D.C., H.S. AND A.D. v. THE UNITED KINGDOM
Inadmissible
Nicolas Bratza
The applicants are United Kingdom citizens, born in 1947, 1948 and 1955 respectively. The first and third applicants live in London, the second applicant lives in Gloucester. They were each directors of D Limited (“ D Ltd”), a company which traded as a members' agent in the Lloyd's insurance market. They are represented before the Court by Messrs Titmuss, Sainer Dechert, solicitors, London. A. s, may be summarised as follows. On 29 March 1995 the Secretary of State for the Department of Trade and Industry (“the Secretary of State”) issued an originating summons seeking orders under Section 6 of the Company Directors (Disqualification) Act 1986 (“CDDA”). The affidavit which was filed in support of the summons made a number of allegations: that all three applicants had breached Section 151 of the Companies Act 1985 (“the 1985 Act”), which prohibits a company from giving financial assistance in relation to the purchase of its own shares; that they had acted to the detriment of D Ltd's creditors by permitting an unsecured, interest-free loan which conferred no benefit on D Ltd; that they had knowingly caused and permitted the production of accounts of D Ltd which did not give a true and fair position of the company's financial position, and that they gave security to a bank over payments of Advance Corporation Tax in preference to other creditors. The applicants filed affidavits in reply, as they were required to do if they wished to challenge the affidavit in support of the Secretary of State's position. They also filed a number of affidavits from third parties who were well-known and respected in the insurance industry, and who deposed to the applicants' fitness to be company directors, their standing in Lloyd's and their good character. The Secretary of State applied to strike out the character evidence under Order 41 rule 6 of the Rules of the Supreme Court, which empowers the court to strike out of any affidavit “any matter which is scandalous, irrelevant or otherwise oppressive”. The Secretary of State's application for the character evidence to be struck out was granted on 1 July 1996 by Blackburne J. The judge recalled that character evidence was not ordinarily admissible in civil proceedings because it was not probative of any issue. He rejected the applicants' submissions that the evidence was relevant even though there were allegations of dishonesty, and he did not accept that the CDDA proceedings were akin to criminal proceedings by reference to the case of Re Southbourne Meals Ltd [1992] BCC 797. The judge also struck out certain parts of the applicants' own affidavits as conflicting with the rule against hearsay evidence. A Statement of Undisputed Facts was agreed between the applicants and the Secretary of State so that the CDDA proceedings could be decided under the so-called Carecraft procedure (after the case of Re Carecraft Construction Co. Ltd [1994] 1 WLR 172, in which the procedure was described). The parties agreed that, if the Court did not approve summary disposal of the proceedings, no further reference would be made to the Statement. The applicants accepted, by reference to the undisputed facts set out in the Statement, that a disqualification order against each of them was appropriate for the period contended for by the Secretary of State, namely five years for the first applicant, six years for the second applicant, and four years for the third applicant. The Statement set out the three remaining matters, with the charge in each case. The first charge was that the applicants did not know that the loans to one company were unlawful as in breach of Section 151 of the Companies Act 1985, but that they ought to have known. The applicants did not dispute the allegation. The second charge was that a series of unsecured, interest-free loans to that company were potentially to the detriment of D Ltd and its creditors. Again, the applicants did not dispute the allegation. The third charge was that the second applicant had caused D Ltd to prefer a bank over other creditors on one specific occasion. The allegation was not disputed. There followed a statement of mitigation on behalf of each applicant. The substantive hearing was held before the Vice-Chancellor on 4 February 1997. In his judgment, the Vice-Chancellor held as follows: “My function, [...], is to consider the contents of the agreed statement of facts and decide, first, whether a disqualification order ought to be made and, second, what the length of the disqualification period should be. It is of course relevant that the [applicants] do not contest that disqualification orders can properly be made. [...] I am not bound by the agreement between the parties that the facts warrant a disqualification order nor am I bound by their agreement as to the length of the disqualification periods. It is open to me if so advised, having regard to the contents of the agreed statement of facts, to form a different view. It would I think be unlikely for a judge to do so but the judicial function requires me to direct my mind to the facts in the agreed statement and to consider what the right order to be made should be. (...) [The] Section 151 matter is in my view the most important of the three. The facts which constitute the breach of Section 151 were facts known to each of the three [applicants]. I accept that none was aware at the time that what was being done in advancing moneys to H Ltd. [the related company] did constitute a breach of Section 151, but I would conclude without difficulty, and it is indeed accepted by each of the [applicants], that each ought to have known that that was so. It is important however that I should record that the making of the loans was not done for any personal gain which it was thought might thereby be obtained by any of the directors. It was not accompanied by any want of probity or dishonesty.  (...) Section 151 is part of the statutory scheme imposed in order to protect the public from the conduct of limited companies carrying on business with the protection of limited liability. It is a provision which is sometimes overlooked and treated as of little account. It never should be so but where that does happen and where, as is often the case, no point resulting from it ever emerges into the public view, no adverse consequences will follow. In the present case it may be a misfortune for the three directors that the Lloyd's litigation drew them into its clutches, brought about the need for the companies to go into insolvent liquidation, brought an independent mind to bear upon the manner in which the company's affairs had been conducted in the past and led to the Section 151 breaches becoming known to the Secretary of State. That is a misfortune for the directors but it does not in itself reduce the seriousness of the Section 151 breaches. I am of the opinion that those breaches justify disqualification orders. This is, of course, an easier conclusion for me to reach than it would have been had that been disputed by the [applicants], which it is not. The question, therefore, is what length of disqualification period would be appropriate. I repeat that in approaching this question I regard the breaches of Section 151 as serious. I regard the conclusion that disqualification orders are appropriate as a result of these breaches as being a conclusion impelled by a serious misfeasance on the part of the directors in managing the affairs of the company that the Section 151 breaches represent. (...) For my part, first because I think that the agreed periods were on the stiff side so far as the [applicants] were concerned, second because I do not regard the post-31st May 1992 loans as constituting a matter which should have any real weight in the balance and, third, because of the invidious comparison that there might appear to be with the treatment of Mr Lines [in a recent case], I think it right that the periods of disqualification should be five years for [the second applicant], four years for [the first applicant] and three years for [the third applicant]. That is one year less than the Secretary of State was contending for but I do not imagine that that will be a reason why the Secretary of State would wish a full trial.” Costs were ordered against the applicants, and the Vice-Chancellor refused an application by the first and second applicants for an extension of the statutory period of three weeks allowed to the applicants to divest themselves of their directorships. He did, however, indicate that it would be open to them towards the end of that period to return to him with more specific reasons which called for an extension. The first applicant's request to be permitted to continue as director of the trading company of the group for twelve months was granted on 24 February 1997, subject to conditions. B. Relevant domestic law Section 1 of the Company Directors Disqualification Act 1986 ("the 1986 Act") reads as follows: "(1) ... a court may, and under Section 6 shall, make against a person a disqualification order, that is to say an order that he shall not, without leave of the court (a) be a director of a company, or (b) be a liquidator or administrator of a company, or (c) be a receiver or manager of a company's property, or (d) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order." Section 6 of the 1986 Act reads: "(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." Section 151 of the Companies Act 1985 reads as follows: “(1) Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place. (2) Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred. (3) If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both.” Rule 3 of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987 reads as follows: “(1) There shall, at the time when the summons is issued, be filed in court evidence in support of the application for a disqualification order, and copies of the evidence shall be served with the summons on the respondent. (2) The evidence shall be by one or more affidavits, except where the applicant is the official receiver, in which case it may be in the form of a written report (with or without affidavits by other persons) which shall be treated as if it had been verified by affidavit by him and shall be prima facie evidence of any matter contained in it. (3) There shall in the affidavit or affidavits or (as the case may be) the official receiver's report be included a statement of the matters by reference to which the respondent is alleged to be unfit to be concerned in the management of a company.”