Company director wins Upper Tribunal appeal over imposition of financial penalty for HMO regulation breaches

The appellant, Mr Khuja, was not the landlord of the property concerned (three flats in Banbury), but he was the sole director of the corporate landlord, OX1 Limited.

The FTT had confirmed the penalty imposed on him on the basis that he consented to the commission of the offence by the company.

Mr Khuja appealed on the basis that:

1. The conditions for a director's liability in section 251 of the Housing Act 2004 [‘Offences by body corporate’] had not been met; and
2. In imposing a penalty both on him and on OX1 Limited the FTT failed to consider the need to avoid double-counting.

The appeal was solely against the penalty imposed on Mr Khuja; permission to appeal against the penalty imposed upon the company on other grounds was refused.

Upper Tribunal Judge Elizabeth Cooke highlighted how there is no authoritative case law about section 251, which reads:

"251. Offences by body corporate

(1)  Where an offence under this Act committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of–

(a)  a director, manager, secretary or other similar officer of the body corporate, or

(b)  a person purporting to act in such a capacity,

 he as well as the body corporate commits the offence and is liable to be proceeded against and punished accordingly."

The judge said: “A number of observations can be made about the text of the section. First, it is perfectly clear that the liability of a director or other officer is not established by his position alone; specifically, liability does not follow simply from being the director. Second, the section requires proof that the offence was committed with the director's ‘consent or connivance’ or was attributable to his neglect, and we must expect the three terms ‘consent’, ‘connivance’ and ‘neglect’ to mean different things.”

Judge Cooke said she took from the Court of Appeal decision in Attorney-General's Reference No 1 of 1995 [1996] 1 WLR 970 that for consent to be proved, directly or by inference, under section 251 of the Housing Act 2004 and similar provisions “it must be shown that the director knew of the facts that constitute the offence.

“An inference of consent must be an inference of actual knowledge. A finding that the director ought to have known what was happening, or that compliance with the housing regulations was within his area of responsibility, may indicate neglect (depending on the particular facts) but is not a finding of consent.”

The judge said she thought it was uncontroversial that section 251 is an anti-avoidance provision; “it may be impossible to pursue a company because it has gone into liquidation, or difficult to do so because of confusion about company structure (as is the case in the Salford appeal).”

She added, however, that there was nothing to prevent the imposition of a penalty both upon the body corporate and upon one – or more – of the persons described in section 251.

“If that happens then an obvious question arises about the level of penalty to be imposed on two or more parties and the need to avoid double-counting,” she said, pointing to the Court of Appeal decision in Sutton v Norwich City Council [2021] EWCA Civ 20 (at paras 38-40) on double punishment.

In terms of the factual background of the present case, the company was the freeholder of a property comprising three flats above commercial premises. Mr Khuja was the sole director. The company let the flats to tenants, and used a managing agent to look after them.

The council inspected the property on three days in August 2023 and contacted the agent to say urgent work was required. Immediate measures were taken and more work was done subsequently.

In October 2023, a notice of intention to issue a financial penalty was served by the council on both the company and Mr Khuja. This alleged failure to comply with the Licensing and Management of Houses in Multiple Occupation (Additional Provisions) (England) Regulations 2007. Eight breaches were listed in the notice.

A final notice issued in July 2024 imposed a penalty of £24,975 each on Mr Khuja and the company.

Mr Khuja and the company appealed.

The FTT said it was satisfied that an offence had been committed because it found that the property was a HMO and the various breaches of the regulations had taken place. It did, however, reduce the penalty imposed on Mr Khuja and the company to £11,000 each.

On the first ground advanced by Mr Khuja in the Upper Tribunal, Judge Cooke highlighted how all that the FTT said about the basis of his liability was the final sentence of paragraph 113 of its ruling, which read:

“As Mr Khuja is the sole director and shareholder of OX1 Limited and the directing mind of the company's operations, we find that its breaches of the relevant regulations were with his consent.”

The Upper Tribunal judge said: “There was no analysis of section 251; no consideration of whether Mr Khuja knew anything about the defects in the property before 8 August 2023 (and indeed so far as I can tell there was no evidence that he knew anything before that date), and no consideration as to whether the offence was caused by his neglect.

“He was found to have consented to the breaches of the regulations simply by virtue of his being its sole director and its ‘controlling mind’. There is no finding of fact, whether from direct evidence or by inference, that he actually knew about the breaches of the regulations before 7 August 2023.

“He certainly knew after that, but since from then on he was working with the respondent to remedy the breaches it is impossible to infer from that knowledge that the breaches were committed with his consent.”

Counsel for Cherwell argued that the crucial point was that Mr Khuja was the "controlling mind", and that all the decisions of the company were taken with his consent.

“I am not sure that that goes any further than the fact that he was sole director; but in any event [counsel] cannot point to any decisions of the company, since all the breaches of the regulations were omissions rather than actions,” Judge Cooke said.

“At the very least, the FTT's explanation for Mr Khuja's liability is unexplained. It also appears to be unsustainable on the evidence of which I have been made aware. It is set aside.”

Noting that ground 2 would have a bearing on whether the matter should be remitted to the FTT, the judge said: “I can deal with this equally quickly; the FTT was not made aware of the decision in Sutton v Norwich City Council and clearly did not direct its mind at all to the problem of double-counting, despite mentioning the potential for it. It did so in the context of Mr Khuja's liability, and gave it no further consideration in the context of quantum.

“It would in fact have merited careful consideration for the reasons explained by the Court of Appeal in Sutton; Mr Khuja is the sole director and shareholder of the company and the penalty affects him, as he put it, pound for pound.

“Accordingly, even if ground 1 had failed, ground 2 would have succeeded and the penalty against Mr Khuja (since there is no challenge now to the penalty imposed on the company) would be set aside.”

The Upper Tribunal judge decided not to remit the matter “because it would be possibly futile, and certainly disproportionate and unfair, to do so”.

She said, on the evidence as it stood, it would be difficult to prove neglect rather than consent.