Kluk v Secretary of State for Business, Enterprise and Regulatory Reform [2007] EWHC 3055 (Ch)

[2007] EWHC 3055 (Ch)

Case No HC2007/PTA/0501 & HC2600 OF 2005

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

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

Date 20/12/2007

Before

SIR ANDREW PARK

Between

Steven KlukAppellant

The Secretary of State for Business, Enterprise and Regulatory ReformRespondent

In the matter of Morija PLC

And in the matter of Sundernote Limited

And in the matter of Isaac Green Limited

And in the matter of section 17 of the Company Directors Disqualification Act 1986

Malcolm Davis-White QC (instructed by Mishcon de Reya) for Appellant

Michael Green (instructed by asblaw) for Respondent

Hearing Hearing dates: 3rd and 4th December 2007

Judgment

Sir Andrew Park:

Overview

[1]In this judgment I use the following abbreviations. CDDA The Company Directors Disqualification Act 1986 Davis-White, Mr Malcolm Davis-White QC, counsel for Mr Kluk Disqualification undertaking See the explanation in paragraph 6 of the judgment False invoices fraud See the explanation in paragraph 10 of the judgment. Green, Mr Michael Green, counsel for the Secretary of State IGL Isaac Green Limited, company in the case of which Mr Kluk seeks leave to be a director. Kluk, Mr Steven Kluk, the appellant; not to be confused with his brother Neville Kluk. Leave Usually leave, pursuant to s.1(1)(a) or s.1A(1)(a) of the CDDA, to be a director of a company notwithstanding a disqualification order or disqualification undertaking. Letters of credit fraud See the explanation in paragraph 10 of the judgment. Morija Morija plc, company by reference to which a disqualification undertaking was given by Mr Kluk. Registrar, the Registrar Jaques Secretary of State The Secretary of State for Business, Enterprise and Regulatory Reform, formerly the Secretary of State for Trade and Industry, whose department has the primary responsibility for administering the disqualification regime prescribed by the CDDA. Sundernote Sundernote Ltd, company in the case of which Mr Kluk seeks leave to be a director. Time of discovery issue See paragraphs 25 and 45 of the judgment. Zahid, Mr A former director of Morija

[2]This is an appeal by Mr Kluk from a decision of Registrar Jaques. Under the statutory scheme for the disqualification of directors by reason of conduct showing them to be unfit to be concerned in the management of a company (a scheme about which I will say a little more in the next section of this judgment) Mr Kluk gave an undertaking to the Secretary of State that for 10 years he would not be a director of a company unless he had the leave of the court. The undertaking was given by reason of conduct connected with Morija, a company of which he had been a director in the past. A few days after the undertaking he made an application to the court for leave to continue as a director of two other companies, Sundernote and IGL, of which he was already a director at that time. The application, after several adjournments on the basis of temporary orders which permitted Mr Kluk to continue for the time being as a director of those two companies, was heard by Registrar Jaques in July of this year, 2007. By a judgment handed down on 30 July the Registrar dismissed the application, refusing to grant to Mr Kluk the leave which he had sought. Mr Kluk now appeals to the High Court, permission to appeal having been given by Rimer J on 4 September.

[3]In the circumstances which I will describe and for the reasons which I will explain I have concluded that I must dismiss the appeal.

The disqualification scheme, especially undertakings and leave

[4]The statutory regime for the disqualification of unfit directors is contained in the CDDA. The authority principally responsible for the administration and enforcement of the regime is the Secretary of State. There is, I believe, a section or unit within the Department of Business, Enterprise and Regulatory Reform which in practice discharges the Secretary of State’s functions in this respect. Section 1 from the commencement of the Act provided for disqualification orders to be made by a court and still does, but the importance of the section has to some extent been changed by amendments made in 2000. Some of the amendments are relevant in this case, and I will describe them in the next paragraph. Section 1 states that, in the circumstances specified in subsequent provisions of the Act (essentially past conduct as a director of a company which becomes insolvent, the conduct being such as to show unfitness to be a director), the court may make a disqualification order. Such an order prevents the person concerned from doing various things, of which the most important is being a director of a company. However, it is not an absolute prohibition. It is a prohibition against being a director of a company ‘unless he has the leave of the court’. (The wording used to be ‘without the leave of the court’: this change seems to me to be immaterial.)

[5]So under the initial structure of the Act only the court could impose a disqualification order, and only the court could grant leave to a disqualified director to do something which the order would have prohibited. Against that background the so-called Carecraft procedure developed. The name is derived from the decision of Ferris J in re Carecraft Construction Company Ltd

[1994] 1 WLR 172

. The essence of the procedure was that the director concerned and the Secretary of State agreed upon a statement to be presented to the court and upon a period of disqualification which they invited the court to order. It remained the case that only the court could impose a disqualification, but there can have been few cases, if any, where a court declined to make a Carecraft-type order to which the Secretary of State and the director agreed.

[6]The central feature of the amendments made in 2000 was to eliminate the need for the court to make an order in cases where the director and the Secretary of State had agreed upon a period of disqualification. This was achieved by inserting several new provisions into the Act. One is a wholly new section, section 1A, and another is a new sub-section in section 7, section 7(2A). Section 1A provides for the Secretary of State, without any involvement of the court, to accept a ‘disqualification undertaking’. The most important example of a disqualification undertaking is that the person concerned undertakes not be a director of any company for a specified period. But, critically for the purposes of this case, the key provision of section 1A continues ‘unless he has the leave of the court’. I need not say much about the new section 7(2A). Essentially it provides that the Secretary of State may accept a disqualification undertaking in circumstances where the court could make a disqualification order.

[7]The important point to note for this case is that, although the Secretary of State can and does accept disqualification undertakings without the court being involved, the Secretary of State cannot grant leave. If a person who has undertaken to the Secretary of State not to be a director for a period wants to be permitted, notwithstanding his undertaking, to be a director of one or more specific companies, he has to make an application to the court.

Mr Kluk’s disqualification undertaking

[8]In the next section of this judgment I shall outline the circumstances in which Mr Kluk’s disqualification undertaking was given. I believe, however, that it is convenient and helpful for me first to set out the relevant terms of the undertaking. I preface doing that by mentioning that the Secretary of State’s practice has been for undertakings to be in two parts: a first page which contains the undertaking itself and which the director signs; and a schedule which describes the conduct which is agreed to have been sufficient to justify the disqualification. A challenge to this practice of including a description of the ‘unfit conduct’ was dismissed in re Blackspur Group plc (No 3)

[2001] EWCA Civ 1595

[2002] 2 BCLC 263

(Court of Appeal, affirming Patten J).

[9]The first page of Mr Kluk’s undertaking is headed with the title of the Act, and ‘Form of Disqualification Undertaking’. It continues:

“IN RE MORIJA PLC I, Steven Kluk of [address], hereby undertake to the Secretary of State for Trade and Industry on the basis set out in the schedule attached to this disqualification undertaking, that in accordance with section 1A of the CDDA I WILL NOT for a period of 10 years: (a) be a director of a company …”

The undertaking continues with detailed wording which I need not reproduce. Mr Kluk signed it on 5 February 2007. The schedule is important, and I will reproduce it in full. “SCHEDULE OF UNFIT CONDUCT TO THE DISQUALIFICATION UNDERTAKING GIVEN BY STEVEN KLUK For the purposes solely of the CDDA and for any other purposes consequential to the giving of a disqualification undertaking, I do not dispute the following matters: • I was a director of Morija PLC • Which went into Administrative Receivership on 22 April 2003 • With assets of £78,143.76 • Liabilities of £2,060,825 • A deficiency as regards creditors in excess of £2,060,825 • And share capital of £525,000 • Making a total deficiency of £2,585,825 MATTERS OF UNFITNESS 1 On my return from South Africa on 7 January 2003 I discovered immediately that 129 false invoices with a total value of £553,724 had been prepared in my absence and dishonestly submitted and assigned on behalf of Morija to the Bank of Scotland Cashflow Finance (“BoSCF”) under the company’s newly acquired Confidential Invoice Discounting facility in return for a substantial loan under the confidential invoice discounting facility. I did not disclose to either BoSCF or any of Morija’s customers or the authorities my discovery of this fraudulent activity. Instead I caused Morija to continue trading with the benefit of the money fraudulently borrowed from BoSCF. I benefited from not having been required personally to guarantee the facility, unlike the previous arrangements with Bank Leumi. 2 On or around 14 January 2003, having discovered that Morija had obtained a Letter of Credit from the Bank of Scotland in the sum of £112,320 by misrepresenting its purposes, I failed to expose the misrepresentation to the Bank of Scotland. This was to the detriment of the Bank of Scotland. ” • I was a director of Morija PLC • Which went into Administrative Receivership on 22 April 2003 • With assets of £78,143.76 • Liabilities of £2,060,825 • A deficiency as regards creditors in excess of £2,060,825 • And share capital of £525,000 • Making a total deficiency of £2,585,825

[10]There are two observations about the schedule which I wish to make at this stage. First, it sets out matters which Mr Kluk does not dispute ‘for any purposes consequential to the giving of a disqualification undertaking’. One such purpose would be an application to the court for leave to do something which the undertaking would otherwise prevent. Second, the schedule identifies two ‘matters of unfitness’. Each consists of failing to disclose something which Mr Kluk discovered and ought to have disclosed. I will refer to what he discovered as described in paragraph 1 as ‘the false invoices fraud’, and to what he discovered as described in paragraph 2 as ‘the letters of credit fraud’. It seems to me that each non-disclosure as described was serious and reprehensible. In so far as there are degrees of seriousness the non-disclosure of the false invoices fraud strikes me as the more serious of the two, but that is not to say that I underestimate the gravity of the non-disclosure of the letters of credit fraud as well.

The facts

[11]The facts fall into three phases: the facts down to the collapse of Morija; the facts from the collapse of Morija down to the commencement of disqualification proceedings; and the facts of how the disqualification proceedings progressed.

[12]Morija was incorporated in 1993. I do not know when it started business, but Mr Kluk became a director in January 1995. His brother Neville was also a director. In July 2002 a Mr Zahid became a third director. The ordinary shares were owned as to 40% by Mr Kluk and as to 60% by his brother. A witness statement of Mr Kluk says that Morija ‘traded as a wholesaler of clothing apparel and accessories for the corporate promotions and events market, as well as work-wear clothing’.

[13]On 17 December 2002 Mr Kluk left for South Africa for a three weeks holiday. His brother Neville (and, as far as I know, Mr Zahid) remained in charge of Morija’s business.

[14]While Mr Kluk was away the false invoices fraud and the letters of credit fraud both occurred. Mr Kluk did not know about them at the time. (This last point must follow from the use of the word ‘discovered’ in each paragraph of the ‘Matters of Unfitness’ set out in the schedule to the disqualification undertaking.)

[15]On 7 January 2003 Mr Kluk returned from his holiday. He discovered the two frauds. Because of one aspect of the decision of Registrar Jaques and because of an argument which was addressed to me I need to say something about when it was that Mr Kluk discovered the two frauds. According to the schedule to the disqualification undertaking he discovered the false invoices fraud ‘on my return from South Africa … immediately’, and he discovered the letters of credit fraud ‘on or around 14 January 2003’. No issue has arisen about the time of Mr Kluk’s discovery of the false invoices fraud. But an issue has arisen about the time of his discovery of the letters of credit fraud. I will not attempt to describe what the issue is here, but I will return to it later under the heading: ‘Discovery of the letters of credit fraud: the timing complication’.

[16]As the schedule to the disqualification undertaking records, Mr Kluk did not inform anyone, in particular the Bank of Scotland, about either fraud. He was presumably hoping that all would turn out well in the end, that the bank and other creditors would be paid, and that the frauds would not be discovered.

[17]His hopes did not work out. On 22 April 2003 Morija collapsed. Administrative receivers were appointed. In the end there was a deficiency as regards creditors of over £2m. I assume that the bank was a major creditor.

[18]At this point I move to the second phase which I described in paragraph 11 above. In July 2003 another company with an established business of a fairly similar nature to Morija’s was acquired. That company was and is Sundernote. If I have understood correctly, the previous owner and manager of Sundernote was retiring and was willing to sell the company. The Registrar says in his judgment that ‘the Applicant [Mr Kluk] bought Sundernote’. In a formal sense that is not correct, but this point makes no difference. In detail what happened was this: IGL was formed or acquired to be a holding company, and IGL bought Sundernote. There were 200 shares in IGL, half of them owned by Mr Kluk’s wife and the other half owned by trustees of a Swiss trust for Mr and Mrs Kluk.

[19]Mr Kluk became the sole director of Sundernote. Sundernote has continued its trade since then. Mr Kluk is still its principal director. (Registrar Jaques’ decision would have stopped him being a director, but an interim order made pending the outcome of this appeal has allowed him to remain in office so far.) Recently (and after the disqualification process had been initiated by the Secretary of State) two other directors have been appointed. They are long term employees of the company. The evidence to the Registrar was to the effect that the company has traded reasonably successfully, but that Mr Kluk’s continued participation in running its business is crucial. Although the point is not (I think) expressly spelt out anywhere, I assume, as I believe does everyone involved, that neither Mr Kluk’s brother Neville nor Mr Zahid are in any way involved in the business or ownership of Sundernote and IGL.

[20]In June 2004 arrangements were concluded between Mr Kluk and the Bank of Scotland, the practical effect of which was that Mr Kluk assumed personal liability to the bank for the indebtedness owed by Morija which Morija was unable to meet. Mr Kluk says, and I see no reason to doubt, that he is up to date with the programme for reducing and ultimately discharging his indebtedness to the bank. He also says that he will not be able to meet his liabilities if he cannot continue to be a director of Sundernote.

[21]I now come to the third phase of the facts: the disqualification proceedings. On 21 April 2005 the Secretary of State commenced disqualification proceedings against all three directors. On or about 1 August 2005 Mr Kluk’s brother Neville gave a disqualification undertaking to the Secretary of State for a period of 12 years. The application for an order against Mr Neville Kluk therefore did not need to proceed. He is not involved at all in the present case.

[22]The applications for orders against Mr Kluk and Mr Zahid progressed towards a contested hearing before a Registrar. The trial was fixed to commence on 6 February of this year, with a time estimate of four days. It did commence as regards Mr Zahid, with an outcome which I do not know and which does not concern this appeal.

[23]The trial did not commence as regards Mr Kluk. On 5 February, the day before the trial was due to begin, he gave to the Secretary of State the disqualification undertaking which I have described in paragraph 9 above.

[24]Mr Kluk’s solicitors had informed the Secretary of State’s solicitors that he intended to apply to the court for leave to continue as a director of Sundernote and IGL. There were delays about bringing the application before the court for decision. They are described in the Registrar’s judgment, and I need not go into them here. I have already mentioned that there is an interim order under which Mr Kluk has so far been able to remain in office pending the outcome of his leave application.

Discovery of the letters of credit fraud: the timing complication

[25]This is the time when I can return to this matter, to which I alluded in paragraph 15 above. At various later points in this judgment I shall refer to it as ‘the time of discovery issue’. It will be recalled that, in the schedule to the disqualification undertaking, one of the things which Mr Kluk said he did not dispute ‘for purposes consequential to the giving of a disqualification undertaking’ was that he discovered the letters of credit fraud ‘on or around 14 January 2003’. But in an affidavit which Mr Kluk swore for the purposes of his leave application he did dispute it. The disqualification undertaking was given on 5 February 2007. On 12 February 2007 Mr Kluk applied to the court for leave to continue as a director of Sundernote and IGL, and in support of his application he swore the first of what are now several affidavits in this application. At the end of paragraph 22 he said:

“Although the first time that I became aware that the bill of lading was fictitious was shortly following the appointment of the Administrative Receivers, I accept that I ought to have known at the time it was created.”

The critical point was not so much what Mr Kluk said he accepted as his saying that he did not become aware that the bill of lading was fictitious until after 22 April 2003 (the date of appointment of the Receivers). I ought to add that a fictitious bill of lading was the foundation of the letters of credit fraud. Mr Kluk made essentially the same point again in a second affidavit, sworn on 28 June 2007 (which preceded the hearing before Registrar Jaques).

[26]This led to me (I think to a greater extent than the Registrar) being taken behind the scenes of what preceded the disqualification undertaking. As I have said in paragraphs 22 and 23 above, Mr Kluk was opposing the Secretary of State’s application for a disqualification order to be made against him under section 1. The case was going to be heard on 6 February of this year, which was a Tuesday, but did not proceed (except against Mr Zahid) because in the afternoon of the day before, the Monday, Mr Kluk gave his disqualification undertaking. There were exchanges between the solicitors for Mr Kluk and the solicitors for the Secretary of State about the terms of the undertaking, and in particular about the description of the Matters of Unfitness to be set out in the Schedule. I was shown emails beginning on the Friday and continuing on the Monday. It is hard to tell whether they are all the emails that passed. There were also telephone conversations the details of which I do not know. To a degree I am reconstructing events from what may be incomplete records. Nevertheless I think that it is possible to work out what happened. In what follows I am dealing only with what led up to paragraph 2 of the Schedule to the disqualification undertaking, the paragraph relating to the letters of credit fraud. (The main terms of the disqualification undertaking, including the whole of the Schedule, are set out in paragraph 9 above.)

[27]As I have recorded earlier, the Secretary of State had commenced disqualification proceedings against all three directors on 21 April 2005. I have been shown a copy of a witness statement which Mr Kluk made on 23 August 2005. It appears that at that stage a charge which the Secretary of State was advancing was that on 14 January 2003 all three directors, by means of a fictitious bill of lading, caused Morija to obtain the letter of credit for £112,320 from the Bank of Scotland. In relation to that Mr Kluk said in his 2005 witness statement:

“The first time that I became aware that the bill of lading was or may have been fictitious was when I was informed of the fact by the Receivers, after they had carried out their investigations.”

There are two points to note about this. One is that Mr Kluk was saying that he played no part in the carrying out of the letters of credit fraud. The other is that he said that he did not even find out about it until receivers had been appointed, which was of course too late for it to have made any difference if he had disclosed the fraud to the bank.

[28]I can now move forward 18 months to the period just before the disqualification application was to be heard by a Registrar. As I have described, the hearing had been arranged to begin on 6 February 2007, a Tuesday, but in the event went off so far as Mr Kluk was concerned by reason of the disqualification undertaking which he gave on the previous day. In the immediately preceding days there were exchanges between Mr Kluk’s solicitors and the Secretary of State’s solicitors about the wording of the undertaking, and in particular about the content of the second Matter of Unfitness, the one which related to the letters of credit fraud. I have been supplied with copies of the relevant emails. In the early afternoon of the Friday the Secretary of State’ solicitors sent a draft to Mr Kluk’s solicitors. The draft itself has not survived (or if it has I have not seen it), but it can be inferred from later emails that it said that Mr Kluk had been a party to the letters of credit fraud or at least had known about it when it happened.

[29]Quite late on the Friday afternoon Mr Kluk’s solicitors emailed a different draft. To anticipate, it was nearly the same as the wording which went into the final Schedule on the Monday afternoon, but there is one potentially significant difference. Like the final wording the draft did not say that Mr Kluk participated in the letters of credit fraud or knew about it when it happened. Like the final wording it says that he discovered the fraud, and ‘failed to expose to expose the misrepresentation to Bank of Scotland’. Unlike the final wording it says that the time when he discovered the fraud was ‘on or after 14 January 2003’. The final wording was ‘on or around 14 January 2003’.

[30]Going back slightly in time to the Friday afternoon and the Monday morning, the first reaction of the Secretary of State’s solicitors when they received the draft wording emailed by Mr Kluk’s solicitors was not to agree to the removal of words to the effect that Mr Kluk had been a participant in the fraud. It seems that there was evidence from Mr Zahid (which I have not seen) saying that Mr Kluk knew what was going on when it happened. At this point the email trail runs out. The last one I have seen was at 10.42 a.m. on the Monday morning. However, exchanges must have continued – I imagine by telephone or at a hastily arranged meeting – because before the end of the day the final wording had been agreed and Mr Kluk signed the undertaking. The second matter of unfitness in the Schedule did not say that he had participated in the letters of credit fraud or knew that it was happening. It said that he discovered it and did not disclose it to the bank, and, as I noted in the foregoing paragraph, it says that he discovered it ‘on or around’ 14 January 2003. There is only one word of difference in that formulation from ‘on or after’, but the difference could be significant, particularly given that Mr Kluk had said in his 2005 witness statement that he did not discover the letters of credit fraud until after Morija had collapsed and receivers were appointed.

[31]Nevertheless, when on the Monday afternoon Mr Kluk’s solicitors wrote and sent a fax to the Secretary of State’s solicitors enclosing the disqualification undertaking signed by Mr Kluk, their letter included this sentence:

‘Our client’s evidence has been, and still is, that he did not discover this fraud until much later on.’

Further, as I said in paragraph 25 above, in the first and second affidavits which Mr Kluk swore in support of his application for leave to continue as a director of Sundernote and IGL, he repeated that he did not know about the letters of credit fraud until after the appointment of the receivers.

Leave applications: the principles to be followed

[32]I will not say much in this part of my judgment, since the principles are well-established and not disputed on the appeal to me. It is accepted that there is no difference between applications for leave in cases where a disqualification order has been made under the CDDA s.1 and applications in cases where a disqualification undertaking has been given under s.1A. Sir Richard Scott V-C pointed out in re Dawes & Henderson Ltd

[2000] BCC 204

at 211, that the statute puts no fetters on the discretion to grant leave and attaches no conditions. Nevertheless some broad principles have emerged from cases over the years.

[33]The purpose of a disqualification order or undertaking is not to punish the director for his misconduct. Rather it is to protect the public. Partly it does that by restricting the ability of the person concerned to expose the public to the risk of loss from further misconduct on his part. It is worth adding that the possible further misconduct does not have to be of the same nature as that which has led to the disqualification: see observations of Lloyd J in the Stern case, re Westminster Property Management Ltd (No2)

[2001] BCC 305

at 359 to 360. The observations were cited (appropriately so, in my judgment) by Registrar Jaques in the present case. Partly a disqualification order or undertaking achieves its purpose of protecting the public by deterring other directors from misconduct which might lead to disqualification proceedings against them. It also seems to me that the existence of the disqualification jurisdiction can have a beneficial effect in the form of maintaining and improving standards of integrity on the part of businessmen who become directors of companies.

[34]Where a leave application is made the court has a balancing process to undertake. In favour of a grant of leave is the ‘need’ criterion: the need of the disqualified director to earn a living, and (a different matter, and usually more important) the need of some other person, typically another company, to have his services. Against the grant of leave may be the factors which I mentioned in the foregoing paragraph as purposes which the legislation is intended to serve: protecting the public by, to use a familiar metaphor drawn from another kind of disqualification, keeping off the road a person whose past conduct has fallen short of the standards to be expected; deterring other directors from similar misconduct; and maintaining and improving standards of integrity.

[35]In the balancing process the degree of seriousness of the misconduct on the part of the disqualified person who is applying for leave is relevant. The relevance seems to me not to rest on the notion that, if a person’s misconduct has been serious enough, a refusal of leave serves him right. Rather the point is in part that, in the case of a person who has misconducted himself seriously in the past, the risk to the public of him misconducting himself again if he is granted leave is greater than would exist in the case of a person whose misconduct was less serious. A different aspect of the same point is that, if a disqualified director whose conduct has been significantly bad is seen by others to have been granted leave by the court to continue as a director of another company, the deterrent effect on other directors will be weakened.

The decision of Registrar Jaques

[36]The Registrar began by outlining the facts, the procedural history which led to Mr Kluk’s application for leave coming before him, and the law concerning such applications. He then outlined the evidence which had been put before him, in particular evidence designed to show that the need factor (to which I have alluded in paragraph 34 above) was satisfied. In relation to that he said in paragraph 12 of his judgment:

“I am content for present purposes to assume, without deciding the point, that if there is any longer a separate requirement, on an application such as this, to show need, whether it be need of the Applicant, need of the two companies or need of any person or group of persons, that requirement is satisfied in this case.”

In a later paragraph he said, less cautiously:

“As I have already indicated, I am prepared to accept that any separate requirement to show need is satisfied in the present case.”

For my part I would agree with the less cautious later paragraph. It seems to me that strong evidence was placed before the Registrar to the effect that, if Mr Kluk could continue as the principal director in charge of Sundernote’s business, the business had good prospects of surviving, probably through a purchase of the company by an unconnected party which had expressed a serious interest provided that Mr Kluk could remain. In contrast, if Mr Kluk was barred from participating in the management of the business, the evidence suggested that it would not be able to continue.

[37]However, to establish a strong case of need is not enough. After the first of the two sentences which I quoted in the foregoing paragraph the Registrar continued:

“On the basis of that assumption [that any need requirement was satisfied] I, therefore, proceed to consider the twin objectives of the disqualification regime, the protection of the public and the deterrent effect of a disqualification order or undertaking.”

I comment at this point that the Registrar correctly identified the principal factors which a court should evaluate when considering an application for leave: need, which is likely to point in one direction, and the protection of the public, which is likely to point in the other direction.

[38]The Registrar then referred to some reported cases about leave applications, and in particular to several judicial observations that it would be rare for leave to be granted in a case of misconduct which had been thought sufficiently serious to justify a long period of disqualification. (Ten years, the period in this case, is not the maximum period, but is certainly a long one.) One of the cases to which the Registrar referred was re TLL Realisations Ltd

[2000] BCLC 998

. That was an appeal to the Court of Appeal from a decision of my own. I had granted leave. The Court of Appeal allowed the decision to stand, but each member of the court said that he would have refused leave if he had been the judge at first instance. It seems to me that the director in that case was very fortunate that the Court of Appeal did not reverse my decision and withdraw the leave which I had granted. In the present case re TLL Realisations Ltd had been cited by counsel then appearing for Mr Kluk, but I would see the case as having been on the whole unhelpful to Mr Kluk rather than helpful.

[39]The Registrar then set out quite long citations from the judgment of Lloyd J in the Stern case (see paragraph 33 above), concluding with this paragraph:

“There is, as I have explained, in my judgment a presumption against the grant of leave. In a case where the circumstances of misconduct are as serious as they have been shown to be in the present case, it is a heavy presumption. In my judgment it would substantially reduce the effectiveness of the order as a deterrent, if nothing else, to allow Mr Stern to be a director of Dollar Land (Manhattan) even if that company does need his services. Nor am I satisfied there is no risk to the public suffering from misconduct on the part of Mr Stern as a director because of the kind of conduct already proved, or some other conduct, if he were allowed to act as a director of any of these three companies.”

[40]The Registrar continued with his own reasons in the case before him. “23. As I have already indicated, I am prepared to accept that any separate requirement to show need is satisfied in the present case. What I am not prepared to accept, however, is that the public will be protected if the Applicant is given permission under section 17 to continue to act as a director of IGL and Sundernote, whether subject to the conditions offered or to any other conditions. The final paragraph from the judgment of Lloyd J that I have cited above reflects exactly how I feel about the application before me. 24. Any confidence that I might have had on this score was shattered when I read the Applicant’s affidavit evidence sworn in support of this application. To recap, in order to dispose of the disqualification proceedings the Applicant signed an undertaking, for which purpose he said he did not dispute that he discovered on or around 14th January 2003 that Morija had obtained a Letter of Credit from the Bank of Scotland in the sum of £112,320 by misrepresenting its purposes and that he failed to expose the misrepresentation to the Bank of Scotland” 41. The Registrar then quoted paragraph 22 of Mr Kluk’s first affidavit (see paragraph 25 above), and mentioned what amounted to a repetition of it in Mr Kluk’s second affidavit. The Registrar continued as follows:

“27. The Applicant’s blatant attempt to retract his clear, unequivocal admission of complicity in the fraud on the bank, which was perpetrated by his brother, Neville, does not inspire me with confidence either that he appreciates the seriousness of his misconduct as a director of Morija or that there would be no risk to the public of further financial or other misconduct on his part, if I were to give him permission under section 17 to continue to act as a director of IGL and Sundernote. In my judgment it would substantially reduce the effectiveness of the undertaking as a deterrent to allow the Applicant to continue to act as a director of IGL and Sundernote, even accepting that those companies or, at least, the latter company, the trading company, does need his services. I am not satisfied that there would be no risk of the public suffering from financial or other misconduct on the part of the Applicant, if I were to give him permission under section 17 to continue to act as a director of either of those two companies.”

I ought to mention that s.17 of CDDA contains provisions for the mechanics of the process when a court is asked to grant leave. If leave is granted it is, in my view, strictly given, not under s.17, but under s.1(1)(a) if the disqualification arises by reason of an order or under s.1A(1)(a) if the disqualification arises by virtue of an undertaking. 42. The Registrar concluded that the fact that Mr Kluk’s actions in repaying to the bank the money that it had lost (see paragraph 20 above), ‘whilst laudable, does not satisfy me that there would be no risk to the public, if I were to give him the permission he seeks.’

Discussion and analysis

[43]I begin by saying something about the nature of this appeal. The words in s.1A of the CDDA ‘unless he has the leave of the court’ confer a discretion on the court. Subject to what I say later in this paragraph, I agree with what Mr Green (who opposed the appeal on behalf of the Secretary of State) said in his skeleton argument:

“… this is a true appeal which means that the decision can only be interfered with if the learned Registrar’s exercise of discretion was outside the ‘generous ambit within which a reasonable disagreement is possible’ or was obviously wrong.”

The quotation within that sentence is taken from the judgment of Peter Gibson LJ in the TLL Realisations case, and is the main basis on which the members of the Court of Appeal, while clearly unhappy about my first instance decision to grant leave, concluded that they ought not to set it aside. In that case the limited scope of an appeal worked in favour of the director concerned. In this case it works against him. Mr Davis-White QC, on behalf of Mr Kluk, broadly accepted what Mr Green said as to the nature of the appeal, but he added other circumstances in which the court could interfere with the Registrar’s decision:

“On an appeal such as this it is necessary to show that the learned Registrar erred, in effect by reaching a conclusion outside the generous ambit within which a reasonable disagreement is possible or by misdirecting himself by taking into account matters that he should not have done or by failing to take into account matters that he should have done or by having failed to balance the various factors fairly in the scale.”

[44]If I have understood correctly, the core of Mr Davis-White’s submission on behalf of Mr Kluk is that the Registrar took into account, and based his decision on, a factor which he ought not to have taken into account, namely Mr Kluk’s attempt to have the leave application determined on the basis that he did not discover about the letters of credit fraud until after receivers of Morija had been appointed. Mr Davis-White argues that the Registrar approached the case on a misconceived basis; accordingly his decision cannot stand; and I should perform for myself the exercise of balancing the factors of need and protection of the public. As I will explain in the next few paragraphs I agree with what Mr Davis-White says up to a point, but only up to a point; and the point up to which I agree is not far enough to persuade me that I can interfere with the Registrar’s refusal of leave, or that, if I can, I should.

[45]I will begin by addressing the specific point on which Mr Davis-White bases his submissions, although, as I will say later, there is a good deal more in the Registrar’s judgment than criticism of Mr Kluk for putting in evidence that he did not discover about the letters of credit fraud until after receivers of Morija had been appointed. I do think that the Registrar made more of that issue, which (as mentioned in paragraph 25 above) I refer to as ‘the time of discovery issue’, than it justified, but he certainly needed to deal with it.

[46]In the ‘Matters of Unfitness’ in the Schedule to the disqualification undertaking Mr Kluk had accepted that he discovered the letters of credit fraud ‘on or around’ 14 January 2003. On that basis it was plainly misconduct on Mr Kluk’s part that he kept quiet about the fraud instead of telling the Bank of Scotland about it. But in the evidence which he put before Registrar Jaques he sought to say that he discovered the fraud much later, at a time when a disclosure of it by him to the bank could not have made any difference. The Registrar had to decide whether Mr Kluk could be allowed to dispute the correctness of what he had accepted by signing the disqualification undertaking. The Registrar decided that Mr Kluk could not do that, and in my view he was absolutely right. Mr Kluk was no more entitled on his leave application to reopen the issue of when he discovered about the letters of credit fraud than the Secretary of State would have been entitled to reopen the question of whether Mr Kluk had known about the fraud all along, instead of only finding out about it after his return from holiday. What I have just said is accepted by Mr Davis-White without reservation. Indeed, although Mr Davis-White did not say so explicitly, I believe that, if he had been appearing for Mr Kluk at the time of the application to the Registrar, he would have withdrawn the offending passages in Mr Kluk’s two affidavits. I ought to add here that, although I do not think that counsel who appeared for Mr Kluk before the Registrar withdrew those passages, it seems from his skeleton argument that he placed no particular reliance on them in support of his submission that leave should be given.

[47]However, the Registrar did not limit himself to saying that Mr Kluk’s leave application had to be decided on the basis of the facts as they were accepted in the disqualification undertaking, and that it was not open to Mr Kluk to seek to modify those facts by the evidence which he submitted for the hearing. The Registrar, in paragraphs 24 and (especially) 27 of his judgment (quoted in paragraphs 40 and 41 above), went beyond that. He said that this aspect of how Mr Kluk had conducted his leave application suggested that he did not appreciate the seriousness of his misconduct as a director of Morija, and that there would be a continuing risk to the public of further financial or other misconduct on his part if he was given leave to continue as a director of Sundernote and IGL.

[48]In that respect I consider that the Registrar made more of this point than there truly was in it. I entirely agree that it was not open to Mr Kluk to adduce this particular evidence. I agree that the Registrar was justified in being critical of Mr Kluk for including it in his affidavits. But I cannot see that the fact that Mr Kluk did attempt to adduce the evidence assists one way or the other on whether he did or did not appreciate the seriousness of his misconduct as a director of Morija, or on whether there would be a continuing risk to the public if he was given leave to continue as a director of Sundernote and IGL. It could be that his legal advisers ought to have advised him that he should not seek to controvert any aspect of the admissions to which he had attached his signature in the disqualification undertaking. But if they did not (as seems possible – see in this respect what his solicitors had written in their letter of 5 February 2007, mentioned in paragraph 31 above), I do not see that his application for leave is thereby rendered any weaker than it would have been if his affidavits had not raised the time of discovery issue. It is worth repeating that, in the skeleton argument of counsel for Mr Kluk for the hearing before the Registrar, no reliance is placed on the issue in support of Mr Kluk’s application to be granted leave.

[49]In paragraph 44 above I said that I agreed with what Mr Davis-White said ‘up to a point’. The point up to which I agree is the point in the foregoing paragraph. However, I do not agree with Mr Davis-White’s next point, which is that the weight which the Registrar gave to the affidavits having sought to reopen the time of discovery of the letters of credit fraud means that he took an irrelevant factor into account to such an extent that his final decision is vitiated and cannot be allowed to stand. As I read the judgment the Registrar would have come to the same conclusion anyway. In my view he had stated his conclusion in paragraph 23 of his judgment, (which I quoted, together with paragraph 24, in paragraph 40 above). Paragraph 24 is the point at which the Registrar first moved to the time of discovery issue. It is true that he says quite a lot about it in the remainder of the judgment, but I do not believe that it was the basis of the conclusion.

[50]As I read the judgment, it is not the case that in paragraph 23 the Registrar says that on grounds of protection of the public leave cannot be given, and that in paragraph 24 he explains that the reason why the public would not be protected is because Mr Kluk’s affidavits raised the time of discovery issue. Rather the relationship is that in paragraph 23 the Registrar states his conclusion that leave cannot be given for a combination of reasons which have already been mentioned in earlier paragraphs, and that in paragraph 24 he says that the time of discovery issue reinforces the conclusion. I do not agree that the time of discovery issue reinforces the conclusion, but in my judgment there were sufficient other factors which led to the conclusion without any need for it to be reinforced. Paragraph 24 begins:

‘Any confidence that I might have had on this score was shattered when I read the Applicant’s affidavit evidence [raising the time of discovery issue].’ ‘This score’ is a reference to whether the public would be protected if Mr Kluk was granted leave. In the context of the judgment as a whole it seems plain to me that the Registrar is not saying that, until he read Mr Kluk’s affidavits, he had confidence on the score, but the affidavits destroyed that confidence. Taken with all that has gone before ‘Any confidence that I might have had on this score’ could be paraphrased as ‘Even if I had had any confidence on this score’

. And implicit in that is that the Registrar did not have any such confidence anyway.

[51]In previous paragraphs the Registrar had noted several highly pertinent aspects of the facts. In paragraph 13 he noted that both matters of unfitness set out in the schedule to the disqualification undertaking ‘concerned false documentation and the misleading of a bank, when borrowing money.’ He added:

“Morija acted fraudulently and although the Applicant did not perpetrate the fraud himself, he was, as Mr Green said in paragraph 7 of his skeleton argument, complicit in it from January 2003, when he discovered it.”

He described two cases in which leave had been given. One was TLL Realisations, which I have already mentioned. The other was re Hennelly’s Utilities Ltd

[2005] BCC 542

. He said of those cases:

“There are two important features which distinguish the case before me from those mentioned above. First, and foremost, the conduct which led to the Applicant being disqualified involved fraud, not fraud on his part, but fraud, nevertheless, in which he was complicit. Secondly, and consequentially, the disqualification period is ten years.”

Then, as I have mentioned earlier, the Registrar cited at some length extracts from the judgment of Lloyd J in the Stern case (see paragraph 33 above). He was plainly of the opinion that there was an affinity of principle, even if not of magnitude, between the factors which led the learned judge to refuse leave in that case, and the circumstances of this case. 52. The Registrar noted all the factors which I have identified in the foregoing paragraph before stating his conclusion (or, at least, what I consider to have been his conclusion) in paragraph 23 of his judgment. None of them depends in any way on the circumstance, to which the Registrar turned in paragraph 24, that Mr Kluk had raised the time of discovery issue in his affidavits, thereby deservedly attracting the Registrar’s disapproval. 53. I note also that, as I read the judgment, the Registrar effectively moved on from the time of discovery issue part way through paragraph 27 (quoted in paragraph 41 above). One point which he goes on to make is that to grant leave for Mr Kluk to continue as a director of Sundernote and IGL would ‘substantially reduce the effectiveness of the undertaking as a deterrent’. In my view this links in with something that the Registrar had said in paragraph 23 of his judgment (before he said anything about the time of discovery issue). He said that the paragraph of Lloyd J’s judgment in the Stern case which I quoted in paragraph 39 above reflected exactly how he felt about Mr Kluk’s application for leave. In that paragraph Lloyd J said that to allow Mr Stern to be a director of a named company ‘would substantially reduce the effectiveness of the order as a deterrent, if nothing else’. 54. I think it likely that, when the Registrar returned to the deterrent point in his paragraph 27 he had in mind a consideration which seems to me to have much force. Until 2003 Mr Kluk had been a director of and a shareholder in a company which dealt in work-related textile goods. In 2003, in connection with that company, he did things on account of which he agreed that he should be disqualified from being a director of a company for the long period of ten years. By the time of the disqualification he was a director of another company which carried on a similar business, the shareholders of which were his wife and trustees for the two of them. What message about the disqualification regime would it convey to directors of similar companies if he was given permission by the court to continue running (with two other directors, recently appointed from long term employees) the same sort of company, carrying on the same sort of business, as he had been running (with two other directors) before? The wrong message, I suggest. It would give the impression that the disqualification regime has no real teeth because, even in cases of serious misconduct, it is not difficult to obtain leave to continue to manage another company. 55. Accordingly, for the reasons which I have explained I do not accept Mr Davis-White’s contention that the Registrar’s decision to refuse leave was based on the single factor of Mr Kluk having inappropriately attempted to raise the time of discovery issue in his affidavits. I accept that that factor by itself ought not to have had any significant impact on whether leave should have been given. However, there were other factors – factors which the Registrar alluded to in his judgment and which I believe he did take into account – that did impact on that question. As I interpret the Registrar’s judgment, reading it as a whole and not limiting myself to the opening sentence of paragraph 24 (‘Any confidence that I might have had on this score was shattered when I read the Appellant’s affidavit evidence …’), I consider that the Registrar would still have refused leave even if Mr Kluk had not said what he did in the affidavits about the time of discovery issue. 56. It follows that, returning to the formulation in Mr Green’s skeleton argument which I mentioned in paragraph 43 above, the appeal can only be allowed if the Registrar’s decision was ‘outside the generous ambit within which a reasonable disagreement is possible’. In my judgment the decision was well within that generous ambit. Consequently the appeal does not reach the stage where, had I considered that the Registrar’s decision could not stand, it would have fallen to me to perform the balancing exercise myself. I am not going to prolong this judgment by performing that exercise nevertheless. I will only say that it does not appear to me to be an easy one. There are strong considerations pulling in conflicting directions. In favour of a grant of leave are the following: that there is a particularly strong case of need on the part of Sundernote and IGL for Mr Kluk to be able to remain a director; that (perhaps a particular aspect of the same point about need) a satisfactory business which provides employment for several persons is seriously at risk of having to be closed if Mr Kluk cannot remain as a director; and that Mr Kluk did not himself perpetrate either of the two frauds. Against a grant of leave are the following: that when Mr Kluk found out about the frauds he plainly ought to have revealed them instead of keeping quiet and hoping that no-one would find out; that, although the frauds were perpetrated by Mr Kluk’s brother, Mr Kluk would have taken a personal benefit from them if they had succeeded; that a grant of leave would (as I have said in paragraph 54 above) give altogether the wrong message to directors of private companies generally; and that ten years is a long period of disqualification, longer (if I recall correctly what I was told) than the term in any other case where leave has been granted.

Conclusion

[57]For the reasons set out above in this judgment I dismiss this appeal.