File no: CCS 741 2002
DECISION OF THE CHILD SUPPORT COMMISSIONER
- I allow the appeal.
- The appellant (to whom I refer as A) is the father and absent parent of qualifying children for whom a child support maintenance assessment has been made. The first respondent is the Secretary of State, the authority responsible for making the assessment. The second respondent (to whom I refer as C) is the mother and parent with care for the children for whom the assessment was made.
- The appellant is appealing with my permission against the decision of the Cambridge appeal tribunal on 3 May 2001 under reference U 42 142 1999 00725.
- For the reasons below, the decision of the tribunal is wrong in law. I set it aside. I refer the appeal to a differently constituted tribunal for determination in accordance with the directions given in this decision (Child Support Act 1991, section 24(3)(b), (5)). I recommend that the new tribunal has a financially qualified panel member as did the previous tribunal.
- I held an oral hearing of this appeal on 1 October 2002. Both A and C attended and represented themselves. The Secretary of State was represented by Miss R Topping of the Office of the Solicitor to the Department for Work and Pensions.
The tribunal decision
- The tribunal decision was made on a reference from the Secretary of State. There was therefore no initial decision before it and it had to deal with the matter as one of first impression, not as an appeal. The application by C was for a departure direction on the grounds of assets capable of producing income or higher income, diversion of income, lifestyle inconsistent with declared income, and partners share of housing costs. For that reason, the formal tribunal decision is wrong, as I pointed out at the hearing. It did not allow an appeal. Rather, it made an initial decision. That decision was that A had diverted income to others which was under his control and which amounted to £695.12 a week. As a result, A's maintenance assessment should be £219.32 a week from 2. 12. 1996.
- There is a full statement of the decision. Unfortunately, the statement did not confine itself to the findings and reasons of the tribunal hearing. Paragraphs 3 to 7 of the statement relate to what happened after the hearing. There may be cases where it is helpful to add these comments to the statement, and this may have been one, but it would be better practice to make the statement without reference to them and then to note them at the end.
Grounds of appeal
- With the agreement of both A and C, I invited Miss Topping to make the first submission at the oral hearing. She was in support of the appeal being granted. The reasons were broadly those set out in the written submission to the Commissioner (documents 284 – 5). However, she did not wish to base her argument on the approach in paragraph 7 of that submission. Paragraph 7 is an overbroad statement about the evidence available to the tribunal, and in my view Miss Topping was right to resile from that paragraph . But she maintained her support for the appeal on the basis that the tribunal either did not have sufficient evidence properly to deal with the issue of control of income, or did not make an adequate decision on that evidence. She also drew attention to a failure of the tribunal adequately to deal with the issue of whether a departure direction was just and equitable.
- A emphasised that there was no basis in fact, and therefore could be no evidence, of his working for or being involved in the company in which the tribunal said he was involved. He had not worked at any time since his term of imprisonment, and he had no income. Anything coming in was from his partner.
I asked A why he did not attend the tribunal. A said that he had asked about it. He had had a brain tumour and was often not well. I put to him the letter he wrote at the time (document 281) and asked why he did not mention his health problems. He said that he did not want C to know about them at the time.
- C indicated that she found the whole proceedings extremely complex. She told the tribunal what she thought to be the case to the best of her knowledge. She indicated some of those issues to me. The evidence in the papers was put to the tribunal and discussed, and the tribunal had looked at the points at its hearing. She had produced the best evidence she could.
Diversion of income
- I agree with the submission of the secretary of state's representative that the tribunal has not dealt with, or alternatively explained, adequately how it reached the conclusion that A had diverted income such that he was within the scope of the powers to make a departure direction on that ground.
- A departure direction may be made on the basis of diversion of income under regulation 24 of the Child Support Departure Directions and Consequential Amendments Regulations 1996. That regulation imposes two preconditions on a direction: (a) the individual must have the ability to control the amount of income he receives, including earnings from employment or self-employment and dividends from shares, whether or not the whole of that income is derived from the company or business from which his earnings are derived; and (b) he must have unreasonably reduced the amount of is income by diverting it to other persons or for purposes other than the provision of income to himself.
"shadow director"
- The approach taken by the tribunal was to find that A was a shadow director of a company. This company was the successor to the company of which A was director, but which was closed down after A's conviction for fraud. The tribunal took the view that A was a shadow director of a company and therefore had control of the resources of the company. He used that control to divert income from himself to others. "We are therefore satisfied that he has effectively complete control over the business and that he has deliberately diverted income out of his own name which could be used to provide maintenance for his children".
- "Shadow director" is not a specific concept of child support law, so it is important to identify what is meant by a shadow director and how A could be categorised as one. The term "shadow director" has a formal definition in section 22(5) of the Company Directors Disqualification Act 1986. That definition is:
"a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity".
That terminology has a long statutory history in company law (as noted in the Deverell case, below).
- This is echoed in the wide definition of "director" that has long been part of income tax law. Section 417(5) of the Income and Corporation Taxes Act 1988 defines "director" for certain anti-avoidance purposes as including:
"any person occupying the position of director by whatever name called, any person in accordance with whose directions or instructions the directors are accustomed to act…"
That definition also includes managers and those who directly or indirectly control a company through its shareholding.
- The wording of those two provisions is effectively the same, and I take that to be the meaning of "shadow director". The full flavour of that meaning was discussed at length by the Court of Appeal in Secretary of State for Trade and Industry v Deverell [2001] Ch 340, [2000] 2 WLR 907. Morritt LJ gave the judgment for the Court. He set out his approach to the definition of "shadow director" in some detail, although he did it in the specific context of the 1986 Act. In his view (at [2000] 2 WLR 920-1) the purpose is:
"to identify those, other than professional advisers, with real influence in the corporate affairs of the company. But it is not necessary that such influence should be exercised over the whole field of its corporate affairs. … Whether any particular communication from the alleged shadow director, whether by words or conduct, is to be classified as a direction or instruction must be objectively ascertained by the court in the light of all the evidence. In that connection I do not accept that it is necessary to prove the understanding or expectation of either give or receiver. In many, if not most, cases it will suffice to prove the communication and its consequence … Non-professional advice may come within the statutory definition. The proviso excepting advice given in a professional capacity appears to assume that advice generally is or may be included. Moreover the concepts of "direction" and "instruction" do not exclude the concept of "advice" for all three share the common feature of "guidance"… It will, no doubt, be sufficient to show that in the face of "directions or instructions" from the alleged shadow director the properly appointed directors or some of them cast themselves in a subservient role or surrendered their respective discretions. But I do not consider that it is necessary to do so in all cases. Such a requirement would be to put a gloss on the statutory requirement that the board are 2acustomed to act" "in accordance with" such directions or instructions.
In my view, if a tribunal seeks to categorise someone as a shadow director for child support purposes, it should be guided by that approach.
- Even if A was a shadow director, there is a problem in linking that finding with regulation 24 of the Child Support Departure Directions and Consequential Amendments Regulations 1996 in the context of this case. Regulation 24 is concerned with those who reduce their income through an ability to control it. Clearly there will be cases where a shadow director can use that authority to reduce his or her income. But what income that would otherwise have gone to A was reduced in this case? A could derive income from the company in one of three ways: as a director, in fees or loans; as a shareholder, in dividends; or as an employee, as earnings or benefits. The tribunal did not find that A had any of those connections with the company. Was there any other way in which he, as shadow director, diverted income from himself to others? If there was, the tribunal does not identify it. Where, then, is the link between his authority, or alleged authority, over the company as a shadow director and the application of regulation 24? I agree with the submission of the Secretary of State that the tribunal has not dealt with this adequately. On that basis, the decision of the tribunal must be set aside.
- In making a departure direction on these grounds, the tribunal did not take further the application of C to make departure directions on any of the other three grounds. Indeed, so far as I can see these were referred to a tribunal for decision and have yet to be decided (see document 3).
- I was asked at the hearing to make my own decision in place of that of the tribunal. I do not consider that expedient. There are four heads of application and there is more fact-finding to do. It may be advantageous for that fact-finding to be conducted by a tribunal with a financially qualified panel member. In addition, I assume from what I was told at the hearing that A will attend and/or be represented at the new hearing, so evidence will have to be heard in full. I therefore refer the matter to a new tribunal.
Directions to the new tribunal
- The new tribunal has before it four applications for departure directions. They have been referred to the tribunal for decision following an application by C accepted as valid by the Secretary of State with effect from 20 February 1997. It is to make its own decision on each of those applications. The new tribunal will note the views expressed above about the application of regulation 24 (diversion of income). It should also consider the other grounds for a direction.
- I repeat the comments I made to the parties about attending the rehearing. They are strongly advised to attend in their own interests, and they should be prepared to give evidence on oath or affirmation to the new tribunal. They are warned that if they do not attend, and are not represented, then a tribunal may draw conclusions adverse to them on the basis of other evidence. There is now a considerable amount of documentation in the papers, including evidence offered by A and C since the last hearing. I also remind the parties that there are four heads of application outstanding, as detailed in the papers. See for the details documents 70 to 73. If they have any further documentary evidence relevant to any of these heads of application, then they should produce it in good time before the next hearing. In particular, if A wishes to produce further documentary evidence about his income – or lack of it – relevant to this application, then he should do so before the new hearing.
David Williams
Commissioner
17 October 2002
[Signed on the original on the date shown]
