MCGIVNEY CONSTRUCTION LTD AGAINST (FIRST) JOZEF KAMINSKI AND (SECOND) GLEN MAREE CONTRACTS LTD
OUTER HOUSE, COURT OF SESSION
[2015] CSOH 107
CA61/13
OPINION OF LORD WOOLMAN
In the cause
MCGIVNEY CONSTRUCTION LTD
Pursuer;
against
(FIRST) JOZEF KAMINSKI
(SECOND) GLEN MAREE CONTRACTS LTD
Defenders:
Pursuer: J Brown; Lindsays,
Defenders: Upton; Balfour and Manson LLP, The McKinstry Co, Ayr
11 August 2015
Introduction
[1] Peter McGivney is a qualified electrician. He set up McGivney Construction Ltd (‘MCL’) in 1998. He owns 80 per cent of its shares and his wife owns the remaining shares. MCL typically undertakes works in relation to street lighting and traffic signals. It receives most of its work from local authorities and main contractors.
[2] Mr McGivney met Mr Kaminski several years ago when they worked on the same construction project. In 2002 MCL employed Mr Kaminski as a labourer. He proved to be a good employee. In early course he became the foreman of MCL and took charge of its day‑to‑day operations. He prepared and submitted tenders, gave orders to the workforce and deployed the plant and materials. His role brought him into contact with many of MCL’s customers. Apart from their working relationship, Mr Kaminski also developed a close friendship with Mr and Mrs McGivney. He often took his evening meals at their house.
[3] In late 2007 Mr McGivney considered giving Mr Kaminski a half-share in the company. Before doing so he consulted MCL’s accountant, William White. Mr McGivney accepted Mr White’s advice to take matters forward in stages. He made Mr Kaminski a director of MCL with effect from 1 January 2008. At the same time, he mentioned that he would arrange a share transfer if everything continued to progress smoothly.
[4] In 2010 Mr McGivney received unwelcome news about Mr Kaminski. He learned that Mr Kaminski was doing a “homer” for a landscaping business in Ayr. It was called Shades of Green and was owned by a friend of Mr Kaminski. In other words, he had used MCL’s labour, plant and materials to carry out the works, but without rendering an invoice from MCL for their value.
[5] Mr McGivney again consulted Mr White and the two men decided to confront Mr Kaminski. The meeting took place on 10 May 2010 at Mr White’s office. In his evidence Mr White stated that at the meeting he followed the points set out in a handwritten note he had prepared in advance. He reminded Mr Kaminski of his fiduciary duties, and raised concerns about their breach in relation to Shades of Green. Mr Kaminski indicated that he would raise an invoice in relation to that job, and he subsequently did so. Other than to confirm that he was not involved with any other business, he did not say anything else at the meeting.
[6] In late 2012 Mr McGivney received a tipoff that Mr Kaminski had applied for an operator’s licence for a new company. Mr McGivney asked his solicitor to investigate. She discovered that in 2011 Mr Kaminski had incorporated a company called Glen Maree Contracts Ltd (‘GM’). Her enquiries also disclosed that GM had been awarded several sizeable contracts in the same field as MCL. They included a contract with North Ayrshire Council (‘the Council’) for which GM had received payment of around £159,000 in September 2012. As MCL is on the framework agreement for the Council, it would have expected to bid for such a contract.
[7] On 5 April 2013, MCL wrote to Mr Kaminski suspending him from his duties. He replied the next day enclosing a resignation letter dated 4 February 2013. Mr McGivney denies receiving that letter. Because he wished to terminate his business relationship with Mr Kaminski, however, Mr McGivney stated that he accepted his resignation with effect from 11 April 2013.
[8] MCL raised the present action for count, reckoning and payment to recover the sum it claims is properly due for the period in which the defenders were acting improperly. GM accepts liability to account. It has lodged a set of accounts relating to the 16 month period from the date of GM’s incorporation in 2011 until 1 September 2013. Kevin Ottley of Wilson and Dunn, chartered accountants prepared these accounts. He has based them on earlier accounts prepared by his predecessor as GM’s accountant, Robin Burnside of McMorland & Co.
[9] MCL lodged a note of objections to the restated accounts. It retained an independent chartered accountant, John Kerr, to provide it with expert assistance. He and Mr Ottley met in September 2014 and they were able to resolve a number of matters in dispute.
The scope of the proof
[10] There are five questions for decision. The first three relate to the outstanding objections to GM’s accounts.
(a) Is the entry of about £75,000 in respect of cash withdrawals from the bank in relation to (i) wages, (ii) materials, and (iii) motor expenses justified?
(b) Are the deductions for payments to sub-contractors justified?
(c) Is the provision for £93,000 for work still to be done justified?
(d) When did Mr Kaminski resign from MCL?
(e) Is Mr Kaminski entitled to relief under s 1157 of the Companies Act 2006?
Preliminary
MCL’s Investigations
[11] Prior to the proof MCL made extensive enquiries to investigate the validity of GM’s position in relation to the disputed entries in the accounts. MCL brought a petition to recover evidence under section 1 of the Administration of Justice (Scotland) Act 1972. It held an open commission at which Mr Kaminski gave evidence. It lodged letters of request to the High Court in England to take the evidence of four persons in relation to payments to sub-contractors. MCL was largely unsuccessful in its enquiries. It was unable to find the contract documents it sought, or to trace the witnesses it wished to question.
Mr Burnside CA
[12] Mr Burnside was not a witness at the proof, but MCL lodged an affidavit from him. MCL had not originally intended to call him as a witness, but changed its mind after the defenders revised their pleadings in early 2015 to criticise his role in preparing GM’s accounts. MCL discovered that he would be abroad at the time of the proof and elected not to cite him. While he was not available for cross-examination, I decided that I could take his affidavit into account.
The burden of proof
[13] Where a defender admits liability to account, the burden of proof initially rests on the objector: Smith v Barclay 1962 SC 1. The onus may, however, shift to the person relying on the accounts. It will depend on the circumstances of a particular case: Murad v Al-Suraj [2005] EWCA Civ 959 para 76; Condliffe v Sheingold [2007] EWCA Civ 1043, para 23.
[14] Where the evidential burden lies may, however, be irrelevant as “questions of onus usually cease to be important, once the evidence is before the court”: Sanderson v McManus 1997 SC (HL) 55, 62G per Lord Hope of Craighead. The court makes its factual findings after evaluating all the testimony, oral and written. It can draw an adverse inference if a party fails to lead evidence that it would be expected to lead: Wisniewski v Central Manchester Health Authority [1998] PIQR 324.
Credibility and reliability
[15] Actions of count, reckoning and payment often focus on matters of a technical nature. That is not the case here. Questions of credibility and reliability loom large. Because there is so little paperwork to support the entries in the accounts, Mr Kaminski’s evidence is crucial.
[16] Mr Brown appeared on behalf of MCL. At his invitation, I gave directions to Mr Kaminski about self-incrimination at the start of his cross examination. He elected to answer all the questions put to him. In his closing submissions, Mr Brown submitted that Mr Kaminski was a liar and a perjurer, who had “robbed the company blind”. Mr Brown invited me to hold that Mr Kaminski had committed eighteen separate acts of dishonesty. I see no need to undertake that lengthy exercise. Instead, I propose to test his credibility and reliability in relation to four key issues.
A. The North Ayrshire Council contract
[17] A significant chapter of the evidence related to the 2012 contract that the Council awarded to GM. The works in question related to traffic signals at a series of junctions on the main road from the centre of Irvine going north along the Ayrshire coast through Kilwinning, Stevenston, Saltcoats and Ardrossan. This contract would have required heavy plant and machinery, and several men to carry it out.
[18] Mr Kaminski’s initial account, as contained within his witness statement, about the award and performance of this contract can be summarised as follows:
(a) GM obtained the contract from the Council in July 2012.
(b) GM sub-contracted the works to Bonza Green Ltd.
(c) The works were carried out in July 2012 and lasted three weeks.
(d) He was not present when the works were carried out.
(e) The Council paid £159,000 to GM in respect of the works on 4 September 2012.
(f) GM paid Bonza Green Ltd in July of the following year.
[19] The award of the contract is shrouded in mystery. No procurement exercise took place. GM was not on the framework agreement. At that time, it did not have its own workforce, plant and materials. It had not registered with the Construction Industry Scheme (“CIS”) operated by HM Revenue and Customs.
[20] Mr Gooding, the Council official responsible, gave evidence. His account was as follows. The Council made the award in haste to use up funds from Strathclyde Partnership for Transport, which would otherwise expire at the end of the financial year. Mr Kaminski told him that MCL and GM were in partnership. Accordingly, Mr Gooding had assumed that there was no difficulty with GM not being on the framework. When he had visited the sites to inspect the contract works from May onwards, Mr Kaminski had always been present. Mr Gooding never saw any sub-contractors, nor did he see any licences, insurance certificates or CIS forms.
[21] Although Mr Gooding was clearly defensive about a number of aspects of the contract award, I formed the clear impression that he did his level best to tell the truth.
[22] After hearing Mr Gooding’s evidence, Mr Kaminski altered his evidence. He stated that the works actually began in May. He also conceded that he was present when they were being carried out. That was a radical change of position. In his witness statement, he was adamant that “I wasn’t near the jobs” and only went to the site at night if there was a problem. He adopted the same position when he first went into the witness box “I wasn’t there”.
[23] A separate cloud of mystery envelops Bonza Green Ltd (‘BGL’). According to Mr Kaminski, BGL carried out the sub-contract works for the Council contract. Contrary to standard industry practice no price was agreed in advance. BGL supplied all the materials and equipment to carry out the works. GM did not pay BGL until July 2013. The sum it paid was substantially less than the sum it had received from the Council.
[24] That is an incredible account. Why would BGL agree to send its men from Manchester to work in Scotland without any agreement over price? Why would it lay out substantial costs, for wages, travel, accommodation and subsistence and then agree to defer payment for about a year? Why would it agree to be paid so much less than the contract sum? These questions cry out for an explanation.
[25] Mr Kaminski knew from the pre-proof investigations that MCL attached great importance to the role of BGL. Yet he chose not to cite his friend and contact there, Mr Eamon Campbell, as a witness. That is despite Mr Kaminski having recently been in touch with him and there being no apparent difficulty about Mr Campbell giving evidence.
[26] Mr Kaminski prevaricated and was unable to provide convincing answers to the key questions. He could not explain why the Council awarded the contract to GM, given that in 2012 (a) it was not on the framework agreement, and (b) it did not have its own workforce or plant.
B. The original defences
[27] Mr Kaminski accepted that he was responsible for the content of the original defences. They state that GM had not competed with MCL in the period prior to February 2013. That is manifestly untrue. I do not accept Mr Kaminski’s explanation that the averment was inserted by mistake. The Council contract must have been in the forefront of his mind. It was the first major award that GM had secured. It plainly placed it in direct competition with MCL. He knew that MCL was on the framework and would have tendered for works of that value.
C. The May 2010 meeting
[28] During the course of cross-examination, counsel challenged Mr White’s account of the meeting at his office on 10 May 2010. It was suggested to him that he had not used the term “fiduciary”. I found that surprising. His evidence was supported by his note and by the evidence of Mr McGivney.
D. Mr Burnside
[29] Mr Kaminski stated that he went to see his former accountant, Mr Burnside, about twice a year to hand in documents. He did not give him figures. In his affidavit, Mr Burnside contradicts that assertion. He states that Mr Kaminski supplied him with figures. As Mr Burnside was not called as a witness, I cannot fully evaluate his evidence. I regard it as unlikely, however, that Mr Burnside made up any entries in the accounts.
Summary
[30] I conclude that Mr Kaminski is both incredible and unreliable. I therefore disregard his evidence except where it is supported by other credible testimony. With regard to the Council’s award of the contract to GM, Mr Kaminski’s account is inherently implausible. It cries out for an explanation that he was unable to supply.
The three objections to the accounts
[31] Mr Kerr was a careful and impressive witness. He has 30 years’ experience of dealing with companies with a similar profile to GM. He is familiar with the difficulties that “one man” companies in the construction industry can face in the early years after their formation.
[32] In his experience such companies almost always have a paper trail to support their accounts. That is for clear and obvious reasons. Such companies have statutory obligations to keep accurate records. Usually they require to make monthly National Insurance and CIS returns and quarterly VAT returns. They must retain their financial records for a period of seven years.
[33] A failure to keep appropriate records may lead to significant financial consequences. HM Revenue and Customs (‘HMRC’) is likely to disallow any entry in a set of accounts that cannot be vouched. It might also look to recover further payments in respect of taxation and impose penalties.
[34] Against that background, Mr Kerr said that most companies take pains to be in a position to establish the authenticity of individual transactions. They will usually have a wide range of documents, including petty cash books, tenders, priced bills of quantities, specifications, invoices and receipts.
[35] The fact that there are no relevant written materials to support Mr Kaminski’s account is in itself most surprising. HMRC requires sub-contractors to be verified in accordance with the CIS. When a sub-contractor is engaged in local authority works, one would expect to see a sheaf of documents. It will include CIS forms, licences, tenders, priced bills of quantities and the like.
[36] Mr Ottley was also surprised about the absence of documentation. He took a less strict line, however, than Mr Kerr. In effect he says that contractors lose receipts and there should be some recognition for the items in question. In this case the amounts in the disputed entries look reasonable, having regard to such factors as (a) the size of the vehicle fleet; and (b) the ratio of cost of materials to turnover.
(i) Cash withdrawals
[37] The accounts of GM show cash withdrawals totalling £150,003, none of which is vouched. At their meeting, the accountants agreed to allocate £75,370 to the directors’ loan account in name of Mr Kaminski. The remaining £74,633 is in issue.
[38] Mr Kaminski said that the withdrawals related to fuel payments, wages and materials. He also said that there had been receipts, but he had lost some of them, because (a) his laptop computer had crashed and (b) he had put receipts into his pocket which he had lost or were destroyed through adverse weather conditions. I do not accept his evidence for the reasons I have given.
[39] Mr Kerr sought evidence to verify the disputed entries, but without success. Mr Ottley told him that there were no contract files to show what works were undertaken by GM. Mr Kerr thought that unusual, given that most of its employers were local authorities or major contractors. In his experience even those businesses that do operate largely on a cash basis, such as restaurants, invariably have a paper trail.
[40] In Mr Kerr’s view an accountant might be prepared to accept a client’s explanation for the absence of vouching. He emphasised that this was a matter of professional judgement. It would only be appropriate in respect of one or two sums, where the figures involved were about £200 to £300. He regarded it as inappropriate having regard to the scale of the sums here.
[41] There were other features of the cash withdrawals that caused concern to Mr Kerr. He thought it unusual in the extreme that all the VAT receipts from the garages had been lost. He also queried how specific cash sums had been allocated for materials (£17,725) and for motor expenses (£25,374) without vouching. He would have expected the figures to be rounded up if there was nothing to substantiate them.
[42] Mr Ottley set out his approach in his witness statement as follows:
“During the whole period to 1 September 2013 …, Mr Burnside had identified £150,003 of cash that was extracted from the company’s bank account and during the same period he had identified £74,633 relevant business expenditure, therefor £75,370 of the case drawn was not included as an expense during the relevant period. Furthermore, Mr Burnside had spilt the £74, 633 of business expenditure between (i) Materials and Purchases £17,725, (ii) Motor costs £25,374 and (iii) Labour costs £31,534. Accountants for the pursuers have questioned any part of the £74,633 which is un-vouched. Unfortunately Mr Burnside’s working papers and explanations are not sufficiently clear enough to provide a clear audit trail, however the process followed by Mr Burnside whilst preparing the accounts appears to have been one that any reasonable accountant would adhere to. In my opinion if Mr Burnside was attempting to inflate costs, he had the option open to him of claiming the entire £150,003 as a business expense (which would be subject to scrutiny in the same way as the £74,633 now is) as opposed to only part thereof, secondly, the fact that the figures were so precise and were not round sums, suggest that at the time these journals were prepared by Mr Burnside and entered into the GMC’s accounts he would have had some basis or rationale for doing so.”
[43] Mr Ottley did a calculation which brought out the average monthly totals as follows: (a) £1,970 for labour costs; (b) £826 for motor expenses; and (c) £1,026 for materials. He thought those figures were reasonable, given that the turnover for the period in question was £973,567.
[44] I regard that approach as ill-founded. In his affidavit, Mr Burnside stated that he did not
“do any investigation into the figures which Jozef Kaminski gave me. He signed the accounts which were prepared on the basis of information provided by him.”
[45] I prefer Mr Kerr’s approach:
“…I would consider that while cash may well have been a regular use of funds within this business, the substantial and almost complete lack of accounting records, does not provide a suitable accounting of the allocation of the cash and specifically in the exact amounts which have been applied in this particular instance.”
[46] Mr Kerr accepted that some documents such as receipts might be lost or mislaid. What he found “most unusual” about GM’s accounts was the scale of missing material. For example, about 40 per cent of its bank transactions are cash withdrawals that are not buttressed with receipts in respect of the expenditure for which the sums were taken out.
Sub-contractors
[47] Similar considerations apply to the account entries in respect of payments to sub-contractors. There are no time-sheets, CIS registration forms and returns, VAT records and the like to provide support for the payments in question.
[48] The defenders have produced four invoices from BGL totalling £69,000, but they give rise to more questions than answers. According to Mr Kaminski, they all relate to the Council contract, yet two of them have the narrative “Civils works carried out at Glasgow Road Paisley.” The other two simply state “Civils works carried out at various sites in North Ayrshire”
[49] Mr Kaminski says he received the invoices by fax, but none of them have a fax header. He says that he asked BGL to split them into four because GM’s bank scrutinised transactions over £20,000, but two of the invoices are for £24,000. Two of the invoices show BGL’s address as being “The Old School, House, 19 Lind Street, Manchester, M40 7ES”, but the other two invoices bear to come from another address: “Unit 701 Apex House, Bolton Street, Radcliffe, M26 3SS.”
[50] It is difficult to find out anything about BGL. The last accounts were filed in relation to the year to 30 November 2012 and the last annual return was for the period to 31 July 2013. The balance sheet shows no fixed assets and very few other assets or liabilities. There are no other details. For example, from a directory for a website for the company. Mr Kerr made his own enquiries, but could not find out anything about them. The phone number rang out.
[51] In cross-examination, Mr Ottley accepted that the invoices gave rise to a degree of suspicion. He also accepted that he would have to consider whether there was any obligation to report in respect of the money laundering legislation.
Provision of £93,000
[52] The accounts have a provision of £93,000. Mr Kerr asked for an explanation at the meeting on 18 September and on that occasion Mr Ottley was unable to provide one. Following further correspondence, he explained that the provision related to certain roadworks still to be undertaken by GM, but for which they had already been paid. The works in question were road-markings and anti-skid works and were estimated to cost £90,000.
[53] Mr Kerr was puzzled by this explanation. He drives past the location of four of the sites on his way home from work each evening. He had noticed that the requisite work was carried out in the summer of 2013. He had checked some of the other crossings and found that they had road markings too. He also said that he would be “astounded” if a local authority signed off road-works and two years later important health and safety works still had to be done.
[54] In Mr Kerr’s clear opinion, it is no longer appropriate to have a provision in the accounts. There is no satisfactory evidence of any outstanding liability at all nor of the amount in question, nor of the date it will arise (if at all). Further, by reason of the passage of time, it should not be in the 2013 accounts.
“In conclusion, I cannot determine that the accrual for £93,000 has an accounting basis which is supported by any evidence or explanation which has been given in respect of the specific contracts. Overall the lack of accounting evidence in respect of the allocation of £74,633 of cash expenses, and the general lack of accounting records or detail for this particular company leads to my conclusion that the costs of these wages and sub-contractor categories cannot be substantiated as accounting costs to be included in the revised accounts of 1st September 2013, nor should the accrual of £93,000.”
Which Approach?
[55] I prefer Mr Kerr’s approach to that of Mr Ottley. In the first instance the appropriate course is to consider the evidence in relation to each disputed entry in the accounts. There is no colourable basis for the disputed entries and the objections must therefore be sustained.
The Date of Mr Kaminski’s Resignation
[56] I hold that Mr Kaminski did not resign in February as he claims. I reach that conclusion for a number of reasons. He continued to work for MCL without telling either Mr McGivney or the workers that he had left. He came to the yard every morning and gave orders. He did not ask for a form P45. He did not ask for his name to be removed from the Company Register as a director.
[57] With regard to the letter of 4 February, Mr McGivney is adamant that he never received it. I accept his evidence that if he had received it, he would have had to consider what to do. For example, whether to issue a P45, whether to hold Mr Kaminski to a set period of notice, and to decide what he was owed. He would also have sat down to discuss all outstanding work with Mr Kaminski.
[58] In the course of these proceedings, Mr Kaminski produced a photograph of the envelope containing the letter, which he said he had taken on a smart-phone when he hand‑delivered it to Mr McGivney’s office. The photograph generates a number of questions. Why did he take it in the first place? Why did he take a photograph of the window envelope? Why did he not activate the date mechanism?
[59] Mr Upton submitted that the question of when Mr Kaminski resigned from the company is no longer relevant. That is because the defenders accept liability to account to September 2013. To the extent that it remains relevant, I hold that Mr Kaminski did not resign on 4 February.
Relief under section 1157 of the Companies Act 2006
[60] The court has power under section 1157 of the 2006 Act to grant relief to a person in respect of his conduct, if he has acted honestly, reasonably, and it is appropriate in the whole circumstances to grant relief: see Commonwealth Oil & Gas Co Ltd v Baxter [2007] CSOH 198; Gillespie Investments Ltd v Gillespie [2010] CSOH 113.
[61] As I hold that Mr Kaminski did not act honestly, he fails at the first hurdle. The misappropriation of the Council contract cannot co-exist with any suggestion that Mr Kaminski acted honestly, which is tested objectively: Royal Brunei Airlines v Tan Sdn. Bhd. [1995] 2 AC 378, 389B per Lord Nichols. No honest man could think that it was appropriate for a director and foreman to poach a sizeable contract.
[62] There must be a strong case to allow relief if the director has obtained personal benefit, even if it is relatively trivial: Towers v Premier Waste Management Ltd CA [2012] BCC 72.
[63] Another illustration is provided by Re In a Flap Envelope Co Ltd (in liq) [2003] BCC 487, para 64.
“… even if a director has acted honestly and reasonably, it would require an extremely powerful case to persuade the court to exercise its discretion… to relieve him from liability if he has obtained a material personal benefit through the breach of duty.”
[64] I conclude that Mr Kaminski has failed to establish any one of the three tests and that therefore his claim for relief under section 1157 fails.
Summary
[65] First, I hold that Mr Kaminski resigned from the company on 11 April 2013. Second, I hold that the objections to the accounts are well founded and that the cash withdrawals, payments to subcontractors, and the provision of a lump sum are not proper deductions from the accounts. Third, I hold that Mr Kaminski is not entitled to relief under the 2006 Act. I shall put the matter out by order to discuss further procedure and reserve the questions of expenses meantime.