Varden Nuttall Ltd v Nuttall & Anor

Factual and Procedural Background

This case concerns a claim brought by (1) the administrators of Company A (in administration) against two individuals, Mr. Varden and Mr. Nuttall, in their capacities as directors of the company, and (2) by the current supervisors of numerous individual voluntary arrangements ("IVAs") against Mr. Nuttall in his former capacity as a supervisor of some of those arrangements.

Company A provided licensed insolvency practitioner services, primarily acting as nominees and supervisors under IVAs. In August 2015, a deficiency was discovered in the company's trust accounts, where funds belonging to various estates administered by Company A's insolvency practitioners were pooled. The deficiency amount was disputed, but Mr. Nuttall accepted it exceeded £1.3 million.

Further investigations uncovered alleged fraudulent activities involving Mr. Nuttall and Mr. Varden, including dishonest arrangements with third-party service providers, breaching duties owed in their respective roles as licensed insolvency practitioners and directors.

Mr. Varden did not participate in the trial, which proceeded solely against Mr. Nuttall. The trial occurred over several days in May 2018, hearing oral evidence from multiple witnesses including licensed insolvency practitioners employed by the company, the company's IT manager, finance director, and one of the joint administrators and current supervisors of the IVAs. Mr. Nuttall also gave evidence on his own behalf.

The trial was intended to address all issues, including the quantum of losses if liability was established. However, the claimants had not clearly established how sums claimed would be proved until closing submissions, where a request for directions on accounts and inquiries was made.

The claims against Mr. Nuttall were presented on a rolled-up basis, combining allegations relating to his duties as a director and as a supervisor of IVAs. The court emphasized the necessity to treat these claims separately, given the distinct duties, causation, and loss issues involved. It was common ground by trial end that breaches as a director and breaches as a supervisor must be considered independently.

It was acknowledged by the claimants’ counsel that substantial personal recovery from Mr. Nuttall was unlikely. Instead, the litigation aimed to enable recovery of losses from insurance (director's liability insurer for director claims and underwriters of Mr. Nuttall's LIP bonds for supervisor claims). The bonds would respond only upon a finding of dishonesty against Mr. Nuttall, who sought to avoid such a finding. Accordingly, claims against Mr. Nuttall as supervisor were advanced on the basis of dishonesty, while claims as director were advanced on the basis of negligence.

The court applied the legal test for dishonesty established in Ivy v Genting Casinos (UK) Limited [2017] UKSC 67, requiring subjective knowledge and an objective standard of honesty. The court also relied on Barlow Clowes International Limited v Eurotrust International Limited [2005] UKPC 37 for principles on dishonesty.

In assessing factual issues, the court tested witness evidence against contemporaneous documents, admitted facts, and inherent probabilities, following established principles from Onassis & Anor v Vergottis [1968] and Gestmin SGPS SA v Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm).

The claimants bore the burden of proving breaches and dishonesty on the balance of probabilities, with more cogent evidence required for serious allegations such as dishonesty (per Re H (Minor: Sexual abuse: Standard of proof) [1996] AC 563).

The court noted that dishonesty in one respect does not necessarily discredit all evidence from a witness, recognizing complexities in human motivation for dishonest answers.

Company A was incorporated in 2003 and operated a substantial IVA business employing licensed insolvency practitioners. It entered administration in March 2016, along with its parent and subsidiaries. At administration, the company’s LIPs were administering 2,762 insolvency cases.

The IVA scheme is governed by Part VIII of the Insolvency Act 1986, involving nominees proposing arrangements to creditors and, if accepted, supervisors administering the IVA. Supervisors must be licensed insolvency practitioners. Supervisors hold estate monies on trust and are entitled to fees, typically 15% of realisations, subject to creditor approval.

Prior to March 2013, Company A maintained separate trust accounts for each estate. After transferring banking to Barclays Bank, pooled "client" accounts (".Net accounts") were used, mixing estate funds. Internal "AMS accounts" were maintained to reflect funds attributable to each estate, but these did not reconcile with the pooled accounts, and LIPs lacked access to the pooled account information, impairing proper reconciliation and control.

Mr. Nuttall reported to his regulatory body in August 2015 a substantial discrepancy between AMS accounts and pooled accounts, amounting to a negative difference exceeding £6.6 million. The ICAEW Review Committee found no reconciliation had been performed before late August 2015, despite warnings from employees. Mr. Nuttall delegated bank reconciliations and operational control of the pooled accounts to Mr. Slater, a non-LIP employee.

The claimants alleged a shortfall of £4,865,118.18 resulting from improper payments from estate monies to the company and onward to the parent company, benefiting Mr. Nuttall, Mr. Varden, and connected parties. Mr. Nuttall accepted a shortfall of £1.3 million but denied wrongdoing in the arrangements that led to further alleged losses.

Additional allegations against Mr. Nuttall concern five key arrangements involving third-party service providers, alleged to have operated as secret commission schemes diverting estate monies to the parent company for the benefit of Mr. Nuttall and Mr. Varden:

• The handling of a substantial VAT repayment ("VAT Reclaim Issue").
• An IT and document management services arrangement with a company controlled by the IT manager ("CDTS Arrangements Issue").
• An agreement with a solicitor firm for pursuing PPI mis-selling claims ("RMSL Arrangements Issue").
• A similar agreement with Expert Insolvency Claims Limited ("EIC Arrangements Issue").
• An arrangement with a property appraisal service provider ("HLL Arrangements Issue").

The claimants allege these arrangements were dishonest breaches of duty by Mr. Nuttall as supervisor, involving secret commissions benefiting the parent company at the expense of IVA estates.

Finally, the claimants assert that certain payments were improperly treated to enable fees to be claimed where none were due, alleged as dishonest attempts to extract fees from IVA estates.

Legal Issues Presented

1. Whether Mr. Nuttall breached his duties as a director of Company A by failing to maintain proper control over trust monies, resulting in a shortfall in the pooled trust accounts.
2. Whether Mr. Nuttall dishonestly breached his duties as a supervisor of IVAs by entering into or permitting secret commission arrangements with third-party service providers that diverted estate monies to the parent company.
3. Whether the handling of a substantial VAT repayment complied with duties owed and whether any breaches were dishonest.
4. Whether accounting treatments of repayments to IVA estates constituted dishonest breaches of duty.
5. The appropriate quantum of damages or compensation recoverable from Mr. Nuttall for any breaches established.

Arguments of the Parties

Claimants' Arguments

• Mr. Nuttall negligently breached his duties as a director by failing to properly supervise pooled trust accounts, resulting in a significant shortfall.
• Mr. Nuttall dishonestly breached his duties as a supervisor by sanctioning secret commission arrangements with third-party service providers (CDTS, RMSL, EIC, HLL) that diverted estate monies to the parent company benefiting himself and Mr. Varden.
• The VAT repayment was mishandled, including deductions without creditor approval, constituting breaches of duty and dishonesty.
• Accounting errors and improper fee extractions from IVA estates further demonstrate dishonest breaches.
• The claimants seek recovery of the admitted shortfall (£1.3 million) and further sums to be determined by inquiry.

Defendant's (Mr. Nuttall's) Arguments

• Mr. Nuttall accepted the existence of a shortfall but denied knowledge or wrongdoing regarding the secret commission arrangements.
• He contended that the banking arrangements and reconciliations were complex and delegated to Mr. Slater, whom he trusted.
• He argued that the VAT repayments were handled properly according to guidance from regulators and creditor consent, and that any breaches were not dishonest.
• He maintained that payments to third-party providers were fair, reasonable, and disclosed, relying on SIP 9 and industry standards.
• Mr. Nuttall denied dishonesty, emphasizing the lack of evidence of loss caused by the accounting treatments and the absence of proof of improper fee extraction.
• He asserted that any payments to the parent company were justified by services rendered, and that the claimants had not demonstrated dishonesty.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ivy v Genting Casinos (UK) Limited [2017] UKSC 67	Test for dishonesty in civil and criminal proceedings requiring subjective knowledge and objective standard of honesty.	The court applied this test to determine whether Mr. Nuttall’s conduct as supervisor was dishonest.
Barlow Clowes International Limited v Eurotrust International Limited [2005] UKPC 37	Principles on dishonesty and knowledge relevant to fiduciary breaches.	Used to assess whether Mr. Nuttall’s knowledge of arrangements rendered his conduct dishonest.
Onassis & Anor v Vergottis [1968] 2 Lloyd's Rep 403	Guidance on evaluating witness evidence against documents and inherent probabilities.	The court used this approach to assess the credibility of witnesses and evidence relating to events years prior.
Gestmin SGPS SA v Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm)	Approach to assessing oral evidence based on contemporaneous documentation and inherent probabilities.	Applied to evaluate the reliability of witness recollections.
Re H (Minor: Sexual abuse: Standard of proof) [1996] AC 563	Standard and burden of proof in civil cases involving serious allegations requiring more cogent evidence.	Referenced to emphasize the evidential standard for proving dishonesty.
Re Barings plc (No 5) [2000] 1 BCLC 523	Duties of directors to acquaint themselves with company affairs and exercise reasonable care, skill, and diligence.	Applied to determine Mr. Nuttall’s duty as director to oversee trust monies and company operations.
Snook v London and West Riding Investments [1967] 2 QB 786	Definition of sham documentation in legal context.	Used to characterize emails exchanged regarding self-billing forms as sham documentation.
Paymax Limited v HMRC [2011] UK FTT 360	Decision on VAT treatment relevant to insolvency practitioners’ fees and VAT recovery.	Provided context for the VAT reclaim issue and regulatory guidance relied upon.

Court's Reasoning and Analysis

The court carefully distinguished between Mr. Nuttall’s duties as director and as supervisor, emphasizing that breaches and losses must be proven separately in each capacity.

Regarding the shortfall in trust accounts, the court found that Mr. Nuttall breached his duties as a director by failing to maintain adequate oversight and control over the pooled trust accounts, delegating critical reconciliation tasks to a non-LIP employee without proper supervision. The failure to reconcile the pooled accounts with internal records led to a significant shortfall. The court rejected Mr. Nuttall’s claims of ignorance and found it inherently improbable that he did not understand the banking arrangements or the existence of discrepancies.

The court accepted that a shortfall existed and that the admitted amount of £1.3 million was recoverable, with the possibility of further inquiry to determine the true quantum. The court also held that costs incurred in investigating and reconciling accounts were recoverable as damages caused by breach of duty.

On the VAT reclaim issue, the court found that the manner in which VAT repayments were credited to a single client account rather than individual estate accounts was not, in itself, a dishonest breach. The court accepted regulatory guidance and institutional creditor consents as justifying deductions of fees, including the 15% supervisor fee, even where formal creditor approval was not always obtained before deductions. The claimants had not proven that fees were improperly deducted without consent or caused loss to estates. Consequently, the court dismissed the claimants’ allegations of dishonest breach concerning VAT repayments.

Concerning the CDTS arrangements, the court found that Mr. Nuttall knowingly entered into or permitted arrangements whereby fees ostensibly payable to a third-party service provider were, in reality, diverted as secret commissions to the parent company benefiting himself and Mr. Varden. This conduct breached the transparency and fairness requirements of SIP 9 and fiduciary duties owed as a supervisor. The court rejected Mr. Nuttall’s assertions of fair value and adequate disclosure, finding the arrangements to be dishonest breaches of duty.

Similar findings applied to the RMSL and EIC arrangements, where payments made to the parent company were characterized as undisclosed referral or administrative fees, lacking proper disclosure or creditor approval. The court found these arrangements to be dishonest breaches of duty by Mr. Nuttall as supervisor and director.

The HLL arrangement was materially the same as the others, involving secret referral fees paid to the parent company. The court held Mr. Nuttall liable on the same basis as for the other arrangements.

Regarding the accounting treatment of repayments to IVA estates, the court found that alleged irregularities amounted to accounting errors or negligence, not dishonest breaches. The claimants failed to prove overcharging or improper fee extraction in this respect.

Overall, the court concluded that Mr. Nuttall acted dishonestly as a supervisor in relation to the secret commission arrangements and negligently but not dishonestly as a director concerning the shortfall in trust accounts. No dishonest breach was found regarding VAT repayments or accounting treatment of returns.

Holding and Implications

The court held that Mr. Nuttall was liable for dishonest breaches of duty as a supervisor in relation to secret commission arrangements involving third-party service providers (CDTS, RMSL, EIC, and HLL).

He was also found to be in negligent breach of duty as a director concerning his failure to properly supervise the company's trust accounts, resulting in a significant shortfall.

The court dismissed claims of dishonest breach concerning the handling of VAT repayments and accounting treatments of repayments to IVA estates.

The claimants are entitled to recover the admitted shortfall of £1.3 million, with the possibility of further inquiry to determine the full quantum of losses and damages related to the secret commission arrangements.

The court indicated that further directions would be given on how to carry the judgment into effect, including the conduct of accounting inquiries and determination of quantum.

No new legal precedent was established; the decision applied existing principles to the facts, clarifying the application of fiduciary duties and regulatory standards in the insolvency context.