Factual and Procedural Background
On 19th July 2022, Company A initiated two sets of proceedings: an application under the Insolvency Act 1986 ("IA 1986") in the Insolvency and Companies List and a Part 7 claim in the Business List. Both proceedings named as respondents or defendants: Defendant, Company B, and Company C (collectively "the Defendants"). Company A claims as the assignee of the joint administrators of Company D, which entered administration on 29th January 2021. The relevant causes of action were assigned to Company A on 26th November 2021.
The two proceedings were consolidated and supported by a single particulars of claim ("the Particulars"). The Particulars allege that Defendant, as director of Company D, caused payments to be made by Company D between 9th October 2020 and 24th December 2020 to Company B and Company C totaling substantial sums ("the Payments"). These payments are alleged to have been made in breach of Defendant's duties under the Companies Act 2006 ("CA 2006"), particularly the duty to consider creditors' interests when insolvency was known or likely.
Company D entered into a pre-pack administration shortly after a meeting with insolvency practitioner, Administrator, who confirmed insolvency. The business and assets of Company D were sold to Company C under a sale and purchase agreement ("SPA") dated 29th January 2021. The SPA provided for a consideration of £50,000 split between initial consideration and a preferential debt payment to HM Revenue and Customs ("HMRC"). Certain liabilities, including a debt to Company B and contingent liabilities such as an Employment Tribunal judgment and HMRC debt, remained with Company D.
The joint administrators discovered the payments made to Company B and Company C and other liabilities not assumed by Company C. Company A seeks equitable compensation from Defendant for breach of duty and claims against Company B and Company C for transactions at an undervalue and preferences under IA 1986. The Defendants deny the claims, asserting the payments were made for consideration and were not preferences or undervalue transactions.
Legal Issues Presented
- Whether Defendant breached duties owed to Company D under sections 170 to 179 CA 2006 by causing payments to be made while the company was insolvent or likely to become insolvent.
- Whether the payments to Company B and Company C constitute transactions at an undervalue under section 238 IA 1986.
- Whether the payments constitute preferences under section 239 IA 1986.
- Whether Company B and Company C are liable for knowing receipt of monies transferred in breach of Defendant's duties.
- Whether Defendant is entitled to relief under section 1157 CA 2006 for any breach of duty.
- Whether any recovery should be limited to the deficiency in the administration.
Arguments of the Parties
Appellant's Arguments (Company A)
- Defendant breached fiduciary duties by causing payments to connected companies while Company D was insolvent or near insolvency, prioritizing connected parties over creditors.
- The payments to Company B and Company C were transactions at an undervalue and/or preferences under IA 1986.
- Company B and Company C were connected with Company D, invoking statutory presumptions of insolvency and desire to prefer.
- Company B and Company C are also liable for knowing receipt of funds transferred in breach of duty.
- Defendant's defenses, including ratification by shareholders and relief under section 1157 CA 2006, should fail due to lack of honesty and reasonableness.
- Recovery should not be limited to the shortfall in the administration as this would prejudice creditors and the assignee.
Defendants' Arguments
- Payments to Company B were made under a long-standing arrangement for administrative and director services, with invoices issued quarterly.
- Payments to Company C were made on instructions of Defendant's nephew, acting as finance director, to repay sums paid by Company B to creditors or to meet employee salaries and contingent liabilities.
- The payments were made for consideration and were not undervalue transactions or preferences.
- The company was not insolvent at the time of payments or was able to pay its debts due to support from Company B.
- Defendant claims any breach of duty was ratified by shareholders and that he acted honestly and reasonably, entitling him to relief under section 1157 CA 2006.
- Recovery should be limited to the shortfall in the administration to avoid "circularity" where recovered sums would return to the same parties.
- Defendants contend that the claim is "circular" because Company B is the only significant creditor and any recovery beyond the shortfall would be unjust.
- Defendants challenge the accuracy and completeness of disclosed documents, alleging damage and non-disclosure hindered their defense.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| BTI v Sequana [2022] UKSC 25 |
Duty of directors to consider creditors' interests when insolvency is probable or imminent; ratification of breaches not applicable when company insolvent. |
The court applied the principle that creditor interests become paramount when insolvency is probable and that shareholders cannot ratify breaches harming creditors. |
| Regentcrest plc (in liq) v Cohen & Anor [2001] BCC 494 |
Subjective test for director's duty: director's honest belief in acting in company's interests. |
The court assessed Defendant's state of mind and found lack of honest belief in acting in the company's interests. |
| HLC Environmental Projects Ltd (in liq.) [2013] EWHC 2876 (Ch) |
Qualifications to subjective test; objective test applies when no evidence of consideration of company's best interests. |
Applied to assess whether Defendant objectively failed to consider creditors' interests. |
| Re Duomatic [1969] 2 Ch. 365 |
Ratification of director's breach by unanimous shareholder consent. |
Applied to reject ratification defense as company was insolvent at relevant time. |
| El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 |
Knowing receipt liability requires disposal in breach, beneficial receipt, and knowledge. |
Applied to hold Company B and Company C liable for knowing receipt. |
| BCCI v Akindele [2000] EWCA Civ 502 |
Knowledge requirement for knowing receipt liability. |
Applied to impute Defendant's knowledge to connected companies. |
| Byers v Saudi National Bank [2023] UKSC 51 |
Recent authority on knowing receipt and knowledge. |
Referenced to support liability of recipient companies. |
| Manolete Partners PLC v Hope [2022] EWHC 1801 (Ch) |
Limitation of recovery to shortfall in administration and principles of assignment of claims. |
The court declined to limit recovery to administration shortfall, distinguishing the case on practical and policy grounds. |
| Dawson v Great Northern and City Railway Company [1905] 1 KB 260 |
Assignee cannot recover more than assignor; principle limiting damages recoverable by assignee. |
Considered in relation to assignment of claims; court found no basis to limit recovery in this case. |
| Darlington Borough Council v Wiltshier Northern Ltd [1995] 1 WLR 68 |
Assignee cannot claim greater damages than assignor. |
Referenced in discussion of assignment principles. |
| In Re Lehman Bros International (Europe) (in administration) (No. 6) [2017] Bus LR 1475 |
Assignment of claims and limitation of damages to those available to assignor. |
Considered in relation to assignment of statutory claims. |
| Re Totalbrand Ltd (in liquidation) [2020] EWHC 2917 (Ch) |
Assignment of causes of action by liquidator; assignee entitled to proceeds without restriction to benefit company. |
Applied to reject limitation of recovery to company’s shortfall and support full recovery by assignee. |
| Re Care Community Limited [2020] EWHC 3360 (Ch) |
Concept of "circularity" in recovery where defendants are also creditors. |
Distinguished; court found no such circularity in current case. |
Court's Reasoning and Analysis
The court examined the facts and legal principles relating to directors' duties, transactions at an undervalue, preferences, and knowing receipt under IA 1986 and CA 2006. It found that Defendant, as director and controlling mind of the companies, caused payments to connected companies without proper consideration of creditors' interests, breaching duties under CA 2006. The company was insolvent or likely to become insolvent at the time of the payments, engaging the statutory presumptions under sections 238 and 239 IA 1986.
The court rejected the Defendants' contentions that the payments were made for consideration or were part of legitimate arrangements. It found no credible evidence of invoices or services supporting the payments to Company B, and no evidence of an agency relationship or debts owed justifying the payments to Company C. The court also found Defendant's evidence to be inconsistent, evasive, and lacking credibility, particularly attempts to shift responsibility to his nephew, which was unsupported by evidence.
The court accepted the evidence of the insolvency practitioner and found that significant contingent liabilities, including an Employment Tribunal judgment and HMRC debts, existed but were not disclosed prior to administration and the SPA. It rejected Defendant's claims that the VAT liability would have been reduced by input tax claims, finding no evidence to support this.
The court also rejected the ratification defense, holding that shareholders cannot ratify breaches of duty when the company is insolvent. Relief under section 1157 CA 2006 was denied as Defendant failed to prove honesty and reasonableness.
Regarding the limitation of recovery to the shortfall in administration, the court analyzed the relevant case law, including Manolete Partners PLC v Hope and others. It concluded that imposing such a limitation would prejudice creditors and the assignee and would undermine the legislative purpose of enabling recovery from wrongdoing directors. The court emphasized the public interest in pursuing misappropriation claims and maintaining corporate governance standards.
Finally, the court held that Company B and Company C are liable on the basis of transactions at an undervalue, preferences, and knowing receipt, imputing Defendant's knowledge to these companies due to his control.
Holding and Implications
The court held that:
- Defendant is liable to pay equitable compensation of £918,590 for breach of duty.
- Company B is jointly and severally liable with Defendant for £240,000 representing payments received.
- Company C is jointly and severally liable with Defendant for £678,590 representing payments received.
The court declined to limit recovery to the shortfall in the administration, ordering full repayment of the sums claimed. This decision means that the Defendants must repay the entire sums transferred improperly, without reduction to reflect the insolvency estate's deficiency. No new precedent limiting recovery in such circumstances was established; rather, the court reaffirmed the legislative intent to enable full recovery from wrongdoing parties for the benefit of creditors and assignees.
The parties were invited to agree the form of order, including interest and costs.