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Judgments - Official Receiver (Appellant) v. Wadge Rapps & Hunt (a firm) and another and two other actions

HOUSE OF LORDS

SESSION 2002-03
[2003] UKHL 49

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Official Receiver (Appellant) v. Wadge Rapps & Hunt (a firm) and another and two other actions

ON

THURSDAY 31 JULY 2003

The Appellate Committee comprised:

Lord Steyn

Lord Hoffmann

Lord Hope of Craighead

Lord Millett

Lord Walker of Gestingthorpe

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Official Receiver (Appellant) v. Wadge Rapps & Hunt (a firm) and another and two other actions

[2003] UKHL 49

LORD STEYN

My Lords,

    1. For the reasons given in the opinions prepared by my noble and learned friends Lord Hope of Craighead, Lord Millett and Lord Walker of Gestingthorpe I would also allow the appeal.

LORD HOFFMANN

My Lords,

    2. For the reasons given by my noble and learned friends, I too would allow this appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

    3. The facts and legislative background have been described and analysed by my noble and learned friend Lord Millett, whose speech I have had the privilege of reading in draft and with which I am in full agreement. I should like to add just a few words of my own, simply to explain why I have come to the same conclusion as he has done on the issue which is before us in this appeal.

    4. The question is whether the powers conferred by section 236 of the Insolvency Act 1986 on the office-holder of a company which is in liquidation or is the subject of administration or receivership proceedings can lawfully be exercised for the purpose only of obtaining evidence for use in disqualification proceedings under section 6 of the Company Directors Disqualification Act 1986 ("the Disqualification Act"). The expression "office-holder" is defined in section 234(1). It means the administrator, the administrative receiver, the liquidator or the provisional liquidator, as the case may be. For the purposes of section 236 the expression includes, in the case of a company which is being wound up by the court in England and Wales, the official receiver, whether or not he is the liquidator.

    5. The applications with which this case is concerned were made by the official receiver. At the time they were made on 26 September 2000 he was not the liquidator of the company, as a liquidator was appointed in his place in June 2000 under section 137 of the Insolvency Act 1986. But the issue is of interest to all office-holders as defined in section 234(1), not just to the official receiver of a company which is being wound up by the court in England and Wales who is not its liquidator. This is because the powers conferred by section 236 are exercisable by anyone else who for the time being in relation to the company is an office-holder within the meaning of section 234(1). The jurisdiction which is given to the court to make the order does not distinguish between different kinds of office-holder. But the fact that they are exercisable by the official receiver, whether or not he is the liquidator, as well as by the persons mentioned in section 234(1), has an important bearing on the purpose or purposes for which those powers may be exercised.

    6. Had it not been for the extended meaning which is given to the expression "office-holder" by section 236(1), one might have thought that the powers in sections 235 and 236 were conferred on the liquidator (to take the example of a company which is in liquidation) solely to assist him in the task of getting in and realising the assets of the company for the benefit of the creditors. It is clear that this is the purpose for which section 234 was enacted. Sections 235 and 236 appear in the same group of sections. At first sight they appear to have been designed to assist the liquidator to carry out these tasks as quickly and effectively as possible. Sections 234 and 236 replace with modifications, and extend to administration and receivership proceedings, sections 551 and 561 of the Companies Act 1985 which re-enacted sections 258 and 268 of the Companies Act 1948. Those sections were included in a group of sections dealing with the general powers of the court in the case of a winding up by the court. They were enacted long before the introduction by Part II of the Insolvency Act 1985 of the procedure now contained in sections 6 and 7 of the Disqualification Act for the disqualification of unfit directors of insolvent companies.

    7. But account must now be taken of the fact that section 100 of the Insolvency Act 1985, which replaced section 561 of the Companies Act 1985 and was the immediate predecessor of section 236 of the Insolvency Act 1986, enabled the official receiver to apply to the court for an order under that section "whether or not he is the liquidator of the company". This provision, which was enacted for the first time in section 100(6) of the Insolvency Act 1985, is now incorporated in section 236(1) of the Insolvency Act 1986. It is plain that its purpose is to assist the official receiver in the performance of his investigative role, even although he may not for the time being be the liquidator for the company. The effect is to extend the scope of the powers which are now conferred by section 236. In his case, at least, it cannot be said that they may be used only for the purpose of getting in and realising the assets of the company for the benefit of the creditors.

    8. In my respectful opinion Chadwick LJ's conclusion in the Court of Appeal [2001] EWCA Civ 1227, [2002] Ch 239, 254C-D, that those powers are conferred solely for the better discharge by the liquidator of his functions in the winding up begs the question which lies at the heart of this appeal. I think that it is self-evident that the powers are conferred for the better discharge of those functions or, in the case of administration or receivership proceedings, for the better discharge of their functions in those proceedings by the relevant office-holders. The question that has to be asked and answered is, what are those functions? Are they confined to the basic tasks of getting in and managing or realising the assets of the company?

    9. The wording of section 236 of the Insolvency Act 1986 contains no such limitation. It is not concerned solely with the transfer of the property of the company to the office-holder. Its scope is indicated by subsection (3), which provides that the court may require any of the persons mention in subsection (2) to submit an affidavit to the court containing an account of his dealings with the company or to produce any books, papers or other records in his possession or under his control relating to the company or the matters mentioned in paragraph (c) of subsection (2). The matters mentioned in subsection (2)(c) are "the promotion, formation, business, dealings, affairs or property of the company". There may be a question as to how the court should exercise its discretion when it is making an order under this section. But the jurisdiction which the court is given is expressed in the widest terms.

    10. No mention is made of the Disqualification Act in section 236 of the Insolvency Act 1986. But there is no doubt that these two measures are intended to be read together: see section 21 of the Disqualification Act which provides for the interaction of the two statutes, section 22 which ensures that the terms and expressions that they use are compatible and section 25 which states that they are to come into force simultaneously. There is also a close and important link between section 236(3) of the Insolvency Act 1986 and section 7(3) of the Disqualification Act. Section 236(3) of the Insolvency Act 1986 describes the information which may be the subject of an order made by the court under that subsection on the application of the office-holder. Section 7(3) of the Disqualification Act provides for the making by the office-holder of a report to the Secretary of State if it appears to him that the conditions for disqualification in section 6(1) of the Act are satisfied as respects a person who is or has been a director of the company. Information gathered under section 236(3) which leads to this conclusion must be reported.

    11. I would conclude that the functions of the office-holder include the making of a report to the Secretary of State under section 7(3) of the Disqualification Act if he comes into the possession of information that leads to the conclusion that the conditions for disqualification are satisfied. As Vinelott J observed in Re Polly Peck International plc [1994] BCC 15, 16A-B, the purposes of the liquidation, the administration or the receivership, as the case may be, must include the gathering of information as to the conduct of the affairs of the company and those responsible for it in order that the office-holder can report to the Secretary of State as he is required to do by section 7(3) of the Disqualification Act; see also Bishopsgate Investment Management Ltd v Maxwell [1993] Ch 1, 47-48 per Stuart Smith LJ.

    12. Section 7(4) of the Disqualification Act provides that the Secretary of State or the official receiver may require the liquidator, administrator or administrative receiver of a company, or the former liquidator, administrator or administrative receiver of a company, to furnish him with such information relevant to any person's conduct as a director of a company as he may reasonably require for the purpose of determining whether to exercise, or of exercising, his functions under that section. Here again the language of the subsection is in the widest terms. There is not even the qualification which is built into section 236(3) of the Insolvency Act 1986, that the information requested must be in the possession or under the control of the office-holder. The only qualifications are that the information must be relevant and the requirement must be reasonable.

    13. What then are the conclusions that are to be drawn from these provisions? The Secretary of State and the official receiver are both given the power to require information to be furnished to them under section 7(4) of the Disqualification Act by an office-holder or former office-holder. But the Secretary of State cannot apply to the court for an order under section 236 of the Insolvency Act 1986. Only the official receiver can do so, whether or not he is the liquidator. Furthermore, while all the office-holders mentioned in section 7(4) of the Disqualification Act can apply to the court for an order under section 236, former office-holders cannot do so. The use of the present tense in section 234(1), which is incorporated into section 236(1) by reference, indicates that this group of sections is designed to assist the office-holders while they are in office and not afterwards. This pattern may appear to be untidy, but it is a consequence of the width of the powers conferred by section 7. It does not provide a reason for reading those powers narrowly.

    14. Then there is the question whether the fact that the official receiver has power to require information to be given to him by the office-holders and former office-holders under section 7(4) of the Disqualification Act renders the use by him of section 236 of the Insolvency Act 1986 for the purpose of disqualification proceedings otiose: [2002] Ch 239, 255B-C, per Chadwick LJ. Here again the pattern may appear to be rather untidy. The powers conferred on the official receiver by section 236 are confined to information about the particular company which is being would up or is in administration or receivership. The power to require information to be furnished by an office-holder or former office-holder under section 7(4) extends to the office-holders and former office-holders of "a company". It enables information to be obtained about the person's conduct as a director or former director of more than one company. In the case of former office-holders, the only information that can reasonably be required of them is information which is already in their possession or under their control. But existing office-holders have the power given to them by section 236 to seek out more information about the matters mentioned in subsection (2)(c) than they already have. These features suggest that the correct approach is to treat these provisions as complimentary to each other, and that it would be wrong to read them as having been designed to be read narrowly.

    15. There is a further reason for taking a broad view of these provisions and reading them generously. The overriding purpose of the disqualification regime is to protect the public interest. Success or otherwise in the prosecution of cases for an order under section 6 of the Disqualification Act will depend on the amount and quality of the information that is available. A narrow interpretation of section 236, confining its reach to information which the office-holder needs to get in the property of the company, would increase the risk that instances of commercially culpable conduct will go unpunished. That would not serve the public interest, and it is hard to believe that it was intended by Parliament. Moreover there is nothing in the wording of section 236 of the Insolvency Act 1986 to prevent an office-holder, other than the official receiver, seeking to make use of the powers under that section for disqualification purposes. Nor is there anything in the wording of section 236 read with section 7(4) of the Disqualification Act, when read together, to prevent the official receiver from using the same powers for those purposes whether or not he is the liquidator.

    16. There are practical considerations, too, which point to the same conclusion. Information sought under section 236 may be of use for more than one purpose. Information gathered solely for the purpose of getting in and managing or realising the property of the company may be relevant also for disqualification purposes. It may be quite unclear before the information has been ingathered and scrutinised whether it contains anything to suggest that the conditions mentioned in section 6(1) of the Disqualification Act are satisfied as respects any of the directors or former directors of the company. Yet if it does contain information to that effect the office-holder is obliged to report the matter to the Secretary of State under section 7(3). Is the office-holder to be stopped from getting in such information deliberately, while he is plainly under a duty to report if he obtains it unexpectedly or by accident? A limitation on the powers conferred by section 236 of the Insolvency Act 1986 which gave rise to artificial distinctions of that kind would be unsatisfactory. It would require clear language before one could regard this as having been intended by the Act. I do not find any such language, so I would reject an interpretation of the section which had that effect.

    17. For these reasons, and those given by my noble and learned friend Lord Millett, I too would allow the appeal.

LORD MILLETT

My Lords,

    18. The question in this appeal is whether the official receiver can have recourse to the powers conferred by section 236 of the Insolvency Act 1986 ("the Insolvency Act") for the sole purpose of obtaining evidence for use in disqualification proceedings against a former director.

The facts

    19. Pantmaenog Timber Co Ltd ("the company") ceased trading in 1997 and was compulsorily wound up by the Bristol County Court on 17 June 1999. The official receiver thereupon became provisional liquidator of the company.

    20. In due course the official receiver reported to the Secretary of State under section 7(3) of the Company Directors Disqualification Act 1986 ("the Disqualification Act") that in his view the conduct of Mr Andrew Hay and Mr Peter Hay as directors of the company made them unfit to be concerned in the management of a company. The Secretary of State considered that it would be expedient in the public interest that disqualification orders should be made against them, and he directed the official receiver to bring proceedings for that purpose.

    21. The official receiver instituted such proceedings in the Bristol County Court in February 2000. He made three allegations of misconduct against the defendants:

(i)

    that they had caused the company to redeem its preference shares before paying its unsecured creditors and the balance of a fine which had been imposed on the company by the local magistrates' court;

(ii)

    that they had failed to ensure that the company maintained adequate accounting and other records; and

(iii)

    that they had caused the company to contravene its felling licence.

    22. The redemption of the preference shares, which was the most serious of the misconduct alleged, took place after Mr Andrew Hay had resigned as a director in December 1997. This raised the question whether he had nevertheless continued to act as a de facto director of the company after that date.

    23. The official receiver filed evidence with a view to showing that despite his resignation Mr Andrew Hay had continued to act as a director of the company until it was wound up in June 1999. In September 2000 he applied to the Bristol County Court under section 236 of the Insolvency Act for orders for the production of documents by two firms of solicitors and a firm of accountants which had acted for the company at the material time. The official receiver conceded that his sole purpose in seeking such orders was to obtain evidence for use in the disqualification proceedings.

    24. Mr Andrew Hay objected to the production of the documents in question. None of the firms concerned had any objection to the production of the documents or to the orders sought, but the documents were obviously confidential and they naturally wished to have the protection of a court order before producing them to the official receiver.

    25. Meanwhile, believing that there might be assets to be recovered for the benefit of creditors, the official receiver had asked the Secretary of State to appoint an insolvency practitioner as liquidator in his place under section 137 of the Insolvency Act. A partner in a well-known firm of accountants was duly appointed liquidator in June 2000. It then came to light that, unknown to the official receiver, the company's name had been struck off the register and the company had been dissolved in November 1999.

    26. The dissolution of the company meant that disqualification proceedings could not be brought in the name of the official receiver or in the County Court. The existing proceedings were thus irregularly constituted. The official receiver accordingly applied for and obtained an order for the proceedings to be transferred to the High Court and for the Secretary of State to be substituted as applicant. He also obtained an order for the company's name to be restored to the register. This had the effect of treating the company as having continued in existence as if it had never been dissolved. It retrospectively regularised the disqualification proceedings and the appointment of the liquidator in place of the official receiver and all steps taken by either of them since the dissolution of the company.

    27. The section 236 application was made in the winding up and not in the disqualification proceedings and so remained with the Bristol County Court. In October 2000 the district judge made the orders sought. They were discharged on appeal by Judge Weeks QC on the ground that the purpose of section 236 of the Insolvency Act was to assist the liquidator of a company in carrying out his functions as liquidator, and these did not include bringing disqualification proceedings against the company's former directors. The Court of Appeal dismissed the official receiver's appeal.

    28. After the dismissal of his appeal the official receiver was able to obtain the production of relevant documents from one of the firms of solicitors concerned by the service of a witness summons in the disqualification proceedings.

    29. The disqualification proceedings were subsequently tried by Neuberger J in the High Court. Neither of the defendants attended the hearing. On 28 January 2003 Neuberger J made orders disqualifying each of the defendants from being concerned in the management of a company. Mr Peter Hay was disqualified for 5 years and Mr Andrew Hay for 7 years.

    30. The resolution of the present appeal can thus no longer affect the outcome of the proceedings which gave rise to it. Neither of the defendants to the disqualification proceedings and none of the firms concerned in the section 236 applications have taken any part in the hearing. The House is greatly indebted to counsel appointed as amicus curiae for the assistance he has given on the proper disposal of the appeal.

    31. The House gave the official receiver leave to appeal because the case raises an important question of principle and one which is not confined to cases where the official receiver is involved. The question is whether the powers conferred by section 236 of the Insolvency Act can lawfully be exercised, whether on the application of the official receiver or of a liquidator or other office-holder, solely or principally to obtain evidence for use in disqualification proceedings; or whether their exercise is confined to cases where such use is at most incidental to the recovery and distribution of the company's assets among its creditors and contributories.

Proceedings for a Discretionary Disqualification Order

    32. The power of the court to make a disqualification order prohibiting a person from being concerned in the management of a company was introduced by section 75 of the Companies Act 1928 (subsequently consolidated as section 275 of the Companies Act 1929) on the recommendation of the Report of the Company Law Amendment Committee (1925-1926) under the chairmanship of Mr Wilfrid Greene KC (Cmd 2657). Application for an order was to the court having jurisdiction to wind up the company and could be made by the official receiver or the liquidator or any creditor or contributory of the company. Except where there had been a conviction the power was limited to cases where it appeared in the course of a winding up that any business of the company had been carried on with intent to defraud and the maximum period for which a disqualification order could be made was five years. The power to make such an order was discretionary. The grounds upon which a disqualification order could be made were later extended by section 33 of the Companies Act 1947 (subsequently consolidated as section 188 of the Companies Act 1948) following the Report of the Committee on Company Law Amendment (1945) under the chairmanship of Cohen J (Cmd 6659).

    33. The grounds upon which a disqualification order could be made were further extended by section 28 of the Companies Act 1976 and section 9 of the Insolvency Act 1976. Section 28 of the Companies Act 1976 covered the case where a person had been persistently in default in relation to statutory requirements for returns, accounts or other documents. Application was to the High Court and could be made only by the Secretary of State. This was the first occasion on which the function of applying for a disqualification order was given to the Secretary of State, but it was unavoidable given that it was not a requirement that the company should be insolvent or in the course of winding up. The Secretary of State was not given power to obtain evidence from third parties, but this was not necessary since all the relevant information would have been in the possession of the registrar of companies.

    34. Section 9 of the Insolvency Act 1976 covered the case where a person had been a director of more than one company which had gone into liquidation while insolvent and his conduct as a director of any of those companies made him unfit to be concerned in the management of a company. Application in England and Wales was to the High Court and in Scotland to the Court of Session. Where the person against whom the order was sought was a person who was or had been a director of a company which was being wound up by the court, the application had to be made in England and Wales by the official receiver and in Scotland (where is no office of official receiver) by the Secretary of State; where the relevant company was being wound up voluntarily it had to be made by the Secretary of State. The application could not be made by a liquidator or other office holder or by a past or present member or creditor; and it was made by the Secretary of State only where it could not be made by the official receiver.

    35. The powers of the court to make disqualification orders were further extended by section 93 of the Companies Act 1981. The power to make an order remained discretionary, but the maximum period of disqualification was extended to 15 years. Application to a court with jurisdiction to wind up the company could now be made by the Secretary of State or the official receiver or by the liquidator or any past or present member or creditor of any company in relation to which the person against whom an order was sought had committed or was alleged to have committed an offence or default. These provisions were consolidated into sections 295 to 299 of the Companies Act 1985 and Part 1 of Schedule 12 thereto and are now contained in sections 2 to 5 of the Disqualification Act.

    36. Sections 2 to 4 of the Disqualification Act give the court a discretionary power to make a disqualification order in prescribed circumstances (conviction of an indictable offence in connection with the promotion, formation, management, liquidation or striking off of the company; persistent breaches of companies legislation; fraud or breach of duty as an officer or liquidator of the company). Section 5 gives the magistrates' court a discretionary power to make a disqualification order on summary conviction for failure to comply with statutory requirements for filing returns, accounts or other documents. As under the 1981 and 1985 Acts application for an order under sections 2 to 4 may be made to a court with jurisdiction to wind up a company by the Secretary of State or the official receiver or by the liquidator or any past or present member or creditor of a company in relation to which the person against whom an order is sought has committed or is alleged to have committed an offence or other default: section 16. The individual is protected from oppressive use of the jurisdiction by the discretion of the court to decline to make an order.

Proceedings for a Mandatory Disqualification Order

 
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