Author
Merry and Dyer (Joint Liquidators of Safe Depot Ltd (in Liquidation) and another v Esa [2023] EWHC 2011 (Ch), [2023] All ER (D) 19 (Aug)
Introduction
Section 214 of the Insolvency Act 1986 (the Act) provides that once a director of a company concludes (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or insolvent administration, they have a duty to take every step that a reasonably diligent person would take to minimise potential loss to the company’s creditors. Section 214 also provides that if, after the company has gone into insolvent administration or liquidation, it appears to the court that a director has failed to comply with this duty, the court can order that director to pay a contribution to the company’s assets.
The lack of company books and records however can mean that it is difficult for office holders to show:
- what the company’s financial condition was on any given date and at what point insolvency was inevitable; and
- when a director did, or should, have realised the point at which a company became insolvent.
In this case the Liquidators were able to provide sufficient evidence to enable the court to make an order under section 214, in the context of a director conducting an ‘informal winding up’ by transferring out the profitable elements of the business, whilst the company continued to incur liabilities.
Background
Safe Depot Ltd (the Company) operated as a provider of storage space across three sites in the northwest of England. At the relevant times prior to its winding up, the respondent director was the sole registered director and shareholder of the Company.
On 24 July 2017 the Company was wound up on a petition presented by the landlord of one of its premises. The Joint Liquidators appointed over the Company (the Liquidators) identified that:
- The Company suffered from cash flow problems from 2014, and eventually serious financial difficulties, such that it was cash flow insolvent by April 2016 and balance sheet insolvent by September 2016. In September 2016 the Company had instructed debt advisors with a view to putting the Company into creditors voluntary liquidation, however this never materialised.
- Despite its insolvency, the director caused the Company to dispose of various assets of each of its storage sites. This included the transfer of a customer list to a competitor, and also the transfer of leases and book debts to a connected company of which the director was also sole director and shareholder (together, Transfers).
- During the period between September 2016 and the winding up order being made in July 2017 the Company’s creditors had increased considerably (according to the Liquidators, by at least £433k).
The Liquidators therefore issued proceedings against the director, on the grounds that the Transactions constituted transactions at an undervalue, or alternatively preferences, or in the further alternative, transactions defrauding creditors. The Liquidators also alleged that in causing or permitting the Transactions the director acted in breach of his duties to the Company.
The Liquidators further claimed that the director had engaged in wrongful trading for the purposes of section 214 of the Act because from September 2016 the director knew or ought to have known that there was no reasonable prospect of the Company avoiding insolvent liquidation, and yet allowed it to continue trading.
The court’s decision
The judge held that the Company was cashflow insolvent from April 2016 and in any event by August 2016, at which point it was probable that the Company would go into insolvent liquidation. This enabled the judge to make the following findings.
Antecedent transactions, breach of duty and determination of value
The judge determined that there was no evidence of any consideration having been given for the Transfers. It therefore followed that the Transfers amounted to a transaction at undervalue effected by the director in breach of his duties to creditors.
The judge considered however that the Liquidators had not been able to present evidence as to the value of certain elements of the transfers, including the customer lists, goodwill and leasehold property, and therefore those elements of the claim were dismissed. There was sufficient evidence of the value of the Company’s debt book to enable the judge to make a determination on the value of that aspect of the claim.
The judge also did not find that the evidence was quite enough to establish that the transactions were entered into for the purpose of putting assets beyond the reach off creditors amounting to a transaction defrauding creditors under section 423 of the Act.
The judge went on to find that there was no basis for granting the director relief from the consequences for his breach of his duties under section 1157 of the Companies Act 2006. The director should not be allowed to enjoy the benefits of the Transfer (in his capacity as sole director and shareholder of the recipient company) at the expense of the Company’s creditors.
Wrongful trading
The judge found that despite the director’s contentions that the Company ceased to trade in July 2016, it was demonstrable that it continued to incur liabilities. The director knew, or ought to have known, by the end of September 2016 that there was no reasonable prospect of the Company avoiding insolvent liquidation. The judge noted that the director’s conduct amounted to an ‘informal winding up’ where the profitable parts of the Company’s business were passed to the connected company.
The judge therefore held that the requirements of section 214 of the Act were made out as at 29 September 2016 and by that date the Company should have stopped incurring liabilities and been placed in an insolvency process. There was no evidence to suggest that the director took any steps at all to minimise losses to creditors. It was therefore ordered that the director would be required to make good the losses caused by the Company continuing to trade after 2016.
Conclusion
This case demonstrates that, despite the difficulties in proving wrongful trading and the rarity in which orders against directors for wrongful trading are made, the court will be prepared to make orders under section 214 of the Act when office holders are able to produce documents that show the required information in sufficient detail.
It is notable that the relevant timeframes did not include the period during which the temporary provisions of the Corporate Governance and Insolvency Act 2020 (CIGA), suspending liability for wrongful trading, applied (1 March 2020 to 30 June 2021) and that reported cases where the Court has been required to determine the personal liability of directors during time periods that include that time have so far been few and far between.
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