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Re City Group Ltd, Secretary of State for Trade & Industry v Gee & Ors

[2007] EWHC 350 (Ch), [2007] All ER (D) 343 (Feb) [2008] B.C.C. 76

Court: High Court
Date of Judgment: 27.02.07
Ruth Jordan

The first defendant was the majority shareholder, and executive chairman of the City Truck Group Ltd group of companies (the group) providing various logistical services. The second defendant was a chartered accountant, and, in 1991, became the finance director and company secretary of each of the City group companies. In February 2001, three of the group’s companies entered into a debt financing agreement with a third party financier. Under the terms of that agreement, the companies assigned debts owed to them by trade debtors to the financier. The value of those debts, less certain finance and administration charges, was then credited to an assets account, from which the companies could draw down funds within an agreed limit. The amounts drawn down by each company would then be debited to an individual current account. The agreement placed accounting and reporting obligations upon the group, and further provided a right for the financier to conduct audits of the group’s accounts. Towards the end of 2002, concerns arose in relation to the group’s accounting practices. Several members of staff expressed concerns internally, and, subsequently, the financier was informed of those concerns. Accordingly, the financier arrived at the group’s premises on 2 January 2002 in order to carry out a full audit on its accounts. It became apparent that there existed serious problems within all the group’s companies and all were placed into administration. Subsequently, the financier brought proceedings against the defendants alleging that various frauds, in relation to the debt financing agreement had been perpetrated against it. The fraud alleged consisted of, inter alia: over-declaring the level of debts notified to the financier; falsification of sales ledgers, management accounts and other records to cover up that over-declaration; deliberate double-counting in relation to ‘works in progress’ debts of self-billing customers; and the misuse of the bank clearing system to enable immediate draw down of funds that the group were not in fact entitled to. The financier succeeded in demonstrating that the defendants had defrauded it, and was awarded a substantial sum in damages (see [2005] All ER (D) 162 (Sep)). Subsequently, the Secretary of State brought proceedings under s 6 of the Company Directors Disqualification Act 1986, by which he sought the disqualification of the defendants on the grounds of the alleged fraud perpetrated against the financier, and the deliberate non-payment of Crown liabilities from mid 2001 onwards.

The Secretary of State submitted that the fraud allegedly perpetrated against the financier, and the non-payment of Crown liabilities had been deliberately orchestrated and procured by the second defendant. The allegation against the first defendant was that he either knew or should have known of the matters complained of, and that he had taken no steps to prevent the frauds from continuing.

In support of the allegations in relation to the fraud perpetrated against the financier, the Secretary of State sought to rely upon the evidence adduced in, and the transcripts of, the earlier proceedings. It was common ground that the findings in those proceedings were not binding in the instant case.

Held: The Secretary of State had proved the underlying facts forming the basis of the proceedings in relation to the frauds perpetrated against the financier and the non-payment of Crown liabilities. On the evidence, it was clear that the second defendant had been at the heart of the financial function of the group, and that he had orchestrated and procured the matters complained of, and that he had known that the actions of the group were improper. Furthermore, the first defendant knew of, and approved of, the actions of the second defendant. Accordingly, both defendants were unfit to be concerned in the management of a company within the meaning of s 6 of the Act. In the instant case, the infringing actions had been deliberate and had involved the falsifications of financial records in an attempt to cover-up the fraudulent activities. In those circumstances, the conduct of the defendants fell within the highest disqualification band, and, accordingly, each would be disqualified for a period of 12 years.


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