Secretary of State for Trade & Industry v Swan & Ors [2005] EWHC 603 (Ch)

[2005] EWHC 603 (Ch)

Case No 6504 of 2002

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 12 April 2005

Before

MR JUSTICE ETHERTON

Between

The Secretary of State for Trade and IndustryClaimant

(1) Mr Christopher Paul McKinley SwanDefendants

(2) Vuchuru Sadhana ReddyDefendant

(3) Brian Christopher RitchieDefendant

(4) Brian Samuel NorthDefendant

(5) Ian StewartDefendant

Roger Kaye Q.C. and Michael Green (instructed by asb Law Solicitors) for Claimant

Stephen Davies Q.C. and Jeremy Bamford (instructed by Gordons Solicitors) for 1 st Defendant

Stuart Biggs (instructed by John Hume) for 4 th Defendant

Hearing Hearing dates: 21, 22, 23, 28 Feb, 1, 2, 3, 4, 9, 10 Mar 2005

Judgment

Index

Introduction 1-12 Cheque Kiting 13-21 Background Facts 22-72 The Law 73-86 The Witnesses 87-97 The Case Against Mr Swan 98-223 Actual knowledge of cheque kiting 98-131 (1) The SoS’s case 98-117 (A) General 99-100 (B) The June Cheques 101-103 (C) The Maccess Circular 104-111 (D) The December incident 112-117 (2) Analysis 118-130 Preliminary 118-120 (A) General 121-127 (B) The June Cheques 128 (C) The Maccess Circular 129 (D) The December incident 130 Ought to have known 131-202 (1) The SoS’s case 131-135 (2) Analysis 136 (A) General 137-141 (B) The June Cheques 142-178 (C) The Maccess Circular 179-195 (D) The December incident 196-202 Inaccuracy of the Maccess Circular 203 Unfitness 204-217 Period of disqualification 218-223 The Case Against Mr North 224-248 Analysis 224-240 Unfitness 241-245 Period of disqualification 246-248 Other Issues 249 Decision 250

Introduction

[1]These are proceedings by the Secretary of State for Trade and Industry (“the SoS”) for disqualification orders under the Company Directors Disqualification Act 1986 (“the Act”) s.6 against former directors of Finelist Group Limited (“Finelist”) and certain other companies within the Finelist group (“the Group”).

[2]Finelist was the Group’s parent company, and, as Finelist plc., was formerly listed on the London Stock Exchange (“the LSE”).

[3]Alan Bloom, Andrew Wollaston and William Tacon (“the Receivers”) were appointed joint administrative receivers of Finelist on 5 October 2000. On 6 October 2000 they were appointed joint administrative receivers of its 12 principal subsidiaries, including AEW Limited (“AEW”).

[4]According to the statement of affairs of Finelist and the statement of affairs of AEW, it is estimated that both companies have a substantial deficiency as regards creditors.

[5]There were initially five defendants to the proceedings. The First Defendant, Christopher Swan, was a director of Finelist from 1991 to 2000. During the period 1998 to 2000 (“the Relevant Period”), with which the proceedings are principally concerned, he was both the chairman and chief executive (“CEO”) of Finelist. He was a director AEW from 1991 to 2000, and was a director of another subsidiary which features largely in these proceedings, Edmunds Walker Limited (“EW”), between 1993 and 2000.

[6]The Second Defendant, Vuchuru Sadhana Reddy, was the finance director of Finelist between 1992 and 2000. He was a director of AEW between 1992 and 2000, and a director of EW between 1993 and 2000. Mr Reddy has given a disqualification undertaking under s.1A of the Act for a period of 8 years. The proceedings have been discontinued against him.

[7]The Third Defendant, Brian Ritchie, was an executive director of Finelist between 1997 and 2000 responsible for group marketing and purchasing. He was an executive director of AEW between 1991 and 2000. He has given a disqualification undertaking under s.1A of the Act for a period of 5 years. The proceedings have been discontinued against him.

[8]The Fourth Defendant, Brian North, was a non-executive director of Finelist between 1992 and 2000. During the Relevant Period he was the deputy chairman of Finelist, chairman of the audit committee and chairman of the remuneration committee.

[9]The Fifth Defendant, Ian Stewart, was a non-executive director of Finelist between 1993 and 2000. The proceedings have been discontinued against him.

[10]Accordingly, the proceedings have continued to trial only against Mr Swan and Mr North.

[11]The SoS’s case against Mr Swan and Mr North is that they had actual knowledge of the cycling of cheques between the bank accounts of AEW and EW, which has been +referred to as “cheque kiting” in the proceedings; alternatively, they ought to have known of the cheque kiting.

[12]As against Mr Swan, the SoS also alleges, and relies upon, Mr Swan’s responsibility for an inaccurate statement contained in a circular sent to shareholders in July 1999 in connection with the disposal of one of the Group companies, Maccess Group Limited (“Maccess”). The circular (“the Maccess Circular”), which was required by the Listing Rules of the LSE (“the Listing Rules”), incorrectly stated that, after the disposal of Maccess, the continuing Group had cash balances at the close of business on 14 June 1999 of £10,363,380.00 and outstanding borrowings of £179,184,805.00. By reason of cheque kiting, those figures were materially inaccurate. If the figures had been adjusted to eliminate the effect of cheque kiting, the continuing Group’s stated balances would have been reduced to nil or a negative balance, and the stated outstanding borrowings would have been increased to at least £190m.

Cheque kiting

[13]Cheque kiting can take a number of different forms, and is known by several different names. At the heart of the process is the utilisation by the kiter of the period taken by the bank to clear a cheque so as to obtain a fictional increase in the balance of the payee’s account before the cheque is cleared and its amount is deducted from the payer’s account.

[14]Cheque kiting may be used, for example, to write a cheque against a bank account where the funds are insufficient to cover it, in the hope that, before it is cleared, the necessary funds will have been deposited. Alternatively, it may be used to transfer funds between two or more banks to obtain unauthorised credit from a bank during the time it takes cheques to clear.

[15]Cheque kiting can, therefore, be used as a means to generate fictitious funds which are then mis-appropriated or used to cover short term cash-flow problems, or simply to create the false impression of a healthier bank balance or cash-flow than would otherwise be the case.

[16]Cheque kiting was conducted between the bank accounts of AEW and EW on a daily basis during a significant part of the Relevant Period. Although cheque kiting may involve accounts at different banks, the accounts of both AEW and EW were with the same branch of National Westminster Bank plc. (“NatWest”).

[17]Cheques for matching substantial amounts passed between AEW and EW, the effect of which was to create the impression of higher bank balances than was a proper reflection of the actual cash-flow of those companies. The purpose, or at least one of the principal purposes, was to create the impression that the Group was operating within its banking facilities, which included a Group gross overdraft limit of £30m.

[18]Cheque kiting would cease within the Group in June and December, that is to say in the month preceding the end of the Group’s half year and full year accounting period. The cessation was related to the half year and year end audit. During June and December the Group’s level of bank balances, temporarily devoid of the effect of cheque kiting, was maintained by the suspension of payment to suppliers.

[19]Cheque kiting can cause a bank severe loss if the kiter becomes insolvent at a time when the kiter’s bank balances are artificially inflated. In the Group’s case, NatWest did not, in fact, suffer from the practice since all the Group’s indebtedness to NatWest was discharged when the Group was purchased by Europe Auto Distributors Limited (“Auto Distributors”) in 2000.

[20]The SoS does not allege that cheque kiting within the Group caused the receivership or the deficiency as regards creditors which I have mentioned earlier.

[21]It is common ground between the parties, however, that cheque kiting within the Group was, at the very least, commercially improper and unacceptable. It enabled the Group to continue to trade while in reality in breach of its banking covenants, and it resulted in a misleading and inaccurate circular to shareholders on the disposal of Maccess, in breach of the Listing Rules.

Background Facts

[22]The following is a brief summary of the background facts.

[23]Mr Swan, who was born in May 1958, left school when he was 18 and began to work at Halfords, which sold automotive parts. In 1978 he became the youngest ever branch manager at Halfords at the age of 19. About a year later, he joined Brown Brothers as a parts salesman and worked his way up to reach management level.

[24]In 1986 Mr Swan joined AEW as operations manager.

[25]In 1989 Mr Swan was part of a management buy-out of AEW. Finelist, which was incorporated on 22 August 1991, was used by Mr Swan, in conjunction with NatWest Equity and 3i, as the corporate vehicle to acquire AEW in 1991, with loans and other facilities being provided by NatWest.

[26]At the time AEW was acquired by Finelist, sales were about £10m and profits about £200,000.00. There were about 150 employees in some 20 locations.

[27]Mr Swan was a director of Finelist from September 1991. Mr Swan and Mr Ritchie were already directors of AEW.

[28]In February 1992 Mr Reddy became a director of AEW.

[29]In March 1992 Mr Reddy was appointed the finance director of Finelist and and Mr North became a non-executive director. Mr North was a very experienced accountant. He had formerly been financial controller of the Burton Group, then its joint managing director, and then chief executive of Thorn EMI Films Ltd. Following a serious incident of ill health and a decision to change the pace of his business life, he stepped down from that position, and then for a period assisted various banks on corporate rescues. He was a non-executive director of a number of other companies

[30]In April 1993 Mr Swan and Mr Reddy became directors of EW.

[31]In December 1993 Mr Stewart became a non-executive director of Finelist.

[32]By February 1994 Group sales had grown to about £24m, and profits had grown to about £2.4m.

[33]Finelist was floated, as Finelist plc, on the LSE in February 1994, sponsored by NatWest Markets (now Hawkpoint Partners Ltd (“Hawkpoint”)) and BZW (now Credit Suisse). Finelist was floated with a market capitalisation of £28m.

[34]In July 1994 Finelist acquired EW. EW thereupon ceased to trade.

[35]In January 1997 Mr Ritchie became a director of Finelist.

[36]In April 1997 Finelist acquired Maccess.

[37]On 30 June 1998 AEW acquired the operations, assets and liabilities of EW (“the EW Business”), which thereupon ceased to trade and became a dormant company. Mr Swan remained a director of EW.

[38]In about October or November 1998 the practice of cheque kiting in the Group began. It was a treasury function, which fell within the control and responsibility of Mr Reddy, as finance director.

[39]By 1999 the Group had experienced a period of significant growth. The 1999 Group accounts show turnover of nearly £500,000.00 and profit on ordinary activities before tax of over £26m. Those accounts describe the Group as a leading supplier to the UK aftermarket for vehicle parts, accessories and consumer products, with 40,000 trade customers, 7m retail customers, on 750 locations, and with 7500 employees. This had been achieved both through organic growth and the acquisition of about 60 businesses of various sizes.

[40]By 1999 the operating and trading entities in the Group were separated into four divisions. One of those divisions (“the AEW Division”) included AEW, which had by then acquired the EW Business.

[41]The EW cheque signing policy in 1999 provided for three “Panels” of signatories: Panel A, Panel B and Panel C. Panel A comprised Mr Swan and Mr Reddy. Panel B comprised four other persons, and Panel C comprised two other persons. The policy required every cheque to have two signatories. Every cheque with a greater value than £5,000 had to have at least one signatory from Panel A or Panel B. Every cheque with a value greater than £25,000 had to have at least one signatory from Panel A.

[42]Mr Swan, as a second signatory from Panel A, signed two cheques dated 1 June 1999 on AEW’s bank account in favour of “Edmunds Walker”. Mr Reddy was on holiday at that time. One of the cheques was for £1m and the other for £4m. He also signed two cheques dated 1 June 1999, for £4m and £1m respectively, on EW’s bank account in favour of “Autela”. “Autela” was intended to be a reference to AEW, which was formerly called Autela Components Ltd. The other signatory on those cheques was Bryan Clifton, who was an employee in Finelist’s financial team based at the Group’s head office in Stratford upon Avon, and who at that time was in charge of the Group’s treasury functions.

[43]Those four cheques (“the June Cheques”) were cheque kiting cheques. Their effect was to contribute £10m of the total of £18m of artificial credit for the Group on 1 and 2 June 1999.

[44]At that time, as I have said, the NatWest facilities for the Group included a gross limit of £30m on the totality of the Group’s overdrafts.

[45]Following an EGM of Finelist on 2 August 1999, at which a resolution was passed approving the disposal of Maccess, the sale of Maccess by Finelist was completed on 4 August 1999 for some £68m. The disposal of Maccess was a Class 1 transaction within the Listing Rules. In the case of a Class 1 transaction the Listing Rules required an explanatory circular to be sent to the company’s shareholders. In the case of a disposal, the circular had to include a statement of indebtedness of the listed company (on the basis that the disposal had taken place) and of the company the subject of the transaction (“the Indebtedness Statement”), as well as a working capital statement to the effect that the working capital available to the company was sufficient for present requirements or, if not, how it was proposed to provide the additional working capital thought by the company to be necessary.

[46]The Maccess Circular was dated 16 July 1999. It contained an Indebtedness Statement which was incorrect in the respects I have mentioned earlier. It was incorrect due to cheque kiting in the Group. The total artificial credit for the Group from cheque kiting on the reference date in the Indebtedness Statement, namely 14 June 1999, was £23m.

[47]From mid November 1999 to 6 December 1999 the total artificial credit each day for the Group from cheque kiting was £16m, comprising £8m on AEW’s account and £8m on one of EW’s accounts (“EW’s account”).

[48]On 1 October 1999 Paul Reeve, who had been providing services to the Group on a consultancy basis since the summer of 1999, began employment as the Group’s chief operating officer (“COO”). Mr Swan remained Finelist’s chairman and CEO, and Mr Reeve reported to him.

[49]John Butcher became a non-executive director of Finelist in October 1999.

[50]On Thursday 2 December 1999 Mr Reeve attended a meeting with Ian Ainsworth, who was about to leave his job as operations manager for AEW, including the EW Business. Terry Grourk, who was then working as an interim Human Resources (“HR”) manager for the Group on a consultancy basis, also attended the meeting. Mr Grourk took notes in the course of the meeting, which were put on his computer that evening, and were checked for accuracy and, so far as necessary, revised by him over the following weekend. Those notes record that Mr Ainsworth described various financial and accounting irregularities within the Group, involving, among other things, the manipulation of financial results by Mr Reddy.

[51]In consequence of the meeting with Mr Ainsworth, Mr Reeve and Mr Grourk arranged to meet Peter Blackburn, who was the finance director of the AEW Division, on Friday 3 December 1999. Again, Mr Grourk took notes during the meeting, which were subsequently entered into his computer later that day, and were checked for accuracy and, so far as necessary, revised by him over the weekend. Those notes record that Mr Blackburn mentioned a number of serious financial and accounting irregularities in the Group. Among other matters, the notes record that the published accounts showed “a level of debt approximately £20m lower than reality”, the “audit team ha[d] been systematically deluded”, ledgers were kept “off site” at Mr Reddy’s house so that they would not be discovered, and there had been a “failure to declare the true level of group borrowings and interest charges, which were considered to be in breach of covenants”.

[52]It appears from Mr Grourk’s notes that, at the outset of the meeting, Mr Blackburn expressed concern about the security of his employment if he made disclosures about financial irregularities within the Group. In order to meet those concerns, Mr Reeve agreed to extend Mr Blackburn’s contractual notice period to 6 months. Mr Blackburn said that, if he was confronted subsequently about the conversation, he would deny it ever took place.

[53]Immediately following the meeting with Mr Blackburn, Mr Reeve decided that the matters that had been raised in the meetings with Mr Ainsworth and Mr Blackburn were sufficiently serious that he should attempt immediately to contact a non-executive director. He arranged that he and Mr Grourk would meet later that day with Mr North at the Runnymede Hotel, Egham, Surrey, which was near to Mr North’s home. Mr North was at that time, as I said, a non-executive director, the deputy chairman of Finelist, and chairman of the audit committee.

[54]They met in the afternoon. Both Mr Grourk and Mr North took notes during the meeting. Mr Grourk entered his notes on his computer the same day. He then checked them for accuracy and, so far as was necessary, revised them over the weekend. Precisely what Mr North was told in the course of that meeting is disputed. It is common ground, however, that he was made aware of the meetings of Mr Reeve and Mr Grourk with Mr Ainsworth and Mr Blackburn, and that, among the allegations that had been made at those meetings, were the allegations that there was a substantial debt within the business, which had not been declared, and that Finelist was possibly in breach of its banking covenants. It appears from Mr North’s own notes, which he made at the meeting, that he was also informed of the allegations that information had been withheld from the auditors, and that ledgers were held off-site so that they could not been seen by the audit teams.

[55]Mr North left to attend a wedding in the Forest of Dean. He was under pressure of time because he was concerned to arrive there by 7.30 pm.

[56]Shortly after the meeting on Friday 3 December 1999, or at some other time over the weekend, Mr North spoke to Mr Swan and arranged a meeting to take place at 7.30 am on Monday 6 December 1999 at Finelist’s head office in Strafford Upon Avon to discuss the matters that had been raised by Mr Reeve. Mr Reeve was so informed by Mr North.

[57]A meeting took place on the morning of Monday 6 December 1999 as arranged. Mr Swan, Mr North and Mr Reddy attended. Mr Ritchie was called into the meeting at some point. Whether Mr Reeve ever attended a meeting on the Monday morning at the same time as Mr Reddy is in dispute.

[58]What is clear and is common ground is that, in the light of what was said by Mr Reddy and Mr Ritchie in the meeting on the morning of Monday 6 December 1999, Mr North did not consider it was necessary for him to take any further steps in relation to what he had been told by Mr Reeve on 3 December 1999.

[59]Mr Swan, for his part, had a conversation with Mr Blackburn following the meeting. The circumstances in which that conversation took place, and where it took place, and what was said, are hotly disputed. It is common ground that Mr Blackburn denied to Mr Swan that he had said anything about irregularities to Mr Reeve.

[60]Later on Monday 6 December 1999 Mr Swan had a meeting with Mr Grourk, in which Mr Grourk was informed that his services as interim HR manager were no longer required since Mr Swan had decided to appoint with immediate effect another person, Marcus Jones, as the personnel manager. Mr Grourk was escorted to his desk to obtain his possessions, and was then escorted directly to the train station in Stratford Upon Avon.

[61]No notes were taken at any of the meetings on Monday 6 December 1999, which I have just mentioned. No reference was made to those meetings or the meetings with Mr Ainsworth and Mr Blackburn on 2 and 3 December 1999 at any subsequent board meeting of Finelist or to the auditors or the other non-executive directors.

[62]At about this time there were proposals for a management-buy-out of Finelist. Also at this time, or shortly afterwards, discussions began for the possible acquisition of Finelist by the French automotive group headed by Autodis SA (“Autodis”), which was the parent company of Auto Distributors.

[63]From about 17 January 2000 Mr Reeve absented himself from work on the ground of ill health. One or more sick notes were sent by him, or on his behalf, to Finelist.

[64]By letter dated 3 February 2000 from Finelist, Mr Reeve was informed that the board of Finelist had that day resolved to terminate his employment immediately for gross misconduct and wilful neglect of duties without reasonable cause. A number of grounds were specified, including the failure to communicate properly with the board and other colleagues while off sick, and the improper submission and sanctioning of expenses.

[65]In April 2000 the Group was acquired by Auto Distributors. As I have said, all the outstanding indebtedness to NatWest was re-paid as part of the sale transaction.

[66]Finelist was de-registered as a public company and re-registered as a private company on 14 June 2000.

[67]Mr North, Mr Stewart, Mr Butcher and Mr Ritchie resigned as directors of Finelist in June 2000.

[68]Mr Swan resigned as a director of Finelist, AEW and EW in about July or August 2000.

[69]As I have said, in October 2000 the Receivers were appointed in respect of Finelist and its 12 principal subsidiaries including AEW.

[70]In October 2000 Mr Reddy resigned as a director of Finelist, AEW and EW.

[71]In December 2000 Mr Reeve was awarded damages of £271,219.24, together with interest and costs, in proceedings against Finelist for unfair dismissal and wrongful termination of his contract of employment.

[72]On 4 October 2002 the present proceedings were commenced.

The Law

[73]Section 6(1) of the Act is as follows:

“(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied – a. that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and b. that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company. ” a. that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and b. that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company. ”

[74]Section 6(4) of the Act provides that under the section the minimum period of disqualification is two years, and the maximum period is 15 years.

[75]Section 9(1) of the Act provides that, in determining whether a person’s conduct as a director makes that person unfit to be concerned in the management of a company, the court must have regard to the matters in Schedule 1 to the Act. The only matter specified in Schedule 1 which has been suggested by the SoS as being relevant in the present case is that specified in para 1 of Part 1 of Schedule 1, namely any misfeasance or breach of any fiduciary or other duty by the director in relation to the company.

[76]The burden of proving unfitness lies on the SoS. Although the standard of proof is the civil standard, that is to say on the balance of probabilities, the seriousness of the allegation is reflected in the need for evidence of appropriate cogency to discharge the burden of proof: Re Living Images Ltd

[1996] 1 BCLC 348

, 355-356; Re H

[1996] AC 563

, 586-587 (Lord Nicholls).

[77]The determination of unfitness under s.6 is a two-stage process. First, the SoS must establish as facts, to the requisite standard of proof, the matters on which the allegation of unfitness is based. Second, the court must be satisfied that the conduct alleged is sufficiently serious to warrant disqualification.

[78]In determining whether past conduct leads to the conclusion of “unfitness” the court is entitled to consider any relevant contemporary extenuating circumstances.

[79]The question is whether, viewed cumulatively and taking into account any extenuating circumstances, the director’s conduct in relation to the company has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies: ReGrayan Building Services Ltd

[1995] Ch. 241

, 253 (Hoffman LJ).

[80]So far as incompetence is concerned, the authorities indicate that a high level of incompetence is required to satisfy s.6 of the Act. In Re Barings plc (No.5) [1999] 433 of pp. 483-484 Jonathan Parker J said:

“Where, as in the instant case, the Secretary of State’s case is based solely on allegations of incompetence (no dishonesty of any sort being alleged against any of the respondents), the burden is on the Secretary of State to satisfy the court that the conduct complained of demonstrates incompetence of a high degree. Various expressions have been used by the courts in this connection, including “total incompetence” (see Re Lo-Line Electric Motors Ltd [1998] BCLC 325 at 337, [1988] Ch 477 at 486 per Browne-Wilkinson V-C), incompetence “in a very marked degree” (see Re Sevenaoks Stationers (Retail) Ltd [1991] BCLC 325 at 337, [1991] Ch 164 at 184 per Dillon LJ) and “really gross incompetence” (see Re Dawson Print Group Ltd [1987] BCLC 601 per Hoffmann J). Whatever words one chooses to use, the substantive point is that the burden on the Secretary of State in establishing unfitness based on incompetence is a heavy one. The reason for that is the serious nature of a disqualification order, including the fact that (subject to the court giving leave under section 17 of the Act) the order will prevent the respondent being concerned in the management of any company.”

[81]On appeal from the decision of Jonathan Parker J, Morritt LJ, giving the judgment of the Court of Appeal, said at

[2000] 1 BCLC 523

, 534: “…the judge made a number of observations on the proper construction and application of the Act to which we refer, not because we disagree with the judge, but because we wish to emphasise the propositions to which he referred. … Third, where the allegation is incompetence without dishonesty it is to be demonstrated to a high degree… This follows from the nature of the penalty. Nevertheless the degree of incompetence should not be exaggerated given the ability of the court to grant leave, as envisaged by the disqualification order as defined in s.1, notwithstanding the making of such an order”.

[82]If the court finds the allegations of unfitness proved to the requisite standard and degree, then the court must, under s.6, disqualify the director for a period of two years at least.

[83]The fact that the director may be unlikely to offend again may be relevant to the length of the period of disqualification, but not to whether or not he should be disqualified: Re Landhurst Leasing plc

[1999] 1 BCLC 286

, 344h-345b.

[84]The disqualification is mandatory in order to protect the public, raise standards and to act as a deterrent. Hoffman LJ expressed the position as follows in Re Grayan Building Services Ltd at p.253H-254D:

“Parliament has decided that it is occasionally necessary to disqualify a company director to encourage the others. Or as Sir Donald Nicholls V.-C. said in In re Swift 736 Ltd. [1993] B.C.L.C. 896, 899: “Those who make use of limited liability must do so with a proper sense of responsibility. The directors’ disqualification procedure is an important sanction introduced by Parliament to raise standards in this regard.”

If this should be thought too harsh a view, it must be remembered that a disqualified director can always apply for leave under section 17 and the question of whether he has shown himself unlikely to offend again will obviously be highly material to whether he is granted leave or not. It may also be relevant by way of mitigation on the length of disqualification… It follows that I agree with the approach of Vinelott J in In re Pamstock Ltd

[1994] 1 BCLC 716

when he said that it was his duty to disqualify a director whose conduct “fell short of the standard of conduct which is today expected of a director of a company which enjoys the privilege of limited liability” even though he did so with regret because, he said, at p. 737:

“The respondent seemed to me (so far as I can judge from the evidence before me) to be a man who today is capable of discharging his duties as a director honestly and diligently.”

But the court is required to disqualify a director whose conduct has made him unfit, as

the judge said:

“even though the misconduct may have occurred some years ago and even though the court may be satisfied that the respondent has since shown himself of capable of behaving responsibly.” “Those who make use of limited liability must do so with a proper sense of responsibility. The directors’ disqualification procedure is an important sanction introduced by Parliament to raise standards in this regard.” “The respondent seemed to me (so far as I can judge from the evidence before me) to be a man who today is capable of discharging his duties as a director honestly and diligently.” “even though the misconduct may have occurred some years ago and even though the court may be satisfied that the respondent has since shown himself of capable of behaving responsibly.”

[85]Lord Woolf MR summarised the policy behind the legislation as follows in Re Blackspur Group plc

[1998] 1 WLR 422

CA at p. 426:

“The purpose of the Act of 1986 is the protection of the public, by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by encouragement of higher standards of honesty and diligence in corporate management, from those who are unfit to be concerned in the management of a company.”

[86]The relevant period of disqualification is in the discretion of the judge, to be exercised in accordance with the relevant principles set down in Re Sevenoaks Stationers (Retail) Ltd

[1991] Ch. 164

at p. 174 E-G (Dillon LJ) (particularly serious cases: 11-15 years; serious cases which do not merit the top bracket: 6-10 years; relatively, not very serious cases: 2-5 years).

The Witnesses

[87]Evidence on behalf of the SoS was given by Mark Bruce, formerly a chief examiner in the Disqualification Unit of the Insolvency Service, Mr Stewart, Mr Clifton, Mr Grourk, Mr Reeve and Mr Blackburn.

[88]Affirmations were made by Mr Bruce; affidavits were sworn by Mr Stewart, Mr Clifton, and Mr Reeve; and a witness summary was prepared for Mr Blackburn which he subsequently signed.

[89]Mr Bruce, Mr Clifton, Mr Stewart, Mr Grourk, Mr Reeve and Mr Blackburn gave oral evidence at the trial.

[90]Evidence was given on behalf of Mr Swan by Mr Swan himself, Mr Ritchie, James Irving, who was formerly employed within the Finelist Group for many years, Lisa Dunn, who was formerly employed by Finelist as its communications executive, Mr Butcher, and Janet Rodway-Bowden, with whom Mr Reeve had a relationship between 1998 and 2000.

[91]Affidavits were made by all of them. All of them, except Mr Ritchie, gave oral evidence at the trial. Mr Ritchie’s affidavit was admitted in evidence as hearsay, to which no objection was taken.

[92]Mr North made three affidavits, and gave oral evidence at the trial.

[93]Mr Bruce, Mr Clifton, Mr Stewart, Mr Grourk, Mr Blackburn, Mr Irving, Ms Dunn and Mr Butcher were all honest witnesses, doing their best to assist the Court.

[94]I formed the view that, in relation to contested issues, the evidence of Mr Reeve, Mr Swan, Ms Rodway-Bowden and Mr North should, for various reasons, be treated with caution.

[95]Mr Reeve’s answers in cross-examination were often very guarded and sometimes obtuse. There were several occasions on which he said he had no recollection, when it might have been expected that he would have done. He said, for example, he had no recollection of anything discussed with, or what was said by him in his meetings with, the Receivers. He appeared to have a surprising lack of knowledge of the terms on which he sold his business, PDP, to Finelist. Some of his answers were not credible. For example, he described his “contemporaneous timeline” or “mind map” on his computer as being a contemporaneous record of events as they occurred. It is perfectly clear, however, that the relevant entries on his computer were not all entered from time to time contemporaneously with the events recorded.

[96]Mr Swan’s memory of material matters of detail as to what took place or was said in 1999 and 2000 was uncertain and unreliable. His evidence was often a reconstruction of what he believed would have happened or would have been said rather than what he could actually recall.

[97]Ms Rodway-Bowden’s relationship with Mr Reeve, and its termination, have plainly been very upsetting for her. Her highly charged emotional relations with Mr Reeve provide the background to an assessment of her evidence, which largely concentrated on undermining Mr Reeve’s character. Further, she was clearly uncertain about the chronology of some of the events about which she was questioned.

[98]Mr North, who is 70 years of age and is retired, readily admitted that his memory is not at all good in relation to material events in 1999. He was inclined from time to time to give oral evidence of what he thought he would have done rather than evidence of actual recollection. The Case Against Mr Swan Actual knowledge of cheque kiting (1). The SoS’s case

[99]The SoS claims that Mr Swan had actual knowledge of cheque kiting in the Group. In support of that allegation the SoS relies principally on the following matters.

(A) General

[100]The SoS relies, first, upon various matters that, it is said, indicate the probability that Mr Swan was fully aware of all the principal financial and accounting policies of the Group, including in particular cheque kiting. It was submitted that the Group was dominated by Mr Swan’s personality and driven by an aggressive executive management style. Further, it is said that, as the CEO, he would have wanted to know and would have been aware precisely how much cash there was in the Group’s bank accounts. That conclusion is reinforced, it was submitted, by the fact that from November 1998 all the directors were sent weekly cash flow statements. Reliance was also placed on Mr Swan’s so-called “black book”, in which he recorded in manuscript detailed weekly figures for the Group and each business in the Group comparing budgeted and actual amounts both for the current and the previous year, demonstrating his day to day operational control. Reliance was also placed in this context on his receipt of a daily reporting pack, monthly “flash forecasts”, detailed monthly accounts, quarterly strategy meetings with the Group’s bankers - in particular NatWest, and his close review of cash collection.

[101]Further, it is said, on behalf of the SoS, that Mr Swan, as chairman and CEO, was well aware of the policy of maximising cash at the year end by delaying payments to suppliers, notwithstanding that in 1999 the Group’s creditors were clearly unhappy about it. As I have said earlier, on the basis of Mr Clifton’s evidence, that practice was, at least in part, to cover the necessary unwinding of cheque kiting (and so the loss of the artificial credit) at the end of the half year and full year accounting period and with an eye to the audit as at those dates.

(B) The June cheques

[102]Second, reliance is placed on the signing by Mr Swan of the June Cheques. It is not in dispute that they were part of the cheque kiting policy.

[103]It is said that the June Cheques were, on their face, so manifestly extraordinary that, if Mr Swan did not raise any query about them at the time he signed them, it must have been because he was aware of cheque kiting and had no objection to it. Reliance is placed by the SoS on the very large face values of the June Cheques; the fact that the June Cheques signed by Mr Swan for AEW and EW respectively were for matching amounts; the fact that they would, according to the evidence of Mr Clifton, have been presented without a requisition slip; the fact that the EW cheques were drawn on the bank account of a company which Mr Swan must have known had been dormant since the transfer of the EW Business to AEW at the end of June 1998; the fact that the payments were being made by cheque when the Group had online banking facilities with NatWest which could have been utilised to make inter-company transfers; the fact that “genuine” inter-company payments would be made on the 15th day of each month or the next working day; the fact that the payments of £5m between EW and AEW were disproportionate to the trade between AEW and the EW Business and to the total turnover of AEW; the fact that the cheques were for round sums of £4m and £1m; the fact that the cheques were all handwritten; and the fact that the value of the June Cheques exceeded the Group materiality level, which at that time was 10% of profits before tax, that is to say about £3m.

[104]The SoS contends that if, alternatively, Mr Swan did question the June Cheques at the time, he would have been told about the cheque kiting policy, since the policy was an open and established practice by the finance and treasury personnel at the head office.

(C) The Maccess Circular

[105]Third, the SoS relies upon Mr Swan’s role and conduct in relation to the Maccess Circular. The SoS’s starting point, in relation to this issue, was that the board of directors of Finelist delegated to a committee of two, comprising Mr Swan and Mr Reddy, the direct responsibility for dealing with the disposal of Maccess.

[106]It is said that Mr Swan would have queried the figures in the Indebtedness Statement, which were materially incorrect, if he had properly carried out his responsibilities; and his failure to do so is explicable on the basis that he knew the figures were incorrect because he knew of the cheque kiting.

[107]Prior to the conclusion of the completion meeting on 15/16 July 1999 (“the Completion Meeting”) the cash balance on page 12 of the draft Circular was altered in handwriting by £8m, increasing the figure from £2.363m to £10.363m. Mr Swan accepted in his evidence that he would have noticed this.

[108]The SoS contends that the only way of explaining that change would have been by reference to the schedules attached to a letter dated 16 July 1999 from PriceWaterhouse Coopers (“PwC”) informing the Finelist directors and Hawkpoint of the extent to which PwC had reviewed the financial information in the Circular (“PwC’s Comfort Letter”). A list of bank balances contained in a schedule to PwC’s Comfort Letter (“the cash Schedule”) showed very large balances on the current accounts of EW and AEW (as a result of cheque kiting), without which the Group would have had a negative cash balance. Mr Swan admitted in his evidence that, if he had seen the cash Schedule, he would not have expected to see such large credit balances in the accounts of AEW and EW.

[109]The SoS claims that Mr Swan’s failure to enquire into the £8m increase in the Group’s cash balance in the draft Circular, and into the large credit balances in bank accounts of AEW and EW shown in the cash Schedule, was due to the fact that he knew about cheque kiting and did not wish it to be revealed as it would have destroyed the Maccess sale.

[110]In further support of that analysis and conclusion, the SoS relies upon the following matters as showing that Mr Swan was fully aware of his duty to enquire into the £8m increase, the large balances for EW and AEW in the cash Schedule, and generally the accuracy of the Indebtedness Statement: namely(1) statements in PwC’s Comfort Letter that the information in the cash Schedule had not been reconciled with the accounting records, PwC had not carried out an audit in connection with the Indebtedness Statement, and PwC placed reliance on the representations of management and the directors of Finelist;

(2) notes prepared by Slaughter and May, the Group’s solicitors, sent to the directors of Finelist for the purpose of recording the steps taken to verify the facts and the bases for expressions of opinion in the Circular (“the Verification Notes”), which Notes included statements that it was important that each director should appreciate that he took personal responsibility for ensuring that all material facts were disclosed in the Circular, and that the directors must believe and have reasonable grounds for believing that each material statement of fact or opinion in the Circular was true and not misleading, and that signature of the Notes by each director indicated that such person had taken appropriate steps to ensure the accuracy of the facts and bases for the opinions given in the answers to various questions raised in the Notes, including the answer that the directors were satisfied that the details of the Group’s indebtedness were accurately set out in the Circular, and that the indebtedness of the continuing Group as at close of business on 14 June 1998 was accurately set out in Part IV of the Circular, and drawing attention of the directors to the need to sign a responsibility statement confirming their responsibility as set out in paragraph 1 of Part IV of the Circular (“the Responsibility Statement”);

(3) the Responsibility Statement itself, which recorded that the directors of Finelist accepted responsibility for the information contained in the Circular, and that, to the best of their knowledge and belief, having taken all reasonable care to ensure that such was the case, the information contained in the Circular was in accordance with the facts and did not omit anything likely to affect the import of such information; and

(4) the minutes of the Completion Meeting, which was attended by Mr Swan, who signed the minutes as accurate, and which he confirmed as accurate in his oral evidence, which minutes recorded that there were produced to the meeting, among other things, a final proof of the Circular, the Verification Notes and representation letters to be given by Finelist to PwC in relation to the Indebtedness Statement, and which also recorded that each director of Finelist had signed a Responsibility Statement, the directors present confirmed the Responsibility Statements, working capital and Indebtedness Statements were noted, confirmed and approved, the directors had conducted a thorough verification exercise of the contents of the Circular, and it was resolved that the Verification Notes and answers be approved and the directors be required to sign them, and PwC’s Comfort Letter be approved.

[111]Further, the SoS relies on the fact that the May 1999 management accounts were received by Mr Swan prior to Finelist’s board meeting on 21 July 1999. He would then have been able to compare the cash position of the Group as at 31 May 1999, 14 June 1999 (the reference date for the Indebtedness Statement in the Maccess Circular) and 30 June 1999 (the end of the accounting and financial year). The SoS points out that the cash in the Group, on the face of the documents, swung from a position of being overdrawn by £4.159m on 31 May 1999, to a positive cash balance of £11.6m on 14 June 1999, and then a reduced balance of £4.46m on 30 June 1999.

[112]The SoS contends that, since the year end was when cash was maximised by deferring the payment of creditors, it should have been expected that the cash would remain flat or increase during the last two weeks of the accounting year, whereas the cash in fact dropped in the second half of June. That drop, it is said, was the consequence of the 14 June 1999 cash figure having been distorted by cheque kiting. The SoS submits that, if Mr Swan had indeed been unaware of cheque kiting, those unusual movements in the Group’s cash balances would have struck Mr Swan as most peculiar. The SoS claims that Mr Swan’s failure to correct the Indebtedness Statement before the EGM on 2August 1999 must, in all those circumstances, have been because he was in fact aware of the cheque kiting and was untroubled by the consequential inaccuracy of the Indebtedness Statement.

(D) The December incident

[113]Fourth, the SoS relies upon the reaction of Mr Swan at and following the meetings on Monday 6 December 1999 as evidence that he knew about the Group’s cheque kiting policy.

[114]There are many disputes of fact concerning the meetings on 2, 3 and 6 December 1999. Mr Swan was not present at the meetings with Mr Ainsworth, Mr Blackburn and Mr North on 2 and 3 December 1999.

[115]The SoS’s case is that Mr Swan and Mr Reddy decided over the weekend of 4/5 December 1999 to find a way of preventing the financial irregularities and concerns raised in the meetings between Mr Reeve and Mr Grourk, on the one hand, and Mr Ainsworth and Mr Blackburn, on the other hand, from being properly investigated. It is contended, on behalf of the SoS, that Mr Swan and Mr Reddy had a meeting on the morning of 6 December 1999 with Mr North, and in the absence of Mr Reeve, in which they decided “what their strategy would be for the rest of the day, the goal being to silence the whistle blowers” [in the language of the written closing skeleton submissions on behalf of the SoS]. It is said that the strategy which was devised was to crush and pressurise Mr Reeve so that he was effectively “squeezed out”; Mr Grourk would be removed; and Mr Blackburn would be intimidated into “keeping his mouth shut”. It is said that strategy was implemented during the course of 6 December 1999.

[116]It was submitted, on behalf of the SoS, that there could not have been an adequate investigation of the allegations at the meeting with Mr Reddy on the morning of 6 December 1999 since, according to the evidence of Mr Swan and Mr North, that meeting began at about 7.30 am and lasted no more than 30-40 minutes.

[117]The SoS’s case is that Mr Reeve was not present at a meeting with Mr Swan or Mr North or Mr Reddy at 7.30 am on 6 December 1999; that, at a subsequent meeting that morning between Mr Swan and Mr Reeve, Mr Swan adopted an intimidating manner towards Mr Reeve; that Mr Blackburn was later that morning summoned to see Mr Swan and Mr Reddy in Mr Swan’s office where he was intimidated and effectively “told to keep his mouth shut”; that Mr Grourk was dismissed later that day and was immediately escorted off the head office premises by a security guard; and thereafter Mr Reeve was “harassed, bullied, threatened and undermined”, and was improperly and unlawfully dismissed in February 2000 without any proper prior attempt to place before Mr Reeve the allegations which were the recorded grounds for his dismissal.

[118]The SoS’s case is that those matters show that Mr Swan knew of the Group’s cheque kiting policy and was motivated by a concern that it should not be publicised. (2) Analysis Preliminary

[119]The SoS has not, in my judgment, established to the requisite standard of proof that Mr Swan knew of cheque kiting.

[120]I have already referred to the need for appropriately cogent evidence to sustain a claim of unfitness under s.6 of the Act. No direct evidence has been adduced that Mr Swan was informed by any specific person on any specific occasion about cheque kiting. The SoS rests her case of Mr Swan’s actual knowledge of cheque kiting entirely on inference from the range of matters to which I have referred.

[121]In my judgment those matters are neither singly nor collectively capable of supporting, on a balance of probabilities, the inference of actual knowledge of Mr Swan of cheque kiting within the Group.

(A) General

[122]I agree with the SoS that the personality of Mr Swan and his management role and style form an important part of the background of the case, against which the suggested inferences must be considered. I do not, however, agree that the dispute between the parties as to whether Mr Swan’s personality and management style were domineering and aggressive or intimidating is critical.

[123]What is important, in my judgment, is the evidence that was given, and the impression that I have formed, that Mr Swan was a businessman with obvious flair and drive in relation to operational matters, but he was not a person likely to pay attention to financial or accountancy technicalities or other matters of detail which he did not regard as having an obvious impact on the profit or loss of the Group. Mr Swan repeatedly emphasised, in the course of his evidence, that by 1999 the Group was a large and dynamic organisation, the size and scale and complexity of which inevitably resulted in him leaving to the Group’s accountancy department and finance team, the auditors, the Group’s financial consultants and its banks the supervision, control and monitoring of financial matters which did not have an obvious and immediate impact on the Group’s profit or loss. I accept his evidence that this was his approach.

[124]In the light of that evidence, and the impression I formed of Mr Swan’s management style, I do not accept that Mr Swan would have wanted to know and would have been aware precisely how much cash there was in the Group’s bank accounts.

[125]I am not satisfied that either the daily reporting packs, or the monthly “flash forecasts” or the detailed monthly accounts or the quarterly strategy meetings with the Group’s bankers would have alerted Mr Swan to cheque kiting.

[126]Nor am I satisfied that the weekly cash flow forecasts sent to Finelist’s directors from November 1998 would have been likely to, let alone did in fact, alert Mr Swan to cheque kiting. Mr Swan gave evidence, for example, that AEW’s cash flow incorporated many Group costs, including interest and other costs subsequently re-charged to other companies within the Group.

[127]I accept Mr Swan’s evidence that his interest in cash was limited, as he described it, to the “components of the cash”, which were such matters as cash from the sales ledger, costs collection, and amounts spent on stock. Those were the matters recorded and monitored in his “black book”.

[128]Further, although Mr Swan was undoubtedly aware of, and indeed promoted, the policy of maximising cash at the half-year and year end, by delaying payment to suppliers, I cannot safely conclude that this indicates that he knew about cheque kiting. The evidence, not only of Mr Swan but also of other witnesses, was that this had been the practice within the Group for many years, and well before cheque kiting began, and it was the practice among many companies within the industry. The object was to present the financial situation of the companies in the best light in their published accounts.

(B) The June Cheques

[129]So far as concerns the June Cheques, I agree with the SoS that there were several aspects of those Cheques which were highly unusual. For the reasons I shall give in due course, I agree that, if Mr Swan was not already aware of cheque kiting, the June Cheques called out for comment and question by Mr Swan at the time he signed them. In the light of all the other matters to which I have so far referred, however, and in particular my findings as to Mr Swan’s personal characteristics and management style, I do not accept that, on the balance of probabilities, he signed the June Cheques in the knowledge that they were part of a cheque kiting policy within the Group.

(C) The Maccess Circular

[130]For reasons I give in detail later in this judgment, I do not accept that Mr Swan’s failure to query the figures in the Indebtedness Statement in the Maccess Circular is cogent evidence of his knowledge and acceptance of a cheque kiting policy within the Group. In general terms, I do not accept that the circumstances leading up to the approval of the Maccess Circular by Mr Swan, and what happened afterwards, including the documents which he saw and read, were such as might reasonably be expected to have led him, if he did not know about cheque kiting, to question the accuracy of the Indebtedness Statement or to ask other questions which would have uncovered cheque kiting within the Group.

(D) The December incident

[131]I do not accept that Mr Swan’s conduct at and following the meetings on 6 December 1999 is cogent evidence of Mr Swan’s knowledge and acceptance of a cheque kiting policy within the Group. The reasons for that conclusion can be stated shortly. In the first place, no express mention was made at any of those meetings of practices within the Group amounting to cheque kiting. Second, there is no evidence that anything was said at those meetings which would or should have alerted a person in Mr Swan’s position and with his knowledge to the fact that there might be such practices within the Group. If follows that, third, even if the matters raised at those meetings ought to have led Mr Swan to instigate a fuller investigation of them – a point it is not necessary for me to decide for reasons I shall give later in this judgment – his failure to do so is not cogent evidence that he knew of cheque kiting within the Group. Ought to have known (1). The SoS’s case

[132]The SoS claims that, if Mr Swan did not actually know of cheque kiting within the Group, he ought to have known about it.

[133]In support of that claim, the SoS relies upon all the same facts and matters said to support the inference of actual knowledge.

[134]In addition, the SoS relies upon various matters which, it is said, indicated or should have indicated to Mr Swan deficiencies in financial controls or were warning signs of possible financial or accounting malpractices within the Group.

[135]The SoS places reliance, for example, on Mr Blackburn’s evidence of concerns raised in 1998 by KPMG who were then carrying out consultancy work for the Group, and on the 1998 audit report, which raised various concerns about financial controls and, in particular, the failure to reconcile inter-company balances and the failure to reconcile EW’s bank statements with the accounting records. The latter issue was raised again in the 1999 audit report, by which time the problem had worsened.

[136]Further, it is the SoS’s case that, during the Relevant Period, Mr Swan had or was aware of doubts about the competence and integrity of Mr Reddy. (2) Analysis

[137]I accept the SoS’s alternative case that Mr Swan ought to have been aware of cheque kiting within the Group.

(A) General

[138]I do not consider that advice given by KPMG in 1998, or the 1998 audit report or the 1999 audit report ought to have been material factors in alerting Mr Swan to the existence of cheque kiting.

[139]Precisely what KPMG advised in 1998 is in dispute. I remain unclear as to precisely what advice the SoS says was given by KPMG, and on which the SoS now relies. There is no written record of that advice. No employee or former employee of KPMG was called by the SoS to give direct evidence of the alleged advice. Further, and in any event, it seems reasonable to suppose that any significant financial or accounting irregularity would have been identified and noted in the 1998 and 1999 audit reports.

[140]I accept Mr Swan’s evidence that, so far as concerns the lack of reconciliation of inter-company balances mentioned in the 1998 and 1999 audit reports, he was reasonably entitled to take the view that adequate steps were taken to tackle the problem after the 1998 audit report, and that the 1999 audit report indicated a significant improvement in the position.

[141]So far as concerns the failure to reconcile bank statements with accounting records mentioned in the 1998 and 1999 audit reports, I accept Mr North’s evidence that this was an intractable problem due to the vast number of small value sales, and that it had nothing whatever to do with cheque kiting.

[142]So far as concerns knowledge of lack of competence and integrity on the part of Mr Reddy, I accept the evidence given by Mr Swan and Mr North that they had no doubts about the integrity of Mr Reddy and that their view was that the financial and accounting problems disclosed by the 1998 and 1999 audit reports were the consequence of the very rapid expansion of the Group and the lack of sufficient financial accounting personnel rather than notable incompetence on the part of Mr Reddy, and those problems were being addressed. The SoS has not made out a case that Mr Swan and Mr North were wrong and incompetent in holding that view. Mr Reeve gave evidence that he was told many times that Mr Reddy was incompetent, but he gave no evidence that Mr Swan or Mr North told him that, and he gave no particulars of precisely who, where, when and in what context those criticisms of Mr Reddy were made.

(B) The June Cheques

[143]On the other hand, and notwithstanding my rejection of the SoS’s case on those points, I have no doubt that Mr Swan ought to have discovered about cheque kiting within the Group when he was asked to sign the June Cheques on 1 June 1999.

[144]Mr Swan’s evidence was that he cannot remember signing the June Cheques or the circumstances in which he signed them. He cannot remember if he asked any questions about them and, if he did so, what, if any, reply was given or by whom.

[145]In opposing the SoS’s case on the June Cheques, Mr Swan relied upon the following points in particular.

[146]First, there is evidence, in the form of two cheques signed by Mr Swan on Finelist’s account, that Mr Swan has signed other large cheques for round sums, which are not the subject of any allegation of cheque kiting.

[147]Second, having regard to the printed numbers on the two EW cheques signed by Mr Swan on 1 June 1999 (nos. 9800 and 9904) Mr Swan maintains that it is likely that the June Cheques were part of a much larger batch of cheques which he was asked to sign. Mr Swan supported that proposition with his evidence that, when he was asked to sign cheques, he did so for cheques of all values and not just large cheques.

[148]Third, Mr Davies submitted that it has not been established that all the June Cheques were in fact signed on 1 June 1999 or were all signed on the same day. It is said, on behalf of Mr Swan, that nowhere in Mr Bruce’s affirmations is it positively asserted that the June Cheques were all signed on the same day. Further, reliance is placed by Mr Swan on the evidence of Mr Clifton that the cheque kiting procedure was that Mr Clifton would note and record for each day of the following week the amount which would be required to maintain borrowing at a particular level; cheques of the value required to maintain that level would be prepared in advance of that week, and would be dated and signed with one signature, leaving only the second signature outstanding. The second signature would only be added if and when the cheque was required to be paid into the bank.

[149]Fourth, Mr Swan relies upon the fact that, even after the transfer of the EW Business to AEW at the end of June 1998, leaving EW technically dormant, the EW Business continued to be run as a distinct entity within AEW, and that there were trading transactions between the EW Business and the rest of AEW.

[150]Fifth, Mr Swan gave oral evidence that NatWest expressly permitted the continued use of EW’s cheque books after the transfer of the EW Business to AEW.

[151]Sixth, Mr Swan relies upon the fact that on 1 June 1999 there was a substantial outstanding balance due from AEW to EW as a result of the sale of the EW Business to AEW in 1998.

[152]Seventh, Mr Swan relies upon the fact that it is not known who gave him the June Cheques for his signature, or what answer was or might have been given to any query which he made or might have made at the time concerning the June Cheques.

[153]Eighth, Mr Swan’s evidence, supported by the entries in his diary, was that he was extremely busy in the period in question. His diary shows that his visit to the head office on 1 June 1999 was one of only four occasions during a 19 day period in which he was at the head office. The diary also shows that he had a series of meetings on 1 June 1999 and would have been very pressed for time on that date. Mr Davies submitted that, if the June Cheques were in fact signed by Mr Swan at the same time on 1 June 1999, the overwhelming likelihood is that, by virtue of pressure of time or momentary distraction, Mr Swan had a “90 second” lapse and no more.

[154]I do not consider that the SoS’s case is advanced by the fact that two of the June Cheques were on EW’s bank account rather than, as in the case of other genuine transactions in 1999, on an account designated “Edmunds Walker (a division of AEW Limited)”.

[155]On the one hand, I do not accept, in the absence of corroboration, Mr Swan’s oral evidence that NatWest expressly authorised the continued use of EW’s cheque books after the transfer of the EW Business at the end of June 1998. That was a point raised for the very first time in the course of Mr Swan’s oral evidence, notwithstanding that he had prepared several extremely detailed and lengthy affidavits over a number of years.

[156]On the other hand, the evidence is that, after June 1998, the EW Business, with some 50 branches, continued as a separate trading and branded entity within AEW, with its own management, management accounts and bank accounts. I also accept that after June 1998 there were genuine trading transactions between the EW Business and the rest of AEW.

[157]In all the circumstances, I do not consider that it was incompetent of Mr Swan to have failed to appreciate that the two June Cheques in favour of “Autela” were drawn on EW’s account rather than on an account of the EW Business, as a division of AEW.

[158]Nor is the SoS’s case supported or advanced by the fact that the relevant payments on 1 June 1999 were made by cheque rather than by use of the Group’s online banking facilities with NatWest. I accept the evidence of Mr North that it was Group policy for inter-company balances to be paid every month by cheque rather than by electronic transfer in order to impose financial discipline within the Group in relation to inter-company balances.

[159]Further, I accept Mr Swan’s evidence that he was not aware that inter-company payments were or ought to be made on the 15th day of every month or the next working day and so, for that reason, the June Cheques dated 1 June might not be for a genuine or proper purpose.

[160]Nor do I accept that Mr Swan should have been alerted to the fact that the June Cheques might not be for a genuine or proper purpose because they were handwritten or for round sums. The SoS relies on the contrast between the June Cheques and other cheques in evidence which were on accounts in the name of the EW Business and AEW and were completed in print. There is no evidence, however, that Mr Swan himself ever signed or saw cheques drawn on AEW or EW or an account in the name of the EW Business, as a division of AEW, which were for a genuine or proper purpose and were not handwritten. Even if he had done so, I see no reason why the fact that the June Cheques were handwritten should have raised any query or concern. No evidence was adduced as the normal practice within the Group, and in particular within EW or AEW, of completing cheques by hand or in print which could assist in drawing an inference against Mr Swan in this connection.

[161]Notwithstanding my conclusion on those aspects and notwithstanding the attractive presentation of the other points made on Mr Swan’s behalf in relation to the June Cheques, I find that there is no credible defence to the SoS’s claim that the June Cheques should have prompted Mr Swan to make enquiries, which would have disclosed cheque kiting within the Group.

[162]The overwhelming probability is that all four of the June Cheques were signed by Mr Swan at the same time on 1 June 1999. In cross-examination, Mr Swan conceded that it was likely that the June Cheques were indeed signed on that day. Cheque kiting required the crossing of cheques of equal amounts between AEW and EW, and the natural inference must be therefore that the second signature was added to all four Cheques on the same day and on the same occasion. Although Mr Clifton accepted in cross-examination there was a possibility that not all the June Cheques were signed on the same day, he said that was not “the norm”. A written analysis of the cheque kiting between AEW and EW over an 18 month period between 1998 and 2000, which was carried out on behalf of the SoS, supports the conclusion that all the June Cheques were indeed signed on 1 June 1999.

[163]Mr Clifton’s evidence was that the cheque kiting cheques had to be banked by 3.30 pm on the day they were required. Usually they would be taken into town at about 12.30 pm to be banked. This would not have been possible on 1 June 1999, however, since Mr Reddy was away on holiday, and the only other Panel A signatory, Mr Swan, was out of the office all morning.

[164]Mr Swan’s diary indicates that there was a period between about 3.00 pm and 3.30pm on 1 June 1999 when he would have been available to sign the June Cheques. In the circumstances, the overwhelming probability is that all four June Cheques were signed at about 3.00 pm on 1 June 1999 and were then banked by 3.30 pm on that day.

[165]I reject the suggestion, made on behalf of Mr Swan, that the June Cheques were probably part of a much larger batch of cheques. Mr Clifton was not able to explain the reason for the numbers of the two EW cheques being 103 apart. His evidence was clear, however, that he would not normally bother Mr Swan to sign cheques. That was confirmed by Mr Swan in his evidence. That is understandable in view of the pressure on Mr Swan’s time, and the importance of many operational matters requiring his attention as chairman and CEO. It was only necessary to request Mr Swan to sign cheques if they exceeded £5,000.00 and none of the Panel B signatories nor Mr Reddy was available.

[166]In the light of those matters, I view with considerable scepticism Mr Swan’s evidence that, from time to time, he signed cheques of all values. Even if true, however, it would have been a very rare occurrence indeed. In fact, it is clear that on 1 June 1999 other Panel signatories were present and available to sign cheques of a lesser amount than £25,000, and actually did so. Accordingly, the weight of the evidence is overwhelmingly against the likelihood of Mr Swan being asked to sign any cheques of a lower value than £25,000 on that day. The records indicate that a very small number of cheques over £25,000, other than the June Cheques, may have been prepared for a second signature on 1 June 1999.

[167]In any event, what is critical is that the face value of the June Cheques, namely two of them for £1m and two of them for £4m, were substantially in excess of the Group’s materiality level, and were so far in excess of the other cheques which may have been presented for Mr Swan’s signature on that day, and so far out of line with anything that could have been to do with ordinary trading activities between AEW and EW, that they cried out for enquiry and explanation.

[168]The evidence was that trading between EW and AEW, or, more accurately, between the EW Business and the rest of AEW, was relatively modest, and could not have created a liability for the amount of the June Cheques.

[169]Seeking to undermine that clear evidence, or the impact of it, Mr Davies drew attention to a document within one of the monthly management packs showing an inter-company balance as at the end of June 1999 of £11.651m due from Autela to EW. I cannot see that any assistance to Mr Swan is provided by that document. It shows an inter-company indebtedness at the end of June 1999, whereas the June Cheques were signed at the beginning of June 1999. The figure of £11.651 was not explained or explored in the evidence. Part of that figure is presumably the amount of £5.544m left outstanding to EW on the transfer of the EW Business to AEW at the end of June 1998. In the course of his evidence Mr Swan suggested that he may have thought that the June Cheques in favour of EW were something to do with that outstanding consideration for the sale of the EW Business. That is pure reconstruction, and is entirely improbable. The outstanding consideration was not in fact paid in or before the end of June 1999. Mr Swan gave no reason why he should reasonably have supposed that on the particular day in question, 1 June 1998, he was signing cheques to discharge part of that long outstanding liability.

[170]Further, the evidence was that requisition slips would have accompanied all cheques presented for signature, other than those prepared for the purpose of cheque kiting. The June Cheques would, therefore, not have been supported by any requisition slip relating to inter-company balances or, indeed, any other indebtedness or liability. That, in itself, should have given rise to enquiry by Mr Swan.

[171]Further, and crucially, any such explanation or excuse as has been suggested by Mr Swan is wholly undermined by the fact that the June Cheques were not just the two cheques from AEW to EW: they comprised matching sets of cheques for equal and extraordinary amounts.

[172]In any event, even if Mr Swan had held such a suspicion or belief, that would not explain or excuse the absence of a suitably rigorous enquiry by Mr Swan in order to verify the actual reason for the June Cheques.

[173]The fact that there are in evidence two large cheques for £4m each on Finelist’s account, signed by Mr Swan, which are not the subject of an allegation of cheque kiting, is neither here nor there. It is not conceded by the SoS that those cheques were not cheque kiting cheques. Mr Swan was unable, in cross-examination to give any credible explanation for them. Whatever the explanation for them might be, I can see no reason for saying that in some way they explain or excuse Mr Swan’s conduct in signing the June Cheques and in failing to pursue a rigorous enquiry to verify the reason for the June Cheques.

[174]Mr Swan could not have made any such rigorous enquiry because, if he had done so, I am satisfied that he would have been told exactly why they were needed, that is to say as a way of generating notional funds in order to keep within the banking covenants. Mr Clifton’s evidence was that there was no secrecy, within the Group’s accounting department and treasury section, about the cheque kiting process. I therefore do not doubt that, if requested to do so, Mr Clifton or someone else within the finance team, would have disclosed to Mr Swan precisely why he was being asked to sign the June Cheques.

[175]I reject, as incompatible with the weight of the evidence, and in particular that evidence of Mr Clifton, a late suggestion by Mr Davies that, if Mr Swan had asked any questions about the June Cheques prior to signing them, persons within the finance department might have wished to hide the existence of the cheque kiting policy from Mr Swan.

[176]Mr Swan, in his evidence, and Mr Davies, in his submissions, suggested that it was quite possible that the June Cheques might have been brought to Mr Swan for signature by Mr Swan’s secretary or by someone else who would or might have been unable to answer any query raised by Mr Swan about the purpose of the Cheques. The short answer to that point is that the June Cheques so cried out for enquiry and explanation that Mr Swan should not have signed them unless and until he received a full and comprehensible explanation. If, as he postulated in his evidence, he had been told that they were part of a standard treasury function, he should not have accepted that answer as sufficient

[177]The same short answer applies to Mr Davies’ observation that the June Cheques involved the payment of money between Group companies, and did not involve any third party outside the Group. There was, he submitted, nothing that might reasonably have indicated to Mr Swan that any fraud was being committed. Irrespective of any indication of fraud, the fact remains that the June Cheques were on their face extraordinary, exceeded the Group’s materiality level, and called out for enquiry; and if a proper enquiry had been made the true reason for the June Cheques, which was an improper purpose, would have been revealed. The purpose of requiring either Mr Swan or Mr Reddy to be a second signatory in respect of cheques greater than £25,000 was to ensure that a proper scrutiny of the largest cheques would be made by those at the very top of the Group’s management, the Chairman and CEO and the finance director. That simply did not happen in the case of the June Cheques.

[178]Mr Kaye rightly emphasised the contrast between Mr Swan’s conduct in signing the June Cheques and the reaction of those in charge after the sale of the Group in 2000 when presented for the very first time with a cheque kiting cheque. Mr Clifton’s evidence was that the person in charge of the English companies, Peter Joyner, was asked to sign a cheque kiting cheque, as second signatory of cheques over £25,000.00, but was uncomfortable with doing so. Having consulted his French counterpart, he refused to do so.

[179]In my judgment, the overwhelming likelihood is that Mr Swan asked no questions about the June Cheques because, as I have explained, he was not interested in and did not regard it as his responsibility to monitor the payment of money into and out of the bank accounts of the Finelist Group. He considered that was the responsibility of the Group’s finance teams, the auditors and others. His concern was with operational matters and profit and loss. The probability is that he signed the June Cheques automatically, without giving any consideration to their purpose, amount or propriety.

(C) The Maccess Circular

[180]I do not accept the SoS’s case that, if Mr Swan had acted with reasonable prudence and competence in connection with the sale of Maccess, he would have discovered about the Group’s cheque kiting policy.

[181]In broad terms, the SoS rests her case in relation to the Maccess Circular on four grounds.

[182]First, as a general and over-arching point, Mr Kaye emphasised that the Listing Rules required the directors of Finelist to accept full responsibility, collectively and individually, for complying with the Listing Rules as to the circular required to be sent to shareholders in a Class 1 transaction. In Finelist’s case, direct responsibility for the Maccess Circular was delegated to a committee of two, comprising Mr Swan and Mr Reddy. The personal responsibility of the directors was further made clear, Mr Kaye submitted, by the Verification Notes and what was recorded in the minutes of the Completion Meeting. Further, he submitted, PwC’s Comfort Letter made plain that PwC was relying on the directors as to the accuracy of the Indebtedness Statement, since PwC’s Comfort Letter stated that the information in the cash Schedule obtained from the banks had not been reconciled by PwC to the accounting records.

[183]Underpinning this first point made by the SoS lies the proposition that, in all those circumstances, Mr Swan accepted a personal and individual responsibility for the accuracy in the Maccess Circular of the continuing Group’s stated cash balances at close of business on 14 June 1999 and the stated outstanding borrowings, both of which were, in the event, inaccurate: he could not absolve himself from responsibility for the accuracy of those figures by leaving to Mr Reddy the task of verifying them.

[184]Second, the SoS contends that Mr Swan, having seen the handwritten alteration of the Group’s cash balance on the draft Circular by the increase of £8m from £2.363m to £10.363m, was bound to enquire into and investigate the reason for the alteration, and could only do so by reference to the cash Schedule.

[185]Third, if, as the SoS submits he should have done, Mr Swan had read PwC’s Comfort Letter and the cash Schedule, he would have seen, and been surprised by, the large credit balances for AEW and EW. If he had questioned them rigorously, he would have discovered that AEW’s account and EW’s account were inflated by cheque kiting.

[186]Fourth, as I have said earlier, the SoS claims that, by the time of Finelist’s board meeting on 21 July 1999, Mr Swan would have been aware that the cash in the Group had swung from being overdrawn by £4.15m on 31 May 1999, to a positive balance of £11.6m on 14 June 1999, and then to a reduced balance of £4.46m on 30 June 1999. The SoS’s case is that the striking peaking of cash on 14 June 1999 should have struck Mr Swan as most odd, and he should have made rigorous enquiries into it. If he had done so, he would have discovered that the stated cash balance on 14 July 1999 was inflated by cheque kiting.

[187]The SoS’s original position (as stated, for example, in closing written submissions) was that, if Mr Swan had asked the questions and pursued the investigation he should have done in connection with the Maccess Circular, whether before or after it had been finalised, he would have had to look at the bank statements of AEW and EW, which, when set alongside the management accounts, would have led him, or any reasonably intelligent and experienced chief executive of a public company, to the discovery of cheque kiting if he did not know about it before. In his closing oral submissions, Mr Kaye retreated from the proposition that it was Mr Swan’s personal obligation to look at bank statements. At the end of the day, the SoS’s proposition was that, by asking the questions which he should have asked, Mr Swan would, one way or another, have discovered the truth about the Group’s cheque kiting policy and that the Indebtedness Statement was incorrect.

[188]In my judgment, the SoS’s case against Mr Swan on the Maccess Circular rests too heavily upon hindsight and an unrealistic analysis of what Mr Swan could and should have done.

[189]Although the directors of Finelist, and Mr Swan in particular, had a personal responsibility under the Listing Rules to ensure that the information in the Circular, including the Indebtedness Statement, were correct, that personal responsibility could only in reality be discharged by doing what was reasonably practical and would have been done by any reasonably competent and experienced person in their position.

[190]The Responsibility Statement required by the Listing Rules, and contained in paragraph 1 of Part IV of the Maccess Circular, makes that clear enough when it refers to “the best of the knowledge and belief of the Directors” and to the fact that they “have taken all reasonable care to ensure that such is the case.” That is also reflected in the Verification Notes which speak of the directors having taken “appropriate steps” to ensure the accuracy of the facts and the bases for the opinions given in the answers to the questions set out in the Verification Notes, and of the directors having to “believe and have reasonable grounds for believing” that each material statement of fact or opinion in the Maccess Circular was true and not misleading.

[191]It was not unreasonable or improper of Mr Swan, who was extremely busy with other matters, to leave to Mr Reddy, and those financial and accounting personnel and professional advisors assisting Mr Reddy, to establish or check and confirm financial details like the figures in the Indebtedness Statement, unless and until something occurred which should have alerted Mr Swan to take some personal interest in those matters. It is entirely unrealistic to suppose, for example, that it is the standard responsibility of the chairman and the chief executive of every listed company to check individual bank statements as part of a normal Class 1 transaction.

[192]I do not accept that the late amendment of the Group’s stated cash balance in the draft Maccess Circular from £2.363m to £10.363m was something which should have caused Mr Swan to question the propriety or competence of Mr Reddy or those advising and supporting him or to alert Mr Swan that there was something seriously amiss which required his personal intervention.

[193]Even if, however, the case of the SoS to the contrary is accepted, I reject the SoS’s assertion that, if a proper enquiry had been made by Mr Swan, he would, on the balance of probabilities, have discovered the Group’s cheque kiting policy and that the Indebtedness Statement was incorrect.

[194]The reason for the alteration was that an account of Finelist had initially been overlooked, and the adjustment had to be made when the oversight was discovered. Mr Swan had no reasonable grounds for rejecting that explanation or for causing further investigations to be made. Any reasonably competent and experienced chairman and chief executive in Mr Swan’s position would have been similarly satisfied with that explanation.

[195]So far as concerns the cash Schedule, I do not accept that Mr Swan was bound to scour the schedules to PwC’s Comfort Letter and to scrutinise and investigate the stated bank balances of EW and AEW for the purpose of verifying them. I consider that he was, in all the circumstances, entitled to leave that task to Mr Reddy and those supporting and advising him. I do not consider that any reasonably competent and experienced chairman and chief executive in the position of Mr Swan would or should have acted differently.

[196]So far as concerns the swings in the cash position of the Group as at 31 May 1999, 14 June 1999 and 30 June 1999 respectively, I accept the evidence of Mr Swan and Mr North that such a mid month peaking of cash would not have excited particular comment since such peaking was often the case and was consistent with normal patterns of trading.

(D) The December incident

[197]In the alternative to the SoS’s case that Mr Swan’s conduct at and following the meetings on 6 December 1999 shows that he had actual knowledge of the Group’s cheque kiting policy, the SoS contends that, as a result of what he was told and knew on 6 December 1999, Mr Swan ought to have ordered a full and proper investigation and, if he had done so, he would have learned of the Group’s cheque kiting policy.

[198]There was disagreement between Mr Kaye and Mr Davies as to whether the SoS was entitled to rely upon that alternative case.

[199]The SoS stated expressly at the pre-trial review in December 2004 (“the PTR”) and in subsequent correspondence that it was the intention of the SoS to rely upon Mr Swan’s conduct in December 1999 solely as evidence from which it could be inferred that he was actually aware of the cheque kiting policy, and that she was not relying on such conduct to support an alternative case that Mr Swan ought to have known about the cheque kiting by making further enquiries as a result of what he was told on 6 December 1999.

[200]In his final submissions, Mr Kaye said that those acting on behalf of the SoS had made it clear, at the outset of the trial, that, notwithstanding what the SoS had previously said, reliance would now be placed upon Mr Swan’s conduct in December 1999 to support the alternative “ought to have known” case.

[201]I agree with Mr Davies that neither Mr Kaye nor anyone else acting on behalf of the SoS made clear, or sufficiently clear, at the outset of the trial that the SoS intended to make a strategic change as the extent and nature of the reliance of the SoS on the events in December 1999 as against Mr Swan. In view of what had been expressly stated in court, as part of a contested issue, at the PTR and what had been expressly communicated in subsequent correspondence by the SoS to those acting for Mr Swan, any such strategic change ought to have been communicated and expressed in the clearest terms. It was not.

[202]Further, I am satisfied that, were I to permit the alternative case to be advanced, a serious injustice might be suffered by Mr Swan. As Mr Davies pointed out in his closing submissions, in reliance on the SoS’s assurance that the alternative “ought to have known” case was not to be run with reference to the events in December 1999, no evidence was adduced on behalf of Mr Swan, and there was no cross-examination by Mr Davies of any of the witnesses for the SoS, on the various allegations of financial impropriety or irregularity which were said by the SoS to have been raised in the meeting with Mr Swan on 6 December 1999. I am satisfied, from what Mr Davies has told me, that such evidence would have been led and such cross-examination would have taken place if Mr Swan, and those acting on his behalf, had been made clearly aware at the outset of the trial that the alternative case was to be advanced.

[203]In those circumstances, SoS is not entitled to rely on the events in December 1999 to advance an alternative “ought to have known” case against Mr Swan.

Inaccuracy of the Maccess Circular

[204]For the reasons I have already given, I reject the SoS’s case against Mr Swan based solely on his responsibility for the Indebtedness Statement in the Maccess Circular. Unfitness

[205]The only conduct of Mr Swan alleged to make him unfit within s.6(1) of the Act which has been proved by the SoS is that he ought to have known of the Group’s cheque kiting policy by reason of the June Cheques.

[206]The question which then arises is whether, taking into account any contemporaneous extenuating circumstances, and all other relevant facts and matters, his conduct is such as to make him unfit to be concerned in the management of a company within s.6 of the Act, bearing in mind the policy and the purposes of the legislation.

[207]It is necessary to weigh in the balance the fact that no lack of probity on Mr Swan’s part has been established; no other instance of his signing or knowledge of cheque kiting cheques has been established (or alleged); and it has not been established (or alleged) that the Group’s cheque kiting policy was for a dishonest purpose or has actually caused any person any loss or has played any part in the insolvency of Finelist or other companies within the Group.

[208]I find that the SoS has established a case of unfitness within s. 6 of the Act by reason of Mr Swan’s conduct.

[209]Mr Swan’s failure properly to enquire into the reason for the June Cheques, and his signing of those Cheques, thereby permitting the Group’s cheque kiting policy to continue and indeed actually assisting its implementation, was a serious dereliction of his duty as a director of Finelist.

[210]For the reasons I have given earlier in this judgment, the June Cheques cried out for comment and enquiry by Mr Swan: comp. City Equitable Fire Insurance Company Limited

[1925] 1 Ch.407

,451-453.

[211]No contemporaneous extenuating circumstances have been established. I have explained the probable reasons why Mr Swan acted as he did.

[212]Whether or not the purpose of the Group’s cheque kiting policy was a dishonest one, it is common ground that it was a wholly unacceptable and improper practice, particularly so for a listed company. Leaving aside any deception of NatWest (which has not been proved), it would plainly have been material for investors and potential investors to know that the Group was not in fact trading within its banking covenants; and to know that, in order to create the illusion that the Group was complying with those covenants, the Group was resorting to a policy of cheque kiting.

[213]It is clear that, on at least one occasion, namely the issue of the Maccess Circular in connection with the sale of Maccess, the Group’s cheque kiting policy led to shareholders being positively misled.

[214]Mr Swan suggested in his evidence that there would have been no difficulty, if he had known of the cheque kiting policy, in obtaining an increase in the level of the gross banking covenants. Notwithstanding the absence of cross-examination on the point, I view such a suggestion with scepticism in the absence of corroborating evidence, particularly from NatWest. Even if true, however, for the reasons I have just given, it does not detract from the commercial impropriety of the cheque kiting policy.

[215]The same answer applies equally to a submission by Mr Davies that there was nothing on the face of the June Cheques, or the circumstances known to Mr Swan, to indicate that fraud might be involved.

[216]The same answer also applies to the observation that the Group’s cheque kiting policy caused no loss to NatWest and is not said or shown to have contributed to the insolvency of Finelist or other companies within the Group. Cheque kiting, as I have said earlier in this judgment, has the potential to cause grave financial loss to a company’s bank or banks. That it did not do so in Finelist’s case was the result of the fact that, purely fortuitously, the Receivers were appointed only after the sale of the Group in 2000 and one of the terms of the sale was that the indebtedness to NatWest be discharged.

[217]The bottom line is that Mr Swan was the chairman and CEO of a listed company, in whose shares the public at large were able to and did invest. He was one of only two people mandated to act as second signatory of the highest value cheques. In relation to the June Cheques, which exceeded the Group’s materiality level, and were extraordinary on their face and called out for comment and enquiry, he wholly abdicated his responsibilities of care and control, and thereby both allowed the commercially improper practice of cheque kiting within the Group to continue and indeed participated in its implementation.

[218]In my judgment, such conduct falls so far below the level of competence to be expected of a director in Mr Swan’s position as to amount to unfitness within s. 6(1) of the Act. Period of disqualification

[219]Mr Swan’s conduct plainly does not fall within the most serious of the three categories specified in Re Sevenoaks Stationers (Retail) Ltd (11-15 years). Nor was that suggested by the SoS.

[220]In judging whether his conduct falls within the lowest category (2-5 years) or the middle category (6-10 years), I consider the following facts, which I have already mentioned in the context of unfitness, to be material: namely, no want of probity on the part of Mr Swan has been established; no other instance of his signing or knowledge of cheque kiting cheques has been established; and it has not been established that the Group’s cheque kiting policy was for a dishonest purpose.

[221]I also bear in mind the length of the disqualification undertakings given by Mr Reddy and Mr Ritchie; and the fact that Mr Swan’s want of competence relates to an absence of vigilance rather than any active role in the formulation or promotion of the Group’s cheque kiting policy.

[222]Taking those and all other relevant factors into account, I consider that the appropriate category is the lowest of the three categories.

[223]In determining where Mr Swan should fall within that category, I also take into account that it has not been alleged or shown that the Group’s cheque kiting policy has actually caused any person any loss or played any part in the insolvency of Finelist or any other company within the Group.

[224]In all the circumstances, and bearing in mind the policy and purposes of the Act, I consider that the appropriate period of disqualification for Mr Swan is 4 years. The Case Against Mr North Analysis

The Case Against Mr North

[225]The case against Mr North is that, in the light of what took place in the meetings with Mr North on 3 and 6 December 1999, Mr North knew of the Group’s cheque kiting policy. The SoS’s alternative case is that Mr North failed to take appropriate action, when financial impropriety and irregularities were reported to him on 3 December 1999, to ensure that those matters were properly investigated. If a proper investigation had been undertaken, the policy of cheque kiting would have come to light.

[226]I reject the SoS’s case that Mr North knew of the cheque kiting policy. There is no cogent evidence that he was told of any such policy.

[227]Mr Reeve’s evidence was that he did tell Mr North about revolving or balancing cheques between AEW and EW. I do not accept that evidence. Mr Reeve’s meeting with Mr North on 3 December 1999 took place a considerable time in the past. The most reliable guide as to what Mr North was told at that meeting is to be found in the contemporaneous notes taken by himself and also by Mr Grourk. Neither of those sets of notes contains any reference to the passing of matching cheques between subsidiary companies or of other transactions which constitute the practice of cheque kiting. Further, Mr Reeve’s computer “mind map”, to which I referred earlier in this judgment, makes no mention of any such statements by Mr Reeve to Mr North.

[228]Mr Blackburn and Mr Reeve gave evidence that Mr Blackburn did discuss in his meeting with Mr Reeve and Mr Grourk earlier on 3 December 1999 matters concerning the payment of cheques between companies within the Group. Having heard Mr Blackburn’s oral evidence, which was often expressed in technical language and a manner that was difficult to follow, I am extremely doubtful whether he communicated to Mr Reeve and Mr Grourk, in language and in a manner that they were likely to understand, the way in which cheque kiting was undertaken and the purpose for which it was undertaken within the Group. Indeed, Mr Reeve himself accepted, in cross-examination by Mr Biggs, that there were certain matters mentioned by Mr Blackburn which Mr Reeve did not understand, but which he nevertheless passed on to Mr North. In any event, whatever Mr Blackburn may have said to Mr Reeve and Mr Grourk, I find, for the reasons I have given, that it is probable that no allegations concerning cheque policy or cheque practice within the Group were communicated to Mr North, or, at any event, communicated to him in a comprehensible manner on 3 December 1999 or at any time on 6 December 1999.

[229]On the other hand, I find that Mr North fell seriously below the standard of conduct to be expected of someone in his position and with his experience in his reaction to the allegations of financial and accounting irregularities that were communicated to him by Mr Reeve on 3 December 1999.

[230]I accept Mr North’s evidence that Mr Reeve appeared to be in an agitated state when Mr Reeve and Mr Grourk met Mr North on 3 December 1999, and that a number of the allegations communicated by Mr Reeve to Mr North appeared to Mr North to be incomprehensible or plainly unsustainable.

[231]I also accept, as I have indicated earlier, that Mr North had no concerns at that time as to the honesty or integrity of Mr Reddy, or as to any marked degree of incompetence on Mr Reddy’s part. Mr Grourk gave evidence that he understood Mr North at the meeting on 3 December 1999 to acknowledge that there had been concerns about Mr Reddy in the past. Mr Grourk accepted, however, that Mr North thought those concerns had been resolved.

[232]What is clear, however, from the contemporaneous notes of the meeting with Mr North on 3 December 1999 is that Mr North was told that both Mr Ainsworth and Mr Blackburn had communicated to Mr Reeve a range of serious allegations of financial and accounting impropriety and irregularity, including allegations that there was a £20m under-declaration of indebtedness in the published accounts, the Group was operating in reality in breach of its banking covenants, the auditors had not been told all relevant information and, in that connection, ledgers were being kept by Mr Reddy “off site”. It is also clear, in my judgment, that Mr North understood that serious allegations of dishonesty and fraud were being made against Mr Reddy.

[233]The case advanced on behalf of Mr Swan and Mr North was that, at a meeting at about 7.30 am on Monday 6 December 1999 at Finelist’s head office attended by themselves, Mr Reddy and Mr Reeve and, in part, Mr Ritchie, all the matters which Mr Reeve or Mr North thought appropriate to raise were answered by Mr Reddy to the satisfaction of Mr North and Mr Reeve.

[234]That was, in my judgment, a wholly inappropriate, unsatisfactory and inadequate way of dealing with extremely serious allegations against the Group’s finance director concerning financial and accounting malpractices within the Group, on information provided by senior managers, including the relevant divisional finance director. Mr North knew of Mr Ainsworth, and he knew Mr Blackburn and that his position within the Group was divisional finance director. There is no evidence that Mr North believed or had any reason to believe that Mr Blackburn was anything other than perfectly competent. Mr North had been told by Mr Reeve that Mr Blackburn was concerned about his employment security if it was discovered he had made the comments he did to Mr Reeve. That should have alerted Mr North to the fact that this was, as I find it to be, a serious “whistle-blowing” incident by an employee well placed to know the truth.

[235]In particular, it was wrong, and manifestly so, in my judgment, for Mr North to have failed to discuss those allegations with his fellow non-executive directors, or to communicate with the auditors, or to ensure that Mr Blackburn was given the means and opportunity of explaining or amplifying the allegations, particularly those that appeared to Mr North to be incomprehensible or manifestly unsustainable, before they were put to Mr Reddy.

[236]I also agree with Mr Kaye that it was simply unacceptable for serious allegations of the kind that had been made, involving the finance director of a listed company, to be disposed of in a meeting lasting only 30 to 40 minutes, without any of those steps having been taken.

[237]I am satisfied that, if all or any of those steps had been taken, the policy of cheque kiting would ultimately have come to light. The evidence of Mr Butcher, who had been a Member of Parliament, a junior minister at the Department of Trade and Industry, and in December 1999 was chairman of the Institute of Directors, was that, if he had been aware of the matters mentioned to Mr North, he would have ensured that they were raised at a board meeting. I accept that evidence. I also find that, if Mr Blackburn had been given the opportunity to amplify to Mr North or the auditors his allegations concerning the £20m under declaration of debt, he would have disclosed the cheque kiting policy since it is clear from his oral evidence that he considered them to be linked.

[238]It is difficult to understand why someone with Mr North’s considerable experience and knowledge acted in the way he did; particularly since his immediate reaction at the meeting on 3 December 1999 was entirely correct, namely that he viewed the accusations of a substantial under declaration of debt and the possible breach of banking covenants as extremely serious, and that the next step would be for him to call a meeting of the directors in the absence of Mr Reddy. Mr North denied, in his evidence, that he made any such suggestion; but I accept the evidence of Mr Reeve and Mr Grourk on the point, corroborated as it is by the contemporaneous notes they took of the meeting. Further, Mr North accepted in his oral evidence that, with hindsight, he should have informed the other non-executive directors of the allegations.

[239]Further Mr North’s own evidence, in cross-examination, was that, if someone had alleged fraud against Mr Reddy, he would have wished to question the person making that allegation. Yet he never sought to question Mr Blackburn. He gave evidence that he was aware, after the meeting with Mr Reddy on 6 December 1999, that Mr Swan intended to speak to Mr Blackburn; but that was after Mr North and Mr Swan had expressed themselves satisfied with the answers given by Mr Reddy, and was in the knowledge that Mr Blackburn was concerned about his job if it should be disclosed he had made the accusations which he had.

[240]It is possible that, acting in good faith, and having thought about the matter further over the weekend, Mr North took the view that, in the light of the negotiations then underway for the sale of the Group to the management, and in the light of the many aspects of what he had been told which appeared to him to be plainly unsustainable or incomprehensible, the best course was to try to give as little publicity or airing as possible to the allegations.

[241]Whatever the reason was, the lapse in judgment was a very serious one, at precisely the moment and in the type of situation in which decisive, courageous and independent action is required by a non-executive director.

Unfitness

[242]In December 1999 Mr North was, as I previously said, a highly experienced non-executive director, deputy chairman of Finelist and the chairman of the audit committee. He was regarded as the senior non-executive director of Finelist.

[243]As I have also said, the manner in which he dealt with what was, and he should have appreciated was, a serious “whistle blowing” incident in December 1999, with the COO of a listed company passing on information from a divisional finance director, was wholly inappropriate, unsatisfactory and inadequate.

[244]In deciding whether his conduct is such as to make him unfit within s. 6 of the Act, I bear in mind, as in the case of Mr Swan, that no lack of probity on Mr North’s part has been established, and there is no other instance of lack of competence which has been established against him. I also take into account the same considerations concerning the purpose and effect of the Group’s cheque kiting policy as in the case of Mr Swan.

[245]Mr North has now retired completely from business life, but, as I have previously explained, that is, as a matter of law, an irrelevant consideration in deciding whether a case of unfitness has been made out.

[246]In my judgment, in all the circumstances, and bearing in mind the purposes and the policy of the Act, Mr North’s conduct fell so far below the level of competence to be expected of a director in Mr North’s position as to amount to unfitness within s. 6(1) of the Act.

Period of disqualification

[247]Bearing in mind all the circumstances I have mentioned in relation to unfitness, and also the length of the disqualification undertakings given by Mr Reddy and Mr Ritchie, and the disqualification period I have ordered in relation to Mr Swan, and the fact that Mr North’s want of competence relates to the failure to pursue an enquiry with sufficient vigour rather than a blanket refusal to investigate the concerns mentioned by Mr Reeve, I consider that the appropriate category in relation to Mr North is the lowest of the 3 categories specified in Re Sevenoaks Stationers (Retail) Ltd.

[248]In determining where Mr North should fall within that category, I also take into account Mr North’s full retirement from the management of any company

[249]In all the circumstances, and bearing in mind the policy and purposes of the Act, I consider that the appropriate period of disqualification for Mr North is three years.

Other Issues

[250]In addition to the matters I have considered so far in this judgment, a range of other facts and matters were in dispute and were the subject of written and oral submissions and oral evidence, but I have not found it necessary to reach any decision on them. They include the following: whether Mr Swan’s management style was domineering, aggressive or otherwise such as to promote a “culture of fear”; the circumstances in which Mr Reeve came to be appointed COO; Mr Reeve’s competence as COO; the terms on which Mr Reeve sold his business, PDP, to Finelist, and, in particular, the sale price; the circumstances in which KPMG ceased to carry out consultancy services for the Group in 1998; the circumstances in which Mr Ainsworth was dismissed, and, in particular, whether Mr Swan or Mr Reeve was primarily responsible for the decision to dismiss him; the precise sequence of events on Monday 6 December 1999; the precise content of any discussion between Mr North and Mr Swan between the time of Mr Reeve’s meeting with Mr North on Friday 3 December 1999 and Mr North’s meeting with Mr Swan on Monday 6 December 1999; whether Mr Blackburn and Mr Reeve were in fact, that is objectively speaking, intimidated by Mr Swan on 6 December 1999; the reason for Mr Grourk’s dismissal on that day; the treatment of Mr Reeve by Mr Swan after 6 December 1999; Mr Reeve’s state of mind from time to time after 6 December 1999; the reason or reasons why Mr Reeve absented himself from work in January 2000; the state of Mr Reeve’s health in January 2000; the reason or reasons for, and the propriety of, the dismissal of Mr Reeve; and whether Mr Reeve handled his company expenses in a proper manner.

Decision

[251]For the reasons I have given, I order, pursuant to s.6 of the Act, disqualification of Mr Swan for a period of 4 years, and the disqualification of Mr North for a period of 3 years.

Secretary of State for Trade & Industry v Swan & Ors [2005] EWHC 603 (Ch)

Introduction

Cheque kiting

Background Facts

The Law

the judge said:

The Witnesses

(A) General

(B) The June cheques

(C) The Maccess Circular

(D) The December incident

(A) General

(B) The June Cheques

(C) The Maccess Circular

(D) The December incident

(A) General

(B) The June Cheques

(C) The Maccess Circular

(D) The December incident

Inaccuracy of the Maccess Circular

The Case Against Mr North

Unfitness

Period of disqualification

Other Issues

Decision

Cited in 4 later judgments