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

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    37. The Disqualification Act introduced the new concept of mandatory disqualification. Section 6 obliges the court to make a disqualification order if it is satisfied that the defendant's conduct as a director of a company makes him unfit to be concerned in the management of a company. The court has no discretion to decline to make an order. The minimum period of disqualification is two years and the maximum period is 15 years. Application for an order under section 6 is to the court by which the company is being wound up; if the company is being wound up voluntarily, any court which has jurisdiction to wind it up; and if the company is in administration, to the court which made the administration order: section 6(3). This has since been amended to include the case where the company is in administrative receivership.

    38. The introduction of mandatory disqualification gave effect to a recommendation of the Insolvency Law Review Committee under the chairmanship of Sir Kenneth Cork ("the Cork Committee"): Insolvency Law and Practice, Report of the Review Committee (1982) (Cmnd 8558). It recommended that application for a mandatory order should be made by the liquidator or, with the leave of the court, by a creditor. This was not acceptable to Parliament, which understandably considered that greater safeguards are necessary in the case of a mandatory order than are required where the court retains a discretion to decline to make an order.

    39. Section 7(1) provides that an application for a mandatory order under section 6 can be made only if it appears to the Secretary of State that it is expedient in the public interest that such an order should be made. The Secretary of State is under a continuing duty to keep the position under review. Proceedings can be brought and continued only if it appears, and continues to appear, to the Secretary of State that it is expedient in the public interest that an order be made.

    40. Application for a mandatory order must be made by the Secretary of State or, if the Secretary of State so directs in a case where the person against whom the order is sought is or has been a director of a company which is being wound up by the court in England and Wales, by the official receiver. As originally enacted, this meant that, if the winding up had been completed and the company dissolved, the application could be made only by the Secretary of State. Accordingly the words "is being wound up" have been amended by the Insolvency Act 2000 to read "is being or has been wound up".

    41. The Secretary of State can form an opinion whether it is expedient in the public interest that an order should be made under Section 6 only if it is based upon adequate information. Section 7(3) and (4) contain provisions which enable him to obtain such information. Section 7(3) provides that, if it appears to the responsible office-holder that the conditions for making a mandatory order under section 6 are satisfied, he must forthwith report the matter to the Secretary of State. In the case of a company which is being wound up by the court in England and Wales, the official receiver is the responsible office-holder. In other cases, the liquidator, administrator or administrative receiver as the case may be is the responsible office-holder.

    42. Section 7(4) lies at the heart of this appeal. It provides:

    "(4) 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—

      "(a) to furnish him with such information with respect to any person's conduct as a director of the company, and

      (b) to produce and permit inspection of such books, papers and other records relevant to that person's conduct as such a director, as the Secretary of State or the official receiver may reasonably require for the purpose of determining whether to exercise, or of exercising, any function of his under this section."

The Official Receiver

    43. The office of official receiver was established by the Bankruptcy Act 1883 (46 & 47 Vict c 52). His role was originally confined to personal bankruptcy, but it was extended to companies in compulsory liquidation by the Companies (Winding Up) Act 1890 (53 & 54 Vict c 63). It is a statutory office held by persons appointed by the Secretary of State from among the civil servants employed within the Department of Trade and Industry. They are members of the Insolvency Service, which is an executive agency of the Department with overall responsibility for the administration of insolvency in England and Wales, and acts under the ultimate direction and control of the Secretary of State. The Insolvency Service is headed by the Secretary of State but her involvement in day to day matters is normally exercised on her behalf by officials. She must make arrangements to ensure that there is at least one official receiver attached to each court having bankruptcy jurisdiction. The official receiver is an officer of the court to which he is attached and is answerable to the court for the carrying out of its orders and for the discharge of his statutory functions. As the holder of a statutory office, he has standing to bring proceedings and has a right of audience before the court to which he or she is attached. He sues and is sued not in his personal name but as "the official receiver". The definite article is appropriate because in the case of each company there is only one official receiver.

    44. Upon the making of a compulsory winding up order of a company in England and Wales, the official receiver attached to the court in which the winding up is proceeding becomes the liquidator of the company by virtue of his office and continues in office until another person is appointed liquidator in his place: section 136(2) of the Insolvency Act. He is also by virtue of his office the liquidator during any vacancy: ib section 136(3). At any time when he is liquidator he may take steps to have a liquidator appointed in his place: ib section 136(4). In Scotland these functions are performed by the insolvency practitioner (known as "the interim liquidator") appointed by the court when making the winding up order.

Investigation and Report

    45. Where a winding up order is made by the court in England and Wales, it is the duty of the official receiver to investigate the causes of the company's failure and to inquire generally into the promotion, formation, business, dealings and affairs of the company, and to make such report (if any) to the court as he thinks fit: section 132 of the Insolvency Act, which can be traced back to section 8 of the 1890 Act. He was formerly but is no longer obliged as a matter of course to submit a report to the court and in practice he seldom does so. But it remains his duty to investigate the causes of the company's failure and take appropriate action. This may include making a report to the Secretary of State pursuant to section 7(3) of the Disqualification Act. He is under the same duty whether or not he is also the liquidator.

Public Examination

    46. Where a company is being compulsorily wound up the official receiver (or in Scotland the liquidator) can apply to the court under section 133 of the Insolvency Act to direct the public examination of any person who is or has been an officer of the company, or has acted as an office-holder of the company, or has been concerned or taken part in the promotion, formation or management of the company.

    47. Before the Insolvency Act a public examination could be ordered only against a person who was suspected of fraud in relation to the company. By 1982 the procedure had fallen into disuse. The Cork Committee recommended that it should be revived. It expressed the hope that, by exposing serious misconduct it would help to promote higher standards of commercial and business morality and serve as a sanction against former officers of a failed company who had not adequately assisted the official receiver and the liquidator in their investigations into the company's affairs.

    48. In In re Paget [1927] 2 Ch 85 Lord Hanworth MR explained that the object of the public examination of the debtor was not merely to obtain a full and complete disclosure of his assets and the facts relating to the bankruptcy in the interests of the creditors, but was also for the protection of the public. At pp 87-88 he said :

    "To concentrate attention upon the mere debt collecting and distribution of assets is to fail to appreciate one very important side of bankruptcy proceedings and law."

The judge had disallowed a question on the ground that the answers would not assist in the collection of the debtor's assets. At p 92 Lord Hanworth rejected this as a sufficient ground for disallowing the question on the ground that it excluded:

    "a side of the bankruptcy law which we are constantly affirming in this court, where it has been necessary over and over again to point out that in matters of bankruptcy it is not merely the creditors who have their rights, but it is also the public themselves whose interests have to be safeguarded."

    49. The Cork Committee recommended that the court conducting the public examination should have power, during the course of or at the conclusion of the public examination, to make a disqualification order. This proposal was not accepted; but there can be no doubt that the official receiver could apply for a public examination if he suspected that there had been serious misconduct on the part of a former director which rendered him unfit to be concerned in the management of a company. The court could decline to direct a public examination if it considered that it would be oppressive; but there can equally be no doubt that evidence obtained by a public examination could form the basis of an application for a disqualification order. It would be odd if the same were not true of a private examination under section 236 of the Insolvency Act.

Disqualification Proceedings

    50. It is also the duty of the official receiver, as I have explained, to bring proceedings under section 6 of the Disqualification Act for a mandatory disqualification order if directed by the Secretary of State to do so; and to furnish the Secretary of State with information not only for the purpose of enabling her to determine whether such proceedings should be brought or continued but also for the purpose of bringing or continuing them.

The Functions of the Liquidator

    51. The principal function of the liquidator of a company is to carry out the winding up of its affairs by collecting the assets and distributing them among the creditors with a view to the ultimate dissolution of the company. But his functions are not confined to this. Under the heading "The liquidator's functions" section 143 of the Insolvency Act describes the general functions of the liquidator in a winding up by the court as follows:

    "General functions in winding up by the court

(1)

      The functions of the liquidator of a company which is being wound up by the court are to secure that the assets of the company are got in, realised and distributed to the company's creditors and, if there is a surplus, to the persons entitled to it.

(2)

      It is the duty of the liquidator of a company which is being wound up by the court in England and Wales, if he is not the official receiver-

      (a) to furnish the official receiver with such information,

      (b) to produce to the official receiver, and permit inspection by the official receiver of, such books, papers and other records, and

      (c) to give the official receiver such other assistance,

      as the official receiver may reasonably require for the purposes of carrying out his functions in relation to the winding up."

The words "in relation to the winding up" are wider than "in the winding up." Since the official receiver is ex hypothesi not the liquidator in the case envisaged, "his functions in relation to the winding up" cannot extend, still less be limited, to the collection, realisation and distribution of the company's assets. They must encompass the functions which are conferred on him in the public interest in relation to the company which is being wound up, including the investigation into the reasons for the company's failure and the conduct of those concerned in its management. It does not stretch the language of the section to read it as including the official receiver's functions under section 7 of the Disqualification Act.

    52. From the earliest days of the joint stock company the liquidator has exercised functions which serve the public interest and not merely the financial interests of the creditors and contributories. The Cork Committee observed (in para 192 of its Report) that:

    "The law of insolvency takes the form of a compact to which there are three parties: the debtor, his creditors and society."

In consequence insolvency proceedings:

    "have never been treated in English law as an exclusively private matter between the debtor and his creditors; the community itself has always been recognized as having an important interest in them." Ib para 1734.

Criminal Proceedings

    53. Under section 167 of the Companies Act 1862 (25 & 26 Vict c 89) one of the functions of a liquidator was to bring criminal proceedings against directors and others who were alleged to have committed offences in relation to the company. The proceedings were brought at the expense of the estate, and this served as a powerful disincentive. But the court could direct the liquidator to bring such proceedings, and would do so if appropriate. In In re London and Globe Finance Corporation Ltd [1903] 1 Ch 728, 734-735 the prosecuting authorities declined to bring criminal proceedings. The court authorised the liquidator (who happened to be the official receiver) to do so at the expense of the company. Buckley J observed that section 167 was concerned with enforcing commercial morality and was:

    "not measured or limited or even concerned with pecuniary benefit to be obtained for the shareholders or creditors."

    54. The legislation remained in the same form until the Companies Act 1928, when section 77(1) authorised the court in a compulsory winding up to direct the liquidator either to prosecute the offender himself or to refer the matter to the Director of Public Prosecutions. If it appeared to the liquidator in a voluntary winding up that any past or present director, manager or other officer of the company had been guilty of an offence in relation to the company for which he was criminally liable, section 77(2) required him to report the matter to the Director of Public Prosecutions. It also required the liquidator to give the Director of Public Prosecutions information and access to documents in his possession or under his control. If the Director of Public Prosecutions decided not to bring proceedings against the offender, the liquidator could do so himself though only with the leave of the court. This was a safeguard against the company's assets being wasted on frivolous or vexatious proceedings.

    55. The present law is contained in section 218 of the Insolvency Act. In the case of a compulsory winding up, section 218(3) provides that if it appears to the liquidator, not being the official receiver, that any past or present officer of the company or any member of it has been guilty of an offence in relation to the company for which he may be criminally liable he must report the matter to the official receiver. In the case of a voluntary winding up section 218(4) provides that the liquidator must report the matter, in the case of a winding up in England and Wales, to the Secretary of State and, in the case of a winding up in Scotland, to the Lord Advocate. The liquidator is subject to a duty as before to give the Secretary of State or the Lord Advocate as the case may be information and access to documents which are in his possession or under his control.

Public Examination

    56. Although the Companies Acts have expressly required an application for a public examination to be made by the official receiver, and it was generally assumed before 1953 that a public examination could not be directed unless the company was in compulsory winding up and the application was made by the official receiver, this was not the case. Section 307 of the Companies Act 1948 provided that in a voluntary winding up the liquidator or any creditor or contributory could apply to the court inter alia:

    "to exercise…. all or any of the powers which the court might exercise if the company were being wound up by the court."

It was held that the effect of this section was that the court could direct a public examination on the application of the liquidator in a voluntary winding up: see In re Campbell Coverings Ltd [1953] Ch 488 CA and In re Campbell Coverings (No 2) [1954] Ch 255. Section 307 has been re-enacted as Section 112 of the Insolvency Act and has the same effect: see Bishopsgate Investment Management Ltd v Maxwell [1993] Ch 1, 24 and 46.

Investigation and Report

    57. I have already referred to section 7(3) of the Disqualification Act, which imposes a duty on the liquidator to report to the Secretary of State if it appears to him that the conditions for a mandatory disqualification order are satisfied; and to section 143 of the Insolvency Act and section 7(4) of the Disqualification Act, which impose a duty on the liquidator to assist the official receiver in carrying out his functions in relation to the winding up and to furnish the Secretary of State or the official receiver with information. I shall have to return to section 7(4) later.

Section 236

    58. So far as material section 236 of the Insolvency Act reads as follows:

    "(2) The court may, on the application of the office-holder, summon to appear before it—

(a)

      any officer of the company,

(b)

      any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or

(c)

      any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company.

    "(3) The court may require any such person as is mentioned in subsection (2)(a) to (c) 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 the subsection."

The expression "office-holder" is defined in section 234(1) to mean the administrator, administrative receiver, liquidator or provisional liquidator of the company as the case may be. Where the company is being wound up by the court in England and Wales section 236(1) extends the expression to include the official receiver whether or not he is the liquidator.

The Judgment of the Court of Appeal

    59. The judgment of the Court of Appeal [2002] Ch 239 was given by Chadwick LJ. In paragraphs 37 and 38 he gave two reasons for his conclusion that the court has no power to make an order on the application of the official receiver under section 236 of the Insolvency Act for the production of documents in circumstances where the sole purpose of the application is to obtain information or documents for use as evidence in pending proceedings under the Disqualification Act. They are closely reasoned and merit being set out in full:

    "37. . . .The reason, as it seems to me, is that the powers conferred by sections 235 and 236 are conferred on the liquidator for the better discharge of his functions in the winding up; and are not conferred to enable the Secretary of State to obtain, indirectly, information and documents which Parliament has not thought it necessary or appropriate to enable him to obtain directly. There is no reason to think that Parliament intended that the powers to obtain information and documents for use in disqualification proceedings should be any greater in a case where the company was being wound up by the court in England and Wales than in a case where the company was in voluntary winding up. As I have sought to explain, the role of the official receiver in relation to disqualification proceedings in a case where the company is being wound up by the court is attributable to considerations of convenience and cost; there is no reason to explain that role on the basis that it reflects an intention to provide enhanced powers in relation to the obtaining of information and documents.

    38. Second, in a case where the company is being wound up by the court in England and Wales, the function of the official receiver, under the Insolvency Act, is to investigate the causes of failure and to make a report to the court: see section 132 of that Act. It was plainly intended that the official receiver should be able to invoke the powers conferred by sections 235 and 236 for the purpose of discharging that function. Equally, as it seems to me, information which he obtains in the course of discharging his function under section 132 of the Insolvency Act is information to which he is intended to have regard, and to take into account, in making the report to the Secretary of State which section 7(3)(a) of the Disqualification Act requires. And information which he obtains in the course of discharging his function under section 132 of the Insolvency Act is information which he is intended to use in pursuing disqualification proceedings, if that role is entrusted to him under section 7(1)(b) of the Disqualification Act. But the official receiver cannot have been intended to invoke the powers conferred by sections 235 and 236 of the Act either (1) for the purpose of carrying out his role under section 7(3) of the Disqualification Act — save in so far as that is incidental to the discharge of his function under section 132 of the Insolvency Act 1986 — or (2) for the purpose of obtaining evidence for use in disqualification proceedings of which he has conduct under section 7(1)(b) of the Disqualification Act — again, save in so far as that is incidental to the discharge of his function under section 132 of the Insolvency Act 1986. The reason is to be found in section 7(4) of the Disqualification Act. Unlike the Secretary of State — who may require information or documents under that section for the purpose of determining whether it is expedient in the public interest that a disqualification order should be made — the only purpose for which the official receiver could require an office holder to provide information or documents under section 7(4) of the Disqualification Act would be that he reasonably required that information in connection with his functions under section 7(3)(a) or 7(1)(b) of that Act. But, if those were functions in connection with which the powers conferred by section 235 and 236 of the Insolvency Act 1986 could be invoked, section 7(4) — in so far as it applies to the official receiver — would be otiose. There would be ample power to obtain, under section 235(3)(c), any information which the official receiver required from a liquidator, administrator or administrative receiver. The inference, as it seems to me, is that Parliament included a reference to the official receiver in section 7(4) of the Disqualification Act because it was necessary to do so. It was thought necessary to do so, because Parliament did not contemplate that the official receiver would be able to invoke sections 235 and 236 of the Insolvency Act 1986 for that purpose. It is pertinent to keep in mind that the Insolvency Act and the Disqualification Act were enacted on the same day (25 July 1986) and form part of the same corpus of legislation."

    60. The last observation is well made. The provisions of the Disqualification Act and the Insolvency Act form part of the same statutory scheme formerly contained in the Insolvency Act 1985 and must be read together: see In re Jeffrey S Levitt Ltd [1992] Ch 457 per Vinelott J at pp 473-474, approved by the Court of Appeal in Bishopsgate Investment Management Ltd v Maxwell [1993] Ch 1, 31.

    61. I shall examine these two reasons in turn.

The First Reason

    62. There are two strands to this part of Chadwick LJ's reasoning: (i) the liquidator of a company in voluntary liquidation cannot invoke the section for the purpose of disqualification proceedings and the official receiver's power to invoke the section can be no greater than that of the liquidator; (ii) the Secretary of State cannot invoke the section directly, and Parliament cannot have intended that the official receiver should be able to do so in order to enable the Secretary of State to obtain indirectly information and documents which it considered that he should have no power to obtain directly.

    63. The first of these strands proceeds from the premise that the powers conferred by section 236 are conferred on a liquidator "for the better discharge of his functions in the winding up". These words are not derived from the express terms of the section but are evidently considered to be implicit in it. The unspoken assumption is that a liquidator's "functions in the winding up" are limited to the collection and distribution of the company's assets. I agree that the bringing of disqualification proceedings is not a function which is conferred on the official receiver "in the winding up"; if it were, the costs of the proceedings would be payable out of the assets of the estate. It is not necessary to consider whether the gathering of evidence for the purpose of such proceedings is part of "his functions in the winding up", for this formulation is unduly narrow. The liquidator's functions in relation to the company which is being wound up are not and never have been limited to the recovery and distribution of the company's assets. It would be very odd if the liquidator of a company in voluntary liquidation could apply to the court to direct a public examination in the wider public interest but could not invoke section 236 to order a private examination in the same interest. In practice the liquidator would usually prefer to invite the official receiver to make the application; and even where the application was made by the liquidator the court would be disposed to invite the views of the official receiver. But it is impossible to say that the liquidator would be acting outside his proper role in the one case and not in the other.

    64. Section 236 contains no express limitation on the purpose for which it may be invoked. Of course it may be invoked only for a legitimate purpose in relation to the company which is being wound up, and the court, which has discretion to make or refuse an order, should be astute to see that the powers conferred by the section are not abused. It would plainly be an abuse to use those powers for a purpose which is foreign to the functions of the applicant in relation to the company which is being wound up. But I reject the unspoken assumption that the functions of a liquidator are limited to the administration of the insolvent estate. This is only one aspect of an insolvency proceeding; the investigation of the causes of the company's failure and the conduct of those concerned in its management are another. Furthermore such an investigation is not undertaken as an end in itself, but in the wider public interest with a view to enabling the authorities to take appropriate action against those who are found to be guilty of misconduct in relation to the company. If the investigation yields information material to the Secretary of State's decision to bring or continue disqualification proceedings, it must be reported.

 
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