EMBARGOED UNTIL 1.45PM – 4 DECEMBER 2012
REVIEW OF DISQUALIFICATION PROCEEDINGS TAKEN IN THE CASE OF EUROPEAN HOME RETAIL PLC AND FAREPAK FOOD AND GIFTS LIMITED (“Farepak”)
There are a number of useful lessons to be learned from the Farepak case, although there was a recognition that all disqualification involves litigation and all litigation involves risk (including examination at trial). The improvements and affirmation of current practice have been annexed to the review. These cover the following areas:-
- Improving the sense and understanding of ownership of the investigation and final affidavit in section 8 disqualification cases
- Increasing the focus on any lessening of the public interest in progressing disqualification proceeding as the case develops and as time elapses
- Strengthening assurance that witnesses are familiar with their evidence, its relevance and significance (including all exhibits) and are clear about the process and what is expected of them, especially where third parties may have prepared or assisted in preparation of affidavits, and where the witnesses may be unfamiliar with giving evidence.
- Whilst it is not the Secretary of State’s role to speculate on what actions directors might have taken, explicit consideration should be given as to how, the defendant ought to have behaved. In the majority of cases the answer may be obvious but nevertheless the exercise may be of value. This may prompt rewording or a recasting of the affidavit and allegations.
- Continuing with the common practice, that Ministers and others are informed regularly of the progress of high profile cases
- Ensuring that the contingent liabilities for cases are reviewed regularly by the audit committee and management board in the Service and regularly communicated through the monthly forecasting process to BIS.
The annex sets out how these can be taken forward.
Whilst recognising the value of the lessons learned, the review is satisfied that there is a suitable process in place for the preparation and authorising of disqualification cases in cases such as Farepak.
The process includes checks and balances, which the review considered were adequate at the time and which, independently, had already been strengthened since the decision to take disqualification proceedings in 2009. These include the fact that the decision to take proceedings is now very clearly independent of the original investigator.
The review is satisfied that the Farepak disqualification properly followed the then existing process and would in any case have been commenced under the new procedures.
There was a recognition that every trial involves risk. However, throughout the disqualification process, the prospect of success was assessed as, at the least, greater than 50%.This continued beyond the commencement of the trial. The decision to discontinue proceedings was taken at the point during the trial when the prospect of success was considered to have fallen below this level.
Legal advice (including from independent counsel) was sought throughout the Farepak litigation and has been sought as part of this review.
European Home Retail plc and Farepak Food And Gifts Limited (one of its subsidiaries) were the subject of a Companies Act section 447 investigation which started in October 2006 and concluded in May 2008. Both companies also went into administration in October 2006. Disqualification proceedings were commenced under section 8 of the Company Directors Disqualification Act in January 2011 and withdrawn in June 2012 after the trial had commenced. The Secretary of State became liable for the legal costs of the defendants. Exceptionally the Judge hearing the case made a statement on 21 June 2012 following the withdrawal of the case , in which he made serious criticisms regarding the proceedings and how they had been conducted. This led to a review being set up by the Insolvency Service looking to examine whether the Farepak disqualification case complied with established procedure , whether changes needed to be made to the way that future disqualification cases were handled and what lessons could be learned from the Farepak case. It was not a review of the investigation which preceded the disqualification proceedings, nor did it purport to encompass wider issues (such as regulation of saving clubs, the position of depositors, etc).
It is also worth recording that this case was conducted under Section 8 of the Company Directors Disqualification Act 1986, which allows for disqualification proceedings to be brought following an investigation under, as in this case, a Companies Act investigation. The vast majority of disqualification cases brought by the Service are under S6 of the CDDA. Both procedures now follow identical procedures (subject to legal distinctions) but at the time there were minor differences in process.
The review panel was set up on 11 July 2012 to provide a forum for reporting compliance (of the Farepak disqualification proceedings) with established disqualification case handling, the extent to which cross cutting changes to the approach to disqualifications are required and the lessons which may be learned from the Farepak case. The review panel was latterly chaired by Pat Boyden, an independent member of the Insolvency Service’s Steering Board and its other members were Robert Burns , the Director of Investigation & Enforcement Services in the Insolvency Service (and the first chair) , Sarah Hodgetts , BIS MF Group , Philip Drye , Head of BIS Internal Audit, Alan Evans , BIS Legal A andDavid Chapman, Regional Director for Official Receivers London & South East.
The review itself was carried out in two separate strands of work, as follows:
The first strand covered legal and other issues relevant to the conduct of director disqualification proceedings that arose from the Judge’s statement in this case. This part of the review was subdivided into the following areas:-
- What is the status of the Judge’s statement prior to its status being determined by the court
- In the light of the Judge’s Statement, is the Secretary of State’s “duty of fairness” likely to be developed so as to require changes to be made to The Insolvency Service’s current approach to obtaining and producing evidence in disqualification cases?
- What are the other implications of the Judge’s statement for future disqualification cases?
- In particular, what are the implications of the Judge’s comments in paragraphs 41 and 42 and paragraphs 74 and 75 of his Statement on:
– the use of “hearsay” evidence in the Secretary of State’s lead affidavit as opposed to producing that evidence in the form of third party affidavits?
– the preparation and production of third party affidavits?
– the preparation of third party witnesses to give oral evidence at trial?
- Could the policy on evidence production be challenged on the grounds that it is unfair and discriminatory for defendants without substantial means? If so, what is the likelihood of a successful challenge?
- Given the Judge’s comments about [the] volume of evidence, should the Secretary of State be more selective in producing evidence or is it right to produce all of the evidence in the interests of fairness?
- What are the implications of the Judge’s comments in paragraph 33 of his Statement in which he suggests that where the Secretary of State criticises the actions of directors he should be able to point to any actions that the directors should have taken instead?
- Whether there are any steps that could be taken by the Insolvency Service to mitigate the risk of a successful challenge?
The second strand of the review looked at lessons learned from the conduct of the Farepak disqualification itself:-
- Were the procedures which existed at that time properly applied? If there were departures, were they reasonable and justified?
- If procedures have changed since then, would the new procedures have made any difference?
- The approach taken to assembling and testing the evidence;
- The presentation of the case, particularly the judges; comments about the weight of evidence and balance of viewpoints.
- Stakeholder management – did The Service act appropriately as regards to keeping Ministers and BIS informed, and in our handling of the media?
The review has concluded that there are useful lessons to be taken from the case (some of which are covered by changes which have already been made in the way in which disqualification cases are handled by the Insolvency Service). The application of these recommendations, together with the changes already instigated should guard against a repetition of criticisms of the sort raised by the Judge in the Farepak case. These changes cover the way in which disqualification cases are handled within the Insolvency Service itself , the way in which cases are progressed in litigation and the way in which the Insolvency Service communicates with its main stakeholders on disqualification cases.
- The review is satisfied that the Judge’s statement does not have any sort of binding legal force. In particular, it is not a judicial decision reached after hearing evidence and argument and having the force of precedent. Although the Judge makes some general comments in his statement about the use and status of hearsay evidence in disqualification proceedings, he fails to make any reference to the leading Court of Appeal authorities or any cases where these matters have been considered. The statement does of course represent the particular views of the Judge himself.
- The review has concluded that for both legal and resourcing reasons there is not a need to obtain direct evidence (as opposed to hearsay evidence) of all relevant matters at the outset of a case, regardless as to whether it is contested.
- The review has concluded that the practice of the Secretary of State or the Official Receiver relying in the first instance on hearsay evidence is not in any way discriminatory against unrepresented defendants.
- The review has concluded that in respect to the volume of evidence in disqualification proceedings, a “one size fits all” approach to the preparation of evidence in disqualification proceedings is likely to give rise to difficulties. In some cases, considerations of fairness may mean that the entirety of the documents relating to a particular aspect of the company’s operations during a particular period, or relating to a particular issue, will need to be exhibited, so as to ensure that the material put before the Court is not unfairly selective. In other cases, the production of a significant volume of evidence without any prior filtering or selection may be considered to be unfair on the grounds that so much unfiltered information is oppressive and overwhelming for a defendant.
- It is not the Secretary of State’s role to speculate on all the solutions which might have been available, which would inevitably involve a degree of hindsight, and in the majority of cases the answer would be obvious but there may be some value in explicitly anticipating what the defendants might potentially have done, not least to anticipate what lines of defence might be offered, and which might lead to allegations being amended or withdrawn…
- The review has concluded that the Farepak disqualification was handled in line with the procedures which existed at the time that the decision was made to pursue the case in 2009 and were subsequently applied in line with that process. Procedures have been amended since that time with a clearer focus on reviewing the public interest in taking and continuing disqualification proceedings in section 8 disqualification cases (i.e. cases that lead from section 447 Companies Act investigations rather than follow from insolvency proceedings).
- The review considered whether the revised procedures would have made any difference on the progress of the Farepak case. The new procedures may have led to a clearer focus on the public interest in taking and continuing disqualification proceedings. However, it is clear that when disqualification proceedings were issued in 2011 there was confidence that the case for pursuing the litigation remained good. There was also still considerable concern about the failure of the Farepak, most particularly from the savers. It is quite clear that the case would still have been instigated and pursued even had it been dealt with under the revised procedures.
- The review has considered whether there were any undue delays in progressing the case and recognised that the size and complexity of the case made moving quickly very difficult. Following legal advice, significant further effort needed to be put into examining company information/communications after the conclusion of the section 447 report. This took some time before pre trial letters went to the directors in 2009. The delay is understandable but it crosses into the concerns regarding the time that had passed when witnesses prepared their evidence. Similarly it was important to seek representations from the directors and this was also a time consuming exercise. The inevitable delay was recognised and its implications kept under review as there is clearly some risk that public interest may diminish over time, but other public interest considerations led to the case continuing.
- The review has concluded that legal advisors were appropriately engaged in this case.
- The review has examined issues around the presentation of the case, including volume of evidence and preparation of affidavits. The evidence from witnesses was prepared by the Secretary of State’s solicitors in conjunction with the witness or in the case of bank employees by the bank’s solicitors (although there was liaison with the Secretary of State’s solicitors).Undoubtedly the tight timetable between the seeking of witness statements and the deadline for filing them created significant pressure. It has to be noted that the witnesses underwent very challenging questioning from counsel for the defendants and the judge and certainly some of their responses reflect this. The lapse of time since the events had happened made it difficult to sustain any comment made that was not directly evidenced by contemporaneous documentation. If the witnesses had made contemporaneous criticism of the directors but not raised these points with the directors, they were liable to be subjected to close questioning as to why not (some witnesses withdrawing evidence rather than providing an explanation). That said, the evidence was gathered and presented with the support and on the advice of legal advisers who had considerable knowledge and expertise in the requirements of the appropriate manner in which to gather and present evidence. The review has not found any indication that there was concern at the time of the gathering of the evidence (or at any other point) that ethical and professional standards were in any way being compromised.
- The review has also considered the manner in which stakeholders were kept informed of the proceedings and their development – in general terms stakeholders were kept informed but there are improvements that could be made in the way in which they are kept informed in similar cases in the future, in particular the manner in which regular updates are provided and the way in which information of contingent liabilities is passed.
Annex – Lessons Learn and Affirmation of current practice