Factual and Procedural Background
This opinion concerns two insolvency applications made by the joint liquidators of two companies, Company A and Company B, both in compulsory insolvent liquidation following winding-up orders made in 2018 on unopposed petitions presented by the local Council due to failure to pay National Non-Domestic Rates (NDR) for trading premises at a specified location.
Company A was incorporated in December 2016 and Company B in February 2018. Both were wholly owned and controlled by Respondent 1, who managed their commercial and financial operations. Both companies operated a furniture retail business from the same premises, with no substantive distinction between their businesses. Respondent 2, the life partner of Respondent 1, was appointed as a director of Company B for a short period but had no involvement in its management, with Respondent 1 acting as a de facto director during that time.
The companies were insolvent, with creditor claims including substantial sums owed to the Council for unpaid NDR. Both companies made minimal payments towards these liabilities. There was also potential liability to HMRC due to failure to register for VAT, PAYE, or NIC, and inadequate financial records.
Respondent 1 gave an undertaking not to act as a company director for six years starting in April 2020 due to admitted failures related to record-keeping and trading to the detriment of the Council.
The liquidators brought claims for fraudulent trading under section 213 of the Insolvency Act 1986 against Respondent 1, wrongful trading under section 214 against both respondents concerning Company B, and claims of misfeasance regarding unexplained payments made by the companies to the respondents and others.
Legal Issues Presented
- Whether Respondent 1 carried on the business of the companies with intent to defraud creditors, specifically the Council and HMRC, constituting fraudulent trading under section 213 of the Insolvency Act 1986.
- Whether Respondents 1 and 2 are liable for wrongful trading under section 214 of the Insolvency Act 1986 in respect of Company B, knowing or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation and failing to take every step to minimize loss to creditors.
- Whether the respondents are liable for misfeasance due to unexplained or unjustified payments made by the companies during their respective periods of control or directorship.
- Whether Respondent 2 is entitled to relief from liability under section 1157 of the Companies Act 2006, given her limited involvement and circumstances of appointment.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| R v Grantham [1984] 1 QB 675 |
Defines "intent to defraud" requiring actual dishonesty and moral blame. |
Used to establish the requisite dishonesty for fraudulent trading under section 213. |
| Ivey v Genting Casinos (UK) Ltd t/a Crockfords Club [2017] UKSC 67 |
Clarifies the test for dishonesty as a two-stage enquiry: subjective knowledge and objective standards of ordinary decent people. |
Applied to assess Respondent 1's state of mind and dishonesty. |
| Re a Company No.00148 of 1988 [1990] BCC 526 |
Intent to defraud involuntary creditors includes continuing liabilities with no honest belief in payment. |
Supported the conclusion that failure to pay NDR with no honest belief of discharge constituted intent to defraud. |
| Re Overnight Ltd (No.2) [2010] EWHC 613 (Ch) |
Principles on quantifying contributions under section 213: compensatory, not punitive, and linked to loss caused. |
Guided the court in ordering Respondent 1 to contribute to losses including liquidation costs. |
| Re E-Tel (UK) Limited [2023] EWHC 1214 |
Confirmed compensatory nature of section 213 contributions including costs and expenses of liquidation. |
Supported ordering Respondent 1 to contribute full loss including liquidation costs. |
| Re DKG Contractors Ltd [1990] BCC 903 |
Section 214(4)(b) cannot shield inexperienced or unskilled directors from liability for wrongful trading. |
Applied to reject any excuse for Respondent 2's lack of involvement as director. |
| Re Brian D Pierson (Contractors) Ltd [1999] BCC 26 |
Directors have irreducible duties and cannot be "sleeping" directors. |
Supported finding that Respondent 2 breached duties by failing to inform herself about the company. |
| Re Ralls Builders Ltd [2016] EWHC 243 (Ch) |
Compensatory nature of section 214 contributions and the requirement of causation. |
Informed the court’s approach to quantifying losses caused by wrongful trading. |
| Brooks v Armstrong [2015] EWHC 2289 |
Principles for assessing loss and causation in wrongful trading claims under section 214. |
Applied to ensure contributions reflect losses caused by wrongful trading, with judicial discretion. |
| Burke v Morrison [2012] BCC 315 (Ch) |
Directors bear evidential burden to explain payments made from company assets. |
Used to hold Respondent 1 liable for unexplained payments from company accounts. |
| GHLM Trading Ltd v Maroo [2012] 2 BCLC 369 |
Directors are fiduciaries and must account for company property; unexplained payments may infer breach. |
Supported findings of misfeasance against both respondents for unexplained payments. |
| Re Mumtaz Properties Ltd [2011] EWCA Civ 610 |
Absence of contemporaneous documentation can lead to adverse inferences against directors. |
Applied to infer improper use of company assets due to lack of proper records. |
| Lexi Holdings Plc (In Administration) v Luqman [2007] EWHC 2652 |
Complete inactivity by a director is unreasonable and precludes relief under section 1157 of CA 2006. |
Rejected Respondent 2’s claim for relief under section 1157 due to abdication of duties. |
Court's Reasoning and Analysis
The court conducted a detailed factual and legal analysis applying the statutory provisions of the Insolvency Act 1986 and Companies Act 2006 to the evidence presented.
It found that Respondent 1 had extensive prior experience as a company director, including involvement in multiple insolvent companies, and deliberately used a series of companies to continue the same furniture retail business while evading payment of NDR liabilities to the Council. This conduct amounted to fraudulent trading under section 213 because it involved actual dishonesty, real moral blame, and an intent to defraud creditors by incurring liabilities with no honest belief in their discharge.
The court rejected Respondent 1’s assertions that he believed in the availability of discounts, reliefs, or appeals that would reduce the companies’ NDR liabilities. Documentary evidence contradicted these claims, showing no such advice or appeals had been properly made or pursued. The court concluded that the companies were insolvent throughout their trading, incapable of meeting liabilities, and that Respondent 1 knowingly continued to trade to the detriment of creditors.
Regarding wrongful trading under section 214, the court held both respondents liable for Company B. Respondent 1 knew or ought to have known from 31 July 2018 that insolvency was inevitable and failed to take every step to minimize loss to creditors. Respondent 2, despite being appointed director, took no active role, failed to inform herself of the company’s affairs, and thus was liable for wrongful trading during her tenure.
The court further found misfeasance in respect of unexplained payments made from the companies’ bank accounts to Respondent 1 and Respondent 2, or for their benefit. Respondent 1 failed to provide credible evidence that these payments were for proper company purposes. Respondent 2 abdicated her fiduciary duties and was responsible for payments during her directorship period.
The defense under section 1157 of the Companies Act 2006 was rejected for Respondent 2 because her complete inactivity was unreasonable and incompatible with relief.
The court emphasized the importance of documentary evidence over unreliable oral testimony, noting Respondent 1’s evidence was inconsistent, evasive, and contradicted by documents. The court drew adverse inferences from the absence of proper financial records.
In remedy, the court applied established principles that contributions under sections 213 and 214 are compensatory, not punitive, and should be sufficient to cover the losses to creditors including liquidation costs, with appropriate allocation based on responsibility. Further submissions were invited to determine the exact amounts or mechanisms for calculation.
Holding and Implications
The court made the following holdings:
- The fraudulent trading claim against Respondent 1 under section 213 of the Insolvency Act 1986 is upheld. Respondent 1 is ordered to contribute to the assets of both companies sums sufficient to cover the total losses, including creditor claims and liquidation costs.
- The wrongful trading claim under section 214 is upheld against both Respondents in respect of Company B. Respondent 1 must contribute an amount equal to the increase in net deficiency from 31 July 2018 to liquidation on 19 December 2018. Respondent 2 must contribute an amount equal to the increase in net deficiency from 31 July 2018 to her resignation on 19 October 2018.
- The misfeasance claims succeed against both Respondents. Respondent 1 must compensate the companies for unexplained payments; Respondent 2 must compensate Company B for payments made during her directorship.
- The application for relief under section 1157 of the Companies Act 2006 by Respondent 2 is refused.
The decision directly affects the parties by imposing financial liabilities on the respondents to compensate creditors and uphold statutory duties. No broader precedent is established beyond the application of existing insolvency and company law principles to the facts of this case.