Court of Appeal judgment in Re Rottmann, The Times, March 27, 2009 - some interesting issues

There are a couple of noteworthy developments in the bankruptcy law field that have been reported today. The celebrity chef and Michelin Star winner Mr. Paul Rankin has reached a settlement with his creditors thus staving off a bankruptcy order. Mr Rankin is to pursue an IVA. Elsewhere in the Royal Courts of Justice, Collins, LJ, Keene, LJ and Ward, LJ have delivered their judgments in Re Rottman. A full transcript of the judgment is not yet available but the Times report makes clear that Judge Kaye QC, sitting at first instance, had been justified in suspending the public examination of a bankrupt who was also facing criminal proceedings in Germany and in ordering the examination to be conducted in private. Interestingly it was held that the use in the foreign criminal proceedings of the transcript of the private examination did not infringe the bankrupt's right not to incriminate himself, nor did it prejudice his right to a fair trial. The first instance decision can be seen at: [2008] EWHC 1794 (Ch), [2009] Bus. L.R. 284. As soon as a copy of the full Court of Appeal judgment is available more thorough comment will follow. 

Re Rottmann raises some interesting issues regarding the interplay between the insolvency laws on the one hand and article 6 of the European Convention on Human Rights and Fundamental Freedoms on the other hand. The vexed issues are perhaps best summed up by two latin tags, namely, accusare nemo se debet (nobody is bound to incriminate himself) and qui non negat confitetur (he who does not deny acknowledges). This area has a long history, stretching back to at least 1604 (James I, 1604, c.15. -  An Act for the better relief of the creditors against such as shall become bankrupts’). Punishment occurred then of course when evidence was not forthcoming, for it is noted in that statute that:

“if therein the offender or offenders shall refuse to be examined or to answer fully to every interrogatory to him to be ministered by the said commissioners, or the greater part of them, it shall be lawful for the said commissioners or the greater part of them, to commit the said offender or offenders to some strait or close imprisonment, there to remain until he, she or they shall better conform him or herself’ ‘and that if upon his, her or their examination, it shall appear that he, she or they have committed and wilful or corrupt perjury, tending to the hurt or damage of the creditors of the said bankrupt, to the value of ten pounds of lawful money of England, or above, the party offending shall or may thereof be indicted in any of the King’s majesty’s courts of record, and being lawfully convicted thereof shall stand upon the pillory in some publick place by the space of two hours, and have one of his ears nailed to the pillory and cut off”

The current regime is less severe. Pursuant to the Insolvency Act 1986 (IA86) and the Companies Act 2006 (CA06) certain people are required by compulsion to assist the officeholder by giving evidence. Herein lies the problem, especially against a backdrop of investigatory powers that Dr Hamish Anderson has called the “most rigorous in the world.” If the debtor or director does not assist the officeholder they can be held liable for contempt of court. They must therefore comply and assist the office holder. The problem arises in that by complying, they may inadvertently give information in their evidence, which is prejudicial to themselves and which can be used in relation to other, possibly criminal, proceedings. The recent rise in complex fraud cases has highlighted the problem of on the one hand, (1) balancing the basic right of a witness to rely on the privilege of not self-incriminating and the right to silence, against on the other hand, (2) the public interest requirements in punishing and properly investigating such frauds.

The matter has been somewhat resolved by the Insolvency Act 2000 (IA2000), but problems may still arise. The officeholder will need to ascertain “the true facts…from those who know them”  pertaining to the company’s past activities in order to ascertain whether or not any improper activities have taken place. The relevant statutory provisions within the IA86 are:

s.131 IA  - Statement of Affairs. This provision enables the official receiver, where the court has ordered a winding up order or appointed a provisional liquidator , to apply to the court to compel any past or present officer of the company, or anyone else who has been involved in the formation, promotion or management of the company and any past or present employee to produce a statement of affairs to enable the official receiver to ascertain the companies present position. The information can include, inter alia,

  • particulars of any assets
  • liabilities the company may have,
  • all names and addresses of the company’s creditors,
  • any securities held and when these were given,
  • or any other information the official receiver may require.

If the requirements of the provision are not adhered to then the defaulting party may be fined  and any answers that are untruthful will give rise to a prosecution for perjury

s.235 IA86 - Duty to co-operate with the office holder. This section provides that any person who is a past or present officer of the company, any person who has taken part in the formation of the company, any past or present employee and or any administrator, administrative receiver or liquidator, must supply the office holder with any information in relation the company which he requires , essentially they have a duty to co-operate with the office holder. Failure to comply with this section results in a fine . This provision requires no court order and significantly bolsters the s.133 and s.236 provisions .

s.133 IA86 – Public Examination. This section permits an official receiver, when a company is in winding up (ONLY!) , to apply to the court for a public examination of any past or present officer of the company, any administrator, liquidator or receiver of manager or any other person concerned with the formation, management or promotion of the company . The official receiver may be compelled to apply to the court for a public examination if the creditors of company contributories so request it by the appropriate majorities. If the person requested to attend fails to attend he may be punished for contempt of court .

s. 236 IA86 – Private examination. This provision applies to companies in respect of which a winding up order has been made, provides that the court  may on the application of the office holder , summon to appear before it, inter alia , officers of the company for private examination . The courts discretion is unfettered , and as Milman and Sealy have noted, “there are overriding requirements that the examination should be necessary in the interests of winding up, and that it should not be oppressive or unfair to the respondent.”

s.290 IA86 - Public examination of bankrupt. This section is noteworthy as: (1) Where a bankruptcy order has been made, the official receiver may at any time before the discharge of the bankrupt apply to the court for the public examination of the bankrupt.

The central problem arising in this area, is that any information obtained under the provisions can possibly be used (prior to the Insolvency Act 2000) in subsequent proceedings pursuant to s.433 IA86. The section provides that any information obtained may be used in proceedings, whether or not under the IA86. Specifically it states:-

"[(1)]   In any proceedings (whether or not under this Act)— 

  (a)    a statement of affairs prepared for the purposes of any provision of this Act which is derived from the Insolvency Act 1985, and 

  (b)    any other statement made in pursuance of a requirement imposed by or under any such provision or by or under rules made under this Act, 

may be used in evidence against any person making or concurring in making the statement."

It is a fundamental principle of English law that an accused:

  • has a privilege against self-incrimination
  • a right to remain silent

The genesis of the dual rights arose form the innocuous activities of the Star Chamber in the early seventeenth century who frequently compelled confessions on pain of severe personal injury and death. These dual criminal law privileges have caused problems for the Department of Trade and Industry (DTI now of course BERR) investigators when interviewing directors in that they have pleaded the dual rights in defence to questions asked and when the information is used pursuant to s.433 as discussed above. Unfortunately, the IA86 makes no mention of the rights and the courts have had to grapple with this complex question

The case law in this area on the corporate side is voluminous. Re Rottmann is particularly noteworthy as it provides us with some authority on the personal side. The cases which, inter alia, spring from a rash of frauds in the late 1980’s and early 1990’s consider the extent that the privilege is evocable against the office holder. These include:

  • Re Jeffrey S Levitt Ltd 
  • Re London United Investments plc
  • R v. Seelig
  • Cloverbay Ltd v. Bank of Credit and Commerce International
  • Bishopsgate Investment Management Ltd v. Maxwell 
  • Re Arrows Ltd (No.4)

The Human Rights Act 1998 has lead to much controversy in this area. Article 6 of the European Convention of Human Rights and Fundamental Freedoms states, inter alia, that:-

“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. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice.”

The whole area was tested in: Saunders v. UK, Case No 19187/91 (17 December 1986), (1997) 23 EHRR 313. [1997] EHRR 313; [1997] BCC 872. In the case the European Court of Human Rights had the opportunity to consider the legality of the admissibility of evidence obtained by compulsion and its compliance with Article 6 of the European Convention of Human Rights and Fundamental Freedoms. This case has had a fundamental effect on the usage of evidence obtained under the Companies and Insolvency Act and its subsequent admissibility in criminal trials. The court held by a majority of sixteen votes to four that the use of a self-incriminating statement, in criminal proceedings, obtained under compulsion pursuant to the Companies and Insolvency Acts provision was unfair and a breach of Article 6(1) of the European Convention on Human Rights.

Section 11 of the IA2000,  provides for an amendment to s.219 of the IA86 in light of the decision of the European Court of Human Rights in Saunders v. UK. As a result of this amendment there are restrictions on the use of answers obtained under compulsion, namely, any answers given under compulsion cannot be used against a director who would has been compelled to give answers pursuant to the IA86 provisions except in limited circumstances.

It is clear from the above, that the position at English law in relation to the admissibility of evidence in criminal trials, that has been obtained by compulsion pursuant to either the IA86 or the CA06, is that such evidence will not be allowed to be used except under limited circumstances. The investigatory provisions although not capable of use in criminal trials are however obviously eminent useful for the office holder in pursuit of the statutory purposes of the IA86.

I have some sympathy with the view that the privilege of separate corporate personality must not be abused and the denial of the right of silence and the right to not self-incriminate in an effort to bolster protection of this privilege of incorporation has been somewhat eroded by s.11 of the IA2000. Further expansion of occasions when such evidence is admissible as it is deemed a ‘limited circumstance’, is a matter for further interpretation by the courts.

If you are going to have juristic persons as a legal concession or a statutory privilege, you must afford them the same rights as ‘natural’ persons, i.e. why should a director be immune from prosecution after he has fraudulently acted towards a company? I will revisit this area more closely on the personal side of our subject once the full Court of Appeal judgment in Re Rottmann is available.

Picture Credit: Muir Hunter Museum of Bankruptcy, KU (BP).