Petitioner: D Thomson; Burness Paul & Williamsons LLP

Respondent: Party

22 March 2013

Introduction

[1] Between 2004 and 2005, Mr Bloch was the sole director of Centenary Holdings III Limited ('CH3'). When he took office, CH3 had cash assets of £15 million. Within a year, it went into liquidation with a few thousand pounds in its bank accounts. The petitioner brings this application under the Company Directors Disqualification Act 1986. He maintains that Mr Bloch managed the company in a manner which makes him unfit to hold the office of director.

History of the Company

[2] CH3 traces its origins to Robert Brown Limited. That company was incorporated in 1928 as a manufacturer, wholesaler and retailer of alcoholic beverages. In 1963 it became part of the Seagram group and changed its name to Seagram Distillers Ltd. Later, it became a public limited company. In December 2000 the Seagram Group merged with another multi-national group whose parent company was Vivendi Universal SA. I shall refer to the group collectively as 'Vivendi'.

[3] In December 2001 Vivendi arranged for CH3 to sell its drinks business. The purchasers were Diageo plc and Pernod Ricard SA. CH3 then became non-trading and in 2002 re-registered as Centenary Holdings III plc before becoming a private limited company under its current name in December 2003. All its shares were held by Vivendi.

[4] At December 2003 CH3 had substantial assets and liabilities. Its assets were valued in excess of £1 billion. Its liabilities mainly comprised tenancy obligations under several commercial leases. In the preceding accounting year, a provision of about £42 million required to be made to reflect the outstanding liabilities under the leases.

The Ark

[5] Vivendi's most significant lease obligations related to the Ark. It is a distinctive building in Hammersmith, London. Formerly it had been Seagram's head office in the United Kingdom. But it had been unoccupied for some time. The subjects were let to CH3 under two full repairing and insuring leases. They were dated respectively 19 December 1995 and 8 February 1996 and each was of 25 years' duration. The rent, service charges and rates for the Ark totalled about £5 million each year. The landlord was Deka Immobilien Investment GmBH ('Deka').

[6] In late 2002, Vivendi instructed estate agents to market the Ark leases on its behalf. Their efforts were unsuccessful. Prospective purchasers were only prepared to take on the leases if Vivendi paid them a premium of about £20 million. Vivendi was not minded to follow that route. Instead it approached Deka direct to negotiate its release from the lease obligations. Deka indicated that it would only be prepared to do so on payment of a sum in the region of £30 million. Vivendi was unwilling to pay such a high sum.

[7] By the middle of 2003 Vivendi was under severe financial pressure. It had to sell assets to reduce its debts. Under accounting standard FRS12 the Ark lease obligations had to be shown in the balance sheet. The magnitude of those entries was affecting the attitude of Vivendi's bankers. It was therefore desperate to find a solution to reduce these liabilities. In June 2003, Deka declined a cash offer of £20 million from Vivendi to surrender the leases.

Restructure of the Company

[8] Peter Harrod worked as an accountant with Vivendi. In late 2003, he was given the task of closing down Seagram Distillers plc (as CH3 was then called). In October, he asked PricewaterhouseCoopers (PwC) for advice on a proposed restructuring of the Vivendi group. The main aim was to address the "toxic" Ark problem by isolating it in CH3. PwC recommended a number of options, which were assessed by Mr Harrod.

[9] Mr Harrod has a brother called Murray Richards. Sometime in 2003 Mr Richards indicated that he was interested in taking over the Ark leases. Vivendi decided to adopt one of the schemes devised by PwC. It is rather labyrinthine in nature and it is unnecessary to set it out in full. Its principal elements were as follows:

a. CH3's assets were transferred out by way of a dividend in specie.

b. CH3 was left with £15 million in cash.

c. Murray Richards established a new group of companies ('the Centenary Group'). It included CH3, Centenary 6 Limited ('C6') and Centenary 7 Limited ('C7'). He was the ultimate shareholder and beneficiary of all three companies.

d. Vivendi sold its entire shareholding in CH3 to C6.

e. CH3 purported to lend £77.7 million to C6 to enable it to make the purchase.

f. That loan was repayable in 2019.

[10] As the loan constituted financial assistance, a director of CH3 had to give a 'whitewash declaration' before the scheme could be implemented: Companies Act 1985 section 156(4). He had to swear that he had formed the opinion (i) that immediately following the giving of financial assistance, there would be no ground on which the Company would be found unable to pay its debts; and (ii) that the Company would be able to pay its debts as they fell due during the year immediately following that date.

[11] Prior to 22 January 2004 Richard Constant, the head of Vivendi's legal division, was the sole director of CH3. Under the restructuring scheme, he would cease to be a director. He was not prepared to sign the whitewash declaration because he would have no control, influence or direction of the company after its sale by Vivendi.

[12] The whitewash declaration was in fact signed by Mr Bloch on 22 January 2004. That was the day when he took over from Mr Constant as the sole director of CH3. Mr Bloch had been a director of various companies for some twenty years, but had no past knowledge of CH3. He was a friend of Mr Richards and received a 'signing on fee' of £50,000, together with a service agreement in terms of which he was ultimately paid £150,000 per year. It is surprising that neither Mr Harrod nor Mr Richards became directors. Mr Richards explained that he declined to assume office because he was non-domiciled for tax purposes.

[13] When he swore the whitewash declaration, Mr Bloch knew that the sum of £15 million would allow CH3 to meet its obligations for at least 12 months. He also knew that he could use part of the balance to invest. If successful, that would generate an income stream for the company. The other crucial document available to Mr Bloch in assessing the future financial viability of CH3 was its business plan. Mr Richards had devised a strategy based upon two central pillars. First, CH3 would approach Deka and secure its consent to multi-letting the Ark. Secondly CH3 would contribute funds towards the purchase of the Paramount Hotel Group. It was being offered for sale at a price in the region of £250 million. Another of Mr Richards' companies based in Jersey was a preferred bidder.

[14] PwC prepared a report on the business plan. It concluded that the plan was difficult but viable. At the time Kenneth Wilson of PwC used the term "fragile". The liquidator, Mr Caven, was more robust. In his view CH3 was insolvent from its inception. That was because it was non-trading and its cash assets of £15 million were outweighed by the lease liabilities of about £35 million.

[15] When he became a director, Mr Bloch therefore knew that CH3 would become insolvent within a relatively short period unless something happened. At that stage, hopes rested on the twin pillars of the business plan. Neither of those proposals came to fruition. On 1 April 2004 the vendors of Paramount Hotels signed an agreement with another bidder. That removed one part the strategy.

[16] With regard to the Ark, there was no substantive meeting between CH3 and Deka to discuss the leases until August 2004. There is a dispute about the cause of the delay. Both Mr Bloch and Mr Richards said that Deka was reluctant to arrange a meeting. The petitioner founds on email correspondence that points the finger of blame the other way. In any event, at the meeting Mr Bloch adopted what he termed a 'hard line' negotiating tactic and offered to buy the Ark for a reduced price, rather than seeking consent for sub-letting. Unsurprisingly, Deka turned that approach down.

[17] Accordingly, the business plan was not implemented. What actually happened can be divided into two periods.

January to July 2004

Consultancy Services £600k

[18] On 3 March 2004, CH3 engaged Mr Richards as a "property investment and development consultant". In exchange for his services, CH3 was to pay (a) £30,000 per month in advance; and (b) £240,000 at the inception of the agreement to retain Mr Richard's services on "a first priority basis". The sums were to be paid to p4Property Consulting Limited ("P4"), a Jersey company beneficially owned by Mr Richards. In fact CH3 paid the whole £600,000 at the outset.

[19] Mr Bloch did not obtain independent advice in respect of this contract. Instead he relied upon the advice of Richard Pirie, a director of P4. Mr Bloch does not appear to have made any attempt to negotiate its terms. The figure to be paid was based not upon the value of Mr Richards' services to CH3, but rather the cost to P4 of employing two executives in his place. During the course of this contract, Mr Richards did not bring any remunerative deal to CH3.

Dividend of £5.3 million to C6

[20] On 26 May Mr Bloch resolved that CH3 should pay a dividend of £5,314,000 to C6. He explained that the banks were unwilling to grant loans to CH3 because of its balance sheet. By passing the sum to C6, it could make investments for the benefit of CH3. In order to declare such a dividend, CH3 required to have distributable reserves. It did so by reducing the value of the Ark liabilities in its balance sheet on the basis that it would be multi-let. Given that Mr Bloch had not yet had a meeting with Deka, it is hard to understand the basis for this decision. In an email dated 12 April 2004, PwC advised Mr Bloch about the criteria to be satisfied before making a dividend, and provided the following warning:

"CH3 can make inter-group loans to other group companies, absent of distributable reserves. However there may be potential financial assistance and tax issues from doing this with a whitewash process required prior to any loan being made. Based on the projections prepared for the statutory declaration given on 22 January 2004, ignoring other project income and expenditure, if a loan of £5m was made to other group companies there would be insufficient cash to meet CH3 debts as they fall due over the next 12 months."

[21] The dividend payment was not subject to any repayment obligation. Two days after it received the dividend, C6 loaned the sum of £5.314 million to C7. Mr Bloch was the sole director of all three companies. There is no evidence of any investments being made by C6 or C7 on behalf of CH3. None of the documents or the witnesses could point to any return being received. On 9 August 2010 the court ordered C7 to be wound up.

Payments of c£2.6 million to C7

[22] Between 20 February and 26 May, CH3 made a series of payments to C7 totalling £2,649.344. By 31 December 2002, C7 owed CH3 £2,595,000.

£250,000 loan to Herongate

[23] By an agreement dated 29 July 2004, CH3 contracted to advance a loan of £250,000 to Herongate Construction Ltd ('HCL'). At that stage it was a distressed company. Mr Caven stated that he had tried many times to see if there was any logic to CH3's reasons for making the loan. He had failed to do so. It was extremely risky and the potential return was not high.

[24] HCL went into liquidation in September 2004. Its liquidator rejected CH3's claim because the loan had in fact been paid into the account of a separate company, Herongate Development Limited ('HDL'). Having taken legal advice, he considered that CH3 had advanced the loan to HDL rather than HCL. The joint liquidators of CH3 are trying to recover sums from the directors of HCL under personal guarantees.

July 2004 to June 2005

Introduction

[25] Mr Bloch had two meetings in October 2004 with Brian Jackson of PKF (UK) Limited, chartered accountants, to seek advice on CH3's financial position. There seems to have been a lull before a flurry of commercial activity in late 2004 and early 2005. Mr Bloch and Mr Harrod (who was by then the in-house accountant at CH3) both accepted that all the transactions were high risk ones.

£338k loan to Cloverleaf

[26] On 2 December 2004, CH3 agreed to lend £338,290 to Cloverleaf Holdings Limited, a company based in Monaco. The loan was unsecured. CH3 paid the sum into a bank account held in the name of "Linda A Miller" at Farmers and Merchants Bank, Los Altos Office, Long Beach, California. Mr Caven has been unable to determine why there is this disconnect between the borrower and the payee. It was not satisfactorily explained in the evidence.

£2.75M to Phonevision

[27] Phonevision Australia Pty Ltd ('PA') held a number of valuable 4G wireless licences. Mr Harrod visited Australia and observed that PA was a significant operating business. He knew that other companies within the Murray Richards group either owned shares or held agreements to purchase shares in PA. On 24 January CH3 transferred £2.75 million to Phonevision UK Limited to purchase shares in PA. PA in turn gave that money to C7. C7 then paid the sum of £2,723,134.33 to CH3. All these transactions took place on the same day. I found the underlying rationale difficult to understand. Mr Bloch seemed to suggest it was a book-keeping exercise. As C7 already owed sums to CH3, however, this carousel left CH3 £2.7 million worse off.

Four further transactions

[28] On 25 January CH3 loaned €488,600 to Baktofactory Ltd. On the same day CH3 purchased 72,847 shares in Twisted Pair Solutions Inc at a cost of £189,068.88. On 27 January 2005, the Company gave funding of $250,000 to B-Quad Inc. On 11 February 2005, CH3 transferred $500,000 for the benefit of HomeNet Communications Inc. In the case of the last two loans, the sums were transferred to Cairncross & Hempleman, attorneys in Seattle.

Liquidation

[29] In June 2005, CH3 presented a winding up petition on the basis that it was unable to pay its debts as they fell due. Mr Jackson was appointed provisional liquidator on 14 June and interim liquidator on 14 July, when the court made a winding up order. By resolution of a creditors' meeting held on 23 August 2005, Robert Caven and Kevin Roy Mawer of Grant Thornton, Chartered Accountants, were appointed joint liquidators of CH3. The deficiency to creditors as at the date of liquidation was estimated at £67 million.

[30] In January 2009 the Liquidators raised proceedings at the Chancery Division in London. They sought to recover damages in excess of £77 million from Mr Bloch, Mr Constant, Vivendi and PwC. That action was resolved in early 2011 by means of an extra judicial settlement. It involved Vivendi paying a large sum to the liquidators. In May 2011, Vivendi instituted proceedings against Mr Bloch and Mr Richards in the Chancery Division of the High Court of Justice for payment of about £10 million. That suit alleges that Mr Bloch breached his duty as a director of CH3. He is defending that action.

The Investigation

[31] On 25 January 2005 the Petitioner authorised an investigation to be carried out under section 477 of the Companies Act 1985. The investigators submitted their report in August 2005. Mr Thomson, who appeared on behalf of the petitioner, sought to explain the delay in bringing proceedings. He said that it was a very complex matter. The petitioner and his legal advisors had required to spend a great deal of time in analysing the voluminous materials and the issues that arose.

Credibility and Reliability

[32] The petitioner's witnesses were Mr Fenton (the investigator), Mr Caven, Mr Wilson and Bernice Dunmuir of Shepherd and Wedderburn WS. I formed the view that they were all credible and reliable witnesses.

[33] Apart from his own testimony, Mr Bloch led the evidence of Mr Richards and Mr Harrod. He also relied on witness statements from two other persons, Mr Campbell and Mr Boon. It is convenient to begin with Messrs Harrod, Campbell and Mr Boon. In my view their evidence did not touch upon the main issues in the case and can be set aside.

[34] Turning to the evidence of Messrs Bloch and Richards, in my opinion they were both unsatisfactory witnesses. Both became evasive when they were asked to explain the basis upon which CH3 had proceeded. Their answers were particularly lengthy and opaque in relation to the consultancy fee and the payment of the dividend to C6. Neither was able to offer a cogent or convincing explanation for these matters.

[35] All the witnesses including Mr Bloch accepted that he was in sole charge of CH3. He made all the decisions which are now founded upon by the petitioner.

Legal framework

[36] Section 8 of the Company Directors Disqualification Act 1986 provides as follows:

"(1) If it appears to the Secretary of State from investigative material that it is expedient in the public interest that a disqualification order should be made against a person who is, or has been, a director or shadow director of a company, he may apply to the court for such an order. ...

(2) The Court may make a disqualification order against a person where, on an application under this section of that Act, it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company."

[37] The court must decide whether the director's conduct "viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies": In Re Grayan Building Services Ltd (in liquidation) [1995] Ch 241, 253-254 per Hoffmann LJ. The matter is summarised in Mithani, Directors' Disqualification, Volume I, Section III, paragraph [344] as follows:

"Ultimately, the question whether unfitness is established is a matter for the judge dealing with the issue to exercise a 'value judgment'. It is submitted that the making of that value judgment requires no more than for a court to come to a common sense decision about whether the facts of the case when applied to the standard of conduct laid down by the courts should result in a finding of unfitness being made against the defendant."

[38] A number of propositions apply (all references are to paragraph numbers in Mithani, Volume I, Section III)

a. The court must approach the issue by taking off the spectacles of hindsight and considering the situation that confronted the director. [410B]

b. Mere commercial misjudgement will not justify disqualification. [398]

c. Incompetence, however, such as "misapplication of company funds or putting them at risk by inappropriate transactions", may justify an order. [436]

d. Trading while insolvent and without a reasonable prospect of meeting creditors' claims "is likely to constitute incompetence of sufficient seriousness to justify the making of a disqualification order." [438A]

e. Payment of excessive remuneration to another at a time when the director knows the company is insolvent or is failing to discharge creditors' debts is blameworthy [537]

[39] With regard to dividends, Oliver J stated in Re Halt Garage (1964) Ltd [1982] 3 All ER 1016, at 1039 that "the real test must, I think, be whether the transaction in question was a genuine exercise of the power. The motive is more important than the label."

Decision

[40] I consider that the petitioner has established his case. Indeed there seemed little or no challenge on the facts. Mr Bloch was helpful and courteous throughout the hearing. He summarised his position in his written submissions as follows:

"I did not knowingly trade the company while it was insolvent. I regularly sought what I believed to be professional advice and acted on that advice. The transactions entered into were done so in good faith with the intention of benefitting CH3 and protecting the interests of its creditors, and the eventual repayment to it of the £77m loan by C6.

The amounts of money involved in the late 2004 and early 2005 transactions were not material (significant) as against the company's funding and the leaseholders. The complaint with regard to these transactions appears to be that the company became insolvent one quarter earlier than it would have if they had not been entered into. Further I entered into these transactions because I believed there was a reasonable prospect of them achieving positive prompt returns for CH3."

[41] In my view, it is questionable whether Mr Bloch fully understood what strategy to employ in making CH3 viable. It seemed to depend largely on his optimistic belief that some deal would turn up that would allow CH3 to continue in business. He presented no independent evidence that he relied upon professional advice. In relation to the email from PwC dated 12 April 2004, he appeared to misread what it said.

[42] It is clear that Mr Bloch failed to implement the business plan. One of the pillars was removed at an early stage. By April 2004 at the latest and possibly as early as February, he knew that CH3 was not going to be involved in the purchase of the Paramount Hotel group.

[43] As to the critical matter of the Ark, Mr Bloch appears to have done very little to progress multiple sub-letting. By the time of the meeting with Deka on 20 August 2004, it was uncertain whether CH3 could afford the conversion costs of about £5 million, or the delay of about 12 months while the works were carried out. In any event, no attempt was made to secure the consent of Deka to multi-letting of the Ark. Instead it was suggested that CH3 might buy the building.

[44] Mr Bloch did not put any alternative strategy in place. Instead some £6m left CH3 within the first four months of him taking office. That comprised the payments to P4, the dividend to C6, and the £2.7m paid to C7. In that period CH3 engaged Mr Bloch on an initial salary of £120,000 per annum and then engaged Mr Harrod at a salary of £150,000 per annum with an additional "security payment" of £150,000. CH3 was still non trading and had not otherwise entered into any business.

[45] I do not accept that the sums paid out in late 2004 and 2005 can be regarded as insignificant. In my view Mr Bloch failed, and continues to fail to appreciate that such monies were effectively held by CH3 in trust for its creditors. It was not open to him to use those funds in risky speculations.

[46] The two most troubling transactions remain the consultancy payment and the dividend. Neither appeared in the business plan. In the course of their investigations, Mr Fenton and Mr Caven found no evidence that any services were actually rendered to CH3 by Mr Richards. No further material was produced at the proof to challenge that finding. Accordingly there is a substantial question-mark against the propriety of that agreement.

[47] Turning to the dividend of £5.3 million to C6, I can find no justification for Mr Bloch's decision. There was no warrant for passing any sum, far less such a substantial figure, to another company without any legal means of securing its return. That dividend was only made possible by making the assumption that the Ark would be multi-sub-let. At the time of the dividend (and indeed subsequently), there was no proper basis for that assumption.

Disqualification Order

[48] Having regard to all the circumstances, I conclude that Mr Bloch's conduct, viewed cumulatively and individually is clearly such as to render him unfit to be concerned in the management of a company. The question then arises as to the period of disqualification. In Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, 174 Dillon LJ stated:

"I would for my part endorse the division of the potential 15-year disqualification period into three brackets, which was put forward by [counsel] for the official receiver to Harman J in the present case and has been put forward by [counsel] for the official receiver in other cases, viz: (i) the top bracket of disqualification for periods over 10 years should be reserved for particularly serious cases. They may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again. (ii) The minimum bracket of two to five years' disqualification should be applied where, though disqualification is mandatory, the case is relatively, not very serious. (iii) The middle bracket of disqualification for from six to 10 years should apply for serious cases which do not merit the top bracket."

[49] In my view, Mr Bloch's conduct was very serious. He denuded the company of its substantial assets during the period of his directorship.

[50] In mitigation, I take into account two factors. First the petitioner does not accuse him of dishonesty or personal gain. Secondly, I take into account the lapse of time between the conduct in question and the present proceedings. In Re Westmid Packing Services Ltd [1998] 2 All ER 124, 131-132 Lord Woolf MR said:

"there is often a considerable time lag between the conduct complained of, its discovery and the disqualification proceedings actually coming to court ... One result of delay when it does occur is that there are occasions when disqualification must be ordered even though, by reason of the director's recognition of his previous failings and the way he has conducted himself since the conduct complained of, he is in fact no longer a danger to the public at all. In such cases, it is no longer necessary for the director to be kept 'off the road' for the protection of the public, but other factors come into play in the wider interests of protecting the public, ie a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned."

[51] The court must also "ascertain the extent of the prejudice that has been caused by any period of de facto disqualification": Mithani, Volume I, Section III, [1638]. Mr Bloch stated that since proceedings started, he has turned down a number of offers of directorships.

[52] Weighing all these factors as best I can, I shall disqualify Mr Bloch for a period of eight years.