Case No: CO/2179/2002

Neutral Citation Number: [2002] EWHC 72783 (Admin)

Before :

- - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - -

Mr Terence Ewing, a Director, appeared for the Claimants

Mr Philip Jones (instructed by the Treasury Solicitor, Queen Anne’s Chambers, 28 Broadway, London SW1H 9JS) for the Defendants

Mr Adrian Francis (instructed by the Treasury Solicitor (as above) appeared as

Advocate to the Court)

Hearing dates: 4^th-5^th December 2002

- - - - - - - - - - - - - - - - - - - - -

1. By this application for judicial review made with the permission of Jackson J on the 17^th September 2002 the Claimants seek orders quashing decisions of officials of the Registrar of Companies (whom I shall refer to collectively as "the Registry") to recover penalties of £100 imposed on each of them by section 242A of the Companies Act 1985 ("Section 242A") for non-compliance with the requirements of section 242(1) of the same Act ("Section 242(1)") in respect of the delivery of accounts and reports to the Registrar. The Claimants in their Claim Form challenge six decisions to recover the penalties, two contained in penalty notice invoices sent to each of the Claimants and four contained in other documents. I do not think that it serves any useful purpose on this application to consider or examine the decisions separately. None have any distinct legal standing. They are all to like effect and are in turn supported and challenged on the same grounds.
2. Section 242(1) provides that the directors of a company shall in respect of each financial year deliver to the Registrar a copy of the company’s annual accounts together with a copy of the directors’ report for that year and a copy of the auditors report on those accounts. Section 242(2) provides that, if the requirements of subsection (1) are not complied with before the end of the period allowed for laying and delivering accounts and reports, every person who immediately before the end of the period was a director of the company is guilty of an offence and liable to a fine. Section 242(4) however affords a defence for a person charged with an offence under this section if he can prove that he took all reasonable steps for securing that the requirements of subsection (1) would be complied with before the end of the period allowed for laying and delivering accounts and reports.
3. Section 242A provides as follows:

   "Civil penalty for failure to deliver accounts

   (1) Where the requirements of section 242(1) are not complied with before the end of the period allowed for laying and delivering accounts and reports, the company is liable to a civil penalty.

   (2) The amount of the penalty is determined by reference to the length of the period between the end of the period allowed for laying and delivering accounts and reports and the day on which the requirements are complied with, and whether the company is a public or private company, as follows -
   
   

   Length of period	Public company	Private company
   Not more than 3 months	£500	£100
   More than 6 months but not more than 12 months	£1,000	£250
   More than 6 months but not more than 12 months	£2,000	£500
   More than 12 months	£5,000	£1,000

   (3) The penalty may be recovered by the registrar and shall be paid by him into the Consolidated Fund.

   (4) It is not a defence in proceedings under this section to prove that the documents in question were not in fact prepared as required by this Part."

4. The primary issues in this case are as to the meaning of the word "liable" in section 242A(1) and (more importantly) the ambit of the discretion (implicit in the word "may") conferred by section 242A(3) ("the Discretion"). The further issue raised relates to the compliance of the provisions for imposition of the penalties with the provisions of the European Convention on Human Rights ("the Convention") incorporated into English law by the Human Rights Act 1998 ("the 1998 Act").

FACTS

5. The First Claimant, POW Trust ("POW") is a charity for the socially excluded incorporated on the 4^th June 1997 and the Second Claimant Al’s Bar and Restaurant Limited ("Al’s Bar") is a subsidiary of POW incorporated on the 29^th July 1999. On the 7^th February 2001 the Registry wrote to POW reminding it of its obligation to deliver its accounts for the period 1^st July 1999 to 30^th June 2002 not later than the 30^th April 2001 and enclosed a Registry leaflet entitled "Late Filing Penalties" which clearly stated that the Registry would only exercise the Discretion not to recover the penalty in case of default in very exceptional circumstances. POW did not comply with its obligation until the 11^th May 2001. On the 16^th May 2001 the Registry sent a penalty notice invoice to POW requesting payment of the £100 penalty due under Section 242A in respect of the late filing of POW’s accounts. By letter dated the 24^th May 2001 POW wrote to Mr Owen of Overdue Accounts at the Registry requesting revocation of the penalty notice invoice pointing out that the accounts were only 11 days overdue. By letter dated the 8^th June 2001 Mr Dominic Roberts of the Late Filing Penalties Section declined to do so. After an earlier warning letter dated the 13^th June 2001, on the 19^th June 2001 the Registry sent a penalty notice invoice to Al’s Bar requesting payment of the £100 penalty in respect of the late filing of Al’s Bar’s accounts for the period to 31^st July 2000 which ought to have been filed by the 29^th May 2001. Protracted correspondence followed in which the Claimants requested the Registry to exercise the Discretion not to recover the penalties on the grounds that:

1. POW was a charity and Al’s Bar was its subsidiary;
2. both had limited means. (It was not however suggested that payment of the penalties would occasion hardship);
3. one of the two directors of POW was ill at the time; and
4. the delay in delivery to the Registry was in one case only 11 days and in the other 14 days.

6. For internal use only at the Registry, about 7 years ago the Registrar published a manual ("the Manual") providing guidance to his staff as to the exercise of the Discretion. The provisions of the Manual have been modified in matters of detail over time and a full review is currently pending. No modification has been considered necessary as yet to secure compliance with the 1998 Act. The Manual (amongst the guidance provided) specifically directs that applications for exercise of the Discretion in favour of not recovering penalties on each of the four grounds advanced by the Claimants should be refused.
7. The Registry in accordance with the guidance in the Manual rejected the applications by the Claimants, and internal appeals at the Registry achieved no results. The Claimants commenced these proceedings on the 7^th May 2001.
8. The Claimants challenge the decisions made to recover the penalties on a whole series of grounds, including non-compliance with the 1998 Act. It is appropriate to address these grounds by considering in turn a series of legal issues which embrace the grounds raised.

Construction of Section 242A(1)

9. The first issue raised by the Claimants relates to the meaning of the word "liable" in section 242A(1) and in particular whether in the context of the section it means "subject to a present obligation to pay the penalty" or "exposed to the risk of an obligation arising or being imposed in the future". The word "liable" is used in statutes bearing both these meanings. What it means in any particular statutory provision turns on the context in which it is used. The Claimants submit that in the context of section 242A(1) the word "liable" bears the latter meaning and that the obligation to pay only arises when a decision is made by the Registrar to recover the penalty. I do not think that this construction is maintainable in the context of the section as a whole. The section provides that on expiry of the date for compliance with section 242(1), a penalty of the amount determined in accordance with the formula set out in subsection (2) is payable. No provision is made for the obligation to pay arising at any later date or under any later process. There is no indication that the Registrar is to be vested with the power to bring the obligation into existence. Indeed subsection (3) indicates quite the contrary: once the period for compliance has expired, without more the Registrar may recover (i.e. enforce payment of) the pre-existing liability to pay the penalty and on recovery is required to pay the sum recovered into the Consolidated Fund. The liability is strict: there is no defence to a claim to payment if there has been non-compliance with the filing obligation. The role of the Registrar is confined to recovery of the penalty: he has no role in respect of the liability to pay or the quantum of the penalty. I accordingly hold that the statutory penalty is immediately payable without more on non-compliance.

ARTICLE 1 OF THE FIRST PROTOCOL TO THE CONVENTION

10. Article 1 provides as follows:

"Protection of property

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it seems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

11. Article 1 comprises three distinct rules. The first enunciates the principle of peaceable enjoyment of property; the second rule covers deprivation of possessions and subjects such deprivation to satisfaction of certain conditions; and the third recognises that the Contracting States are entitled, amongst other things, to control use of property in accordance with the general interest and to secure the payment of penalties. Article 1 is clearly engaged as Article 1 makes express reference to the State’s right to enforce laws that secure payment of penalties. There has been and can be no serious challenge to the compliance of Section 242A with Article 1. Section 242A is part of the statutory fixed penalty scheme for ensuring in the public interest the provision of essential information to the public which is the price payable for the benefit of limited liability. Under Article 1 the scheme must pursue a legitimate aim in the public interest by proportionate means. It must strike a fair balance between the rights of the individual and the public interest and there must be a relationship of proportionality between the means employed and the aim pursued: Lindsay v. CCE [2002] 1 WLR 1766 at para 52 per Lord Phillips MR. The modest civil penalties imposed by the scheme as sanctions for non-compliance with a vital regulatory requirement to secure the public interest are clearly legitimate and proportionate and accordingly the scheme is Convention compliant. The scheme is very different from the fixed penalty scheme under consideration in International Transport Roth GmbH v. Secretary of State for the Home Department [2002] 3 WLR 344 ("ITR"), a case relied on by the Claimants. The scheme in that case, which was applicable to carriers of clandestine entrants to the UK under the Immigration and Asylum Act 1999, had elaborate draconian features, including a scale of penalties which were capable of giving rise to considerable liabilities, a reversal of the burden of proof and the detention of vehicles until that burden was discharged. The scheme was held to be a grossly unfair and disproportionate response to the mischief of illegal entry. In contrast the scheme under Section 242A gives rise (as I have said) to modest civil penalties as part of an essential regulatory system which can be avoided by compliance with the reasonable requirements of Section 242 and it makes no provision for interference with the ordinary procedural safeguards, including the usual incidence of the burden of proof, in the County Court to which the Registrar must have recourse to recover any penalty.

ARTICLE 6 OF THE CONVENTION

12. The Claimants have maintained that the provisions of Section 242A for recovery of penalties infringe Article 6 of the European Convention ("Article 6"). Under Article 6.1 everyone is entitled in the determination of his civil rights to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. It is common ground (as it must be) that the issue whether the Claimants are liable to penalties requires a determination of their legal rights and obligations and that Article 6.1 is accordingly engaged. The Claimants complain that under Section 242A a penalty may be imposed upon them without the availability of the safeguard provided in Article 6.1. The short answer is that the Registrar is required to establish in the County Court before he can recover the penalty the non-compliance by the Claimants with Section 242(1) (and accordingly that the obligation on the part of the Claimants under section 242A(1) to pay the penalty has arisen) and it is at all times open to the Claimants to challenge in judicial review proceedings (as they do in these proceedings) the exercise of the Discretion under Section 242A(3). The requirements of Article 6.1 are accordingly fully complied with. The real complaint of the Claimants is with the rule of substantive law embraced in Section 242A for imposition of fixed penalties. Article 6 does not support any challenge to such a rule of substantive law. Article 1 sets standards for such rules, and it has (as I have held) passed muster.
13. Article 6.2 confers on persons charged with a criminal offence the benefit of the presumption of innocence and Article 6.3 confers on them certain further minimum rights. The Claimants have raised the issue whether for the purposes of the Convention the proceedings for recovery of penalties under Section 242A are civil or criminal, and accordingly whether Article 6.2 and 6.3 are brought into play. The term "criminal offence" under Convention jurisprudence has an autonomous meaning. The principles to be applied in characterising the penalties in this case were summarised in Han v. Customs & Excise Commissioners [2001] 1 WLR 2253. The court is required to consider: (1) the classification of the proceedings in domestic law; (2) the nature of the offence; and (3) the nature and severity of the penalty. The starting point accordingly is the express classification of the penalties as civil by Section 242A, in contrast to the criminal penalties imposed for offences on directors by Section 242(1). The nature of the offence is a regulatory default the character of which (whether innocent, negligent or fraudulent), is irrelevant. The imposition of the penalty may be perceived as an incentive to encourage compliance with a regulatory code. The penalties imposed are purely monetary and modest in amount. In the circumstances, for Convention, as for domestic law purposes, the character of the recovery proceedings should be designated as civil. I should however add that there can be no doubt that, even if the proceedings were categorised as criminal, the proceedings governed by the Civil Procedure Rules in the County Court would satisfy the applicable procedural requirements.

NATURE OF DISCRETION

14. I turn to the ambit of the Discretion. Section 242A(3) by the use of the word "may", as opposed to "shall", implicitly confers upon the Registry a discretion whether to recover the penalties. The legislature plainly saw that it would be absurd to impose on the Registry an obligation to take steps to recover the penalty in every case, irrespective e.g. of the relative cost of doing so and the likely return. Looking at the scheme of the legislation and the language and role of the Registrar in the statutory scheme, the ambit of the discretion is clearly intended to be limited. There can be no intention that the Registrar is to have a general dispensing power excusing from recovery of penalties whenever he considers it just to do so. The exercise must be uniform and consistent. The ambit of the Discretion must be elicited from the purpose and policy of Section 242A and of the 1985 Act as a whole. The principle implicit in the section, as it seems to me, is that the Registrar should in every ordinary case (so far as his resources allow) seek to recover the penalty, but (as very much an exception to the general rule) he may decide not to do so in those exceptional cases where in his considered judgment he considers that such a decision is conducive to achieving (1) the broad object of the legislation of timely compliance with Section 242(1) or (2) the specific task entrusted by Section 242A(3) to the Registrar, namely the economic and efficient application and management of resources available for the recovery of penalties.
15. The duties of the Registrar imposed by section 242A plainly require that he should adopt policies and rules governing exercise by his staff of the Discretion to ensure proper guidance to the staff and uniform exercise by them of their powers. Lord Reid afforded valuable judicial guidance on the necessary and appropriate steps to be taken in this regard in British Oxygen v. Ministry of Technology [1971] AC 610 at 625:

"The general rule is that anyone who has to exercise a statutory discretion must not ‘shut his ears to an application’ (to adapt from Bankes LJ on p.183). I do not think there is any great difference between a policy and a rule. There may be cases where an officer or authority ought to listen to a substantial argument reasonably presented urging a change of policy. What the authority must not do is to refuse to listen at all. But a Ministry or large authority may have had to deal already with a multitude of similar applications and then they will almost certainly have evolved a policy so precise that it could well be called a rule. There can be no objection to that, provided the authority is always willing to listen to anyone with something new to say – of course I do not mean to say that there need be an oral hearing. In the present case the respondent’s officers have carefully considered all that the appellants have had to say and I have no doubt that they will continue to do so. The respondent might at any time change his mind and therefore I think that the appellants are entitled to have a decision whether these cylinders are eligible for grant."

16. Lord Clyde spoke much to the same effect in R (Alconbury Ltd) v. Environment Secretary [2001] 2 WLR 1389 at 1431-2:

"The formation of policies is a perfectly proper course for the provision of guidance in the exercise of an administrative discretion. Indeed policies are an essential element in securing the coherent and consistent performance of administrative functions. There are advantages both to the public and the administrators in having such policies. Of course there are limits to be observed in the way policies are applied. Blanket decisions which leave no room for particular circumstances may be unreasonable. What is crucial is that the policy must not fetter the exercise of the discretion. The particular circumstances always require to be considered. Provided that the policy is not regarded as binding and the authority still retains a free exercise of discretion the policy may serve the useful purpose of giving a reasonable guidance both to applicants and decision makers. Nor is this a point which can be made solely in relation to the Secretary of State. In a variety of administrative functions, in addition to planning local authorities may devise and implement policies of their own."

17. As Mr Philip Jones for the Registrar accepted in the course of his valuable submissions to me, the binding rules laid down in the Manual and applied in the Claimants’ cases are legally objectionable if viewed as fetters upon free exercise in the circumstances covered by those rules of a discretion of the character considered by Lord Reid and Lord Clyde, for they do not admit of exceptions or the admissibility of a special or new case requiring a decision on its merits. But again as he submitted, the rules in question are not of that character. It is no more open to the Registrar himself than to the Registry in the circumstances covered to exercise the Discretion otherwise than in the manner stipulated in the Rules, for the rules reflect the limits on the Discretion itself. The limitations exist because in the considered judgment of the Registrar reflected in the provisions of the Manual an exercise of discretion not to recover the penalties in the situations in question is not conducive to achieving timely compliance with Section 242(1) or the specific task entrusted by Section 242A(3) to the Registrar.
18. I take the view that the Registrar’s judgment expressed in the Manual, that the grounds relied on by the Claimants for an exercise of the Discretion in their favour cannot in law justify such an exercise, is a judgment which he was fully entitled to reach and that it was entirely proper for him to include the rules to this effect in the Manual. Accordingly the various decisions the subject of challenge on this application were plainly correct and free from any grounds for challenge on this application.
19. My view is unaffected by an argument to the contrary raised by Mr Francis, the Advocate to the Court, resting on the provisions of Article 1. The contention made is that the Discretion must (since the coming into force of the HRA) be exercised in a manner compliant with Article 1 and that Article 1 requires the Registry in each individual case to consider the impact of the imposition of a penalty on the defaulting company and whether the penalty is proportionate to the default. This contention must fail. It is clear, as I have already said, that the provisions of Section 242A(1) are compliant with Article 1. In those circumstances section 3 of the HRA (which requires the court to adopt a Convention compliant construction if possible) can and should be ignored as totally superfluous: see Lord Hope in R v. A (No 2) [2002] 1 AC 45 at paragraph 58. In those circumstances there is no scope for widening the ambit of the Discretion to take account of the impact of any penalty on the Claimants and whether the imposition of the penalty is proportionate to the non-compliance and the object sought to be achieved. The applicability of Article 1 in the case of this fixed penalty scheme is limited to the stage when a decision had to be reached whether the scheme itself and its component parts are Article 1 compliant. I have already held that they are. There is no scope for the further applicability of Article 1 as suggested.

CONCLUSION

20. For the reasons given I accordingly hold that Section 242A is Convention compliant, that the penalties were imposed on the Claimants by Section 242A(1) and not the Registrar, and that the Registrar had for the reasons stated no discretion to decline to recover them. Accordingly this application for judicial review must be dismissed. I should add two observations. First considerations of good administration do in my view require in the interests of transparency that the Manual or at the least a document spelling out the rules governing the exercise of the Discretion should be made available to the public. It is unsatisfactory that individuals should have decisions reached vitally affecting their interests without any opportunity to know the full "rules of the game". Secondly I must express a degree of concern how far it can be proper that POW, a small charity, and its subsidiary, which in consequence of default in compliance have with Section 242(1) have been faced with penalties of £100 each, should undertake this disproportionately expensive and (at best) speculative litigation in an effort to avoid payment. Charity funds should not be placed at risk in this manner. This situation is aggravated by the fact that the decision to do so has been taken without any (or any qualified) legal advice. This is a matter for consideration by the Charity Commission.

*****