Secretary of State for Business Enterprise & Regulatory Reform v Aaron & Ors [2008] EWCA Civ 1146

Case No A3/2008/0983[2008] EWCA Civ 1146
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THOMAS IVORY QC
(Sitting as a Deputy High Court Judge)
Claim No 8630 of 2005
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 16/10/2008
Before
LORD JUSTICE BUXTONLORD JUSTICE KEENELORD JUSTICE THOMAS
Between
The Secretary of State for Business Enterprise and Regulatory ReformRespondentDavid Meyer AaronAppellantAndrew Cameron JonesAppellantMichael Meyer AaronAppellant
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Edward Bannister QC (instructed by Edwin Coe LLP) for AppellantsGuy Newey QC and Andrew Westwood (instructed by Howes Percival) for RespondentHearing Hearing date: 4 July 2008
Judgment
[1]This appeal raises an evidential issue in an application under s.7 of the Company Directors Disqualification Act 1986 (CDDA) to seek the disqualification of three directors. The Secretary of State wishes to rely upon finding of fact and opinions set out in a Report of the Financial Services Authority (FSA) (made under s.170 of the Financial Services and Markets Act 2000 (FSMA) by investigators appointed under s.167 and 168 of FSMA) and other materials on which the Secretary of State relied when deciding to make the application. The defendant directors contend that the findings of fact and the opinions expressed in the report and other documents are inadmissible, principally because of the rule in Hollington v Hewthorn. Mr Thomas Ivory QC, sitting as a Deputy Judge, decided the issue on all the materials in favour of the Secretary of State.

Background

[2]It is not necessary to describe the background at length. A summary will suffice: i) The first defendant, David Aaron, was the Chairman and Chief Executive of David M Aaron (Personal Financial Planners) Limited (DMA). The second defendant, Andrew Jones, was the investment director of DMA; he became the compliance officer in 2002. The third defendant was the technical director of DMA, being responsible for the provision of technical support in all areas of financial planning. DMA was a company regulated by the Personal Investment Authority (PIA) until November 2001 and thereafter by the FSA. ii) The business of the firm was run as a partnership until 30 September 2000 when DMA was incorporated. It acted as an independent financial adviser and was authorised under the FSMA to advise and enter into deals in investments. It had about 27,000 active clients. iii) In the period 1998 to 2003 about 28% of its business was structured products. A part of that business in structured products, though it was not possible to tell precisely how much, related to advice and the sale of structured capital at risk products (“SCARPs”). iv) SCARPs are financial arrangements which give investors a guaranteed fixed income or growth on the initial capital invested over a fixed term; the return of the initial capital invested is linked to a specific measure such as a designated index or basket of stocks. Although the income is guaranteed, the return of the initial capital invested is dependent upon the performance of the designated index or basket of stocks to which it was linked. v) DMA sold SCARPs either as direct sales to investors on the basis of material it provided to potential investors or on the basis of advice. About 85% was sold on the basis of written materials. vi) In March 2002 the FSA conducted an industry-wide review of the sale of SCARPs. The review of DMA included an examination of training materials, sales documentation and complaints. The complaints related to the loss of capital on the maturity of the SCARP in which members of the public had invested. It was alleged there had been mis-selling. Concerns were identified regarding the suitability of sales. As a result a visit to DMA was undertaken in March 2003. vii) After further action by the FSA, on 23 June 2003 the FSA commenced an investigation under s.167/168 of FSMA into the sale of SCARPs by DMA. The investigation included interviews of the officers of DMA. viii) On 8 December 2003 the Financial Ombudsman Service (FOS) upheld 4 complaints against DMA and awarded compensation. As a result the directors of DMA consulted the FSA and KPMG. In consequence, and with the approval of the FSA, on 18 December 2003 the directors resolved to place DMA into administration. On 22 December 2003 DMA went into administration. ix) On 30 April 2004 the FSA published its investigation report on DMA. x) Subsequently, after considering representations from the defendants, on 25 August 2004 the FSA by a Final Notice cancelled DMA’s authority to carry on business.[3]The FSA Report and the Final Notice included the following conclusions: i) DMA’s process for categorizing risks was flawed. ii) In promoting the sales of SCARPs DMA did not give a proper explanation or advise correctly on their suitability for investors. DMA did not provide customers with an objective view; it played down the risks associated with the return of capital and so mis-sold SCARPs. iii) In the risk ratings allocated to SCARPs by DMA, the risk rating was too low. iv) The literature did not sufficiently emphasise the risks as to the return of the capital invested. v) DMA’s advertising material did not give sufficient information to enable the customer to make an informed decision. vi) DMA’s record-keeping was defective. The compliance officer failed to pay adequate attention to his role and spent too much time selling products. The FSA Report and Final Notice set out the relevant principles of the FSA and the FSA/PIA rules which it was said that DMA had breached and the facts relied on for those breaches.[4]When DMA went into administration, there was a deficiency of assets over liabilities. The Financial Services Compensation Scheme received 2,600 claims against DMA; on these it has paid out £11.92m relating to 1,862 claims. The Financial Services Compensation Scheme has projected total compensation of £14.6m. In the result this would give an overall deficiency as regards creditors and shareholders of £17.3m; it was not anticipated that any dividend would be payable to creditors.

The application by the Secretary of State

[5]The FSA Report, the Final Notice and five of the Complaints determined by FOS were considered by the Secretary of State through the Insolvency Service, an Executive Agency of his Department, in order to determine whether he should make an application for disqualification. Under the CDDA there are two powers to disqualify directors which are relevant to this application: i) Under s.6 of the CDDA the court is obliged to make a disqualification order where the court is satisfied that the person has been a director of a company which has become insolvent and that his conduct as a director of the company makes him unfit to be concerned in the management of a company. Under s.7, the Secretary of State is entitled to make such an application within 2 years of the date on which the company became insolvent; it was under this section the application against the defendants was made. ii) Under s.8 of CDDA the Secretary of State can apply for an order for disqualification if it appears to him “from investigative material that it is expedient in the public interest” that a disqualification order should be made against a person who has been a director of the company. “Investigative material” includes a report by Inspectors under s.437 of the Companies Act 1985, a report made by Inspectors under ss. 167 and 168 of the FSMA and information obtained under the investigations provisions in ss. 165, 171, 172, 173 and 175 of FSMA. The court will make a disqualification order where it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of it.[6]The Secretary of State decided to consider making an application for disqualification under s.6. I accept that an application could have been made under s.8 in view of the fact that there was “investigative material” set out in a report under s.170 of FSMA made by investigators appointed under s.167/168 of FSMA.[7]On 18 November 2005 notices were sent to the defendants giving them notice pursuant to s.16 of CDDA of the Secretary of State’s intention to apply for a disqualification order under s.6 of that Act. After considering the responses of the defendants, the Secretary of State commenced the present proceedings on 20 December 2005 seeking the disqualification of the defendants. It was made a matter of days before the expiry of the two year time limit.[8]An affidavit in support of the application was sworn by Mr Elliott Burns, a Chief Examiner of the Insolvency Service, on behalf of the Secretary of State in support of that application. The affidavit was required to comply with Rule 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987 (as amended) which provided “The case against the defendant(1) There shall, at the time when the application is issued, be filed in court evidence in support of the application for a disqualification order; and copies of the evidence shall be served with the application on the defendant.(2) The evidence shall be by one or more affidavits, except where the claimant is the official receiver, in which case it may be in the form of a written report (with or without affidavits by other persons) which shall be treated as if it had been verified by affidavit by him and shall be prima facie evidence of any matter contained in it.(3) There shall in the affidavit or affidavits or (as the case may be) the official receiver's report be included a statement of the matters by reference to which the defendant is alleged to be unfit to be concerned in the management of a company.[9]It was the contention of the Secretary of State that the defendants were unfit to be concerned in the management of a company by reason of their failure to ensure that DMA carried on business in a manner appropriate to an Independent Financial Adviser and in a manner in compliance with the regulatory regime applicable to its business. In particular it was contended that each of the defendants failed: i) To ensure that he was sufficiently concerned with the regulatory responsibilities that applied to DMA. ii) Adequately to understand or take account of the risks associated with SCARPS. iii) To ensure that the advertisements and promotional material issued on behalf of DMA were clear, fair and not misleading. iv) To use within DMA’s promotional literature material provided by journalists in an appropriate manner. v) To make suitable recommendation to customers. vi) To keep adequate records of the manner in which DMA assessed and discussed the risks of SCARPs and complete records of individual sales. vii) To ensure that DMA’s compliance procedures were adequate and properly followed.[10]The exhibits to the affidavit included transcripts of interviews conducted by the FSA and a new report by Mr Jeremy Kaye. He was an expert appointed by the Secretary of State to test the findings made by the FSA and the FOS and to make additional findings. His report commented upon and expressed his opinion on the performance of the defendants as authorised persons; Mr Kaye drew heavily upon the FSA Report and the findings of FOS, but also added further opinions of his own.

The objection made by the defendants to the evidence served; the course of the proceedings

[11]The defendant directors objected that the report was expert evidence for which no permission had been obtained by the Secretary of State. On 10 April 2006, the Registrar directed that the Secretary of State apply for permission to adduce expert evidence and that the application be heard by a Judge.[12]On 5 May 2006 the Secretary of State applied for permission to rely upon the report of Mr Kaye. That application came on before Etherton J on 6 July 2006. He adjourned the application, directing that the Secretary of State serve schedules specifying which were the facts and opinions in the various documents annexed to Mr Burns’ affidavit upon which he wished to rely for the purpose of the proceedings. The order provided that the defendant directors were then to file and serve a schedule stating whether or not the facts set out in the Secretary of State’s schedule were accepted, whether or not the statements of opinion set out in the Secretary of State’s schedule were agreed to be admissible and whether or not they were challenged by the defendants.[13]A schedule of 115 pages was prepared by the parties. i) The Secretary of State set out 935 statements of fact or statements of mixed fact and opinion and identified by documents and page number where the statement was to be found. ii) The response of the defendant directors was to accept some as statements of law or fact and in respect of others to require sight of documents before acceptance or to accept some subject to qualification or to reject them. The defendant directors did not accept as accurate the overwhelming majority of statements of mixed fact and opinion. They made clear that opinion evidence was in any event inadmissible. This was completed by 24 August 2006; as Mr Bannister QC, on behalf of the defendant directors, succinctly summarised it in his skeleton argument:
“as an attempt to refine the issues, it proved futile”
[14]The application for permission to rely on Mr Kaye’s report was restored by the Secretary of State and came on for hearing before Robin Knowles QC, sitting as a Deputy Judge of the Chancery Division, on 1 March 2007; the bundle for the hearing before him ran to 8 volumes; included within these was the affidavit from Mr Burns (which ran to 63 pages) and the report of Mr Kaye that ran to 100 closely typed pages. In a judgment given on 19 June 2007, the Deputy Judge made it clear at paragraph 20 that he was not asked to consider and therefore did not consider whether the findings of the FSA report were admissible on the basis now argued before this court. The Deputy Judge questioned the need for expert evidence, particularly on the issue of whether the FSA and FOS had been correct in their conclusions as to rule breaches (see paragraphs 21, 23, 35 and 40). He pointed out that the issue for the court was not whether the FSA and FOS had been correct, but whether on the findings of fact made, the defendants were unfit to be directors; a court could readily understand the issues and did not need an expert to help it on most of the issues, taking as an example the question of whether risk ratings had been properly explained. Accordingly he gave the Secretary of State very limited permission to adduce the expert evidence from Mr Kaye and confined it to the issue of “the nature of [the SCARPs] in question and the investment risks they pose”. It was ordered that the Secretary of State file a revised affidavit of Mr Burns by 27 July 2007, together with a report from Mr Kaye, on that basis. The defendants were given permission to adduce expert evidence in answer to Mr Kaye’s report, such evidence to be filed by Friday, 19 October 2007. The usual order was made for the meeting between experts.[15]Mr Burns swore a revised affidavit on 27 July 2007; this still ran to 61 pages. It exhibited and relied on as evidence a number of documents, including transcripts of evidence given by the defendants, the report to creditors, the FSA’s investigation report, the Final Notice and FOS decisions, but not the report of Mr Kaye.[16]On 28 September 2007, the defendant directors issued an application seeking an order that the Secretary of State re-swear the evidence to omit all references to various matters including opinions of the FSA or factual findings and conclusions of the FSA set out in its report dated 30 April 2004 or the final notice dated 25 August 2004. The defendant directors also sought an order that their evidence in answer to the affidavit of Mr Burns be extended until 8 weeks after the determination of the application.[17]That application came on for hearing before Thomas Ivory QC, sitting as a Deputy Judge of the Chancery Division, on 27 and 28 February 2008. By a judgment and order on 22 April 2008, the application was dismissed. He held that all the material exhibited was admissible as evidence. The defendants were ordered to serve their evidence by 18 June 2008. On 5 June 2008, the Judge of this Court gave the defendants permission to appeal. Expedition was ordered.

The issue and the contentions

[18]The argument centred on the FSA report and as the report was produced as a result of a statutory mechanism referred to in the CDDA in the same way as reports of inspectors appointed under the Companies Act, it is convenient to deal with this separately from the FSA Final Notice and the FOS decision. The FSA report contained the following types of material: i) Statements of what the FSA Investigators had been told by witnesses: this is hearsay in the ordinary sense of the term. ii) Findings of fact reached by the FSA Investigators from the interviews conducted and the enquiries made iii) Conclusions of the investigators reached in relation to the conduct of the business of DMA by the defendants, particularly in relation to risk assessment, mis-selling and rule breaches.[19]In my view all of this is undoubtedly relevant. It is common ground the statements of witnesses set out in the report and in the transcripts are hearsay, but admissible under s.1 of the Civil Evidence Act 1995. However, it is also common ground that the findings of fact and the conclusions on the conduct of the defendants are ordinarily inadmissible on the basis that they constitute findings in other proceedings and are excluded under what is commonly referred to as the rule in Hollington v Hewthorn [1943] 1 KB 587.[20]Despite criticism of the rule in Hollington v Hewthorn (as for example in the opinion of Lord Hoffman in Arthur JS Hall v Simons [2002]1 AC 615 at page 702D and the observations of Toulson J in Lincoln National v Sun Life [2004] EWHC 343 Comm at paragraph 92), the rule remains a clear rule of evidence – see the cases referred to in Cross & Tapper on Evidence 11th edition (2007) at page 119. The very distinguished members of the Law Reform Committee in their Fifteenth Report on the rule in Hollington v Hewthorn (Cmnd 3391, 1967) recommended the abolition of the rule for convictions in criminal proceedings and certain matrimonial proceedings observing, at paragraphs 3 and 4:
“3. Rationalise it as one will, the decision in this case offends one’s sense of justice. The defendant driver had been found guilty of careless driving by a court of competent jurisdiction. The onus of proof of culpability in criminal cases is higher than in civil; the degree of carelessness required to sustain a conviction for careless driving is, if anything, greater than that required to sustain a civil cause of action in negligence. Yet the fact that the defendant driver had been convicted of careless driving at the time and place of the accident was held not to amount even to prima facie evidence of his negligent driving at that time and place. It is not easy to escape the implication in the rule in Hollington v. Hewthorn that, in the estimation of lawyers, a conviction by a criminal court is as likely to be wrong as right. It is not, of course, spelt out in those terms in the judgment of the Court of Appeal, although, insofar as their decision was based mainly upon the ground that the opinion of the criminal court as to the defendant driver’s guilt was as irrelevant as that of a bystander who witnessed the accident, the gap between the implicit and the explicit was a narrow one. 4. It is in a sense true that a finding by any court that a person was culpable or not culpable of a particular criminal offence or civil wrong is an expression of opinion by the court. But it is of a different character from an expression of opinion by a private individual. In the first place, it is made by persons, whether judges, magistrates or juries, acting under a legal duty to form and express an opinion on that issue. In the second place, in forming their opinion they are aided by a procedure, of which the law of evidence forms part, which has been evolved with a view to ensuring that the material needed to enable them to form a correct opinion is available to them. In the third place, their opinion, expressed in the form of a finding or verdict of guilty or not guilty in criminal proceedings or a judgment in civil proceedings, has consequences which are enforced by the executive power of the state.”
The recommendations were enacted in the Civil Evidence Act 1968. However, the Committee recommended against any change in relation to findings in all other proceedings (see paragraphs 38-39). They did so for reasons that can be viewed as sensibly applying to ordinary civil proceedings. Parliament accepted this recommendation and made no change to the law in the Civil Evidence Act 1968.[21]The Secretary of State contended that the findings of fact and the opinion set out in the report were admissible under an implied exception to the strict rules of evidence developed in disqualification proceedings - referred to by Mr Newey QC as the Armvent principle after the decision of Templeman J in Re Armvent [1975] 1 WLR 1679. The defendants contended that the exception no longer had any relevance. It was concerned with hearsay only and had in that respect been replaced by the 1995 Act. It had never enabled a court to rely on findings of fact or opinions of other courts or persons. It is therefore necessary to examine in a little detail the scope of implied exception developed in the cases.

The scope of the implied exception to the strict rules of evidence in disqualification proceedings

[22]The implied exception to the strict rules of evidence developed in disqualification proceedings has its origins and rationale in the decision of Pennycuick J in Re Travel & Holiday Club [1967] 1 WLR 711. The Board of Trade (the predecessor to the Secretary of State) presented a petition for winding up on the basis of a Report of external inspectors (appointed under the equivalent provision to s.432 of the Companies Act 1985) made under the equivalent provision to s.437 of the 1985 Act. The Report set out the findings of fact made by the inspectors (a Queen’s Counsel and an accountant) and their conclusions that the director had been guilty of misconduct. The judge held that it was permissible to rely on the report of Inspectors as they were acting in a statutory fact finding capacity and the findings were not contradicted by any evidence adduced on behalf of the company. At page 715, he said:
“It seems to me that it would not be in accordance with the apparent intention of the section that, where inspectors appointed under the Act have made a report, the court should not be entitled to look at that report and accept it, not as hearsay evidence, but as material of a different character altogether, and should have to be satisfied anew by evidence of the ordinary nature as to the facts found in the report.”
[23]This was followed in Re Armvent [1975] 1 WLR 1679. The Secretary of State presented a petition to wind up the company based on a similar report. An official in the Department swore an affidavit exhibiting the Report in which he stated that the Secretary of State believed that the facts set out in the Report were true and the opinions contained therein were the opinions of the inspectors. Templeman J followed the decision of Pennycuick J and held that even if the report of the Inspectors was challenged, “it ought to be treated as prima facie evidence and it ought to be left to a Judge in any case, having read the report and having seen the witnesses, to make up his own mind whether it is just and equitable to wind up the company. The whole machinery of the inspectors’ report was evolved in order to enable the Secretary of State to present a winding up petition where the Secretary of State considers the public interest so demands. It would be unfortunate if once the Secretary of State has reached that conclusion on proper grounds based on the inspectors’ detailed report, that the court should be right back to square one and start again as if the inspectors had never come on the scene at all. A great deal may depend on the on the contents of the report and the evidence set out in the report; but I would hope that a report of this nature would be accepted by the court as being prima facie evidence of the main conclusions drawn by the inspectors. Once evidence is sworn to the contrary, then if the Secretary of State fails to support the report by direct evidence which removes nay doubt cast on the validity of the inspectors’ conclusions the court would not be slow to dismiss the petition” 24. Both decisions were followed by Dillon J in Re St.Piran Limited [1981] 1 WLR 1300, another winding up case. He observed in relation to Pennycuick’s decision, “the reason why he held that the Secretary of State was entitled to rely on the inspectors' report to support his petition was a combination of two factors, first, that the report was not ordinary hearsay evidence because the inspectors acted in a statutory fact-finding capacity, and secondly, that it would be nonsensical if the court could not take the report into consideration in deciding whether it was just and equitable that the company should be wound up when on the very terms of section 169 (3) of the Act of 1948 as of section 35 of the Act of 1967, it is on the basis of his consideration of the report that the Secretary of State has concluded that it is expedient that the winding up petition should be presented or that the company should be wound up. It would be strange in that context if Parliament had intended that the Secretary of State should have to rely on entirely fresh evidence and should not be able to present the report to the court and rely on the findings of the inspectors.” It is clear from these decisions that the exception as to admissibility of the reports of inspectors appointed under the Companies Acts was not confined to hearsay evidence, but included the evidence of the findings and opinions of the inspectors.[24]The principle decided in these winding up cases was then applied by Sir Donald Nicholls V.-C. in Re Rex Williams Leisure plc [1994] Ch 1 to proceedings for the disqualification of directors under s.8 of the CDDA. The Secretary of State relied upon an affidavit made by an examiner in the Investigations Division of the then Department of Trade and Industry who had interviewed directors and employees of the company under powers contained in s.447 of the Companies Act 1985. The Examiner, in his affidavit made comments and submissions based on what he was told in the interviews; he exhibited the interview notes. The directors submitted that the interview notes were being put forward as evidence of the facts related to the Examiner by those interviewed and as such the evidence was hearsay. As the Vice-Chancellor accepted, the evidence contained in the notes was hearsay in the case of all witnesses save the directors against whom disqualification was sought. The Vice-Chancellor, however, held that the Secretary of State could rely upon the principle the court had developed in winding up petitions as to the admissibility of reports made by inspectors appointed under s.431. He stated at page 12:
“In my view the approach adopted by the Court to the use of the contents of an inspector’s report in a winding up petition is equally applicable on an application for a disqualification order founded on such a report. That is so because the rationale underlying the use of the contents of an inspectors’ report on a winding up petition is equally applicable to a disqualification application based on the contents of such a report. In the latter case as much as the former, Parliament must have intended the Secretary of State should be able to present a case to the Court founded upon the information gathered by the inspectors and set out in their report. He added at page 15: “There is a measure of practical good sense in a procedure whereby the plaintiff has first to set out his case, with sufficient clarity and identification of the evidence being relied on for the defendant to know where he stands. Then the defendant puts in his evidence. The plaintiff can see what factual issues there are, and then he can take steps and incur expense in adducing where necessary first hand evidence on these issues, before the hearing. In this way the genuine issues can be resolved properly and fairly in the interests of the defendant and in the public interest. This procedure does no prejudice a fair and just trial of the issues.”
Although what was in issue was hearsay evidence set out in materials obtained under powers contained in the Companies Act, the Vice-Chancellor did not distinguish between what was hearsay and what constituted opinion evidence or findings of fact. His conclusion was upheld by the Court of Appeal at [1994] Ch 350 at p.364-368. Hoffmann LJ made clear that the principle developed in relation to winding up also applied to disqualification proceedings under s.8 of the CCDA: he said at 367A:
“In my judgment, these distinctions go to weight rather than admissibility. In a disqualification application hearsay evidence untested by cross-examination of the informant may be insufficient to satisfy the burden of proof against opposing evidence. It will depend upon the facts and probabilities of each case. Once the Secretary of State knows from the opposing affidavits which material facts are seriously in dispute, he may be well advised to reinforce his case by affidavits from the appropriate informants. But that is no reason why their hearsay evidence obtained under section 447 should be inadmissible. Much of what they say may be uncontested, in which case it would have been a waste of time and money to insist that they swear affidavits.”
In his concurring judgment, Staughton LJ pointed out that this was a well developed exception: at page 369A he added:
“How then can the Secretary of State be entitled to use affidavits of information and belief in disqualification proceedings? As Hoffmann L.J. has shown, this stems from an implied statutory provision as to the use of hearsay as evidence, or at any rate as provisional evidence until it is challenged. That doctrine is now of respectable antiquity, having been established between 1967 and 1975. I would for my part have hesitated to accept it when first propounded. But as it has existed for a substantial period of time, during which relevant statutory provisions have been replaced and re-enacted or amended, I would not now alter it.”
[25]In Secretary of State for Trade and Industry v Ashcroft [1998] Ch 71, the argument was made to this Court that the position was different in an application under s.7 for disqualification under s.6 of the CDDA. The Secretary of State sought to rely upon the affidavit of one of the joint liquidators where he had set out an account of an interview with one of the non executive directors against whom proceedings had not been brought; that evidence was hearsay. Although the Civil Evidence Act 1995 had been enacted in November 1995 and brought into force on 31 January 1997, the transitional provisions applied the Act only to proceedings commenced after 31 January 1997 (see note 33-0-2 to Civil Procedure Vol. 1 2008); this Court therefore had to apply the law as it existed before the 1995 Act. It was held that there was no distinction which could properly be drawn between an application for a disqualification under s.8 and s.6 and between information supplied to him under statutory powers by his own officials and information supplied to him by others such as inspectors. The Court held that, although a distinction could have been drawn between relying on such evidence in a winding up petition and in disqualification proceedings or between the evidence of outside inspectors and information obtained by officials under s.447, none had been drawn. There was no logical distinction between applications under the different sections of the CDDA. Millett LJ said at 81:
“A logical distinction might have been made between cases where the Secretary of State was seeking a winding up order and cases where he was applying for a disqualification order; but this court refused to make it. A similar distinction might alternatively have been made between cases where the Secretary of State was acting upon a formal report by outside inspectors, where section 441 of the Companies Act 1985 covers the situation, and information obtained by officials appointed under section 447, where there is no comparable provision; but the court refused to draw it. Once the last step was taken, I can see no discernible distinction between an application for a disqualification order by the Secretary of State based on information gathered for him by his own officials and one based on information supplied to him by an office holder. In both cases the information is obtained by a professional man or an official acting in pursuance of statutory powers to compel the provision of information. In both cases the information will necessarily include hearsay but it will be the material on which the Secretary of State decides that a particular regulatory response is necessary. In both cases it would be nonsensical if the court could not take it into account at least unless and until it is challenged by direct evidence to the contrary. The safeguards, in my opinion, are threefold: first, the information is obtained by a professional insolvency practitioner or an official in the Department of Trade and Industry, who must have judged it prima facie worthy of credence; secondly, it is considered by the Secretary of State, who must have judged it sufficiently credible to form the basis of his own opinion and to base an application to the court upon it; and, thirdly, the respondent whose conduct is impugned has every opportunity to rebut it and, if the evidence is not later supported by direct evidence, to invite the court to reject it.”
Although both Rex Williams Leisure and Ashcroft were concerned with the admissibility of hearsay, the court in each case approved the statements of principle set out in the earlier cases as to the general admissibility of what was contained in reports and other materials obtained under the statutory powers.[26]In Re Barings plc & Others(No.2) [1998] 1 BCLC 590 (Evans-Lombe J) and Re Barings plc (No 5) [1999] 1 BCLC 433 (Jonathan Parker J), disqualification proceedings were brought on the basis of an affidavit of an accountant instructed by the Secretary of State to collate for him the facts contained in various investigations including the report by the Board of Banking Supervision Enquiry into the circumstances surrounding the collapse of Barings and the report of Inspectors appointed by the Government of the Republic of Singapore. The reports were relied on for pure hearsay statements (for example recitals of what witnesses had told the enquiry) and for analyses of the facts carried out by the enquiry and findings of primary or secondary fact made by the enquiry, but not for the evaluative judgments or expressions of criticisms of any of the directors on the basis that the Court was in a position to reach its own conclusions on the evidence before it. Evans-Lombe J applying the principles in the cases to which I have referred decided in the first of the hearings that the Secretary of State was entitled to put before the court the affidavit of the accountant as he had relied on that for bringing the proceedings, including recitals of what witnesses had said or what was contained in documents, even though these were hearsay statements. Jonathan Parker J held at pages 495-6 that it was implicit in Evans-Lombe J’s decision that findings of primary and secondary fact in the report of the Board of Banking Supervision and the Singapore Inspectors report were also admissible:
“It seems to me to be implicit in the decision of Evans-Lombe J that findings of primary and secondary fact (as noted above, evaluative judgments are to be excluded for present purposes) are also admissible as evidence in these proceedings. But in any event, whether or not that be strictly correct, I take the view that the implied statutory exception identified in Re Rex Williams Leisure plc, the wide-ranging nature of which was explained by Millett LJ in Ashcroft (at 81-82) – a passage quoted by Evans-Lombe J in his judgment in Re Barings plc (in admin) (No 2), Secretary of State for Trade and Industry v Baker (No 2) [1998] 1 BCLC 590 (see at 594-595) – covers findings of fact, as well as pure hearsay statements. The weight to be attached to such evidence is of course a matter for the court.”
On appeal this part of his decision was not challenged, but although the issue was therefore not argued before the court, Morritt LJ, in giving the judgment of the court, observed at p.537f of [2001] BCLC 523 that the court had no reason to doubt the validity of the Judge’s conclusions.[27]Although the decisions which I have set out seem to have made clear that the width of the implied exception applied not only to hearsay, but also to findings of fact and opinion at least when contained in reports or materials obtained under statutory powers, the defendants contended that the decision in Secretary of State for Trade and Industry v Bairstow [2003] EWCA Civ 321, [2004] Ch 1 made clear that the exception was confined to hearsay. In proceedings commenced in February 2000 (and to which the Civil Evidence Act 1995 applied), the Secretary of State applied to disqualify a director under s.8 of the CDDA relying upon an affidavit of one of the Inspectors appointed by the Secretary of State under s.432 of the 1985 Act to investigate the affairs of the company which drew heavily upon matters discovered during the inspection of the company. The Secretary of State also relied on the affidavit of an official in the Department which referred to the findings of Nelson J in proceedings which the director had brought against the company for wrongful dismissal; the affidavit pointed to the substantial identity of the issues in the disqualification proceedings and the hearing before Nelson J. Pumfrey J, relying on the principle in Hunter v Chief Constable for the West Midlands [1982] as to collateral attacks on findings made in earlier proceedings, made an order that the director could not challenge the findings made by Nelson J and was to be bound by them. On appeal, the director contended that the decision was wrong; not only was he not bound by Nelson J’s findings, but they were inadmissible as evidence. It was held that the director was not so bound; as to the question as to whether the findings were admissible, Sir Andrew Morritt V-C, giving the leading judgment in this court, held that the rule in Hollington v Hewthorn applied and evidence could not be adduced. “26. I am unable to accept the distinction on which counsel for the Secretary of State relies. Even if Hollington v F.Hewthorn & Co.Ltd could originally have been confined to cases in which the earlier decision was that of a court exercising a criminal jurisdiction, it has stood for over 60 years as establishing a much broader proposition. There was no criminal prosecution in any of the other cases to which I have referred except Hui Chi-Ming v R. The submission of counsel is inconsistent with the judicial statements made in each of the other cases to which I have referred, in particular of Lords Steyn, Hope of Craighead and Hutton in Three Rivers District Council v Bank of England. It is true that in most of them the decision in question was not that of a court, but of inspectors appointed under the Companies Act, an arbitrator or extra-statutory investigators. But that feature was not the basis of the decision in any of those cases and cannot account for the dictum of Balcombe LJ in Symphony Group plc v Hodgson or the decision of Keene J in Hawaz v The Thomas Cook Group Ltd. 27. Accordingly I would accept the submission of counsel for Mr Bairstow that the factual findings and conclusions of Nelson J in the earlier proceedings are not admissible as evidence of the facts so found in these proceedings. Counsel for the Secretary of State accepted that he could not rely on any statutory or common law exception to render those conclusions admissible for the purpose of proving those facts. Thus it is unnecessary to consider further the decisions of Evans-Lombe or Jonathan Parker JJ in Re Barings plc. Counsel for the Secretary of State also accepted that if the factual conclusions of Nelson J are inadmissible there is nothing in the Civil Procedure Rules, in particular CPR Rule 32.1, to alter the position.”[28]In my view this court in Bairstow was not dealing with an issue that fell within the scope of the implied exception set out in the earlier cases. The findings made by Nelson J were findings made in ordinary civil proceedings to which the rule in Hollington v Hewthorn plainly applied. As counsel for the Secretary of State accepted in that case, the findings and conclusions in the judgment of Nelson J was not covered by any of the exceptions. The implied exception related to reports and materials produced under the statutory scheme under the Companies Acts as referred to in the CDDA. Sir Andrew Morritt referred at paragraph 13 to Re Rex Williams, but only in connection with the hearsay rule and to observe that in that respect it had been overtaken by the Civil Evidence Act 1995. The decision was not concerned with the report of the Inspectors, and as is clear from the paragraphs of the judgment which I have set out did not consider the decisions in Barings. Nor is that part of the decision of the House of Lords in the litigation relating to the collapse of BCCI, Three Rivers District Council v Bank of England [2001] UKHL 16 (at paragraphs 5 and 31-33), affirming the application of the rule in Hollington v Hewthorn in relation to the Bingham Report into the collapse of BCCI; the Bingham report was a non statutory report being used in ordinary civil proceedings. The implied exception was not in any way relevant.[29]In my view therefore, it is clearly established that in disqualification proceedings whether brought under s.8 or under s.7 for an order under s.6 that there is an implied exception to the strict rules of evidence on hearsay evidence, opinion evidence and the rule in Hollington v Hewthorn. This was developed from the scheme of the Companies Acts on the basis that Parliament must have intended that a court should have regard to the materials produced under clear statutory procedures on which the Secretary of State had relied in bringing the proceedings. There was no real disadvantage to a director. It was no more than prima facie evidence and the director was entitled to adduce evidence to contradict the findings and conclusions in the report. The court would reach its own conclusions.[30]Although it is no longer necessary to rely on the implied exception in relation to hearsay evidence, it is still necessary to do so in relation to findings of fact and conclusions in the report so long as the rule in Hollington v Hewthorn remains good law. The principle of the statutory scheme under the Companies Acts, although broadened to include provisions of FSMA, remains the same and the reasons for the implied exception remain valid. On an examination of the rationale for the decision in Hollington v Hewthorn and the Law Reform Committee’s reasons for recommending its retention in civil proceedings, it is clear that the exception does not offend the underlying purpose of the rule. It is clear from the decisions to which I have referred that the implied exception has been developed in the context of the specific rules relating to disqualification and not in the context of rules pertaining to the use in subsequent litigation of a decision in prior litigation where the issues on which evidence is required in each of the sets of proceedings are delineated by pleadings. The primary objective of the implied exception is to put before the court material obtained under the statutory scheme on which the Secretary of State relied in making his decision and which forms the basis of the case against the defendant. It enables the defendant to know the case made against him and to put in the materials on which he relies in response.[31]In my view there is good reason to reaffirm not only the principle of the implied exception and its scope as extending to whatever is contained in the reports and other materials obtained under the statutory scheme, but also its eminent good sense in relation to disqualification proceedings such as this. To abrogate the exception would be to render of no value a careful investigation, to put the public through the Secretary of State to considerable and unnecessary expense and to cause significant delay. Save by making the task of the Secretary of State more difficult, slower and expensive (with the consequent advantage that would provide to such defendant directors), it cannot sensibly be argued that the admission of such evidence causes any disadvantage to the defendant directors. It is plainly relevant evidence which a judge can and should take into account with all the other evidence in the case, giving it such weight as it deserves in the context of all the other evidence adduced.[32]It was suggested on behalf of the defendant directors that the directors would be condemned on the basis of the opinion of third parties and not of the court determining the matter. I cannot accept that submission as having any semblance of reality. A judge of the Chancery Division will receive all the evidence, including the FSA report and the evidence for the defendants. It is, with respect, absurd to suggest that a judge of the Chancery Division who tries this case will not make up his or her own mind but will meekly follow or be influenced by the views of the FSA investigators. In my view, to exclude the FSA report would be to cause injustice by bringing about further delay and expense in these proceedings. There is fortunately no need to do so as the scope of the implied exception is clear. I would therefore uphold the decision of Mr Ivory QC on the main issue.

The FOS decisions, the final notice and the other materials

[33]The primary argument before us took place in relation to the FSA report. However Mr Burns also relied on decisions of the FOS in relation to complaints about DMA, the Final Notice and two compliance reports as materials taken into account by the Secretary of State and so admissible as evidence under the implied exception.[34]It was contended on behalf of the Secretary of State that the issue had been decided by Barings No 2 and No 5 where, as I have set out above, the documents relied on were investigative reports which had not been produced under statutory powers in the Companies Acts, but were relied upon by the Secretary of State. Evans Lombe J decided that the decisions did “not reveal that in either [Rex Williams and Ashcroft] that the Court is prescribing as a rule that only evidence gathered pursuant to the relevant statutory powers is capable of being given in the affidavit sworn by the provider of information to the Secretary of State. ”[35]Mr Bannister contended that this decision could not stand in the light of Bairstow where, as I have set out, it was held that the findings made by Nelson J were not admissible. This submission was rejected by the Deputy Judge, Mr Ivory QC, on the basis that Bairstow was a decision under s.8 where the Secretary of State could only make an application where it appeared to him “from investigatory material”. In contradistinction, s.7 enabled an application under s.6 to be made where it appeared to the Secretary of State “that it is expedient on the public interest that a disqualification order under s.6 should be made against any person”. Thus in Bairstow, the Secretary of State had been right not to rely upon the implied exception because the judgment of Nelson J was not investigative material, but as the application was made under s.7 for an order under s.6, other material could be relied on.[36]I am not persuaded that this is correct. I see no reason to make a distinction between s.6 and s.8. The basis of the decision in Ashcroft was that it was not sensible to make a distinction as to the admissibility of evidence between the two different powers under the CDDA; that that is a proper and correct conclusion is underlined by the fact that in this case an application could have been made under s.8. It would make little sense if the evidence was admissible if the application was made under s.6, but not under s.8. Furthermore the whole basis for the rationalisation in the cases is the statutory scheme. I cannot see any reason to hold that anything relied on by the Secretary of State is admissible in disqualification proceedings; the rationale for relying on the reports and other material fits into the statutory scheme, but there is nothing to suggest that the Secretary of State can go outside this scheme. If he could, it would difficult to see what limit there could be to the materials relied on. There is also good sense in restricting the material relied upon to material produced through the statutory scheme for investigation; this is understood by everyone and the procedure clear. Moreover a report or other material produced in this way can readily be distinguished from a decision in an adjudicative process (such as the decision of the FOS or the Final Notice) where the decision maker is deciding a matter between two parties.[37]It may be that in a diverse regulatory system within the UK and in a globalised financial and banking services industry, it is necessary to rely on investigative reports carried out by other regulators or under statutory authority in other states and that by analogy, such material can be relied on in disqualification proceedings. That was the effect of the decision in Barings and, although the point does not arise on the present appeal, I accept that an argument can be made along those lines and the merits of the argument can be decided when it arises, unless Parliament takes the preferable course of amending the CDDA.[38]The other material sought to be relied on in the present case is not analogous investigative material of this kind and I cannot accept that it falls within the implied exception. I therefore cannot uphold the decision of the Deputy Judge on this issue.[39]However, as is illustrated by the tortuous history of this case, an examination of the schedules produced in relation to the FSA report and the reliance placed on the decisions of the FOS, there is no sense in trying to excise parts of the documents before they are put before the court making the determination. The FOS decisions contain much that is simply a recital of the evidence given by the complainants; that is admissible as hearsay under the Civil Evidence Act 1995. But the decisions also contain findings which, in my view, are inadmissible under the rule in Hollington v Hewthorn and fall outside the scope of the implied exception. It is my experience that many experts report views on matters on which it is for the court to make its decision and not for an expert to express a view. No modern or sensible management of a case requires putting the parties to the expense of excision; a judge simply ignores that which is inadmissible.[40]In this case therefore the judge at the trial will simply ignore findings of fact in the documents not produced under the statutory scheme in the way judges are these days well used to doing. To do otherwise would be to ignore the warning highlighted by Lord Woolf MR in Re Westmid Packing Services Ltd [1998] 2 All ER 124 at 134-5 as to the dangers of an over-elaborate over-technical approach. Thus, in respect of those small passages contained in the material not produced under the statutory scheme which are not admissible, I accept the alternative submission made in the respondent’s notice served on behalf of the Secretary of State, that the whole of these documents should be before the court, the judge taking into account what was admissible at trial and ignoring the remainder; excision would be a wholly unnecessary exercise and serve to defeat the just disposal of these proceedings by causing unnecessary delay and expense.

The further conduct of the proceedings

[41]It follows therefore that the affidavit of Mr Burns can stand and that the defendants must serve their evidence within 2 months of the date of this judgment.[42]As accepted by Counsel for the Secretary of State before us, the Secretary of State will on receipt of the evidence of the defendants review the evidence needed. In the light of that evidence the Secretary of State may take the view that the court might attach little weight to some parts of the FSA report and therefore wish to serve evidence from other witnesses on some of the matters in issue. The Rules make provision for this and for the giving of directions.[43]It is clear, in my view, that what will then be needed is very robust case management by a judge of the Division to focus the issues and ensure that the materials placed before the court are proportionate to what is in issue. Mr Knowles QC in his clear and incisive judgment has already pointed to the disproportionate way in which the case has so far proceeded. It will be for judge on the directions hearing to decide whether it is necessary to make any further use of the schedule that has been produced.[44]In the present case it is clear that much of the factual material set out in the report is not in issue. Some of the findings of fact in relation to mis-selling are in issue as are the conclusions that the FSA has drawn, but robust case management should identify precisely what is in issue when the defendants have put in their evidence.[45]It will be for the judge hearing the proceedings to decide on the weight to be attached to the materials place before him in reaching the decision he has to make on whether there has been mis-selling and, to the extent material, whether there have been breaches of the rules and principles, and, if so whether such conduct should result in disqualification. It may be that on contested issues little, if any, weight will be placed on the report of the FSA. Furthermore, it will always be open to the defendants to contend that it would be unfair in particular circumstances to rely at all on any part of the report without adducing specific evidence and if it is, the judge will put that part out of his mind when making his decision. There will be no prejudice to the defendants. Lord Justice Keene[46]I agree. Lord Justice Buxton[47]I also agree.

Cited in 10 later judgments

and 1 more case