DECISION OF THE UPPER TRIBUNAL
(ADMINISTRATIVE APPEALS CHAMBER)

The DECISION of the Upper Tribunal is (1) to give permission to appeal and (2) to allow the appeal by the appellant.

The decision of the Sunderland First-tier Tribunal dated 18 May 2010 under file reference 236/08/2277 involves an error on a point of law and is set aside.  The appellant’s appeal against the City Council’s decisions in relation to housing benefit (dated 18 January 2008) and council tax benefit (16 September 2008) is remitted to be reheard by a different First-tier Tribunal, subject to the Directions below.

This decision is given under section 12(2)(a) and 12(2)(b)(i) of the Tribunals, Courts and Enforcement Act 2007.
DIRECTIONS

The following directions apply to the re-hearing:

(1)	The re-hearing should be at an oral hearing; 

(2)	The new tribunal should be differently constituted from the First-tier Tribunal which considered this appeal at the hearing on 18 May 2010;

(3)	The Tribunals Service should arrange for a typed copy of the handwritten Record of Proceedings of the hearing on 18 May 2010 to be prepared for the assistance of all parties at the rehearing (see paragraph 58 below);

(4)	The tribunal judge responsible for giving listing directions for the re-hearing of this appeal is strongly recommended to consider directing that the case should be heard by a tribunal judge sitting with an accountant member (see paragraphs 39 and 59 below);

(5)	The tribunal judge responsible for relisting arrangements may also wish to consider exercising the power under rule 5(3)(d) of the Tribunal Procedure (First-tier Tribunal) (Social Entitlement Chamber) Rules 2008 to require SR as company secretary, and DD as managing director, to provide relevant documents relating to CC Ltd. (see paragraph 60 below);

(6)	The City Council should clarify whether it is submitting that SR is a de jure, de facto or shadow director of CC Ltd or just the company secretary (see paragraph 57 below);

(7)	DD may be invited to attend the re-hearing as a witness by the appellant, or may be directed to do so by the tribunal under a witness summons (see paragraph 61 below).

(8)	The new tribunal should follow the directions and apply the guidance at paragraphs 40-56 below;

These directions may be supplemented by later directions by a Tribunal Judge in the Social Entitlement Chamber of the First-tier Tribunal. 
REASONS FOR DECISION

The decision in summary

1.		I give the claimant permission to appeal to the Upper Tribunal against the decision of the Sunderland First-tier Tribunal (FTT) dated 18 May 2010.  I also allow the claimant’s appeal to the Upper Tribunal, as the FTT’s decision involves an error on a point of law.  The FTT’s decision is set aside.  The Upper Tribunal is not in a position to substitute (or to “re-make”) its own decision for the one that the FTT made.  This means that the appeal will need to be re-heard by a differently constituted tribunal in Sunderland.

2.	The claimant has won this battle.  She may or may not win the war. The outcome of the re-hearing depends on the view taken by the new FTT of all the evidence in the case.  In the course of this decision I refer to a number of evidential matters which may need to be explored further by the new tribunal.  I also strongly recommend that the new tribunal should comprise an experienced tribunal judge sitting with an accountant member. 

The proceedings in the Upper Tribunal

3.	I held an oral hearing of the claimant’s application for permission to appeal on 10 February 2011 at Doncaster County Court.  The claimant attended the hearing with her partner.  The claimant was represented by Ms Sarah Barratt of Hay and Kilner, Solicitors, and Sunderland City Council (SCC) by Ms Lynne Bennett, a Senior Solicitor with SCC.  I am grateful to both Ms Barratt and Ms Bennett for their careful and helpful submissions, both at the hearing and subsequently in writing.  They have both done much to refine and narrow the issues in dispute.  I am confident that if they had both been involved in this case at a much earlier stage in the proceedings then the key issues would have been identified and resolved much more swiftly.

4.	For the record I should add that at the oral hearing Ms Bennett submitted a detailed 12 page response, setting out SCC’s grounds for resisting the claimant’s application for permission to appeal.  Ms Barratt requested an adjournment of the hearing to another day to enable the claimant to digest this document and give her further instructions. I refused that application for a number of reasons. These included the following factors: (i) Ms Bennett’s written submission related to points of law only, and was not “new” or “late” evidence on which instructions needed to be obtained from a lay client; (ii) the date of the Doncaster hearing had been fixed well in advance and the parties had all travelled some distance to be there; and (iii) the claimant’s concerns could be accommodated by providing an opportunity for further written submissions after the oral hearing.  I therefore concluded that the overriding objective was best served by refusing the request for an adjournment.

5.	In keeping with my indication at the hearing, I have deferred further consideration and determination of the application for permission to appeal pending receipt of both parties’ further written submissions. 	Both parties have also helpfully indicated that they are content for me to deal with the application for permission to appeal and, if relevant, the appeal proper, on a “rolled up” basis.  I now proceed on that basis.

A short account of what this case is all about

6.	This is a highly complex case in which the FTT had to grapple with over 500 pages of documentary evidence, raising a number of tricky legal and evidential issues.  As I have decided that the only option open to me is to send the matter back for rehearing at the FTT, I will not cover every aspect of the case in this summary of the background to the case.  For present purposes the following overview will have to suffice.

7.	The claimant (ED) and her partner (SR) have occupied a large property as their home since 1996.  The claimant received housing benefit and council tax benefit in respect to that property between 1999 and 2005.  In December 2005 Sunderland City Council (SCC) suspended payment of benefit and investigated their case.  The investigation dragged on.  The FTT later took the view that this was “at least in part explained by the obstructive approach taken by ED and SR, combined with the unfocussed enquiry mounted by the City of Sunderland.”  There appears to be some merit in that assessment.  Eventually SCC made the two (revised) decisions which were the subject of the subsequent appeal to the FTT.

8.	The first decision, on 18 January 2008, was that housing benefit (HB) was not payable to the claimant as from 18 October 1999.  Four reasons were given by SCC: (a) the claimant did not have a legally enforceable liability to pay rent; (b) her tenancy was not on a commercial basis; (c) her tenancy was contrived; or (d) (at least as regards the latter period) her correct income was not known for the period from 16 August 2004.  SCC also decided that, as a result of grounds (a) – (c) above, there was a recoverable overpayment of HB amounting to £22,636.74 for the period from 18 October 1999 to 11 December 2005.

9.	The second decision, on 16 September 2008, was that council tax benefit (CTB) was not payable to the claimant as from 16 August 2004.  The reason given was that the claimant’s correct income was not known for the relevant period.  This resulted in a recoverable excess payment of £1,621.44, covering the period from 16 August 2004 to 11 December 2005.

10.		The District Tribunal Judge (DTJ) held a hearing of the claimant’s appeal which lasted a whole day.  SCC was represented by an appeals officer and the claimant by Ms Barratt.  Both the claimant and SR attended and gave evidence.  The DTJ took a full note of evidence and issued a detailed Statement of Reasons.  He dismissed the claimant’s appeal(s).

11.		The DTJ was understandably less than impressed by the SCC’s investigation.  He described the SCC fraud inquiry as being “very unfocussed, and much of it was based on supposition and gossip and led nowhere.”  On the basis of the papers before me, that seems an entirely fair criticism.  But he was even less impressed by the claimant and especially by her partner SR. The DTJ found that much of their evidence was either unsatisfactory or simply unbelievable.  He was particularly critical of SR’s evidence, which he regarded as unreliable and/or implausible in certain key respects.

12.		It is axiomatic that judgments of credibility are for the FTT to make.  I am acutely conscious that the DTJ in this case had the advantage of hearing from SR at first hand over the course of a full day’s hearing and of questioning him on various aspects of the appeal.  The Upper Tribunal should not readily upset a credibility finding made in such circumstances.  However, if the tribunal’s findings are found themselves to rest on shaky foundations, then there may be no option but to do so.  I have arrived at the conclusion that that is the situation here.

13.	At this juncture I should make clear the limits of my decision.  All I have decided is that the claimant should be given permission to appeal and indeed that her appeal to the Upper Tribunal succeeds because of an error of law by the FTT.  The DTJ in question may, or may not, have formed an accurate assessment of both the weight to be attached to SR’s evidence and as to the merits of the claimant’s case overall.  That is a matter which the new tribunal will have to resolve.  Suffice to say that, despite the claimant’s protestations, it seems to me there may be a number of potential difficulties with her case.  I refer to some of these later in this decision.  However, issues of fact are for the next tribunal to determine.  Ultimately, my own view of the facts does not matter as the Upper Tribunal’s jurisdiction is confined to points of law.  I am confident that the new tribunal will read this decision with that important distinction in mind.

The muddied waters in this case

14.	In essence the FTT fell into error in this case as it failed to see clearly through the muddied waters of this case.  This murkiness needs to be outlined before examining why the tribunal erred in law.  Some of the delays in the fraud investigation were doubtless caused by SCC’s inability to get to grips with the relationships between various individuals and companies which appear in the dramatis personae (or cast list) of this case.   The short account that follows is based on what (I stress) appears to be the position from the evidence on file (all references to documents [“docs”] are as numbered on the Upper Tribunal file).  The new tribunal will have to satisfy itself of the true position at all relevant times.

15.	ED and SR live in an extensive house which I shall simply call “The Property”.  The Property is owned by a Channel Islands-based property holding company, SPH Ltd.  The Director of SPH Ltd is one BG; his partner (presumably his wife) is MG; there are no other known owners of SPH Ltd (docs 483-485).  SPH Ltd uses another property company, WP Ltd, as its agents in the UK.  WP Ltd sent a letter of support for ED and SR to their solicitors; that letter was signed by BG in his own name, but without disclosing his position in the company (docs 502-503).  SR is, by his own admission, a former employee and business associate of BG, as confirmed by WP Ltd’s letter of support to ED’s solicitors.  There is, furthermore, some (limited) evidence on file that SR himself may have owned SPH Ltd in 1993 (doc 482).

16.	ED and SR have an adult son, DD. ED, SR and DD each has some involvement with CC Ltd, a property management company first incorporated in July 1996 (doc 81).  CC Ltd appears as a landlord on SCC’s benefits system as a recipient of HB cheques (doc 186). CC Ltd and SPH Ltd have apparently used the same business address (docs 18 and 482).  The same address has also been used by WP Ltd (doc 502). BG has confirmed that he had sold CC Ltd to DD (doc 502).  This sale appears to have taken place in or around January 2003.  There is no evidence as to the amount paid for the purchase of the company or how the funds were provided.

17.	The claimant’s case is that DD is the director and sole shareholder, and hence sole owner, of CC Ltd.  He certainly calls himself “Managing Director”.  SR is said to be the company secretary for CC Ltd and he was also employed by the company in the capacity as “General Manager” from September 1996 (doc 6) – i.e. shortly after incorporation and at a time when it was still owned by BG – until November 2003 (doc 113), nearly a year after DD bought the company. ED was thereafter employed by CC Ltd in his place as administrator from August 2004 (docs 35 and 56).  It is unclear who, if anyone, was employed in this capacity between November 2003 and August 2004.  However, what is clear is that both SR and ED were employed by CC Ltd at a relatively nominal wage (SR was said to be paid £100 p.w. for a 20 hour week, and ED £320 or £340 every 4 weeks for a similar commitment).  

18.	ED and SR, however, may not necessarily have been ordinary employees: the bank mandate on file shows that each of them was entitled to sign cheques for CC Ltd and that one signature alone would suffice (doc 395).  

19.	SCC’s confusion about the inter-relationship of the various companies is clear from the file.  The claimant’s 2003 HB claim form stated that WP Ltd was the landlord of The Property (doc 12), as did the 2004 claim form (doc 47).  However, the original assured tenancy itself from 1994 stated that the landlord was SPH Ltd and that its agents were WP Ltd (docs 191-192).  Certainly the Land Registry confirms that SPH Ltd is the freehold owner of The Property (doc 209).  Yet it was only in July 2009 that SCC belatedly realised that WP Ltd was not actually the owner of The Property (doc 399), although this should have been apparent to SCC early in 2008 (see doc 209).

20.	Ms Barratt, on behalf of ED, has developed a number of grounds of appeal against the FTT’s decision.  In the circumstances I do not need to deal with them all.  I will focus on those which appear to me to be her strongest arguments, which primarily concern the CTB aspect of the case.  These relate to the FTT’s findings on the role of the claimant’s partner SR in the various companies and the tribunal’s associated (adverse) credibility finding about SR, along with the reasoning for the FTT’s decision in relation to the excess payment of CTB.

SR’s role in the various companies

21.	The FTT made various findings of fact as regards SR’s role in both CC Ltd and in WP Ltd. As to the former, the DTJ’s initial findings of fact included the following:

“DD and SR are directors of CC Ltd and SR is also company secretary.  SR has disputed that he is a director of CC, but there is unambiguous written evidence contained within a recent company search showing him to be a director” (at paragraph 2).

Later, the FTT repeated the finding that SR had “insisted that he was not a director or shareholder of CC Ltd, although as mentioned already there is documentary evidence that he is a director and the company secretary” (at paragraph 8).  

22.	As to the second company, the FTT then found as follows:

“In his oral evidence SR claimed never to have worked for WP Ltd, but it is noted that he is described as a Housing Assistant for WP on 28 January 2003 at documents 17 and 18, and that he was receiving £100 per week from the company at that time. There is no explanation for this complete contradiction of his evidence.”

23.	Ms Barratt attacks both findings as ones which were unsupported by the evidence actually before the tribunal. The “unambiguous written evidence contained within a recent company search” cited by the FTT was presumably a reference to the company search for CC Ltd, dated 16 April 2009 (docs 358-364), which listed both DD and SR under the heading of “Directors” for CC Ltd (doc 364). This certainly replicated an earlier company search, in similar terms, under the heading “Director Details” (doc 80, dated 27 January 2006).  So far, so good.  However, under those same headings both searches described DD’s role as “Director” but SR’s role as (only) “Company Secretary”.  The inference to be drawn from the accountant’s letter of 2 March 2006 (doc 113) and the solicitor’s letter of 1 February 2007 (doc 148) was that this position was SR’s sole role in CC Ltd (although neither letter is entirely clear on the point).  I also note that at the FTT hearing the SCC appeals officer asserted that SR was both Company Secretary and a Director of CC Ltd (doc 623), although Ms Bennett for the local authority now concedes that the tribunal was wrong to find that there was “unambiguous written evidence” to this effect. Both searches undoubtedly confirmed that DD was the sole shareholder, holding 100 ordinary shares (docs 85 and 361).  

24.	In these circumstances I do not think the tribunal could reasonably conclude that there was “unambiguous written evidence” that SR was both a Director and Company Secretary of CC Ltd.  He may or he may not have been.  The evidence, as is often the way, pointed in different directions: indeed, it was ambiguous.  Moreover, when CC Ltd was acquired by DD in 2003, the legal position was covered by the pre-Companies Act 2006 company law regime.  It followed that as a matter of law if CC was a single director company, then that same person could not also be the company secretary, requiring some other person (e.g. SR) to undertake that function.  If, however, there was more than one company director, which was quite possible, then one of those persons could “double up” as company secretary.  On the evidence before the FTT, it is not entirely clear which scenario applied in this case.

25.	The position is equally muddied as regards SR’s role in WP Ltd.  SR has insisted throughout that he has never worked for WP Ltd, a position he maintained at the FTT hearing (doc 542) and which had also been confirmed in writing by WP Ltd (doc 392).  However, the tribunal found as a fact that SR had been employed as a Housing Assistant by WP Ltd at £100 a week in January 2003.  But that particular finding was simply wrong – the certificate of earnings in question refers to SR’s employment by CC Ltd, and not by WP Ltd (doc 17 and 18).  Again, Ms Bennett for SCC concedes that this attribution to WP Ltd was an error of fact by the tribunal.  I have to say the tribunal’s error is understandable, as the certificate of earnings was signed by none other than BG (who appears to own both WP Ltd and SPH Ltd), but signed on behalf of CC Ltd, albeit at a time when he had apparently already sold that business to DD.  However, SR has an explanation for this apparent inconsistency, which the new tribunal will need to consider (see docs 293 and 305).

26.	Ms Bennett submits that these two errors do not undermine the FTT’s overall conclusions.  As regards the question of SR’s precise role in CC Ltd, she points out that this was just one of several findings of fact made by the tribunal and any such error did not outweigh the thrust of those other findings.  She also argues that the issue of SR’s role in CC Ltd was solely relevant to the couple’s income and so only affected the decision in relation to CTB, whereas the appeal mostly related to the disputed tenancy for The Property and ED’s entitlement (or not) to HB.  Ms Bennett makes similar points in relation to the FTT’s error in relation to SR and WP Ltd, and also argues that the tribunal’s finding on SR’s role in WP Ltd, if any, was purely to demonstrate the business association between BG and SR, which was not in dispute anyway.

27.	Ms Barratt’s response is to emphasise that a mistaken finding of material fact which is unsupported by the evidence may itself give rise to an error of law, not least as SCC appeared to have changed its position as regards to the nature of SR’s involvement in CC Ltd.  As will be apparent later, SCC’s position before the FTT was that SR was much more intimately involved in the business of CC Ltd than he had admitted (see further paragraph 48 below).  Now, however, SCC appeared to be conceding that SR was not a director of that company.  Ms Barratt also argues that the findings in question clouded the whole of the FTT’s decision, as they go to SR’s credibility, which was a central question across the range of issues, relating to both HB and CTB entitlement, to be determined by the tribunal.

28.	With some hesitation I agree with Ms Barratt’s analysis on this point. It is undoubtedly true that the FTT made a number of other findings of fact which supported its decision, especially in relation to the HB aspect of the appeal.  However, the findings about SR’s involvement in both CC Ltd and WP Ltd were undoubtedly significant findings, rather than being simply “makeweight” findings.  The finding about SR’s role in CC Ltd appears in only the second paragraph (and indeed first substantive paragraph) of a 4-page decision, by way of setting the scene to the whole decision, and so signifying the importance attached to the finding.  It is then reiterated at the beginning of the extensive passage dealing with SR’s evidence (paragraph 8).  The finding about SR working for WP Ltd is regarded by the DTJ as being a “complete contradiction of [SR’s] evidence” for which “there is no explanation”.  In essence, the tribunal was making a categorical finding that SR was deliberately misleading the tribunal on both points. I am satisfied that these findings were a major factor in the conclusion that SR’s evidence would not be relied upon in the context of both of the appealed decisions.

29.	I have, of course, considered whether the FTT’s decision can stand on the basis that the other findings of fact are sufficient to support the tribunal’s decision to dismiss the claimant’s appeal(s).  If the errors by the tribunal would not have made any difference to the outcome, then by definition they would not have been material and might be overlooked.  However, I cannot be satisfied that this would necessarily be the case, given the force with which the adverse findings were made.  I also think there is a potential risk of unfairness, looked at objectively, if the tribunal’s decision were allowed to stand, not least given the apparent change in position by SCC over the course of these proceedings.

30.	I therefore conclude that the tribunal erred in law in relation to its findings about SR’s role in CC Ltd and WP Ltd and that these errors, and the associated adverse credibility finding, are such that I must allow the appeal and set aside the tribunal’s decision.

The tribunal’s reasoning on the council tax benefit appeal

31.	The FTT’s decision dealt principally with the arrangements under which ED and SR occupied The Property and the related HB appeal.  There was very little discussion of the recoverability of the alleged excess payment of CTB.  The FTT recorded the details of SCC’s decision in relation to CTB (paragraph 1(a)), but then focussed on the HB aspect of the case.  There was a brief mention of council tax liability for The Property at the outset of the claimed tenancy, but no explicit discussion as to why there was an excess payment of CTB for the period from 2004 (and why indeed only from 2004) and why it was recoverable.

32.	Ms Barratt for ED argues that the tribunal erred in law in this respect – it effectively stated an outcome without adequate reasons and gave no separate consideration to the CTB aspect of the case.  Ms Bennett for SCC resists this ground of appeal; she says it was sufficient in effect for the tribunal to incorporate the local authority’s decision and reasoning, and that in any event the tribunal had made an express finding that there was insufficient proof of ED’s income from CC Ltd at the material time.

33.	I also agree with Ms Barratt on this ground of appeal.  There are obviously circumstances in which it may be appropriate to incorporate reasoning by reference to the initial decision maker’s explanation of the decision under appeal.  There are equally obviously dangers in such an approach, as it may simply compound earlier inadequacies.  Given the considerable volume of evidence on file, and the way in which SCC had conducted the case and changed its decisions, it was incumbent on the tribunal to explain briefly why the CTB aspect of the case had been decided in the way that it had.  In addition, the FTT’s findings about ED’s wages were lacking in detail.  The tribunal quite rightly pointed to the dangers involved in CC Ltd operating a cash-based system; however, although the practice may well be unwise, it is not unlawful.  But beyond that, there was little by way of specific findings.  For example, the FTT recorded ED’s evidence that she was paid in cash by CC Ltd, but did not make any findings as to how much she was in fact paid.  There was, however, other evidence on file about ED’s income (e.g. from CC Ltd’s accountants, and in the form of ED’s P60s and HMRC tax credit awards for the relevant period). The tribunal needed to come to a firm view on whether that third party evidence was accepted or not and, if not, why not.

34.	I therefore conclude that the tribunal erred in law by failing to explain adequately the basis for its decision on the CTB aspect of the appeal. This is a further ground for allowing the appeal and setting aside the tribunal’s decision.

The grounds of appeal relating to the HB decision

35.	I have considered carefully whether the tribunal’s decision on the HB aspect of the appeal can stand even though the decision in relation to the CTB excess payment has to be set aside.  However, as indicated at paragraphs 28 and 29 above, I have decided that the decisions cannot be “severed” in this way.  The adverse credibility finding about SR was plainly a significant factor in both the CTB and the HB aspects of the appeal. In those circumstances I do not need to deal with the claimant’s other grounds of appeal in any detail.  For example, Miss Barratt argues that the FTT failed to apply the case law of the courts and the Social Security Commissioners and Upper Tribunal in relation to whether a tenancy is non-commercial or contrived for HB purposes.  I have to say I am not wholly persuaded by that line of argument, for the reasons set out by Ms Bennett in her submissions.  It seems to me that Ms Barratt is really objecting to the conclusions that the FTT reached, rather than citing any misapplication of principles of law.  I bear in mind that in this context “the issue of whether or not there is a commercial basis is one of fact. True it is that this overall question involves weighing a number of factors – sub-facts so to speak. But everything in the evaluation is purely factual” (per Jacob LJ in Campbell & Others v South Northamptonshire District Council [2004] EWCA Civ 409, reported as R(H) 8/04).  However, given that I have already concluded that the tribunal’s decision must be set aside, there is little point in exploring those points in any further detail now.

The Upper Tribunal’s disposal of this appeal

36.		I conclude that the decision of the First-tier Tribunal involves an error of law for the reasons summarised at paragraphs 30 and 34 above and allow the appeal. 

37.		In the circumstances, given the nature of the errors and the substantial amount of money at stake, it is not appropriate to exercise my discretion and leave the tribunal’s decision intact.  I therefore set aside the decision of the tribunal (Tribunals, Courts and Enforcement Act 2007, section 12(2)(a)).  There are too many unanswered questions in the case to justify the Upper Tribunal deciding the underlying appeal against the SCC decisions.  The case must therefore be remitted for re-hearing by a new tribunal subject to the directions above (section 12(2)(b)(i)).  

The composition of the new First-tier Tribunal

38.	This is a highly complex case which was previously heard by a DTJ.  It needs to be heard by another DTJ or an equally experienced tribunal judge.

39.	The default position is that a tribunal hearing a HB/CTB appeal comprises a single tribunal judge sitting alone (see Senior President’s Practice Statement, The Composition of Tribunals in Social Security and Child Support cases in the Social Entitlement Chamber on or after 3 November 2008, paragraph 6).  However, the Chamber President may determine that such an appeal should be heard by a judge sitting with an accountant member.  That power may be delegated to a Regional Tribunal Judge or District Tribunal Judge (Practice Statement, paragraph 9).  In my view the judge responsible for giving listing directions for the re-hearing of this appeal should give very careful consideration to that option.  An accountant member may well be able to provide invaluable forensic and expert input into any further directions for disclosure which may need to be made prior to the rehearing. I strongly recommend that an accountant member be appointed to sit with the tribunal judge.

Directions to the new tribunal

40.	The new tribunal should be careful to deal with the HB and CTB aspects of the appeal separately.  	

41.	As regards the HB appeal, the tribunal will need to bear in mind that the onus is on SCC to show that there were grounds for superseding the original decision to pay HB.  The tribunal will need to make careful findings of fact in relation to the various grounds advanced by the local authority for deciding that there was no HB entitlement.  Given the complexity of the case, it might be wise to make separate findings in relation to each of the four bases relied upon by the local authority, taking into account the relevant case law on e.g. non-commercial and contrived tenancies.

42.	As regards the CTB appeal, the issues are somewhat narrower, being confined to whether there are grounds for supersession and the question of ED’s income (which, of course, also includes SR’s income) for the material period after 2004.  Again, the tribunal will need to make findings of fact as best it can on the level of their joint income in the relevant period, taking into account all the evidence available.

Further evidential issues which the new tribunal may need to explore

43.	It will be plain by now that some aspects of this case are at present as clear as mud.  Some of these uncertainties and complexities are referred to above.  There are, however, several other evidential matters which may need to be resolved at the rehearing.  For the benefit of the new tribunal I summarise several of these below.  The first three may appear to be relatively minor issues.  The fourth and last, however, may be much more important and may hold the key to the appeal.

(i)	The error in the CC Ltd company accounts

44.	First, the claimant’s HB claim forms for 2003 and 2004 disclosed that either she (doc 35) or her partner (doc 6) was employed by CC Ltd as General Manager. Although there may have been no general manager in place between November 2003 and August 2004, the company accounts for the whole of 2003 and 2004 recorded both that CC Ltd had no employees and that no salaries were paid (docs 82 and 87; see also docs 156-157).  The firm’s accountants subsequently stated that this was because ED’s wages had previously been wrongly classified as director’s emoluments, rather than wages, although this explanation may not sit easily with the admittedly abridged accounts revealed by the company search (doc 157).  This may well be a reason for seeking full disclosure of CC Ltd’s company accounts (see further paragraph 60 below).

(ii)	The question as to whether SR ever worked for WP Ltd

45.	Secondly, SR has been adamant throughout these proceedings that he has never worked for WP Ltd (see paragraph 25 above).  However, there is a copy of a rent card for one of its properties on file which suggests that he had acknowledged receipt of rent on behalf of WP Ltd as landlord or landlord’s agent on a number of occasions in 2001 (doc 248).  SR has an explanation for this apparent inconsistency (essentially that he was doing a favour) which the tribunal may wish to explore further (doc 295).  I note also that the previous tribunal was told by a SCC official that he understood that BG and SR had had a meeting with SCC staff in 1996, in which it was said that SR was to manage the property portfolio of a firm (VF) which subsequently became WP Ltd (docs 528-529 and 531).  It is quite possible, of course, that SR worked for VF but was never employed by WP Ltd.  The previous tribunal made no finding either way on that evidence.  The SCC evidence in question was hearsay evidence – of course, this arguably rendered it less persuasive, albeit still admissible.

(iii)	The links between CC Ltd and WP Ltd

46.	Thirdly, and on a related theme, the tribunal may need to explore further the links between the various companies involved, and especially between CC Ltd and WP Ltd.  The use of a common address has already been noted (paragraph 16 above).  Yet the relationship may go further than this.  For example, the company searches indicate that CC Ltd is subject to mortgages over No 12 S Road (see e.g. docs 85 and 366).  SCC records indicate that the same property is either owned or managed by WP Ltd (see docs 269 and 271; but note that in April 2009 WP Ltd stated that it did not own any properties, acting solely as a management company; doc 392).  The same property was visited by an SCC investigator and allegedly found to be unoccupied (doc 186).  Another property, 6 P Street, was also owned or managed by WP Ltd according to SCC records (docs 268 and 271).  However, that property was sold by CC Ltd to SCC in 2007 (doc 199).

47.	In addition, the links between the various companies (beyond simply using or sharing the same address at various times) may also be evident in the role of a further individual who has not been mentioned so far, AP.  Between 2002 and 2004 AP signed documents as agent on behalf of WP Ltd (docs 250-256).  S/he also signed a certificate of earnings for SR as administrator for CC Ltd in May and June 2003 (docs 19-22), using the same address as WP Ltd.

(iv)	SR’s involvement in CC Ltd: de jure, de facto and shadow directors

The nature of the dispute

48.	The fourth and final issue may be far more significant.  This concerns the true role of SR in the business operated by CC Ltd.  The claimant’s case throughout has been that SR’s role in CC Ltd is minimal, and bordering on the nominal (see e.g. the explanation at doc 307).  SCC’s case, at least as put in its September 2008 “reconsideration” (doc 233) and October 2009 supplementary submission to the FTT (doc 458), was that DD was not the true owner of CC Ltd at all but was in effect a “front” for his parents.  The previous tribunal did not really resolve this critical issue.  The new tribunal will need to – not least as it may have a bearing on the proper assessment of ED and SR’s income and may also have implications for their joint capital assets, if any (whilst it will also be crucial to bear in mind that CC Ltd has a separate legal identity to that of its owner(s)).

49.	There are a number of factors which suggest that SCC’s suspicions in this regard may be well-founded (I put it no higher than that).  They are as follows.  First, SR has worked in the property management business in the North East for many years, much of the time with BG (who owns SPH Ltd, used to own CC Ltd and appears to own WP Ltd).  In contrast there is no evidence that DD has any experience whatsoever in the property field.  For example, in 2006 DD was employed as a chef in the Midlands (doc 102, confirmed by HMRC evidence at doc 133).  Secondly, there is some evidence that SR was the real decision-maker in relation to the conduct of CC Ltd’s business.  For example, CC Ltd sold three residential properties to SCC in the course of 2007 for £48,000, £52,000 and £48,000 respectively (docs 197-199).  The relevant agreements have a business stamp for CC Ltd stating a business address but also refer to CC Ltd as being the Seller and its address as being The Property.  In addition, in each case SR signed as (or perhaps on behalf of) the Seller and a SCC official has confirmed that at all times SR dealt with the negotiations on behalf of CC Ltd (doc 227; other SCC officials in another department relayed a similar account: see docs 275-276).  Thirdly, no hard evidence has been forthcoming about the acquisition of CC Ltd by DD in early 2003.  SR has stated simply that he was aware the business was for sale and would have bought it himself if he had the funds, but he did not and his son did so as an investment (doc 294).  Certainly the company search evidence is that DD is the sole shareholder – but that may or may not tell the whole story.

50.	So far the tribunal and the parties all appear to have worked on the assumption that SR is a director if he has been formally appointed as such under the company’s constitution and, if he has not been so appointed, he is not a director.  That assumption is misplaced.  Even if the tribunal concludes that the formal (or “de jure”) position is that DD is the sole director and owner of CC Ltd, the tribunal will need to consider whether that also reflects the position in reality. The tribunal may therefore need to consider whether SR is actually either a “de facto director” or alternatively a “shadow director” of CC Ltd.  

De jure directors

51.	The first issue for the new tribunal to resolve is whether, as the claimant argues, DD is the sole director and SR is simply the company secretary and sometime employee or whether, as SCC has argued (although not before the Upper Tribunal), SR is both a formal director and company secretary as well as being sometime employee of CC Ltd. An official Companies House search (rather than a third party commercial one) should provide that answer, and a copy of CC Ltd’s articles of association, effectively its constitution, certainly will.  Presumably SR should be able to provide a copy of the articles of association.  But even if that formal document supports his contention that he was not appointed a company director, that is not the end of the matter.

De facto directors

52.	For present purposes a “de facto director” is a person who acts as though s/he is a director but was never properly appointed as such (see Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 at 183 per Millett L.J). In Secretary of State for Trade & Industry v Hollier & Others [2006] EWHC 1804 (Ch), Etherton J. summarised the principles as follows (at paragraph 81):

“(1) The touchstone is whether the defendant was part of the corporate governing structure. (2) Inherent in that touchstone is the distinction between someone who participates, or has the right to participate, in collective decision making on corporate policy and strategy and its implementation, on the one hand, and others who may advise or act on behalf of, or otherwise for the benefit of, the company, but do not participate in decision making as part of the corporate governance of the company. Accordingly, the test is not satisfied by someone who was at all times and in all material decisions subordinate to the de jure directors. (3) The defendant may have been a de facto director even though he or she did not have day to day control of the company's affairs, and even though he or she was only involved in part of the company's activities (4) The issue is to be determined objectively on the basis of all relevant facts. Whether the defendant was held out by the company, or claimed or purported, to be a director, and whether the defendant had access or the ability to obtain access to relevant company information is likely to be highly relevant and may be decisive. Factors such as a family relationship with other admitted directors and the defendant's financial interest in the company may also be relevant, sometimes supporting and sometimes negating the allegation that the defendant was a de facto director. (5) De facto directorships and shadow directorships are alternatives, although there may be cases, particularly where the defendant's influence in the corporate governance was partly concealed and partly open, where it may not be entirely straightforward which of the two descriptions is most apposite.”

Shadow directors

53.	A “shadow director” is defined by section 251(1) of the Companies Act 2006 as a person in accordance with whose directions or instructions the directors of a company are accustomed to act, excluding those who give advice in a professional capacity or by way of one off instructions. The status of a “shadow director” was further explained by Millett L.J. in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 (at 183) as follows:

“A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as a director by the company. To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2), that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act. What is needed is first, a board of directors claiming and purporting to act as such; and secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others."

54.	Thus a shadow director is someone who does not appear in the formal company documentation as a director but in effect controls the company’s resources: see also the Court of Appeal’s decision in Secretary of State for Trade and Industry v Deverell [2001] Ch 340, [2000] 2 WLR 907 and the helpful discussion by Mr Commissioner Williams (as he then was) in decision CCS/741/2002 (at paragraphs 13-16). 

55.	There has been a continuing debate over whether de facto and shadow directors are exclusive categories or can overlap (see e.g. Secretary of State for Trade and Industry v Hollier [2006] EWHC 1804 (Ch) (at paragraphs 64-81), Secretary of State for Trade & Industry v Aviss & Ors [2006] EWHC 1846 (Ch) (at paragraphs 82-90) and now Holland v Commissioners for Her Majesty’s Revenue and Customs & Another [2010] UKSC 51). Millett L.J. in Re Hydrodam (Corby) Ltd was clear that the roles did not overlap and were usually, if not always, mutually exclusive.  However, the distinctive roles now appear to have been eroded, and the better view appears to be that they are not fundamentally different nor mutually exclusive (see Lord Collins at [91], Lord Walker at [110] and Lord Clarke at [127] in Holland, a decision which on its facts was only concerned with whether the individual was a de facto director).  Indeed, a shadow director may not necessarily “lurk in the shadows” (Lord Walker at [109] in Holland).  So a person may be a de facto director in certain respects and simultaneously a shadow director for other purposes.

A further evidential issue

56.	There is one further evidential matter which may have a bearing on this question. SCC investigators were clearly suspicious of correspondence purporting to come from DD, as much of it was unsigned (docs 114, 115, 129, 322-327), albeit not all (e.g. docs 131 and 151-152).  The inference, presumably, was meant to be that the letters had not actually been written by DD.  If that is indeed SCC’s position, the tribunal may therefore need to examine the correspondence on file with some care. In this context there are some spelling peculiarities which may need to be considered.  SR and DD both spell “responsibility” in places incorrectly as “responsability” (compare e.g. docs 114, 129 and 318); they also both refer to the SCC having conducted its investigations “lethargicaly” rather than “lethargically” and to SCC statements as being “libelous” rather than “libellous” (docs 323 and 343). Similarly SR and ED refer to SCC having acted “unprofessionaly” (doc 343) while DD describes himself as having acted “professionaly” at all times (doc 393; see also doc 130).  Realistically there would appear to be only three possible explanations for these misspellings: (i) these are simply coincidences and SR and DD independently share the same spelling idiosyncrasies; (ii) one of them had sight of letters written by the other and simply repeated the same spelling mistakes; (iii) one of them alone was responsible for writing the letters purporting to be from SR and DD respectively.  The new tribunal may need to form a view on which of those explanations (or indeed any other explanation) is the more probable.

Preparations for the new hearing

57.	Thus SCC’s case, at least as it was put to the tribunal below, even though it was not expressed in quite these terms, was in effect that SR and ED were the owners and shadow directors of CC Ltd, and that DD was only nominally in charge. SCC needs to make clear to the new tribunal whether that is indeed still the local authority’s case, not least as Ms Bennett appeared to be conceding before the Upper Tribunal that SR was not a director of CC Ltd. SCC should write to the regional Tribunals Service office within one month of the date of issue of this decision making its position clear on this point.
58.		The Tribunals Service should arrange for a typed copy of the handwritten Record of Proceedings of the hearing on 18 May 2010 (docs 526-552) to be prepared for the benefit of all parties.  Although I have set aside the tribunal’s decision, the evidence given to it at the oral hearing may well be relevant.  These are civil, not criminal, proceedings and there is every reason why the previous tribunal’s Record of Proceedings and Statement of Reasons, along with the Upper Tribunal’s decision, should be before the new tribunal (see Swash v Secretary of State for the Home Department [2006] EWCA Civ 1093; [2007] 1 WLR 1264).

59.	The Regional or District Tribunal Judge responsible for relisting arrangements is strongly recommended to direct that this case be listed before a tribunal judge and an accountant member sitting together (see paragraph 39 above).

60.	The tribunal judge responsible for relisting arrangements may also wish to consider exercising the power under rule 5(3)(d) of the Tribunal Procedure (First-tier Tribunal) (Social Entitlement Chamber) Rules 2008 to require SR as company secretary, and DD as managing director, to provide relevant documents relating to CC Ltd.  These might include e.g. full accounts including the director’s (or directors’) reports and all notes for the accounting years ending in 2003, 2004, 2005 and 2006, along with a copy of movements on the loan account and dividends paid for the same period and full details of shares held.  It might also be helpful to direct the production of the transfer form executed when BG sold his shares in CC Ltd to DD.  An accountant member could doubtless advise on any more detailed directions needed.

61.		I note that DD originally declined to be interviewed by SCC (docs 114 and 129).  However, he later indicated a willingness to be available to the Tribunals Service (doc 393). SCC also asked ED’s solicitors that DD should attend the tribunal hearing (doc 397).  However, at a preliminary directions hearing, the previous tribunal made no direction to that effect (doc 441).  If the true ownership of CC Ltd is an issue, it is obviously desirable that DD should attend the re-hearing.  He can be invited by ED as her witness.  Alternatively, SCC can apply for a direction, or the tribunal may direct of its own accord, that DD attend under a witness summons (see rule 16).

Conclusion

62.	For the reasons explained above, the decision of the Sunderland First-tier Tribunal involves an error of law.  I therefore give the claimant permission to appeal and allow her appeal and set aside the tribunal’s decision under section 12(2)(a) of the Tribunals, Courts and Enforcement Act 2007.  The appeal needs to be reheard before a new tribunal (section 12(2)(b)(i)), subject to the Directions listed above.

63.	The new tribunal is faced with a stark choice.  The local authority’s case is that it had grounds for superseding earlier decisions to award HB and CTB and that the claimant is, for various reasons, not entitled to those benefits for a prolonged period, resulting in substantial overpayments of benefit amounting to more than £20,000 in total.  The claimant’s case is that the local authority has mishandled the investigation, misunderstood the role of the claimant and her partner in CC Ltd, jumped to mistaken conclusions and persecuted her.  The new tribunal will have to resolve that dispute by making careful findings of fact and applying the relevant law.

Signed on the original			Nicholas Wikeley
on 28 April 2011				Judge of the Upper Tribunal