HER MAJESTY'S SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLS v THOMAS BANKS HAMILTON
OUTER HOUSE, COURT OF SESSION
[2015] CSOH 46
P1283/12
OPINION OF LORD DOHERTY
In the petition of
HER MAJESTY’S SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLS
Petitioner;
against
THOMAS BANKS HAMILTON
Respondent:
For a disqualification order under the Company Directors Disqualification Act 1986
Petitioner: Duthie; Shepherd & Wedderburn LLP
Respondent: Party
21 April 2015
Introduction
[1] Her Majesty’s Secretary of State for Business, Innovation and Skills (the petitioner) seeks a disqualification order in terms of section 6 of the Company Directors Disqualification Act 1986 in respect of Thomas Banks Hamilton (the respondent).
[2] The respondent qualified as a chartered accountant in 1980. Prior to his becoming a director of Ascot Care Homes Limited (“Ascot”) he had worked for many years in the care home industry. He had a good deal of knowledge and experience of that industry. He had been a company director of many companies. He was very familiar with the duties of company directors.
[3] In 2008 the respondent approached David Newett to seek investment in a business venture to acquire and operate nursing homes. The respondent and Mr Newett had known each for more than 20 years. They had done business together previously. Mr Newett introduced the respondent to Endless LLP, a private investment partnership of which he, Garry Wilson and Darren Foreshaw were the partners. Agreement was reached that Endless LLP would provide finance to enable the acquisition of a business in Callander which operated three care homes, Ashlea House, Mountview House and Pinewood Lodge. Endless LLP (or another entity within the Endless group) was to purchase the care homes and lease them back to be operated by a care home company run by the respondent. Endless LLP was to be an equal shareholder with the respondent in the new business venture, Ascot Care Homes Holdings Limited (”Holdings”). Ascot was to be a wholly owned subsidiary of Holdings. On 30 May 2008 the respondent and Stirling Investments Properties LLP (“SIP”) each acquired one of the two issued shares of Holdings. Mr Newett and his wife were the partners in SIP. The intention was that SIP’s shareholding in Holdings would be transferred to Endless LLP or another entity within the Endless group. On 14 May 2010 a stock transfer form was duly executed by Mr and Mrs Newett transferring SIP’s share to Ascot Healthcare Investments LLP (“AHI”), a related partnership in the Endless group, but it appears that the transfer was not registered in Holdings’ Register of Members. The unchallenged evidence from Mr Newett was that the stock transfer had been “a tidying up exercise”. It ought to have been registered after the transfer but the person (Paul Foster, chief financial officer at Endless LLP) who had had the responsibility for doing that had overlooked it. Both the petitioner and the respondent accepted that SIP held its shareholding in Holdings as the nominee of AHI.
[4] A related partnership, Endless Investments LLP (“Investments”), duly acquired Ashlea House, Mountview House and Pinewood Lodge. Investments let each of the homes to Holdings for a period of 35 years from 29 September 2008. The initial annual rents were £113,000, £102,000 and £125,000 respectively.
[5] The respondent was appointed as a director of Holdings, of Pinewood Nursing Home Limited (“Pinewood”) and of Ascot. He continued to hold office as a director in each company until the companies entered administration in December 2010. The only other director of Holdings and Ascot was Angela Burns. Pinewood is a wholly owned subsidiary of Ascot.
[6] Holdings’ strategy was to seek to grow the business by acquiring further care homes. While the plan was for growth with it being envisaged that additional investment might be made by Endless LLP or a related entity, no Endless entity was under any legal obligation to Ascot, Holdings or the respondent to make any such additional investment. Each potential acquisition was to be considered on its merits. During 2009 and 2010 several potential acquisitions were considered. Many were rejected.
[7] On 27 April 2009 Holdings acquired the business of Drumpark House Limited which operated Drumpark House in Bridge of Allan. Holdings leased the premises from the owners for 35 years at an initial rent of £120,000 per annum. Ascot became operators of the nursing home.
[8] On 30 July 2009 Holdings acquired the business and assets of Belvedere Lodge, Stanley. Investments acquired the freehold title and let the care home to Holdings for a period of 25 years at an initial rent of £80,000. Ascot became operators of the nursing home.
[9] Holdings was simply a holding company. The trading company was Ascot. It occupied and operated the care homes. The rents for the care homes were paid out of Ascot’s trading income.
[10] Between 6 November 2008 and July 2009 AHI lent approximately £190,000 to Ascot. Until 9 October 2009 the arrangements for the loans were not formally documented. On 9 October 2009 AHI subscribed for two sets of loan notes issued by Ascot, a variable rate secured loan note with a total value of £48,000 and repayable over 12 months, and a variable rate secured loan note with a total value of £142,120 repayable over a three year period. The first set of loan notes was repayable by two equal instalments of £24,000 due on 31 May 2010 and 31 August 2010. The second set of loan notes was repayable by five equal instalments of £24,000 due quarterly from 30 November 2010. The loan notes did not oblige AHI to advance any further sums to Ascot.
[11] On 9 October 2009 Ascot and Holdings granted to Endless LLP a composite guarantee and debenture comprising fixed and floating charges over their assets as security trustee for Endless LLP and AHI. The debenture was granted in terms of all sums due, owing and incurred to Endless LLP and AHI.
[12] As at March 2010 a quarterly instalment of rent for the care homes (totalling £94,230.77) was due to be paid by Holdings. It was not paid. A late part-payment of £60,000 was made on 21 April 2010. On about 27 May 2010 Endless was informed that Ascot was unable to finance staff wages which were due for payment the following day. Ascot requested £50,000 financial assistance in order to be able to meet its obligations to staff. The request further increased concerns that all was not well at Ascot. Holdings defaulted on the June rental. As at 31 May 2010 Ascot was in default in respect of the first set of loan notes. No payment was made on that date or on 31 August 2010 when the second instalment fell due. No payments of rent were made by Holdings after the part payment of the March 2010 rent. As at 30 November 2010 Ascot was in default in respect of the second set of loan notes. No repayments of the loan notes were ever made by Ascot.
[13] In September 2010 Endless carried out investigations into Ascot’s income and expenditure. The care homes were visited and access was obtained to Ascot’s books and financial information. The petitioner maintains that as a result of those investigations it was discovered that very substantial unauthorised payments had been taken by the respondent from Ascot. The respondent maintains that all of these payments were known to David Newett and were authorised by him.
[14] On 22 December 2010 joint administrators were appointed to Ascot and Holdings. The joint administrators were appointed provisional liquidators of Pinewood the following day. In fact Pinewood had ceased trading in 2009 and its business and assets had been taken over by Ascot. Claims totalling £1,133,822.71 were lodged in the administration of Ascot. There were no known creditors of Pinewood. HMRC submitted a claim in the Ascot administration of £291,490.21 for outstanding PAYE and national insurance contributions (“NICs”) (for the years 2009/10 and 2010/11). The only claim lodged in the Holdings administration was by HMRC for corporation tax of £2,631.52. There were insufficient funds in the administrations to enable any dividends to be paid to any class of creditors.
[15] The respondent was sequestrated on 17 December 2012.
[16] The petitioner maintains that the respondent’s conduct as a director of Ascot and Holdings makes him unfit to be concerned in the management of a company. First, the petitioner says that the respondent caused or permitted the misapplication of £158,843.68 of Ascot’s funds, viz unauthorised payments to him totalling £70,474.04; unauthorised payments totalling £38,858.82 to settle liabilities incurred by him in respect of personal expenses using Ascot credit cards; and unauthorised payments totalling £49,510.82 to settle liabilities incurred by himself and third parties connected to him. Second, the petitioner avers that the respondent caused Ascot wrongfully to delay repayment of Free Personal Care (“FPC”) rebates to residents and their families.
[17] On 5 March 2014, following a debate, Lord Woolman allowed a proof before answer ([2014] CSOH 89). I heard the proof over a period of six days. There were two joint minutes of agreement. In terms of the second joint minute the parties agreed that the witness statements of Angela Burns and Rickey Pooran should each be treated as his/her evidence. It was not agreed that their evidence was accurate. The respondent led at the proof. He gave evidence himself, and called Keith Douglas and Damien Bechelli as witnesses. The petitioner called Joanne Covell from the Insolvency Service; two of the partners in Endless LLP, Garry Wilson and David Newett; Aidan Robson, an Investment Director with Endless LLP; Anthony Briscoe of DHC Accounting; Alison Campbell from Stirling Council; and Gerard Friar, one of the joint administrators. In addition the petitioner lodged an affidavit from a former employee of Ascot, Maureen Pearson (whose inability to attend court to give evidence had been certified on sole and conscience by a medical practitioner).
Misapplication of funds
[18] In terms of the Articles of Association of both Ascot and Holdings directors were “entitled to such remuneration as the company may by ordinary resolution determine” (Ascot: article 2, applying Reg. 82 of Table A in the Companies (Tables A to F) Regulations 1985 (6/12 of process). Holdings: article 1, applying Reg. 82 of Table A (6/48 of process)). There were no ordinary resolutions by either company approving any payment to the respondent.
[19] Between November 2008 and May 2009 the respondent received a salary from Ascot of £2,500 gross every four weeks (£32,500 per annum). Between June 2009 and November 2010 he received a salary from Ascot of £4,615.40 gross every four weeks (£60,000 per annum). Notwithstanding that there had not been ordinary resolutions of the company approving these salaries, the petitioner did not suggest that receipt of them by the respondent involved misapplication of the company’s funds. It also seems clear that Endless was well aware that those salary payments were being received, and it appears to have accepted that without demur.
[20] It was also common ground that the £158,843.68 was paid to or for the benefit of the respondent or connected persons; and that it represented cash payments or the meeting of personal liabilities.
The respondent
[21] The respondent’s position in his pleadings (Answer 16) was:
“…[O]f the balance of £158,843, an amount of £66,303.95 was approved in the consolidated accounts to 30th September 2009 and agreed by members of Ascot and the Endless Group. The balance not approved by the members being the value expended in the year ended 30th September 2010, of £83,417.55, and the balance of £9,122.58 accruing in the year to 30th September 2011 …”
In relation to the year to 30 September 2010 the respondent averred that there was no agreement as to his remuneration, but that costs of £153,000 for him were “approved within budgetary statements of the Ascot Group”. He averred that that figure falls to be compared with PAYE salary of £55,384.80 and benefits in kind of £83,417.55 paid to him; that that exercise provided “sanction, support and approval” for the expenditure; and that he carried out “substantive and supportable work substantially in excess of any of the value received by [him] from Holdings”. In relation to the £9,122.58 incurred after 1 October 2010 he averred that it “was covered by similar budgets … with the budget set being substantially higher.” He averred that the whole expenditure of £158,843.68 “was made on behalf of Holdings not Ascot” and that “the total of £158,843.68 would have been held as a debt owed by Holdings to Ascot, and dealt with accordingly for tax purposes or otherwise when the consolidated statutory accounts for the Ascot Group were filed…” He further averred that he had “accrued time and expense relative to the development of Holdings amounting to £839,382”.
[22] In his witness statement (42 of process) the respondent stated:
“16. Throughout the period I was paid a basic salary via the Ascot payroll for pension plan purposes and received benefits which were all credited to my Director’s Loan account, all aspects of benefits received are admitted by me in the cause, and have been from the outset. All of these were expensed to the Profit and loss account as set out in Respondent Productions Number [7/]4, [7/]13, and [7/]16.
17. The total benefit I received throughout amounted to around £270,884, as set out in Respondent Production number [7/]32. I estimate this to be a pre-tax monetary value of just over £90,000 a year for the three years of work. This is a substantial discount of around 65% of my 3rd party market value of around £250,000 per annum. Respondent production [7/]4 sets out the calculation. I estimate that I was underpaid by about £600,000.
18. All of my entire benefit were fully authorised, it was fully budgeted for and entirely reasonable, and fully reported in the accounts via PAYE and my director’s loan account.
19. I had no contract of employment, and consider the benefit I received to be 65% below my market value provided on the basis of good faith.
…
63. In May 2009, I successfully acquired a long lease interest of Drumpark House…the lease right vested being in “Holdings”.
64. This transaction injected a free cash flow of £120,000 a year into the Ascot group.
65. Endless agreed to a £25,000 refurbishment budget as set out in the Report by Mr Stephen Harrison of Endless at Respondent Production [7/]10 at page 2.
66. It require(sic) no initial capital introduction from Endless LLP.
67. The interest was acquired at no premium by negotiation and had a market value of around £250,000 in terms of the granted lease value as set out being 2 x EBIDAR (sic).
68. In terms of success fee, I was granted £30,000, and given the quality of the transaction modest (sic).
…
118. By around end June 2010 my personal (sic) into Ascot can only be described as substantive and with total commitment. I have set out all the work and costs in Respondent Production Number [7/]32, on an arms lengh (sic) basis the value is £838,382 over 3 years commencing in January 2008, a huge workload.”
[23] The respondent accepted that there had been no resolution of Ascot or of Holdings approving any such payments by way of remuneration, but he maintained that he had determined his own remuneration and that he had been entitled to do so. He had not helped himself to Ascot’s funds. He had taken reasonable remuneration for the work he was doing. He said that from the very beginning all of the additional sums had been paid through a director’s loan account in order to avoid national insurance contributions. It was untrue to suggest that he had resisted the setting up of a director’s loan account. Mrs Pearson was lying when she said that he had. All the payments making up the £158,843.68 had been approved by David Newett. Mr Newett had known about them and had had no difficulty with them. Some of them had been in Ascot’s accounts for the year ending 30 September 2009 which the respondent said that Stephen Harrison and Aidan Robson had seen and agreed on behalf of Endless before they were filed at Companies House. He maintained that all of the payments making up the £158,843.68 had been contained within the regular financial information sent to Mr Newett at Endless LLP. There had been weekly or bi-weekly cash flows. In addition Mr Newett had attended at least two banking presentations by the respondent where there had been reference to the business plan set out in 7/4 of process. That document had contained an agreed business plan.
[24] One of the payments particularly focussed upon at the proof was the payment of £30,000 in cash made by Ascot to the respondent on 12 June 2009. In his witness statement the respondent’s position (paragraph 68) was that the £30,000 payment represented a “success fee” for him in respect of the acquisition of Drumpark House. In cross‑examination he indicated that Mr Newett had been aware that he was taking £30,000 as a consultancy fee for the acquisition of Drumpark House. He said that it had been discussed with Stephen Harrison. His initial recollection was that it had been entered first as a payment to his director’s loan account, not as a payment for fixtures and fittings in Drumpark House. However, ultimately he did not dispute Mr Briscoe’s evidence. He acknowledged that he and Mr Briscoe had had a discussion about where the payment should appear in the accounts and that Mr Briscoe had not wanted it to appear as a payment for fixtures and fittings whereas the respondent had suggested that that would be appropriate. He had accepted Mr Briscoe’s view.
[25] In relation to the other sums the respondent’s evidence at first was that Mr Newett would have known about all of them. He said that he “was due remuneration in some form or other in relation to development work”. He said that details of all expenditure had been sent to Endless. Later, he qualified that by saying: “He [Mr Newett] would probably not have been aware of the smaller items.” Under reference to 6/83 and 6/84 of process the respondent accepted that whereas in 6/83 Maureen Pearson had included separate entries for “TH Other” sums paid to him, the respondent had not sent that document to Endless. He had removed those entries from the document which was sent (6/84). He explained that he had done that because the relevant costs were all development costs for Holdings. He suspected that Mr Newett probably had not advised Mr Wilson or Mr Robson that he had approved the £30,000 fee. In cross‑examination he also maintained that “a full cash book analysis to 30 September 2010” had been given in 7/16 of process and had been sent to Endless. He said that the extra remuneration related to his efforts for Holdings and was shown in 7/16. The contents of 7/16 were not further explained. There was no attempt to identify particular entries or to describe their significance.
[26] A further matter explored in cross‑examination was how the respondent had treated the payments for tax purposes. He was asked whether he had declared the £158,843.68 as income. His initial response was “I don’t know what I put.” He then said that the payments “would go through Harris Healthcare Limited” and that only the PAYE salary would have been entered on his tax returns. He said he had filed his tax returns properly. He was pressed as to whether all of the payments would have been recorded against Harris Healthcare Limited. He replied: “I can’t remember the detail - the major ones would have been recorded against Harris.”
[27] The respondent made no reference to 7/17 of process during the course of his evidence (but, as noted below, he elicited evidence about it from Mr Briscoe).
Anthony Briscoe
[28] Mr Briscoe indicated that when he came to prepare the accounts for the year ending 30 September 2009 he noticed that the £30,000 payment was recorded in Ascot’s books as having been a payment to Drumpark House Limited in respect of fixtures and fittings at Drumpark House. Mr Briscoe had prepared the accounts for Drumpark House Limited. He confirmed with that company that no such payment had been made to it. He raised the matter with the respondent. The respondent indicated to him that he would raise an invoice from his consultancy company, Harris Healthcare Limited, for this sum and that that was how the matter should be treated in the accounts.
[29] Accounts for Ascot, Holdings and Pinewood were prepared by Mr Briscoe. In January 2010 he started work on the accounts for the year to 30 September 2009. The accounts for Ascot for that year were sent to the respondent by Mr Briscoe on 5 May 2010. In the covering letter (6/133) Mr Briscoe indicated that the final accounts sent had been adjusted: “We have included the payment of £30,000 to yourself as being further consultancy fees for Harris Healthcare as confirmed in your email.” The profit and loss account had a global entry for “Administrative expenses (£1,790,513)”. Note 4 stated that directors’ aggregate remuneration in respect of qualifying services was £40,577. Note 15 stated:
“15. RELATED PARTY TRANSACTIONS
The company was under the control of Mr Thomas Hamilton throughout the current period. Mr Hamilton is a director and shareholder of the parent company.
…
Ascot Care Homes Limited paid consultancy fees of £48,804 to Harris Healthcare [Limited] a company of which Mr Hamilton is a director…”
Accounts for Holdings were prepared for the year to 30 April 2009 and for periods 1 May 2009 to 30 September 2009. The accounts to 30 April 2009 stated in note 5 that there were no related party transactions. The accounts for the period 1 May 2009 to 30 September 2009 had a profit and loss account for the group which contained an entry “Administrative expenses £2,338,216”. Note 13 declared that there were no related party transactions.
[30] When preparing the 2009 accounts Mr Briscoe had also prepared, in addition to the statutory accounts, a detailed profit and loss account. This was referred to on the contents page of the accounts but it was not filed as part of the accounts which went to Companies House. In his letter of 5 May 2010 Mr Briscoe stated:
“The accounts you have here have been presented in the normal statutory way, but I have also enclosed separate P&L accounts showing the figures in the way you want to show them to the investors.”
Consolidated accounts were also enclosed with the letter. Mr Briscoe wrote of them:
“These are for the purposes of yourself and the investors and hopefully are what you were expecting - we have included the profit and loss which shows the trading contribution, rather than the normal statutory P&L.”
[31] In cross‑examination Mr Briscoe confirmed that he had prepared the consolidated accounts for Holdings, 7/17 of process, at the respondent’s request. They had been for the respondent’s own purposes - to show to investors. They were not required for statutory purposes. Under reference to the profit and loss account on page 7 Mr Briscoe confirmed that the trading contribution from the care home business had been £618,407. Administration costs had been £139,603. That figure had been largely made up of general expenses shown on page 6 but it did not include legal costs. The figure of £298,809 for “Start up costs (100% W/O)” was mostly acquisition, start up costs, and development costs. No accounts for the year ending 30 September 2010 had been made up at the time the companies went into administration. Mr Briscoe explained that in late November 2010 he had prepared the report (6/122 of process) recording his concerns at high levels of expenditure claimed by the directors of Ascot for travel and subsistence, legal and professional fees, consultancy fees and entertaining. He had not been provided with supporting documentation for these items. He did not believe that Ascot could withstand such costs year after year.
Maureen Pearson
[32] Mrs Pearson had been cited to attend as a witness. In advance of the proof a soul and conscience certificate from her general medical practitioner had been submitted. The certificate certified that Mrs Pearson was unfit to attend the proof. In the circumstances the petitioner lodged an affidavit from her (67 of process).
[33] Mrs Pearson was employed in Ascot’s finance team during the period from 19 June 2009 until after Ascot went into administration. She was retained in that post by the administrators until December 2012. She took over as finance manager of Ascot on 1 January 2010. While she had no formal accountancy qualifications she had over 20 years’ experience working in accounts.
[34] Mrs Pearson indicated that in June 2009 she put in place a director’s loan account so as to properly account for the respondent’s spending. The respondent had not been happy about that (paragraph 32). The respondent provided her with few receipts for his credit card expenditure. He instructed her that his credit card was to be signed off as paid in full. He told her that they were all business expenses (paragraph 33). It was plain that they were not (paragraphs 33, 35, 36 - 41). He used his credit card for personal purchases as a way of topping up his earnings without paying tax. He did not include any of the additional payments in a P11D return (paragraph 14). His wife was paid £2,500 per month but she was receiving that for no purpose (paragraph 15). Mrs Pearson prepared a weekly management spreadsheet which was equivalent to a profit and loss account (paragraph 18). The respondent’s expenditure eventually became so significant that she created new lines on the spreadsheet called “TBH Phone” and “TBH Other”. Her recollection was that the respondent’s director’s loan account was recorded on the Sage system, not on the spreadsheet (paragraphs 19 and 32). Mrs Pearson was never allowed to send the weekly management information to Endless. The respondent had said he would send a copy. One of her weekly spreadsheets and what was sent by the respondent to Endless were seen in 6/83 and 6/84. In March 2010 she had discovered from Mr Robson and his assistant Ms Vilamor that the respondent had not been sending financial information to Endless on a regular basis (paragraph 19). Mrs Pearson was frequently requested to transfer funds from Ascot’s bank account to the respondent, and to pay third parties on the respondent’s instructions (paragraphs 34, 37-45, 48-49). The £30,000 withdrawn in cash by the respondent in June 2009 had been posted against acquisitions on the Sage record (paragraph 34 and 45).
Garry Wilson
[35] Mr Wilson is the managing partner of Endless LLP. He is a chartered accountant and a qualified insolvency practitioner. He indicated that the Ascot Group’s main point of contact with Endless had been through Stephen Harrison, one of Endless’ investment managers, and thereafter through Aidan Robson. Mr Harrison, and then Mr Robson, had met with the respondent on an ad hoc basis, generally about once every two months. The meetings had been informal and the respondent would provide an update on trading and on any potential acquisition opportunities. Most had been rejected. Management accounts and cash flow forecasts had been provided for monitoring purposes. Mr Wilson, together with Mr Harrison and later Mr Robson, would review and discuss that information. More occasionally the respondent met with Mr Wilson and Mr Newett.
[36] Mr Wilson indicated that in September 2010 he discovered that the respondent had received large sums from Ascot in addition to his salary, including expenses payments for non-business expenditure. He had had no inkling of this prior to that time. The respondent’s PAYE salary had been agreed. His reward if the equity value of the group increased would have been that his 50% shareholding increased in value.
[37] In cross‑examination Mr Wilson agreed that Mr Harrison had prepared the first five pages of the discussion document 7/10 of process. Mr Wilson did not recall seeing the subsequent pages before. He was not familiar with them. He confirmed that Endless’ solicitors, Walker Morris, had spent a great deal of time trying to get the respondent to sign up to an investment agreement and an employment contract. The proposed service contract was 6/142. In terms of cl. 8.1 the respondent’s salary was to be £60,000 p.a. for all work performed for Ascot and any group company. Mr Harrison had said the respondent could not be pinned down. Mr Wilson had some recollection of the banking presentation 7/4 of process. The Endless letter of 1 November 2010 (7/34) had been drafted by Mr Robson, sent to solicitors for input, and had been seen and finalised by Mr Wilson and Mr Newett before it was sent.
Aidan Robson
[38] Mr Robson is an employee of Endless LLP. He is a chartered accountant. In 2008/9 he held the post of associate director. At the time of the proof he was an investment director. His role was to monitor investments and undertake an initial review of investment opportunities. In early December 2009 he took over responsibility from Mr Harrison for Endless LLP’s relationship with the Ascot group and the respondent.
[39] Perhaps because of the long standing relationship between Mr Newett and the respondent the initial relationship between AHI and the Ascot Group was not as formal as in other investments. Mr Robson re-sent draft heads of terms to the respondent on 26 January 2010 (6/143). Following discussion a first draft of an investment agreement had been prepared (6/144). Agreement had never been reached due to certain outstanding points of principle. The key sticking points had been (i) the respondent’s salary (he wished this to increase as the business grew and became more profitable); and (ii) the respondent’s request for a committed funding package for the business.
[40] From March 2010 it became apparent that Ascot was having cash flow difficulties. It defaulted on rent. Towards the end of May it made an urgent request for £50,000 to enable wages to be paid the next day. At the end of May and August 2010 it defaulted on loan repayments. As a result Mr Robson sought more information about Ascot’s financial position. He had been concerned at information sent by the respondent on 7 September 2010 which indicated that some costs and expenses going through Ascot were higher than Endless had previously been led to believe. That had led to a meeting with the respondent on 8 September 2010 and to the subsequent visit to Callendar and the investigation, culminating in the email of 24 September 2010 (6/27 of process). The investigation disclosed the misapplication of funds, as well as major debts to HMRC and to current and deceased residents in respect of FPC repayments. Prior to the visit Mr Robson had not been aware of, and the respondent had never disclosed to him, the existence of the respondent’s loan account, or the existence of any consulting contract between Ascot or Holdings and the respondent’s company, Harris Healthcare Limited. It was not correct to say that a budget of £153,000 for the respondent’s costs and services for the year ending 30 September 2010 had been agreed by Endless. There had been no such agreement, nor did Mr Robson recollect it being discussed. Endless had been unaware of the additional payments being made to the respondent over and above his salary until the payments were discovered at the time of the investigation in September 2010.
[41] In cross‑examination Mr Robson indicated that he did not recall 7/10 of process. It pre‑dated his involvement. He did not know who had prepared it. He had not played any part in the preparation of 7/4 of process, and he did not think that Endless had. Endless may well have seen it. Banking documents or discussion papers would have gone to Mr Wilson or Mr Newett. It looked similar to a document which had been pulled together earlier in 2010.
David Newett
[42] In examination-in-chief David Newett indicated that he had not approved any of the £158,843.68 payments. It had not been his place to do so. Day-to-day matters such as that and the monitoring of financial information provided by Ascot were the responsibility of others - the team at Endless. When the payments were brought to his attention at the time of Mr Robson’s email of 24 September 2010 (6/27 of process) it had been a surprise. It had been very embarrassing for him because he had introduced the respondent to his partners at Endless. He confirmed that thereafter he had discussed the sending of the letter of 1 November 2010 (6/28) with his partners and that he had signed the letter. In cross‑examination the respondent asked Mr Newett whether he was provided with regular financial information from the Ascot group. Mr Newett replied that he was pretty sure that Endless would have been provided with regular financial information from the respondent. The respondent asked Mr Newett if he had received a copy of 7/17 of process (draft consolidated accounts for Holdings for the period ended 30 September 2009). Mr Newett said that he could not be sure. He would have thought that Endless would have received a copy. The respondent drew his attention to an entry of £298,809 for start-up costs. Mr Newett indicated that he did not know what was within that figure. He was not an accountant. If Endless saw the document the team would have seen this figure. Under reference to 7/16 of process the respondent suggested to Mr Newett that the document was a summary cash book document relating to Ascot’s bank account; he suggested that it showed the size of the development costs to Ascot and Holdings. The respondent asked Mr Newett whether he would have been provided with documents like that on a regular basis “certainly quarterly”. Mr Newett thought that the team at Endless would have received documents like that. In re-examination Mr Newett indicated that he could not say if he had seen 7/16 before. He knew that information had to be provided to Endless by Ascot on a monthly or quarterly basis but he did not get involved with the information. That was dealt with by the team at Endless. When asked by the court to clarify whether Endless had seen 7/16 Mr Newett replied; “Oh, I am pretty sure Endless would have seen it because information was passed on a monthly or quarterly basis”.
Free personal care payments
Introduction
[43] Residents of Ascot’s Scottish care homes who were entitled to FPC payments from the local authority required to pay Ascot the full cost of their care in advance. Ascot then obtained FPC payments for those residents from the local authority and was obliged to repay the residents. Some of the contracts relating to residents provided that Ascot was to pay FPC rebates to residents within seven days of receipt from the local authority (e.g. 6/13). Others provided that rebates were to be paid to residents “within a timely manner of Ascot …receiving payment from the Council” (e.g. 6/14). There were also a few remaining pre‑2008 contracts which provided that rebates would be repaid every four weeks provided payment from the local authority had been received by Ascot.
Agreed facts
[44] In terms of paragraph 168 of the joint minute no. 58 of process it was agreed that 6/183 of process
“is a schedule summarising, accurately, free personal care payments received by the Ascot Group; sums reimbursed to eligible residents; and time taken to reimburse residents during the period 18 February 2009 to 22 December 2010.”
The schedule shows that remittances made by Stirling Council to Ascot up to September 2009 were generally repaid to residents a week after receipt. Thereafter funds were retained by Ascot for longer periods. With remittances received by Ascot between March and September 2010 the average retention was seven to nine weeks. The rebates remitted on 27 October 2010 were retained for an average of six weeks. Between April and October 2010 the average total FPC outstanding to residents at each month end was between £51,770.73 and £57,281.72. At the end of November 2010 the total sum outstanding was £24,392.14, and the sum outstanding at the end of December 2010 was £23,152.
The respondent
[45] In the pleadings the respondent averred (Answer 40) that he “issued no specific instructions on FPC rebates” but that he “did give general guidance that all 3rd party creditors should be paid within a time period of 8 weeks of the debt arising as an overriding commercial position, unless in dispute”. In paragraph 21 of his witness statement he stated:
“I have little direct knowledge of Free Personal Nursing, and there was no specific direction by me on this relative to any other creditors 6-8 weeks credit.”
[46] In cross‑examination it was put to the respondent that he was responsible for the time for repayment of FPC to residents and their families being stretched to eight to nine weeks. His initial response was that he did not treat FPC monies as any different from any monies due to creditors. Extending the period small creditors had to wait to up to eight weeks was the respondent’s general approach. He thought that had been reasonable. Residents and their families were “just another creditor”. Those particular creditors would be due to pay the company more money in the future. It had been a business decision. He did not think it was in any way wrong and he took full responsibility for it. He agreed that at interview on 24 January 2012 (6/161, paragraph 47) he had described the FPC payments as part of Ascot’s “working capital”. He thought that 90% of the contracts provided for payment “within a timely manner of Ascot … receiving payment from the Council”. He did not accept that a sum of £82,857.15 had been due to residents and their families for FPC when Ascot went into administration. Individual statements for each of the residents said to have been concerned had not been lodged so he was unable to check the suggested total. The 15 statements of account for residents which had been lodged (6/191) were incomprehensible. He believed the sum due to have been nearer to £23,000 - the total claims for repayment of FPC which had been lodged in the administration (6/123). He had not looked at FPC due at the time. It had not really been on his radar. Prior to the administration there had only been two complaints about the time taken to repay residents. It had not been a major issue at the time.
Mrs Pearson
[47] In her affidavit Mrs Pearson stated that from around August 2010 she received various complaints from family members of residents that FPC rebates were not being repaid timeously. She brought them to the respondent’s attention but he told her that he needed the money for other things. He instructed her only to pay those families/residents who were demanding rebates.
[48] Mrs Pearson described 6/190 as a spreadsheet taken by her from Ascot’s records which summarised outstanding FPC balances due by Ascot to residents. 6/191 comprised statements of account for 15 residents taken by her from Ascot’s records. 6/192 was a spreadsheet summarising the amounts owed by Ascot to residents. 6/188 was a direct print taken by her from Ascot’s Caresys system of the aged debt analysis and identified deceased residents who were owed FPC or care home fee rebates.
[49] Mrs Pearson indicated (paragraph 66) that from about November 2010 she told the respondent that there were no funds when he asked for money to be transferred to his personal account; and that from that time she refunded as much FPC as she could.
Gerald Friar
[50] In cross‑examination of Mr Friar the respondent put it to him that 6/188 was an analysis of sums due by Ascot to both living and deceased residents as at 22 December 2010. Mr Friar’s understanding was that it related only to deceased residents. He agreed that there were anomalies in some of the statements, and that they looked odd. Further analysis was required. The £82,857.15 figure was not supported by back-up statements. He did not accept that the best indication of the sum outstanding was provided by the claims made in the administration. It was not uncommon for claims not to be made in an administration, particularly if there was no expectation of recovery. A further factor here was that many of the potential claimants were elderly residents, or the estates of deceased residents.
Decision and reasons
General
[51] I deal first with the evidence given on affidavit by Mrs Pearson. She was not available for cross‑examination. In those circumstances I do not think it would be fair to rely upon her evidence other than in relation to uncontentious matters.
[52] Mr Wilson and Mr Robson were impressive witnesses. They gave their evidence carefully and with moderation. I am in no doubt that they were doing their best to assist the court. I found them to be credible and reliable witnesses. On the whole their accounts appeared to me to sit far better with the other evidence in the case than did the respondent’s account.
[53] Mr Newett was, no doubt, to some extent reluctant to come and give evidence. He did not co-operate with either party to provide a witness statement in advance of the proof. However, having eventually attended at proof he gave his evidence in a straightforward way. He appeared to me to be doing his best to assist the court. His evidence was credible and, except where I indicate otherwise, reliable.
[54] By contrast the respondent was not an impressive witness. In a number of respects his evidence was neither careful nor moderate. He shifted position on occasions. On the material matters which are in dispute I am unable to accept that his evidence is credible or reliable.
Misapplication of funds
[55] The starting point is that a director does not have a right to be remunerated for any services performed for the company except as provided by the constitution or approved by the company’s members (Palmer’s Company Law (25th ed.), vol. 2, paragraph 8.901-8.907; Guinness Plc v Saunders [1990] 2 AC 663; Tayplan Ltd (In Admin.) v Smith [2011] CSIH 8, [2012] BCC 523).
[56] The articles of association of both Ascot and Holdings provided that the remuneration of the directors was to be determined by ordinary resolution of the company. That was the basis upon which the respondent accepted appointment as a director. The respondent accepted that there were no ordinary resolutions of Ascot or Holdings making provision for his remuneration. His position vacillated between, one the one hand, asserting that he was a director of each company with a casting vote and as such it was up to him to determine his own remuneration; and that he had been paid no more, and in fact less, than his efforts deserved: and, on the other hand, maintaining that Mr Newett and Endless LLP had known of, and agreed to, all the payments which were made to him being made as remuneration for his services to the companies.
[57] As to the first proposition, the respondent agreed that there had in fact been no resolutions of the Board of Directors of either company approving the payments being made to him as remuneration. Even if there had been, such resolutions would not have validly conferred remuneration upon the respondent (Palmer’s Company Law, supra, vol. 2, paragraph 8.907; Kerr v Marine Products (1928) 44 TLR 292). It is also trite that if remuneration has not been duly authorised (in accordance with the constitution of the company, or the unanimous approval of the members) a director has no right to remuneration on a quantum meruit basis (see e.g. Tayplan Ltd (In Admin.) v Smith, supra, paragraph 29).
[58] The second proposition appears to me to be an attempt to invoke the Duomatic principle (Re Duomatic Ltd [1969] 2 Ch 365). The shareholders of Ascot who would have been entitled to pass an ordinary resolution approving director’s remuneration for the respondent were the respondent himself and Holdings. In turn, the members of Holdings were the respondent and SIP. Any approval by the members would have to have been both unanimous and informed. The relevant members would have to have had full knowledge as to what they were assenting (see Palmer, supra, vol. 2, paragraphs 7.434 - 7.438). Those entitled to vote would have to have applied their minds to the matter (Palmer, supra, vol. 2, paragraph 7.437; Tayplan Ltd (In Admin.) v Smith, supra, paragraphs 27 - 28).
[59] Had I accepted the respondent’s evidence as to Mr Newett’s and Endless’ knowledge, a nice question might have arisen as to whether it was the consent of the registered owner, SIP, or the beneficial owner, AHI, which was relevant (see Palmer, supra, vol. 2, paragraph 7.439 and the authorities there discussed). The partners in SIP are Mr and Mrs Newett whereas the partners in AHI are Mr Newett, Mr Wilson and Mr Foreshaw. The matter might have been of some significance since SIP is not an Endless vehicle. Knowledge and approval by employees of Endless/AHI or by Mr Wilson of remuneration for the respondent would not necessarily have involved knowledge and approval by Mr Newett and SIP.
[60] However, even assuming (without deciding) that proof of assent by Endless/AHI would have sufficed, in my opinion the respondent has failed to prove the requisite knowledge and assent on the part of Endless/AHI.
[61] I do not accept the respondent’s evidence that Mr Newett and Endless knew about, and agreed to, the payments being made to him; let alone that they agreed to them being paid to him as remuneration. On these matters I prefer the evidence of Mr Wilson, Mr Robson and Mr Newett. It was notable that in cross‑examination of Mr Wilson and Mr Robson the respondent did not put it to either of them that they had been aware prior to September 2010 of the additional payments being made to or on of behalf of the respondent. It was not suggested to them that they had seen 7/16 or 7/17 of process prior to that time. Similarly, Mr Newett’s clear evidence that he had been unaware of, and that he had not approved, any of the £158,843.68 payments was not squarely challenged. Nor was it put to Mr Newett that he had agreed to the respondent receiving a £30,000 success fee in relation to Drumpark. The respondent appeared content to take it from Mr Newett that regular financial information was provided to Endless. However, it was readily apparent that Mr Newett was not in any position to recall the contents of any information provided. His evidence was that he did not examine it. Any such examination would have been carried out by “the team” at Endless. In my opinion Mr Newett’s evidence does not provide any reliable support for the respondent’s evidence that 7/16 or 7/17 had been provided to Endless.
[62] The respondent’s reliance upon Endless having seen banking presentation documents such as 7/4 does not take him very far. I am not satisfied that 7/4 was a document prepared by Endless rather than by the respondent. There is no satisfactory evidence that 7/4 was in any sense an agreed document setting out either agreed budgets or agreed remuneration for the respondent. Many of the figures in it proceeded on projections which never came to pass, viz that the number of care homes operated by Ascot would increase substantially beyond the five that were in fact operated. In so far as the presentation suggested that the respondent’s remuneration would increase as the number of care homes grew it is plain from the evidence of Mr Robson and Mr Wilson that no agreement to that effect had been reached.
[63] The Ascot accounts for the year to 30 September 2009 were not prepared until May 2010 and were not filed at Companies House until the following month. The profit and loss account declared only a global figure of £1,790,513 for “Administrative expenses”. The only directors’ remuneration disclosed as such in the accounts was the directors’ aggregate remuneration of £40,577 (note 4). Note 15 (related party transactions) stated that consultancy fees of £48,804 had been paid to Harris Healthcare Limited “a company of which Mr Hamilton is a director”. No further detail was provided of what the fees were for. £30,000 of the £48,804 had been included only in May 2010, following the clarification by the respondent to Mr Briscoe referred to in Mr Briscoe’s covering letter (6/133). In my opinion the information in the accounts does not provide a sound basis for concluding that a reader of them would have been fully informed that the respondent had taken the benefit of all the payments that he had that year. Even if I had accepted the respondent’s evidence that Mr Harrison and Mr Robson had approved the accounts, I would not have accepted that Endless was aware that by being asked to approve the accounts it was being asked to approve the remuneration which the respondent now claims he was entitled to for that year. As is observed in Palmer, supra, vol. 2, paragraph 8.907:
“It is not normally sufficient to show the figure taken by directors in the accounts, and the acceptance by the company of the accounts will not itself authorise remuneration which has not otherwise been authorised. Exceptionally, however, a resolution of the members approving the accounts may be a sufficient authorisation, if all the members are aware that, by being asked to approve the accounts, they are being asked to approve the remuneration.”
The observations made on that passage in the very different circumstances of Snelling v TSG Music Systems Limited 1982 WL 961204 appear to me to have no bearing on the present case.
[64] In any event I do not accept the respondent’s evidence that Mr Harrison and Mr Robson approved the accounts. Mr Harrison’s involvement ceased at the end of 2009 - he cannot have seen or approved them. It was not put to Mr Robson in cross‑examination that he saw and approved them.
[65] It is clear on the evidence that the respondent was not providing Endless with full details of expenditure or of the precise purposes of all expenditure. Even if the fact that some of the expenditure had been incurred was evident from the information which was provided to Endless, I am satisfied that it was not made plain that the expenditure was for the respondent’s own, non-business, purposes and that it was being taken as remuneration. It is also apparent that the respondent was selective in what he reported. He admitted that in the spreadsheet 6/84 he had omitted the TBH Own line which was in the cashbook (as shown on 6/83). His explanation for doing so - that this was Holdings’ expenditure not Ascot’s - was wholly unconvincing. The expenditure was of Ascot’s funds. Whether or not the respondent believed that it ought ultimately to be borne by Holdings, it was his duty to report its having taken place (all the more so because of the Endless’ interest in Holdings). The removal of the figures is an example of the respondent concealing how Ascot’s funds were being used. It reflects badly upon him and upon his general credibility and reliability. Other parts of his evidence which portray him in a poor light are the history of his change of position in relation to the £30,000 payment; the evidence he gave in relation to his tax returns; and his attitude towards company creditors. He took the £30,000 in cash from Ascot and instructed that it be treated as being the purchase price of fixtures and fittings at Drumpark. It was only when this was queried that he instructed that it be treated as a consultancy fee paid to Harris Healthcare Limited. His evidence as to his tax returns and how the £158,843.68 had been treated was vague, evasive and unsatisfactory. It appeared that he had treated none of it as being remuneration paid to him when submitting his tax returns. His suggestion that most of it would have been treated as income of Harris Healthcare Limited was preposterous given the nature and circumstances of the majority of the expenditure. He withdrew the sums from the company at times when it was evident that it had considerable debts to HMRC for PAYE and NICs. He was content to use as working capital the monies which ought to have been paid to HMRC. As discussed below, he adopted the same approach to FPC rebates which ought to have been paid promptly to residents or their families. His attitude to the rent due for the care homes was irresponsible. Each of the homes was occupied by Ascot, although the tenant under each of the leases was Holdings. The respondent was content not to pay the substantial rents due, seeing it as Holdings’ problem. But the rents had always been paid from Ascot’s trading income: Holdings was a non‑trading company. It was plain that the basis upon which Ascot was permitted by Holdings and the landlords to occupy and operate the homes was that Ascot would pay the rent or put Holdings in funds to do so.
[66] It follows that I am satisfied that neither the members of Ascot nor the members of Holdings made an informed and unanimous decision to approve that additional remuneration of £158,843.68 be paid to the respondent. The petitioner has established that the respondent did indeed misapply that sum from Ascot’s funds.
FPC
[67] The respondent raised legitimate concerns as to the calculation of the figure of £82,857.15 said by the petitioner to have been owing to residents and deceased residents at the date of the administration. Mrs Pearson was not available to speak to and explain productions 6/188, 6/190, 6/191 and 6/192. Mr Friar recognised that the documentation produced in 6/191 called for further investigation and explanation.
[68] However, there is no dispute as to the facts set out in 6/183. With FPC received by Ascot between March and September 2010 the average retention was seven to nine weeks. Between April and October 2010 the average total FPC outstanding to residents at each month end was between £51,770.73 and £57,281.72. I am satisfied on the evidence, including the respondent’s own evidence in cross‑examination, that from about March 2010 he instructed that those entitled to repayment of FPC ought to be treated in the same way as any other ordinary creditor; and that he regarded payment of such creditors within eight weeks as being entirely satisfactory. In the same way as he used sums owed to HMRC as Ascot’s working capital, he used FPC which ought to have been repaid as Ascot’s working capital. Between April and October 2010 the sums involved consistently exceeded £50,000. According to 6/183 by the time of the administration the sum involved was of the order of £23,000 (which may fit with Mrs Pearson’s evidence (paragraph 66) that she made a concerted effort to repay FPC from about November 2010).
Other miscellaneous matters
[69] A great deal of time and effort was spent by the respondent seeking to demonstrate that he was not to blame for Ascot going into administration, and that it was in fact Endless which was to blame. Among the matters raised were assertions that Endless was in breach of an (unspecified) obligation to Ascot to provide additional finance; that Mr Robson had committed Endless to purchase the Community Care Homes and the Argus Care Homes; and that the real reason these transactions did not proceed and there was no further investment in Ascot was that Endless had no finance facility available to it at the material time.
[70] In my opinion it is not necessary or appropriate to say much about these matters. Even if they were true they would not excuse or materially mitigate the respondent’s misconduct. I shall restrict myself to the following observations. First, having regard to the documents which I have seen and the evidence which I have heard there is no proper basis for concluding that Endless had any legal obligation to provide additional funding to Ascot. Second, I regard as inherently incredible the scenario that on 21 May 2010 Mr Robson gave binding and unqualified undertakings to Mr Pooran and Mr Douglas that the Community and Argus acquisitions would proceed. Mr Robson’s job was simply to report back with a recommendation. He was not the decision-maker. Everyone involved must have known that. The proposed Community and Argus acquisitions had not been the first proposed acquisitions. I do not accept that there was anything more than informal discussions with Mr Robson about the on-going proposed transactions. I accept Mr Robson’s evidence on this matter and I reject the evidence relied upon by the respondent in so far as it is inconsistent with Mr Robson’s evidence. I do not accept that Mr Robson attended any board meetings of Holdings on that date, nor do I accept that the purported minutes 7/5 of process are accurate indications of the discussions with Mr Robson that day. Third, there is no doubt that by 2010 it had become much more difficult to borrow from banks than it had been before the banking crisis and the property crash which began in Autumn 2008. Endless was not unaffected by the changes in banking practice. However, I accept the evidence that the Endless partners had significant funds of their own which they continued to invest in suitable projects. I also accept the evidence that Endless lost confidence in the respondent, and that it was not prepared to invest further in Ascot while he was at the helm.
Disqualification
[71] The respondent’s misapplication of funds and his retention of FPC payments were both misconduct. Further, I have no hesitation in concluding that that misconduct makes him unfit to be concerned in the management of a company. The misapplication of funds from Ascot was on a very significant scale. It involved deceit and putting his own personal interests above the interests of the company and its creditors. He treated the company’s funds as if they were his own. The pursuit of a deliberate policy to use FPC payments as working capital, rather than refund them promptly to residents, demonstrated a serious lack of probity. The respondent was in a position of trust in relation to residents and their families, and his conduct was detrimental to them.
[72] I am also satisfied that the respondent’s conduct materially contributed to Ascot and Holdings becoming insolvent. It was certainly the major cause of Endless losing confidence in him. So far as Endless was concerned the conduct precluded further investment with the respondent at the helm. The misapplication of funds was to the prejudice of creditors of Ascot. It made a material contribution towards the company not being able to pay its debts as they fell due. The misapplication continued notwithstanding that the respondent was well aware that the company was in that predicament.
[73] Mr Duthie referred me to In Re Sevenoaks Stationers (Retail) Ltd. [1991] Ch. 164 and to the well-known observations of Dillon LJ at page 174E - G; to Mithani, Directors Disqualification (2nd ed), paragraphs 1512, 1513, 1517, 1518, 1520, 1558, 1559 and the authorities there discussed; and to Secretary of State for Trade and Industry v Marshall 1994 GWD 19-1151, and Secretary of State for Trade and Industry v Henderson 1995 GWD 21-1159. He suggested that in the whole circumstances the court might take the view that the respondent’s conduct fell into the top bracket in Sevenoaks; or failing which, the very top of the middle bracket.
[74] I agree with Mr Duthie that this is a serious case. In the whole circumstances I consider that the period of disqualification ought to be very near the top of the middle bracket described in Sevenoaks. In my opinion the appropriate period is nine years.
Disposal
[75] I shall grant the prayer of the petition and make a disqualification order for a period of nine years. I shall reserve meantime all questions of expenses.