the penalty of disqualification.[59]We will deal with these contentions in turn. Before doing so, however, we would mention as a footnote that at one stage counsel for Mr Stern also drew attention in the same sense to what he alleged had been the support given to Mr Stern's policy, or alternatively the difficulty created for Mr Stern in adopting any other policy, by the involvement in DLH's affairs of Mr Neumann and the Keristal interests. That point was not, however, persisted in, because counsel accepted that Mr Stern, in the management of DLH and its subsidiaries, could not act at the direction of a particular group of shareholders.[60]The contention in regard to the Revenue was raised by Mr Stern at the trial, and the officer of the Revenue with whom Mr Stern had principally dealt, a Mr Barnes, was called by Mr Stern to give evidence on subpoena. A very large amount of correspondence was in evidence, and the judge gave the most detailed attention to this contention, devoting 20 paragraphs of his judgment to its history. His conclusion, set out in paragraph 96, was:
"I do not accept that either [the Inland Revenue or the Customs and Excise] was willing to allow the group to trade out of its difficulties. In each case, though with different degrees of emphasis at different times, there was a requirement that liabilities falling due be paid."
[61]In paragraph 118, after severely (and justifiably) criticising Mr Stern for misleading Mr Barnes by failing to reveal to him the release of monies by GE that were intended to satisfy the group's witholding tax obligations, but which were used for other purposes,

the judge observed:

"[Mr Stern] claimed that he had the 'informed knowledge and consent' of the Inland Revenue, but it seems to me that he presented an overoptimistic and incomplete picture of the position to Mr Barnes"
Counsel said that he did not challenge the judge's finding in paragraph 96, nor could he have done. He nonetheless contended that Mr Barnes' attitude gave Mr Stern reasonable encouragement in his policy of trading while insolvent.[62]In view of the judge's findings, that was a hopeless submission. Far from seeing the dealings with the Revenue as any sort of explanation or exculpation of the trading policy, the judge regarded Mr Stern's conduct towards the Revenue, and his misleading of Mr Barnes, as a seriously aggravating aspect of the case: as he was well entitled to do. Although he did not say so in terms, the judge clearly disbelieved Mr Stern's protestations as to his beliefs and understanding, and it is not difficult to see why he reached that conclusion.[63]The argument in relation to the position of the other directors was not raised at the trial. We can see no valid explanation for that, and thus no good reason for permitting it to be raised now. Mr Stern was acting in person at the actual trial, but he had the advantage of advice from very experienced solicitors until shortly before the trial, including during the whole of the period of preparation of his evidence. No indication of this argument is to be found in the extensive evidence advanced by Mr Stern; no attempt was made to call any of the directors concerned; and Mr Stern himself, plainly a resourceful and astute businessman could not have been unaware of the significance of this point, and of the need to give evidence about it, if indeed he had taken conscious comfort from the attitude of his fellow directors towards the trading policy of the group. Moreover if the argument had any force it must relate to the subjective understanding of Mr Stern, yet Mr Stern himself appears to have given no evidence about that understanding.[64]However we permitted counsel to develop the point. Since the point had not been taken at the trial, was not raised in the Notice of Appeal, and appeared in only a somewhat general form in counsel's written argument, it was not entirely easy to pin down its essential elements. We think, however, that it can be fairly stated as follows. The nub of the trading charges was that DLM and Westminster not only traded when they could not pay their debts, but also did so at a time when Mr Stern knew that there was no reasonable prospect of their returning to solvency within a reasonable time in the future. Counsel submitted that the latter contention, which the judge fully accepted, ignored Mr Stern's belief that funds would become available from the sale of properties, and more particularly, through Keristal, by the sale of a property in Brussels, Ilot 68. The relevance of the position of the other directors was, in particular, that they shared Mr Stern's faith in the latter prospect, which was a factor that the judge should have taken into account when assessing the reasonableness, and thus the culpability or otherwise, of Mr Stern's own belief.[65]The judge gave considerable attention to the first part of this argument, which was raised at the trial. He rejected any contention that there were reasonable prospects of the release of funds from dealings with any property other than Ilot 68, a conclusion with which counsel accepted that he could not quarrel. The judge then concluded in paragraph 116, in respect of support from Keristal, and thus support from funds generated by the disposal of Ilot 68 should that occur:
"So far as Keristal was concerned, again it was a question of discussing the funds which became available as and when they appeared. Keristal had its own needs, and generally wanted some of the funds for itself. In addition it often owed money to the group. As regards making additional funds available, beyond the repayment of its debts, and moreover the question what those funds should be used for, there was no policy or prior agreement. Mr Stern suggested in evidence that there was an understanding, at least as regards the prospective proceeds of Ilot 68, but his evidence was in very general and vague terms. In my judgment the position was the same in relation to this property as for the others."
[66]Even had the judge been invited to consider the attitude of the other directors, and the comfort that Mr Stern is now said to have drawn from that attitude, that could not have altered his view, formed on the reasoned basis set out above, of the reasonableness of relying on future actions of Keristal: and particularly of the reasonableness of such reliance on the part of the man, Mr Stern, who was responsible for dealing with Keristal. It was for that reason that the judge concluded, in his paragraph 117, that Mr Stern had "wholly inadequate reasons to believe that creditors would be paid in full within a reasonable time, at any time after April 1991".[67]Counsel for Mr Stern submitted that that conclusion was not open to the judge, because it was falsified by the expectations entertained by Mr Stern, and allegedly the other directors, of the availability of proceeds from the sale of Ilot 68. That contention was unsustainable in the light of the judge's clear findings of fact, and the argument in relation to the other directors does not improve it.[68]We would therefore dismiss the appeal in relation to the Trading Charges.[69]Diligent Finance Limited made a loan of £150,000 to DLM, which was charged on the property of another DLH subsidiary and guaranteed not only by DLH but also by Mr Stern. When DLM collapsed, the commitment, including the payment of interest, was assumed by Westminster, thus avoiding calls on DLH or Mr Stern under their guarantees. This was a plain and calculated piece of misbehaviour, and found to be such by the judge.[70]The justification advanced for it by Mr Stern at the trial and in the Notice of Appeal was that the loan was regarded as working capital for the DLH group as a whole, and thus legitimately transferred from DLM to Westminster when the latter succeeded DLM as the management company of the group. However, as the judge pointed out, that claim was simply a further demonstration of Mr Stern's failure to consider the interests of the outside creditors of Westminster when adjusting debts within the group.[71]Before us, it was suggested that the move was justifiable, alternatively was not culpable, because there were offsetting credits between DLH and Westminster. This claim seems to have been made for the first time in argument, no evidence was provided to support it, and in terms of Mr Stern's responsibility it cannot survive the judge's finding at paragraph 163 that "At the time when Westminster made these payments to Diligent, it could not pay its own creditors, as Mr Stern knew"[72]The judge accepted that the Diligent charge was less serious than others before him, and counsel for Mr Stern developed that point by claiming that if the charge stood alone it would not warrant disqualification. We take a less indulgent view.[73]The judge was right to regard the handling of the Diligent loan as a clear example of Mr Stern's policy of favouring group companies to the detriment of creditors, and of placing liabilities within the shell of the management companies rather than in the property-owning companies. Mr Stern, as an experienced businessman, could not have been unaware that that was what was being done, and why it should not have been done. That in the case of the Diligent loan he was also protecting his own personal interests simply made the matter worse. The judge was fully justified in concluding, at paragraph 166, that "the proof of this charge confirms that Mr Stern is unfit to be concerned in the management of a company".[74]For these reasons we dismiss the appeal in respect of the Diligent Charge as well. Period of Disqualification[75]As we have indicated Lloyd J handed down his judgment on 18th April 2000. He concluded that Mr Stern was unfit to be concerned in the management of a company and then heard submissions from Mr Stern as to the appropriate period of disqualification. Mr Stern adverted to the fact that others were involved besides him, namely the other directors of DLM, the directors of DLH and the auditors. He suggested that they had taken a rather different view of the commercial realities to that of the judge.[76]In his judgment Lloyd J referred to the fact that in the light of his findings he was bound to disqualify Mr Stern. He referred in that connection to the well-known decision of the Court of Appeal in Re Sevenoaks Stationers Retail Ltd [1991] Ch.164, 174 dealing with the brackets within which periods of disqualification should fall. The judge then referred to the submissions of counsel for the Official Receiver and of Mr Stern, including the observation that at the time there was an alternative view as to what the directors of DLM and Westminster should do. Lloyd J concluded:
"It seems to me on balance, having taken account of Mr. Stern's submissions, that this is a serious case. It is a case in which there was a protracted period of trading while insolvent and I accept Mr. Richards submission that that seriousness in itself is exacerbated by the fact that at a time when creditors of the company's group were not being paid Mr. Stern was receiving substantial funds from the companies which would otherwise have been available to creditors. Whether if a CVA had been proposed it would have been successful either in obtaining approval or in carrying on is I think a matter in some doubt in circumstances in which there was no cash flow with which to pay current liabilities. So far as the drawings are concerned, I have accepted Mr. Angus's evidence as being helpful and truthful so far as he was concerned, but his source of information was entirely indirect. He was in no position to check or monitor whether the drawings were properly based and that is I think also true of the auditors. I am not aware of any verification on their part of the basis of these drawings. How far they were aware of the drawings, I do not know. I can take the clean audit certificate as only a very minor matter to bear in mind in this context. I do accept, as Mr. Stern submits, that the consideration of what else the company's board should have done in the context had to be adjudged in relation to circumstances as they were at the time and not with hindsight. Nevertheless it seems to me that Mr. Stern's conduct in continuing the management of these two companies in turn, in putting Westminster in place without any change in the system on the failure of DLM and the substantial drawings that he made without adequate justification does seem to me to make this a serious case. Thinking about the case in the light of my judgment and in the preparation for this hearing, I had independently come to the conclusion that it was a case in the top bracket and that a period of 12 years, subject to submissions made to me, might be the appropriate period. Having heard Mr. Stern's submissions I remain of that view and I will therefore impose a period of disqualification of 12 years."
[77]Counsel for Mr Stern again referred to the parts played by the other directors and the auditors. He emphasised that their responsibilities included "keeping an eye on" Mr Stern. He suggested that this case fell into the middle, not the top, bracket so as to merit a period of disqualification of 8 to 10 years but not more.[78]We remind ourselves of two well-established principles. First, the Court of Appeal in Re Sevenoaks Stationers Retail Ltd [1991] Ch.164, 174 laid down that the top bracket of 10 to 15 years is reserved for particularly serious cases. Second, the period of disqualification is a matter for the discretion of the judge with which this court will not interfere unless he is shown to have erred in principle or is plainly wrong. Secretary of State for Trade and Industry v McTighe No.2 [1996] 2 BCLC 477, 485; Re Westmid Packing [1998] 2 A.E.R. 124.[79]We are unable to detect any such error. This case would have been a serious one, meriting a period of disqualification in the middle bracket of 5 to 10 years, if only the Trading Charges or the Drawing Charges had been established. But the establishment of each exacerbates the seriousness of the other. The establishment of the Diligent charge can only be regarded as increasing the seriousness of the case as a whole. We agree with the judge's view that this is a serious case meriting the top bracket. We see no reason to interfere with his assessment that a 12 year period is appropriate. Conclusion[80]Accordingly, for all these reasons, we dismiss(a) the application for permission to adduce fresh evidence,(b) the application for permission to appeal in respect of the Drawings Charges, and(c) the appeal.

Order

Application for permission to adduce fresh evidence dismissed; application for permission in respect of the drawings charges dismissed; appeal dismissed; first respondent to pay costs of application and appeal such costs to be subject to detailed assessment by a costs judge. (Order does not form part of the approved judgment)

Cited in 5 later judgments