Economic Development Department v. Roche and Taylor and Nardone [2000] NICh 41 (2nd October, 2000)

JUDGMENT GIRVAN J THE PROCEEDINGS 1. By an originating summons issued in July 1998 the Department of Economic Development (now the Department of Enterprise, Trade and Investment) (“the Department”) sought a disqualification order under article 9 of the Companies (Northern Ireland) Order 1989 (“the 1989 Order”) that each of the respondents be disqualified to be directors of a company or to be otherwise involved in the liquidation, administration or management of a company’s property or be in any way directly or indirectly concerned in the promotion, formation or management of any company for a specified period. 2. All three directors reside in the Republic of Ireland. On 16 July 1998 the Master granted leave to serve the proceedings in the proceedings outside the jurisdiction in the Republic. 3. In support of its application the Department filed lengthy affidavits with supporting documentation. The respondents filed statements under the Companies (Disqualification of Unfit Directors) Proceedings Rules (Northern Ireland) 1991 contesting the application and they filed evidence in support of their cases. 4. The matter eventually came on for hearing in September 2000 when Mr Thompson QC with Mr Lewis commenced to open the case on behalf of the Department. It was clear that the proceedings were going to be lengthy and complex and in realistic terms it is likely that if fought out on all issues the application would have lasted at least two and possibly more weeks. 5. The Department in its case contended that the respondents were to be considered unfit to be concerned in the management of a company on the grounds that:- the directors caused the company Walker Air Conditioning Limited (“the company”) to trade until July 1996 in the knowledge that it was insolvent by no later than 31 January 1995; they caused the company to operate a policy of retention of monies due to Crown creditors and funded its trading activities through very substantial sums of unpaid PAYE tax, NIC and VAT; they were responsible for the failure of the company to prepare and submit audit accounts to the Companies Registry for 18 months up to January 1995; and they caused the company to assign an asset having a value of £185,000 to the company’s holding company for no consideration other an increase in the inter-company account and at a time that the company was insolvent and they did so at a time when they ought to have concluded that there was no prospect of securing payment from the holding company of the balance due to the company. THE PRESENT APPLICATION 6. On the third day of the hearing Mr Toner QC on behalf of the respondents made application to the court to stay the proceedings under its inherent jurisdiction on the ground that the respondents were prepared to give:- 1. An undertaking that they and each of them shall not henceforth for a period of 6 years: be a director of a company or be a liquidator or administrator of a company or be a receiver or manager of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company. 2. An undertaking of permanent duration by them and each of them to personally responsible for the debts and liabilities of any company incurred in the future at any time when they or any of them should be involved in the management of such a company in breach of the first undertaking. 7. Mr Toner contended that the court had an inherent jurisdiction to stay any proceedings if it considered it appropriate to do so and that in this case the court should consider it appropriate to do so because the Department was prepared to accept the undertakings, because the directors were all resident outside the jurisdiction and did not intend to be involved in the management of any Northern Ireland companies, because that effectively gave the Department all that it could effectively achieve in the litigation and because the continuation of the proceedings would be oppressive to the respondents since the disqualification order it made would have serious professional consequences for them in their professions two of them being accountants. 8. It became clear that the Department was prepared to accept the respondents’ undertakings if the court had no objection and was of the view that if undertakings were enforceable as undertakings to the court it would no longer be expedient to pursue the claim for disqualification orders as such. THE LEGISLATIVE BACKGROUND 9. The 1989 Order introduced disqualification orders against company directors. Under article 4 the court may in the circumstances specified in Part II of the Order and under article 9 shall make against a person a disqualification order, that is to say an order that he shall not without the leave of the court be a director, liquidator or administrator of a company or be a receiver or manager of a company’s property or be in any way directly or indirectly concerned in the promotion, formation or management of a company. Minimum and maximum periods of disqualification are prescribed. 10. The article 9 mandatory disqualification procedure imposes a duty on the court to disqualify a director in any case where on an application made under article 9 the court is satisfied:- that the director is or has been a director of a company which has become insolvent; and that his conduct as a director of the company makes him unfit to be concerned in the management of a company. “Company” is defined as including (inter alia) a company within the meaning of the Companies Act 1985, any company which may be wound up under Part VI of the Insolvency (NI) Order 1989 or Part X of the Insolvency Act 1986. Under article 10(1) it is provided:- “If it appears to the Department that it is expedient in the public interest that a disqualification order under article 9 should be made against any person, any application for the making of such an order against that person may be made by the Department or if the Department so directs in the case of a person who is or has been the director of a company which is being wound up by the High Court, by the official receiver.” 11. Duties are imposed on office holders as defined by article 10(3) (which include the official receiver, a liquidator for the company, an administrator or an administrative receiver) to report to the Department if the conditions mentioned in Article 9(1) are satisfied. 12. In this instance at the time when the proceedings were issued by the Department it was considered that it was expedient in the public interest that disqualification orders under article 9 should be made against each of the respondents. THE STAYING OF PROCEEDINGS 13. A stay of proceedings may mean different things in different cases. Thus, for example, where the court stays proceedings on the ground that they are an abuse of process the effect of a stay is to bring the proceedings to an end. Such a stay may be described as “an absolute order to stay which is equivalent to a discontinuance or dismissal” (per Neill LJ in Rofa Sport Management AG v DHL International (UK) Limited [1989] 1 WLR at 910). A court may stay proceedings, for example, pending the provision of security for costs. Such a stay constitutes a temporary break in proceedings while the party against whom the order is made finds the necessary funds. Another form of stay which gives rise to different considerations and consequences is a stay of proceedings where terms have been agreed between the parties. This most commonly happens were proceedings are stayed on terms endorsed on counsel’s briefs or where the court by consent stays the proceedings on terms scheduled to the order, the latter being commonly called a Tomlin Order. In Hollingworth v Humphrey (1987) CAT 1244 Fox LJ pointed out in relation to the latter type of stay that:- “As between the parties while the action is not discontinued or dismissed, the bargain was that the action would not be resorted to thereafter save for the purpose of enforcing the terms.” In Rofa Sport Management AG v DHL International (UK) Limited [1989] 1WLR 902 the court held that a stay of proceedings on terms agreed was not equivalent to a dismissal of discontinuance of the proceedings and that an action in which all further proceedings have been stayed even if by consent of all the parties on terms agreed remained in being and the court had power to add a party to an action so stayed though no settlement reached could be disturbed. 14. It is necessary to identify the true nature and basis of the application to stay sought for different consequences flow from a stay order depending on its true nature. Mr Toner QC initially moved the application for a stay in reliance on the inherent jurisdiction of the court. It is clear that the courts of common law and equity had inherent jurisdictions to stay proceedings for example on the grounds that an action was an abuse of process ( Castrell v Murray ) (1875) LR 10 Ex 213) or on the grounds that the action was hopeless and bound to fail ( Dawkins v Prince Edward of Saxe-Weimar [1876] 1 QBD 499). However the present case does not fall within those types of cases and in reality both parties are seeking to stay to the proceedings on the grounds that they have reached an agreed and mutually acceptable arrangement which renders the continuation of the litigation inappropriate and unnecessary. Thus effectively the parties are seeking a stay of proceedings on the basis that they wish to compromise the proceedings. 15. If the parties were not in agreement a director in such proceedings could not prevent the institution of proceedings or seek the stay of ongoing proceedings while ongoing by offering to give up all directorships for a specified period. There would be no basis for arguing that in such circumstances the institution or continuation of proceedings for disqualification constituted an abuse of process. In Re Blackspur Group plc [1998] 1 WLR 422 the Secretary of State sought disqualification orders against a director of several companies in a group which was now in administrative receivership. The director accepted that the proceedings raised serious allegations of misconduct and that if proved he was likely to be disqualified for up to 10 years. The director denied the charges but he offered an undertaking of permanent duration never to be involved in the management of a company and to be personally responsible for the debts of any company should he be involved in the management of a company. The Secretary of State declined to accept the undertakings the applicant sought a stay of the proceedings on the ground that to pursue them would be oppressive to him, prejudicial to the public interest and an abuse of process. He also sought leave to apply for a judicial review of the decision to continue the proceedings. 16. Rattee J at first instance and the Court of Appeal on appeal rejected the applications holding that the Secretary of State in that case considered that it was expedient in the public interest to seek a full disqualification order against the director concerned and the Secretary of State had reasonable grounds for adopting the position that adherence to the statutory scheme was in the interests of the promotion of good regulation of companies. The Blackspur decision does not govern the present case for different considerations arise where the Department and the relevant director are agreed that an undertaking is sufficient to avoid the necessity of proceeding with a full disqualification hearing. Re Carecraft Construction Co Limited [1994] 1 WLR 172 is sometimes cited as authority for the proposition that the Secretary of State (or in this jurisdiction the Department) has no power to stop proceedings by way of compromise while they are ongoing. Ferris J stated that: “In disqualification proceedings, therefore, there is no scope for the parties to reach an agreement and then ask the court to embody their agreement in a consent order. The court itself has to be satisfied, after having regard to the prescribed matters and other facts which appear to be material, that the respondent is unfit to be concerned in the management of a company; and the court itself must decide the period of disqualification if it decides to make a disqualification order.” 17. At first sight these remarks appear to suggest that the Department in a case such as the present could not compromise the disqualification proceedings on the basis of accepting the proposed undertakings. However the passage from Ferris J’s judgment cited is preceded by a paragraph stated in the following terms:- 18. “... the Secretary of State can and should cause an application for a disqualification order to be abandoned if it ceases to appear to him that the making of a disqualification order against the respondent to that application is “expedient in the public interest”. I was told that the Secretary of State does in fact act upon this principle and I have no doubt that this is so. But the Secretary of State has no general power to compromise a claim for a disqualification order which he continues to regard as being expedient in the public interest . In particular he cannot accept an undertaking in lieu of a disqualification order, because that would not protect the public in the way that the disqualification order does by virtue of the consequences presented by section 13 and section 15. He cannot decide that particular conduct does or does not amount to unfitness, for it is the court, not the Secretary of State which has to be satisfied on the relevant matters. He cannot agree that matters to which regard must be had by virtue of section 9(1) should be left out of account and he cannot bargain with the respondent concerning the length of any period of disqualification, for it is the court which has to decide this, subject to the statutory limits.” (Italics added). 19. The Secretary of State in England and Wales has on occasions in the past acceded to and the court has ordered a stay of proceedings on the basis of undertakings (see for example Re Homes Assured Corporation Plc [1996] BCC 297 and Secretary of State for Trade and Industry v Cleland [1997] BCC 473. In Re Blackspur the court pointed out that the Secretary of State did not take the position that he had no power to discontinue proceedings and it had never been the position of the Secretary of State that it is impossible to discontinue proceedings on undertakings. On the facts of that particular case the Secretary of State had considered it inappropriate to discontinue proceedings. 20. In this case the Department has concluded in the light of the tendered undertakings and in light of the fact that the respondents reside outside the jurisdiction that it is no longer considered expedient to prosecute the disqualification proceedings to a final determination by the court. Once the Department comes to that conclusion it could not properly continue to prosecute the disqualification proceedings to a final determination by the court for the Department’s duty and power to institute and prosecute disqualification applications under article 9 arise only if the Department considers that it is expedient in the public interest that a disqualification order should be made. The court could not compel the Department to press on with the application. 21. Indeed to come to any other conclusion would produce undesirable consequences. Otherwise the Department being charged with the public law function of deciding whether it is expedient to obtain a disqualification order from the court would lose control of the litigation once the proceedings had been started. Under the legislation the Department is intended to be the dominus litium. If it were otherwise the court (which cannot be privy to all the material factors relevant to the determination of what is expedient in the public interest) once proceedings are underway would effectively dictate the way in which litigation should be conducted. The principle that it is in the public interest that there should be an end to litigation would be undermined. Contested disqualification litigation of this nature is costly, complex and time consuming generating voluminous paperwork and brings forth a myriad of factual contests. 22. I am satisfied that it is within the powers of the Department to agree the terms of a stay of proceedings with the respondent directors and the court has power to lend aid to the compromise. Once the Department has determined that it is no longer expedient to prosecute the proceedings it is difficult to see on what basis the court could decline to accept the agreed proffered undertakings. To decline to do so would be to compel the Department to prosecute proceedings which ex hypothesi the Department has concluded are no longer expedient in the light of the undertakings and the court would be arrogating to itself the very function which is by statute vested in the Department. 23. Under the law as it currently stands there is no mechanism for the enforcement of pre-litigation undertakings given by directors not to act as directors for specified periods. This lacuna in the law would be made good by the provisions of the pending Insolvency Bill presently before Parliament, if enacted. The Bill incorporates a change in the law recommended in a number of court decisions and in the English Chancery Division Practice Direction on Directors’ Disqualification Applications [1996] 1 All ER 442. Pending any change in the law if the Department and a director are in agreement as to the giving and acceptance of an undertaking not to act as director for a specified period I see no reason why the matter could not swiftly and cheaply come before the court after the issue of the summons in the proceedings and before the filing of extensive evidence required under the Disqualification Rules. IN THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND GIRJ3062 CHANCERY DIVISION (COMPANIES) -------- IN THE MATTER OF WALKER AIR CONDITIONING LIMITED IN ADMINISTRATIVE RECEIVERSHIP AND IN THE MATTER OF THE COMPANIES (NORTHERN IRELAND) ORDER BETWEEN: THE DEPARTMENT OF ECONOMIC DEVELOPMENTS Applicants and THOMAS STEWART ROCHE MALCOLM WILLIAM TAYLOR RAYMOND NARDONE Respondents -------- J U D G M E N T O F GIRVAN J -------- © 2000 Crown Copyright BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII