DC, HS AND AD v. THE UNITED KINGDOM - 39031/97 [1999] ECHR 196 (14 September 1999)

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The European Court of Human Rights (Third Section) sitting on 14 September 1999 as a Chamber composed of

Mr L. Loucaides,
Mr P. Kūris,
Mr W. Fuhrmann,
Mrs H.S. Greve,
Mr K. Traja, Judges,

Having regard to Article 34 of the Convention for the Protection of Human Rights and Fundamental Freedoms;

Having regard to the application introduced on 20 December 1996 by D. C., H .S. And A. D. against the United Kingdom and registered on 18 December 1997 under file no. 39031/97;

The applicants are United Kingdom citizens, born in 1947, 1948 and 1955 respectively. The first and third applicants live in London, the second applicant lives in Gloucester. They were each directors of D Limited (“ D Ltd”), a company which traded as a members' agent in the Lloyd's insurance market.

They are represented before the Court by Messrs Titmuss, Sainer Dechert, solicitors, London.

The facts of the case, as submitted by the applicants, may be summarised as follows.

On 29 March 1995 the Secretary of State for the Department of Trade and Industry (“the Secretary of State”) issued an originating summons seeking orders under Section 6 of the Company Directors (Disqualification) Act 1986 (“CDDA”). The affidavit which was filed in support of the summons made a number of allegations: that all three applicants had breached Section 151 of the Companies Act 1985 (“the 1985 Act”), which prohibits a company from giving financial assistance in relation to the purchase of its own shares; that they had acted to the detriment of D Ltd's creditors by permitting an unsecured, interest-free loan which conferred no benefit on D Ltd; that they had knowingly caused and permitted the production of accounts of D Ltd which did not give a true and fair position of the company's financial position, and that they gave security to a bank over payments of Advance Corporation Tax in preference to other creditors.

The applicants filed affidavits in reply, as they were required to do if they wished to challenge the affidavit in support of the Secretary of State's position. They also filed a number of affidavits from third parties who were well-known and respected in the insurance industry, and who deposed to the applicants' fitness to be company directors, their standing in Lloyd's and their good character. The Secretary of State applied to strike out the character evidence under Order 41 rule 6 of the Rules of the Supreme Court, which empowers the court to strike out of any affidavit “any matter which is scandalous, irrelevant or otherwise oppressive”.

The Secretary of State's application for the character evidence to be struck out was granted on 1 July 1996 by Blackburne J. The judge recalled that character evidence was not ordinarily admissible in civil proceedings because it was not probative of any issue. He rejected the applicants' submissions that the evidence was relevant even though there were allegations of dishonesty, and he did not accept that the CDDA proceedings were akin to criminal proceedings by reference to the case of Re Southbourne Meals Ltd [1992] BCC 797. The judge also struck out certain parts of the applicants' own affidavits as conflicting with the rule against hearsay evidence.

A Statement of Undisputed Facts was agreed between the applicants and the Secretary of State so that the CDDA proceedings could be decided under the so-called Carecraft procedure (after the case of Re Carecraft Construction Co. Ltd [1994] 1 WLR 172, in which the procedure was described). The parties agreed that, if the Court did not approve summary disposal of the proceedings, no further reference would be made to the Statement. The applicants accepted, by reference to the undisputed facts set out in the Statement, that a disqualification order against each of them was appropriate for the period contended for by the Secretary of State, namely five years for the first applicant, six years for the second applicant, and four years for the third applicant.

The Statement set out the three remaining matters, with the charge in each case. The first charge was that the applicants did not know that the loans to one company were unlawful as in breach of Section 151 of the Companies Act 1985, but that they ought to have known. The applicants did not dispute the allegation. The second charge was that a series of unsecured, interest-free loans to that company were potentially to the detriment of D Ltd and its creditors. Again, the applicants did not dispute the allegation. The third charge was that the second applicant had caused D Ltd to prefer a bank over other creditors on one specific occasion. The allegation was not disputed.

The substantive hearing was held before the Vice-Chancellor on 4 February 1997. In his judgment, the Vice-Chancellor held as follows:

“My function, [...], is to consider the contents of the agreed statement of facts and decide, first, whether a disqualification order ought to be made and, second, what the length of the disqualification period should be. It is of course relevant that the [applicants] do not contest that disqualification orders can properly be made. [...] I am not bound by the agreement between the parties that the facts warrant a disqualification order nor am I bound by their agreement as to the length of the disqualification periods. It is open to me if so advised, having regard to the contents of the agreed statement of facts, to form a different view. It would I think be unlikely for a judge to do so but the judicial function requires me to direct my mind to the facts in the agreed statement and to consider what the right order to be made should be.

[The] Section 151 matter is in my view the most important of the three. The facts which constitute the breach of Section 151 were facts known to each of the three [applicants]. I accept that none was aware at the time that what was being done in advancing moneys to H Ltd. [the related company] did constitute a breach of Section 151, but I would conclude without difficulty, and it is indeed accepted by each of the [applicants], that each ought to have known that that was so. It is important however that I should record that the making of the loans was not done for any personal gain which it was thought might thereby be obtained by any of the directors. It was not accompanied by any want of probity or dishonesty.

Section 151 is part of the statutory scheme imposed in order to protect the public from the conduct of limited companies carrying on business with the protection of limited liability. It is a provision which is sometimes overlooked and treated as of little account. It never should be so but where that does happen and where, as is often the case, no point resulting from it ever emerges into the public view, no adverse consequences will follow. In the present case it may be a misfortune for the three directors that the Lloyd's litigation drew them into its clutches, brought about the need for the companies to go into insolvent liquidation, brought an independent mind to bear upon the manner in which the company's affairs had been conducted in the past and led to the Section 151 breaches becoming known to the Secretary of State. That is a misfortune for the directors but it does not in itself reduce the seriousness of the Section 151 breaches. I am of the opinion that those breaches justify disqualification orders. This is, of course, an easier conclusion for me to reach than it would have been had that been disputed by the [applicants], which it is not.

The question, therefore, is what length of disqualification period would be appropriate. I repeat that in approaching this question I regard the breaches of Section 151 as serious. I regard the conclusion that disqualification orders are appropriate as a result of these breaches as being a conclusion impelled by a serious misfeasance on the part of the directors in managing the affairs of the company that the Section 151 breaches represent.

For my part, first because I think that the agreed periods were on the stiff side so far as the [applicants] were concerned, second because I do not regard the post-31^st May 1992 loans as constituting a matter which should have any real weight in the balance and, third, because of the invidious comparison that there might appear to be with the treatment of Mr Lines [in a recent case], I think it right that the periods of disqualification should be five years for [the second applicant], four years for [the first applicant] and three years for [the third applicant]. That is one year less than the Secretary of State was contending for but I do not imagine that that will be a reason why the Secretary of State would wish a full trial.”

Costs were ordered against the applicants, and the Vice-Chancellor refused an application by the first and second applicants for an extension of the statutory period of three weeks allowed to the applicants to divest themselves of their directorships. He did, however, indicate that it would be open to them towards the end of that period to return to him with more specific reasons which called for an extension. The first applicant's request to be permitted to continue as director of the trading company of the group for twelve months was granted on 24 February 1997, subject to conditions.

Section 1 of the Company Directors Disqualification Act 1986 ("the 1986 Act") reads as follows:

"(1) ... a court may, and under Section 6 shall, make against a person a disqualification order, that is to say an order that he shall not, without leave of the court

(d) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company,

"(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied -

(a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and

(b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company."

“(1) Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.

(2) Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.

(3) If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both.”

Rule 3 of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987 reads as follows:

“(1) There shall, at the time when the summons is issued, be filed in court evidence in support of the application for a disqualification order, and copies of the evidence shall be served with the summons on the respondent.

(2) The evidence shall be by one or more affidavits, except where the applicant is the official receiver, in which case it may be in the form of a written report (with or without affidavits by other persons) which shall be treated as if it had been verified by affidavit by him and shall be prima facie evidence of any matter contained in it.

(3) There shall in the affidavit or affidavits or (as the case may be) the official receiver's report be included a statement of the matters by reference to which the respondent is alleged to be unfit to be concerned in the management of a company.”

The applicants allege violations of Articles 6, 8 and 13 of the Convention, and of Article 1 of Protocol No. 1. They claim that the proceedings determined both “civil rights and obligations” and “criminal charge[s]” within the meaning of Article 6 of the Convention, and that the proceedings were not fair. They see unfairness in the rules regulating the conduct of CDDA proceedings, in particular in that the character evidence was excluded, in that the evidence submitted for the Secretary of State had a special status, in that they were required by the rules to file their evidence in order to challenge the evidence of the Secretary of State, and in that the procedures are less favourable than those which are applied in criminal proceedings, and that the difference is discriminatory. The applicants also claim that they were denied the protection of the presumption of innocence guaranteed by Article 6 § 2 of the Convention and the opportunity to bring their evidence and to cross-examine on equal terms under Article 6 § 3. Complaint is also made of the fact that the proceedings were based upon information obtained from the second applicant and others in respect of compulsory powers in circumstances which failed to respect the rights to due process and the right to silence.

The applicants see a violation of Article 1 of Protocol No. 1 in that the requirements to divest themselves of their businesses and to pay the Secretary of State's costs were incurred in furtherance of a breach of Article 6 of the Convention, and could not be justified. They also complain of an absence of effective remedies under Article 13 of the Convention, and that the differences in treatment between the rules applied in their case and the rules of criminal procedure are discriminatory contrary to Article 14 taken with Article 6.

1. The applicants allege a violation of Article 6 of the Convention. Article 6 § 1 reads, so far as relevant, as follows:

“1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.”

Paragraphs 2 and 3 of Article 6 of the Convention guarantee the presumption of innocence and certain specific rights of defence in relation to criminal proceedings.

The Court recalls that in the case of EDC v. the United Kingdom, the European Commission of Human Rights found that disqualification proceedings under Section 6 of the Company Directors Disqualification Act 1986 (“CDDA”) determined "civil rights" within the meaning of Article 6 § 1 of the Convention (No. 24433/94, Comm. Report 26.2.97, § 47).

The criteria for ascertaining whether a "criminal charge" has been determined are the domestic classification of the "offence", the nature of the "offence", and the nature and degree of severity of the potential and actual penalty (see, for example, the Schmautzer v. Austria judgment of 23 October 1995, Series A no. 328, p. 13, § 27 with further references). In the present case, the proceedings were classified as civil in domestic law, the disqualification of directors is a matter which is regulatory rather than criminal, and the “penalty” is neither a fine nor a prison sentence, but rather a prohibition on acting as a company director without the leave of the court. Whilst a great deal was undoubtedly at stake for the applicants, it cannot be said that what is inherently a regulatory matter can thereby become a “criminal charge” within the meaning of Article 6 § 1 of the Convention. Thus, none of these criteria indicates that the applicant was charged with a "criminal offence", and the Court considers that the proceedings in the present case did not determine a criminal charge within the meaning of Article 6 § 1 of the Convention (see also No. 36791/97, Comm. Dec. 21.5.98).

The proceedings against the applicant therefore determined "civil rights and obligations", but did not determine a "criminal charge".

As to the specific matters complained of by the applicants, the Court first notes that as the proceedings were civil rather than criminal, a number of the applicants' complaints do not fall to be considered. In particular, Article 6 § 3 of the Convention does not apply. As to Article 6 § 2, the Court notes that the CDDA proceedings were not criminal in nature, and there is no indication that “criminal charge[s]” against the applicants were determined, or even raised, in any other proceedings. Accordingly, Article 6 § 2 is not applicable in the present case, either.

As to Article 6 § 1 of the Convention, the Court does not accept the applicants' submission that the exclusion of the character evidence was incompatible with a fair hearing. Questions of the admissibility of evidence are, in the first place, for the domestic courts (see, for example, the Schenk v. Switzerland judgment of 12 July 1988, Series A no. 140, p. 29, § 46) and, in any event, in the present case the character evidence submitted by the third parties was not excluded on technical grounds (for example under the rule against hearsay), but because it was not probative of the issues involved.

The applicants claim that the evidence of the Secretary of State had a special status, and that the way it was used was unfair. They note that they were required to file evidence at the outset of the proceedings if they wished to challenge the affidavit relied on by the Secretary of State. They also claim that the evidence of the way in which others considered them was excluded as hearsay, whereas the evidence filed for the Secretary of State (admitted by operation of the rules) was also hearsay. However, the Court cannot see any unfairness in the requirement that the applicants should file affidavit evidence at an early stage, as in proceedings such as the present such a requirement is clearly intended to bring out the issues at an early stage. The Court notes that the evidence of the way in which others considered the applicants was principally excluded because it was not relevant to the proceedings, whereas the evidence filed for the Secretary of State, which related to the issues, was relevant. The Court sees no unfairness here, either.

The applicants further claim that it was unfair to base the CDDA proceedings on the compulsorily obtained statements of the second applicant and others given to the liquidator's solicitor. They refer to the case of Saunders v. the United Kingdom (judgment of 17 December 1996, Reports of Judgments and Decisions 1996-VI). The Court notes a number of substantial differences between the case of Saunders and the present case. In particular, the proceedings in the case of Saunders were indeed criminal proceedings, whereas the present case concerns regulatory, civil proceedings. Further, in Saunders, the applicant vigorously attacked the use of the contested statements in the criminal proceedings; as there was no contested hearing in the present case, and given domestic case-law on the point, the applicants made no challenge to the fairness of using the statements given to the liquidator. Finally, the Court recalls that, in the Saunders case, the compulsorily obtained statements formed a “significant part” of the prosecution case, according to the Court of Appeal (judgment of 17 December 1996, p. 2066, § 72). In the present case, whilst the information from the second applicant was relevant to the facts of the case, there is no indication in the documents that it played a predominant role. In any event, by the substantive hearing in the case, the parties had come to an agreed statement of the facts of the case.

Finally, the applicants allege that the CDDA proceedings were less favourable than those applied in criminal proceedings and that the difference is discriminatory. The Court recalls that not every difference in treatment will amount to a violation of Article 14 of the Convention, which prohibits discrimination in the enjoyment of Convention rights. It must be established that other persons in an analogous or relevantly similar situation enjoy preferential treatment, and that there is no reasonable or objective justification for the distinction (see the Stubbings and others judgment v. the United Kingdom of 22 October 1996, Reports of Judgments and Decisions 1996-IV, p. 1507, § 72). The Court notes that the proceedings in the present case were civil rather than criminal, and finds that they were not analogous to criminal proceedings. The complaint under Articles 14 and 6 of the Convention is therefore not made out.

It follows that this part of the application is manifestly ill-founded within the meaning of Article 35 § 3 of the Convention, and that it must be rejected pursuant to Article 35 § 4.

2. The applicants also allege violations of Articles 8 and 13 of the Convention and Article 1 of Protocol No. 1 to the Convention, which provide for the right to respect for private and family life, home and correspondence, the right to effective remedies for Convention breaches and the right to property, respectively.

In connection with Article 8 of the Convention, the Court considers that any interference with the applicants' right to respect for their private and family life, their home and correspondence was justified as being in accordance with the law - the CDDA - and as being necessary in a democratic society. In this connection the Court notes the importance in modern economic life of public confidence in limited companies, and it accepts that regulatory mechanisms to ensure respect for directors' duties are one way of maintaining the necessary confidence. The Court finds no lack of proportion in the results of the proceedings, whether as a consequence of the application of the established principle that the unsuccessful party in civil proceedings should pay the other party's costs, or in the length of the disqualifications in the case. The Court notes that, at the substantive hearing of the case, the Vice-Chancellor reduced the term of disqualification from that which the applicants had already accepted as reasonable.

Similarly the Court finds that any interference with the peaceful enjoyment of the applicants' possessions was compatible with Article 1 of Protocol No. 1. There is no indication in the papers submitted of the terms on which their businesses were sold, and the Court considers that the losses were the inevitable consequences of the disqualification orders.

Finally, in the absence of any “arguable claim” of a substantive right under the Convention (see the Boyle and Rice judgment v. the United Kingdom of 27 April 1988, Series A no. 131, p. 24, § 54), the Article 13 complaint is also unsustainable.

It follows that this part of the application is also manifestly ill-founded within the meaning of Article 35 § 3 of the Convention, and that it must be rejected pursuant to Article 35 § 4.

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You are here: BAILII >> Databases >> European Court of Human Rights >> DC, HS AND AD v. THE UNITED KINGDOM - 39031/97 [1999] ECHR 196 (14 September 1999) URL: http://www.bailii.org/eu/cases/ECHR/1999/196.html Cite as: [2000] BCC 710, [1999] ECHR 196