Spencer Michael v (1) the Official Receiver (2) Secretary of State for Business, Innovation and Skills [2010] EWHC 2246 (Ch)

Case No 13192/2006[2010] EWHC 2246 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand London WC2A 2LLDate Thursday, 15 July 2010
Before
MR JUSTICE ARNOLD--------------------­
Between
SPENCER MICHAELApplicant(1) THE OFFICIAL RECEIVERRespondents(2) THE SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLSRespondent--------------------­Digital Transcript of Wordwave International,a Merrill Communications Company101 Finsbury Pavement London EC2A 1ERTel No: 020 7422 6131 Fax No: 020 7422 6134Web: www.merrillcorp.com/mls Email: mlstape@merrillcorp.com--------------------­MR S MICHAEL appeared in person for in personMR D LEWIS (instructed by Treasury Solicitors) appeared for Respondents--------------------­Judgment
[1]MR JUSTICE ARNOLD: This is an application by Mr Spencer Michael pursuant to section 4(2) of the Human Rights Act 1998 for a declaration that Schedule 4A paragraph 5(2) of the Insolvency Act 1986 and section 11 of the Company Directors Disqualification Act 1986 are incompatible with Article 6 of the European Convention on Human Rights.[2]The background to the application involves two sets of insolvency proceedings. The first concerns Mr Michael personally. On 21 February 2005 Metropolis Apartments Ltd issued proceedings against Mr Michael seeking payment of deposits on contracts for the purchase of leasehold properties which he had failed to complete. On 5 September 2005 judgment was entered against Mr Michael in the sum of £116,725.56. On 23 December 2006 the creditor presented a bankruptcy petition. At the adjourned hearing of the petition on 29 March 2007, a bankruptcy order was made against Mr Michael. Various applications were made by Mr Michael in an attempt to have the bankruptcy order set aside. Those were dismissed by consent on 14 February 2008. At the public examination of Mr Michael on 8 February 2008, it was ordered that Mr Michael's automatic discharge be suspended until 29 June 2008.[3]The second set of insolvency proceedings are a set of seven winding up petitions against seven companies of which Mr Michael was the sole or a controlling director and the sole shareholder. It is not necessary for the purpose of this judgment to identify all seven companies, but they included a company called Spencer Michael Consultancy Ltd. The winding up petitions were presented by the Secretary of State for Trade and Industry, as he then was, on 7 November 2006 on public interest grounds under section 124A of the Insolvency Act 1986. The petition grounds for each company were similar. It is not necessary for present purposes to set out the grounds in detail, but there were a series of grounds, including matters such as failure to keep adequate financial records, failure to act with financial probity, and so on.[4]Following the making of the bankruptcy order against Mr Michael on 29 March 2007, Mr Michael informed the court that he had been replaced as a director of the companies by a Ms Marcela Frolikova from 20 March 2007, that is to say, prior to the making of the bankruptcy order. It was subsequently directed that there be a preliminary issue as to the ability of solicitors instructed on behalf of the companies to act for the companies on instructions from Ms Frolikova. In the event, the solicitors ceased to act anyway, as I understand it, but the underlying issue of Ms Frolikova's entitlement to give instructions on behalf of the companies remained.[5]The matter came before Mr John Jarvis QC sitting as a Deputy High Court Judge on 25 October 2007. In his judgment, he held that Ms Frolikova had not been validly appointed as a director and, moreover, that a purported appointment had been backdated. In the course of his judgment, Mr Jarvis found that Ms Frolikova was "being used as a stooge by Mr Spencer Michael in order for him to have influence over these companies".[6]Ms Frolikova subsequently appealed against that decision, but although she obtained permission to appeal from Rimer LJ, she did not appear at the substantive hearing of the appeal before the Court of Appeal. She sought, in her absence, an adjournment of the hearing. That application was refused by the Court of Appeal and, in consequence, the Court of Appeal dismissed her appeal by an order dated 14 July 2008. The Court of Appeal's order included permission to Ms Frolikova to apply to set aside that order. She subsequently made such an application, but that application was dismissed by Lloyd LJ on 22 January 2009.[7]Following the conclusion of the preliminary issue proceedings, the upshot was that the companies had no validly appointed directors. The petitions were heard by Registrar Jaques on 29 April 2009. There being no appearance or opposition by the respondents to the petitions, the winding up orders were duly made.[8]I now turn to the genesis for the present application. On 13 June 2008, the Official Receiver applied for a bankruptcy restrictions order (a "BRO") under paragraph 2 of Schedule 4A of the Insolvency Act 1986. The grounds of the application in summary were threefold. First, that Mr Michael had failed to maintain, preserve or deliver up adequate accounting records relating to his business activities as a sole trader. Secondly, that Mr Michael had entered into tenancy agreements in respect of two properties comprised within his estate and vested in his trustee and had received, but failed to account for, receipt of a holding deposit of £1,592.31. Thirdly, that Mr Michael had continued to act as a director of the companies following the making of the bankruptcy order in breach of section 11 of the Company Directors Disqualification Act 1986.[9]On the same day that the Official Receiver applied for the BRO, the Official Receiver also applied for an interim bankruptcy restrictions order (an "IBRO") under paragraph 5 of Schedule 4A of the 1986 Act. In support of the application for an IBRO, the Official Receiver relied upon the same prima facie grounds as he relied on in respect of the substantive application. So far as the question of public interest was concerned, the Official Receiver relied upon the matters set out in paragraphs 5 to 12 of a report by the Deputy Official Receiver dated 6 June 2008. The key points made in those paragraphs are those contained in paragraphs 10 and 11 which read as follows:
"10. In the absence of an interim bankruptcy restrictions order, Mr Michael will be able to trade through limited liability companies (such trading having been a major contributing factor in his insolvency) until the making of a bankruptcy restrictions order against him. 11. Given that Mr Michael has already acted in breach of section 11 CDDA, there is a real risk he will do so again, however, were an interim bankruptcy restrictions order to be in place such further breaches may trigger the criminal sanctions imposed by section 13 CDDA, which sanctions may deter such behaviour and afford protection to the public."
[10]Mr Michael opposed the making of an IBRO. The application came before Registrar Derrett on 7 July 2008. I have not had the benefit of seeing a transcript of Registrar Derrett's judgment on that occasion. Counsel for the Secretary of State has pointed out, however, that it can be seen from the evidence which was before Registrar Derrett that Mr Michael failed to adduce any evidence to counter the allegation that he had failed to maintain, preserve and to deliver up accounting records for the period from February to October 2005. Mr Michael contended in his evidence that the records may have been removed by a Ms Wojna or a Mr McGarrie. In both cases, any records removed by these individuals could only have related to a period prior to that which was the subject of complaint in the application.[11]As to the second allegation made by the Official Receiver, Mr Michael admitted that he had signed the tenancy agreements following the bankruptcy order made against him.[12]So far as the third allegation is concerned, Mr Michael denied, and has subsequently continued strenuously to deny, that he had acted as a director of the companies following the making of the bankruptcy order. Counsel for the Secretary of State pointed out, however, that this denial was contradicted by the fact that Mr Michael had made a witness statement on 25 April 2007 resisting the winding up petitions in which he stated in paragraph 2:
"The statement is made in my capacity as a director of all the companies above which are the subject of this action."
[13]Furthermore, counsel for the Secretary of State submitted that, even if the findings of fact made by Mr Jarvis QC were in themselves inadmissible in evidence by virtue of the rule in Hollington v Hewthorn [1943] KB 587, nevertheless it was apparent from his judgment that there was evidence before him to contradict Mr Michael's denial of having continued to act as a director of the companies. In particular, Mr Jarvis QC said at paragraph [20] of his judgment:
"The most telling piece of evidence, in my view, is the hearing that took place on 22 May involving Fairview Homes and where, in those circumstances, counsel had appeared both for Mr Michael and for the companies and discovered the fact of the bankruptcy of Mr Michael and the effect that that would have on his directorships. Then, when instructions were taken, counsel said he could no longer act plainly on the basis that there was no one who could give instructions on behalf of the companies."
[14]In any event, Registrar Derrett duly made the IBRO applied for. The order is in conventional form and continues in effect until either(a) the determination of the application for a BRO or(b) the acceptance of a bankruptcy restrictions undertaking made by Mr Michael or(c) a discharge of the order on the application of either party.

(c) of the notes to the

[15]Following the making of that order, Mr Michael did not appeal against it. Since then, the underlying application for a BRO has been adjourned on a number of occasions, initially for the filing of evidence and more recently, as I understand it, pending the determination of the present application.[16]The present application was made by ordinary application issued on 15 June 2009. It is to be observed that that was some six weeks after the winding up orders were made by Registrar Jaques. Registrar Jaques' orders were sealed on 11 May 2009 and Mr Michael told me that he had not received them until some time after that.[17]More importantly, to my mind, the application was made over 11 months after the order of Registrar Derrett of 7 July 2008. Mr Michael had no real explanation as to the reasons for that delay other than, as I see it, to point to the fact that it was not until the making of the winding up orders that the consequences of Registrar Derrett's order really came home to him.[18]Mr Michael's ordinary application sets out the following grounds in support of the claim for a declaration of incompatibility:
"1. The OR can, on the above construction, manipulate the winding up proceedings by cutting off the company's effective source of defence and or representation through the imposition of an IBRO, albeit one which subsequently transpires, during substantive proceedings, to be wholly misconceived. By the time of the substantive proceedings, of course, due to the absence of an effective defence and or representation the OR can wind up the companies in the public interest. That cannot be right. The independence of the OR (whether actual or perceived) must remain unperturbed. Unfortunately the OR in presenting prima facie evidence acts as judge, jury and prosecutor combined: he is responsible for producing, selecting and presenting the said evidence. This invariably allows the OR to cherry pick evidence thereby ignoring evidence in the past which may be germane to the person against whom the IBRO is sought. 2. The OR can obtain the IBRO on the basis of evidence which raises a prima facie but not cogent case of fraud or dishonesty, contrary to established principles according to which fraud can only be alleged where there exists cogent evidence. It cannot possibly be in the interests of justice and/or fairness for the OR, a court-appointed official, to use prima facie evidence to make good an allegation of fraud and or dishonesty for the purposes of an IBRO where it could later transpire in a substantive hearing that such evidence was misconceived. 3. Statutory provisions have to be construed in a way which is compatible with the ECHR S4A 5(2) and or S11 CDDA must also be construed so as to give effect to Convention rights."
[19]The ordinary application goes on to say that Mr Michael seeks an[20]It is necessary to point out at this juncture that, even if a declaration of incompatibility were to be made by this court, it would not have any of the consequences that Mr Michael seeks. In particular, it would not have any effect whatsoever on the IBRO made by Registrar Derrett on 7 July 2008. When I pointed this out to Mr Michael in the course of argument, and at my prompting, he requested that, in the alternative, his application be treated as an application for permission to appeal out of time against Registrar Derrett's order on the same grounds.[21]That application was opposed by counsel for the Secretary of State. He correctly pointed out that this application has been pending for over a year on the basis that it is simply an application for a declaration of incompatibility. Furthermore, that being so, no transcript has been obtained of Registrar Derrett's judgment. Still further, Mr Michael has not filed an appellant's notice, nor has he adduced evidence as to the reasons for his delay in seeking permission to appeal.[22]I acknowledge the force of all of those points. On the other hand, it has to be borne in mind that Mr Michael has for some time now been acting in person in these proceedings. Moreover, his ordinary application, specifically the third ground, can be read as invoking section 3 of the Human Rights Act 1998, even though it does not do so explicitly. In addition, his ordinary application makes it clear that he was seeking to have the IBRO set aside.[23]Counsel for the Secretary of State did not identify any particular prejudice that arose as a result of Mr Michael's delay. Moreover, I find it difficult to see that the delay, in and of itself, will have had any particular consequences given that, in the meantime, the IBRO has been in place and the underlying application for a BRO has yet to be determined. In all the circumstances, I am prepared, as an indulgence, to give Mr Michael an extension of time for seeking permission to appeal against Registrar Derrett's order, but that is purely on the basis that the application for permission to appeal is on precisely the same grounds as are already set out in the ordinary application, and hence that the order was wrong in law. Mr Michael accepted during the course of argument that he was not in a position to attack Registrar Derrett's exercise of her discretion if the law which she had applied was correct.[24]I turn, then, to the two substantive grounds upon which Mr Michael seeks his declaration of incompatibility or, in the alternative, permission to appeal against Registrar Derrett's order.[25]So far as the first ground is concerned, counsel for the Secretary of State submitted that Mr Michael had no standing to seek a declaration of incompatibility on that basis. He pointed out that the petitions to wind up the companies were directed at the companies and not against Mr Michael personally. Following the making of the bankruptcy order, Mr Michael was not in a position to give instructions on behalf of the companies as a director. That did not prevent the companies from having alternative directors appointed by the shareholders. In the present case, however, the only registered shareholder of each of the companies was Mr Michael and his shareholdings therefore passed to his trustee in bankruptcy on the making of the bankruptcy order.[26]Counsel for the Secretary of State was prepared to accept for the purposes of this application that the relevant test to be applied was the test of a sufficient interest stated by Lord Steyn in paragraph [21] of his speech in R (Rusbridger) v Attorney General [2003] UKHL 38, [2004] 1 AC 357 rather than the more stringent test suggested by Lord Rodger in paragraphs [53] to [57] of his speech in the same case. He submitted that, even on that basis, Mr Michael, as distinct from the companies, had simply no interest which would support the first ground upon which the declaration of incompatibility was sought.[27]I accept that submission. It must be borne in mind that the argument being presented by Mr Michael is that there has been an infringement of a party's rights under Article 6 of the ECHR. If one asks whose rights are alleged to have been infringed so far as the first ground is concerned, it is not Mr Michael's rights, but the companies' rights. It is the companies who are said to have been prevented from mounting a proper defence against the petitions to wind up the companies as a result of the IBRO.[28]Mr Michael argued that, in circumstances such as these, there was no practical distinction between the companies and himself. He was in some cases the sole, or in others the controlling, director. He was the sole shareholder. He was the person who had all the knowledge. Moreover, he was the person who, up until the making of the bankruptcy orders, had had conduct of the companies' defence of the petitions. Even so, I do not see how it can be argued that, if there has been a contravention of anyone's Article 6 rights, the person whose Article 6 rights have been infringed is Mr Michael. It would be the companies' rights that have been infringed, not Mr Michael's.[29]Even assuming, however, that Mr Michael has standing to seek a declaration of incompatibility, it seems to me that there are at least two further fundamental objections to the first ground.[30]The first is that it is well established that the making of a declaration of incompatibility is an exceptional course and a measure of last resort (see Lord Bingham in Sheldrake v DPP [2004] UKHL 43, [2005] 1 AC 264 at paragraph 28 and R v A (No. 2) [2001] UKHL 25, [2002] 1 AC 45 at paragraph 44 per Lord Steyn). The primary remedial measure for a potential infringement of Convention rights under the Human Rights Act 1998 is not a declaration about incompatibility under section 4. It is to adopt a Convention-compliant interpretation of the relevant legislation pursuant to section 3 of the 1998 Act. In my judgment, it would not be a correct exercise of the court's discretion to make a declaration of incompatibility under section 4 without it first having been established that it was not possible to arrive at a Convention-compliant interpretation under section 3.[31]That point is reinforced in the circumstances of the present case by the fact that Mr Michael's primary remedy, if he were aggrieved by Registrar Derrett's order, was to seek to appeal against it, yet he did not do so until it was pointed out to him by me during the course of argument that that would be a more satisfactory way forward.[32]The second fundamental objection is that it is, in my judgment, quite simply misconceived for Mr Michael to suggest that it is open to the Official Receiver to manipulate the winding up proceedings by applying for an IBRO or that the Official Receiver acts as judge, jury and prosecutor combined. On the contrary, the legislation provides for a clear separation of duties. It is the Official Receiver's duty to consider whether there are grounds for seeking a BRO and an IBRO and, if so, to make an application. It is then for the court to consider whether the grounds are made out and, in the case of an IBRO, whether it is appropriate to exercise the court's discretion to make the order under paragraph 5(2) of Schedule 4A. In so doing, it is the court's duty to ensure that the Article 6 rights of the respondent to the application are respected.[33]As counsel for the Secretary of State pointed out, even if there were grounds in a particular case for suggesting that the Official Receiver had engaged in inappropriate conduct in obtaining an IBRO, that would not in any way lead to the conclusion that the legislation itself was incompatible with Article 6 of the ECHR. In such a case, there would be remedies open to a person aggrieved as a result of the officeholder's conduct. There would be potential remedies in private law for malicious prosecution or misfeasance in public office. There would be a potential remedy in public law by way of judicial review. Above all, there would be the possibility of an appeal. The position would be no different to any other case where an order had been obtained as a result of an abuse of a particular jurisdiction or procedure.[34]For all of those reasons, I conclude that there is no basis for a declaration of incompatibility with Article 6 ECHR on the first ground. For the last of those reasons, I conclude that Mr Michael should not have permission to appeal against Registrar Derrett's order on that ground because that it has no real prospect of success.[35]I turn, therefore, to the second ground. So far as that ground is concerned, as counsel for the Secretary of State pointed out, it proceeds upon a misconception as to the statutory basis for the making of an IBRO. Paragraph 5(2) of Schedule 4A to the 1986 Act provides:
"The court may make an interim bankruptcy restrictions order if the court thinks that (a) there are prima facie grounds to suggest that the application for the bankruptcy restrictions order will be successful; and (b) it is in the public interest to make an interim order."
[36]So far as the first of those criteria is concerned, sub-paragraphs 2(1) and (2) of Schedule 4A provide that:
"(1) The court shall grant an application for a bankruptcy restrictions order if it thinks it appropriate having regard to the conduct of the bankrupt (whether before or after the making of the bankruptcy order). (2) The court shall, in particular, take into account any of the following kinds of behaviour on the part of the bankrupt-…"
[37]There is then a list of kinds of behaviour running from (a) through to (m). It is correct that amongst those is "(l) fraud or fraudulent breach of trust". However, most of the other kinds of behaviour identified in sub-paragraph 2(2) have nothing to do with fraud. They include "(a) failing to keep records which account for a loss of property by the bankrupt, or by a business carried on by him, where the loss occurred in the period beginning 2 years before petition and ending with the date of the application"; "(b) failing to produce records of that kind on demand by the official receiver or the trustee"; "(c) entering into a transaction at an undervalue"; and so on.[38]As to the correct approach to be adopted on an application for an IBRO under paragraph 5(2), counsel for the Secretary of State drew to my attention the decision of Chief Registrar Baister in the Official Receiver v Marchant [2006] BPIR 1525. In his judgment, Chief Registrar Baister said:
"12. It seems to me that the requirement to demonstrate that it is in the public interest to make an interim order must entail doing more than demonstrating a prima facie case for the making of the final order. Otherwise Parliament would not have given the court a discretion and would not have imposed the public interest in paragraph 5(2)(b) of Schedule 4A to the 1986 Act. It seems to me the test must contemplate a requirement to demonstrate that the public is in some immediate need of protection during the gap to which I have referred, or something of that kind. That cannot follow automatically from the prima facie case test. Otherwise Parliament would have devised a mechanism to provide for the automatic imposition of restrictions immediately following the issue or service of the substantive application (for example, by providing for the automatic discharge of the bankrupt to be suspended pending the hearing of the application). It did not do so. It provided a specific mechanism to cater for public protection during the gap, the period defined by para 5(1) of Schedule 4A to the 1986 Act. 13. It seems to me there ought to be a connection between the allegations made and the need for public protection. There may be cases where the nature of the allegations make it clear that the public needs the protection of an interim bankruptcy restrictions order ... 17. The first is that the making of a bankruptcy restrictions order, whether an interim order or a final order, is a serious matter. The making of an order has far-reaching consequences for any person against whom one is made, including exposure to prosecution in certain circumstances (see section 11(1) of the Company Directors Disqualification Act 1986). It follows that great care should be taken in the conduct of these proceedings and any person coming to court seeking an order should be adequately prepared and ready to make detailed submissions in support of the relief sought. It is not enough simply to come to court and ask for an order and expect to obtain one without making the case fully and adequately by reference to the evidence and the law."
[39]As counsel for the Secretary of State submitted, that passage demonstrates that, in order to obtain an IBRO, the Official Receiver must adduce cogent evidence which establishes both prima facie grounds under paragraph 5(2)(a) of Schedule 4A of the 1986 Act and a public interest under paragraph 5(2)(b). The respondent to the application has the opportunity, which Mr Michael availed himself of, of filing evidence in opposition to the application for an IBRO and of making submissions against the making of the order. An order will only be made if the court is satisfied, in the light of the evidence filed and submissions made by both sides, that the criteria established by paragraph 5(2) of Schedule 4A are satisfied. In those circumstances, there is no arguable case that the statutory scheme involves any infringement of the Article 6 rights of the respondent to the application.[40]Accordingly, I see no basis for the making of a declaration of incompatibility on Mr Michael's second ground. Likewise, I do not consider it appropriate to grant Mr Michael permission to appeal against Registrar Derrett's order on that ground since it stands no real prospect of success.[41]For those reasons, the application for a declaration of incompatibility is dismissed and the application for permission to appeal is refused.

order

"You must not act as a director of a company or (directly or indirectly) take part or be concerned in its promotion, formation or management, or act as a member of a limited liability partnership or (directly or indirectly) take part or be concerned in its promotion, formation or management unless you are granted permission by the court (section 11 Company Directors Disqualification Act 1986; Limited Liability Partnerships Regulations Act 2001). If you act in breach of this prohibition you commit a criminal offence and will also be personally responsible for any debts of the company or limited liability partnership in question." order: that "(1) the IBRO be set aside and any substantive proceedings be dismissed in the light of the declaration of incompatibility; and (2) in the interim a stay of any substantive BRO proceedings pending the outcome of this application; (3) damages for breach of a Convention right."