top of page

5. Claims by liquidators

Unlawful dividends: Companies Act 2006

 

Distributions to be made only out of profits available for the purpose

 

"(1)     A company may only make a distribution out of profits available for the purpose.

(2)     A company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)     Subsection (2) has effect subject to sections 832, 833A and 835 (investment companies and Solvency insurance companies)." (CA 2006, s.830)

Distribution in excess of reserves only unlawful to the extent of the excess

"[50] In the result, having considered the authorities to which my attention has been drawn I remain of the view to which I came on my initial consideration of the relevant statutory provisions, namely that the effect in law of making a distribution in excess of the amount of available distributable profits is that the distribution is unlawful to the extent of the deficiency in available profits, not in its entirety. The jurisdiction of the court is thus limited to making orders in respect of the part of the distribution which is unlawful." (Re Marini Ltd [2003] EWHC 334 (Ch), HHJ Richard Seymour QC)

Query whether the same can apply to distributions in specie: Taxation of Companies and Company Reconstructions E1.3.4.

Must be justified by relevant accounts

"(1)     Whether a distribution may be made by a company without contravening this Part is determined by reference to the following items as stated in the relevant accounts—

(a)     profits, losses, assets and liabilities;

(b)     provisions of the following kinds—

(i)     where the relevant accounts are Companies Act accounts, provisions of a kind specified for the purposes of this subsection by regulations under section 396;

(ii)     where the relevant accounts are IAS accounts, provisions of any kind;

(c)     share capital and reserves (including undistributable reserves)." (CA 2006, s.836(1))

 

Last annual accounts, interim accounts or initial accounts

"(2)     The relevant accounts are the company's last annual accounts, except that—

(a)     where the distribution would be found to contravene this Part by reference to the company's last annual accounts, it may be justified by reference to interim accounts, and

(b)     where the distribution is proposed to be declared during the company's first accounting reference period, or before any accounts have been circulated in respect of that period, it may be justified by reference to initial accounts.

(3)     The requirements of—

section 837 (as regards the company's last annual accounts),

section 838 (as regards interim accounts), and

section 839 (as regards initial accounts),

must be complied with, as and where applicable.

(4)     If any applicable requirement of those sections is not complied with, the accounts may not be relied on for the purposes of this Part and the distribution is accordingly treated as contravening this Part." (CA 2006, s.836(2) - (4))

Identifying distributions: not every transfer of value is a distribution

"[24] The essential issue then, is how the sale by PPC of its shareholding in YMS is to be characterised. That is how it was put by Sir Owen Dixon CJ in Davis Investments Pty Ltd v Commissioner of Stamp Duties (New South Wales) (1958) 100 CLR 392, 406 (a case about a company reorganisation effected at book value in which the High Court of Australia were divided on what was ultimately an issue of construction on a stamp duty statute). The same expression was used by Buxton LJ in MacPherson v European Strategic Bureau Ltd [2000] 2 BCLC 683, para 59. The deputy judge did not ask himself (or answer) that precise question. But he did (at paras 39-41) roundly reject the submission made on behalf of PPC that there is an unlawful return of capital "whenever the company has entered into a transaction with a shareholder which results in a transfer of value not covered by distributable profits, and regardless of the purpose of the transaction". A relentlessly objective rule of that sort would be oppressive and unworkable. It would tend to cast doubt on any transaction between a company and a shareholder, even if negotiated at arm's length and in perfect good faith, whenever the company proved, with hindsight, to have got significantly the worse of the transaction.

...

[27] If there were a stark choice between a subjective and an objective approach, the least unsatisfactory choice would be to opt for the latter. But in cases of this sort the court's real task is to inquire into the true purpose and substance of the impugned transaction. That calls for an investigation of all the relevant facts, which sometimes include the state of mind of the human beings who are orchestrating the corporate activity.
[28] Sometimes their states of mind are totally irrelevant. A distribution described as a dividend but actually paid out of capital is unlawful, however technical the error and however well-meaning the directors who paid it. The same is true of a payment which is on analysis the equivalent of a dividend, such as the unusual cases (mentioned by Dr Micheler) of In re Walters' Deed of Guarantee [1933] Ch 321 (claim by guarantor of preference dividends) and Barclays Bank plc v British & Commonwealth Holdings plc [1996] 1 BCLC 1 (claim for damages for contractual breach of scheme for redemption of shares). Where there is a challenge to the propriety of a director's remuneration the test is objective (Halt Garage), but probably subject in practice to what has been called, in a recent Scottish case, a "margin of appreciation": Clydebank Football Club Ltd v Steedman 2002 SLT 109, para 76 (discussed further below). If a controlling shareholder simply treats a company as his own property, as the domineering master-builder did in In re George Newman & Co Ltd [1895] 1 Ch 674, his state of mind (and that of his fellow-directors) is irrelevant. It does not matter whether they were consciously in breach of duty, or just woefully ignorant of their duties. What they do is enough by itself to establish the unlawful character of the transaction.
[29] The participants' subjective intentions are however sometimes relevant, and a distribution disguised as an arm's length commercial transaction is the paradigm example. If a company sells to a shareholder at a low value assets which are difficult to value precisely, but which are potentially very valuable, the transaction may call for close scrutiny, and the company's financial position, and the actual motives and intentions of the directors, will be highly relevant. There may be questions to be asked as to whether the company was under financial pressure compelling it to sell at an inopportune time, as to what advice was taken, how the market was tested, and how the terms of the deal were negotiated. If the conclusion is that it was a genuine arm's length transaction then it will stand, even if it may, with hindsight, appear to have been a bad bargain. If it was an improper attempt to extract value by the pretence of an arm's length sale, it will be held unlawful. But either conclusion will depend on a realistic assessment of all the relevant facts, not simply a retrospective valuation exercise in isolation from all other inquiries.
[30] Pretence is often a badge of a bad conscience. Any attempt to dress up a transaction as something different from what it is is likely to provoke suspicion. In Aveling Barford there were suspicious factors, such as Dr Lee's surprising evidence that he was ignorant of the Humberts' valuation, and the dubious authenticity of the "overage" document. But in the end the disparity between the valuations and the sale price of the land was sufficient, by itself, to satisfy Hoffmann J that the transaction could not stand." (Progress Property Company Ltd v. Moorgarth Group Ltd [2010] UKSC 55, Lord Walker)

 

"[76] It is also clear, in my view, that a mere arithmetical difference between the consideration given for the asset or assets and the figure or figures at which it or they are in subsequent proceedings valued retrospectively will not of itself mean that there has been a distribution. If the transaction is genuinely conceived of and effected as an exchange for value and the difference ultimately found does not reflect a payment 'manifestly beyond any possible justifiable reward for that in respect of which allegedly it is paid', does not give rise to an exchange 'at a gross undervalue' and is not otherwise unreasonably large, there will not to any extent be a 'dressed up return of capital'. In assessing the adequacy of the consideration, a margin of appreciation may properly be allowed.

...

[79] It is plain, in my view, that directors are liable only if it is established that in effecting the unlawful distribution they were in breach of their fiduciary duties (or possibly of contractual obligations, though that does not arise in the present case). Whether or not they were so in breach will involve consideration not only of whether or not the directors knew at the time that what they were doing was unlawful but also of their state of knowledge at that time of the material facts. In reviewing the then authorities Vaughan Williams J in Re Kingston Cotton Mill Co (No 2) said at [1896] 1 Ch, p347: 'In no one of [the cases cited] can I find that directors were held liable unless the payments were made with actual knowledge that the funds of the company were being misappropriated or with knowledge of the facts that established the misappropriation.' Although this case went to the Court of Appeal, this aspect of the decision was not quarrelled with (see [1896] 2 Ch 279)" (Clydebank Football Club Ltd v Steedman 2002 SLT 109, Lord Hamilton; approved in Progress Property at §32)

Unlawful dividends

Unlawful dividends: common law

 

Distributions must not be made out of capital

 

"[26] Before the Companies Act 1980, the legality of dividends was determined by common law rules. Many of those rules were superseded by the statutory provisions but section 851(1) of the Companies Act 2006, re-enacting earlier provisions to the same effect, provides that "the provisions of this Part are without prejudice to any rule of law restricting the sums out of which, or the cases in which, a distribution may be made". The most important of these rules of law is that a distribution to shareholders must not be made out of capital, established by the decision of the House of Lords in Trevor v Whitworth (1887) 12 App Cas 409. The continued relevance and application of this rule was demonstrated by the decision of Hoffmann J in Aveling Barford Ltd v Perion Ltd [1989] BCLC 626. In the present case, the claimants accepted that their pleaded claim for breach of common law rules added nothing to their claims that the dividends contravened Part 23." (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

Unlawful dividends: common law

Reclassification of payments to EBT as unlawful dividends

 

"[6] In 2017 the Supreme Court (RFC 2012 plc (in liquidation) (formerly Rangers Football Club Plc) v Advocate General for Scotland [2017] 1 WLR 2767) found that money paid into an employment benefit trust was intended to operate to give each employee access to the use of the money paid into the principal trust. The money was to be treated as employee's remuneration for employment, and subject to tax. The employer company should have made the necessary deductions to pay the Revenue. In this case the Joint Liquidators ask the Court to look at the position from the point of view of the Company. The distributable reserves were stripped out and paid to employment benefit trusts (and later an interest in possession fund) for the purpose of making tax free payments to the shareholders who were also employees. The payments received by the Respondents and Mr Flanagan were calculated by dividing the capital paid out of the Company, to match the number of shares each of them held.
[7] In my judgment although the payments of the Company's capital were made to the Respondents via a trust or interest in possession fund, they were in substance distributions. Due to a failure to comply with the statutory code they constitute unlawful distributions and are void. Later payments totalling £70,000 made to the shareholders in 2013 also constituted unlawful distributions. One shareholder and employee, Mr Flanagan, received £30,000 in expenses in March 2013. Such payments were made at a time when the Company was insolvent, and in breach of directors' duties." (Re Implement Consulting Limited [2019] EWHC 2855 (Ch), ICCJ Briggs)

Reclassification of payments to EBT as unlawful dividends

Consequences of unlawful distribution

 

Recipient liable to repay if reasonable grounds to believe unlawful

"(1)     This section applies where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part.

(2)     If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable—

(a)     to repay it (or that part of it, as the case may be) to the company, or

(b)     in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution (or part) at that time.

(3)     This is without prejudice to any obligation imposed apart from this section on a member of a company to repay a distribution unlawfully made to him.

(4)     This section does not apply in relation to—

(a)     financial assistance given by a company in contravention of section 678 or 679, or

(b)     any payment made by a company in respect of the redemption or purchase by the company of shares in itself." (CA 2006, s.847)

Knowledge of the facts that make the distribution unlawful required (not knowledge of the law)

"[50]...So, in construing section 277(1) of the 1985 Act, the meaning to be given to the words "he knows . . . that it is so made" is that it is enough that the member has the relevant knowledge of facts which, if they exist, lead to the conclusion that the distribution does contravene the statutory provisions; it is not necessary that the member has the relevant knowledge of the legal rules and the consequences of those rules when properly applied to the facts." (Re It's A Wrap (UK) Ltd [2006] EWCA Civ 544)

Constructive trust if recipient had notice

" The payment of the £60,000 dividend to Marketing was an ultra vires act on the part of the company. Marketing when it received the money had notice of the facts and was a volunteer in the sense that it did not give valuable consideration for the money. Marketing accordingly held the £60,000 as a constructive trustee for the company: see Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation [1986] Ch. 246, per Slade L.J., at p. 298, and per Browne-Wilkinson L.J., at p. 303. That situation did not change before the company went into liquidation." ( Precision Dipping Ltd v. Precision Dippings Marketing Ltd [1986] Ch 447, Dillon LJ)

Query whether liability is strict

Strict

"[47] It is not necessary to express a definite view on this issue in this case. As counsel for HMRC pointed out in their written case, there has been no challenge to the finding by the deputy judge that as from 18 August 2004 all the dividends were unlawful, and it is accepted that the relief available by way of a defence under section 727 CA 1985 would have been available if Mr Holland could show that he acted reasonably. So the issue is academic here, and it was no doubt for this reason that it was not thought to be necessary to develop the point fully in oral argument. But the better view seems to me that in cases such as this, where it is accepted that the payment of dividends was unlawful, a director who causes their payment is strictly liable, subject of course to his right to claim relief under the statute." (HMRC v. Holland [2010] UKSC 51, Lord Hope)

Fault based

[139] On the basis of the above cases, by the end of the 19th Century I consider that the law was established to be as follows. First, directors, although not trustees, were to be treated as if they were trustees in relation to the company's funds. Second, if they knew the facts which constituted an unlawful dividend, then they would be liable as if for breach of trust irrespective of whether they knew that the dividend was unlawful. Third, however, if they were unaware of the facts which rendered the dividend unlawful then provided they had taken reasonable care to secure the preparation of accounts so as to establish the availability of sufficient profits to render the dividend lawful, they would not be personally liable if it turned out that there were in fact insufficient profits for that purpose. Fourth, they were entitled to rely in this respect upon the opinion of others, in particular auditors, as to the accuracy of statements appearing in the company's accounts. Fifth, nothing in the authorities cited as the leading authorities for the strict-liability view (Flitcroft's Case, Lands Allotment and Re Sharpe) undermines that conclusion.

...

[157] For the above reasons, I conclude that the law on the issue whether liability is strict or fault-based remains the same as it was at the end of the 19th Century (as summarised in paragraph 139 above).
[158] I consider this to be consistent with first principles, so far as it applies to the payment of unlawful dividends. The question whether there are sufficient distributable profits may turn on fine questions of accounting judgment. Directors are not required to be accountants and the comments of Lord Davey and Lord Halsbury LC in Dovey v Cory as to directors being entitled to rely on the judgment of others whom they appoint to carry out specialist financial roles within the company are as pertinent today as when they were made in 1901." (Burnden Holdings (UK) Ltd v. Hunt [2019] EWHC 1566 (Ch), Zacaroli J)
 

Consequences of unlawful distribution: repay if reasonable grounds to believe unlawful

Breach of directors duty

 

Duty to act within powers

 

"A director of a company must—

(a)     act in accordance with the company's constitution, and

(b)     only exercise powers for the purposes for which they are conferred." (CA 2006, s.171)

Improper purpose must be primary purpose

"[233]...To ground a claim under section 171, it was necessary for BTI to establish either that an improper purpose was the sole or dominant or primary purpose (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821), or, arguably, that the purpose was causative in the sense that, without it, the power would not have been exercised (Eclairs Group Ltd v JKX Oil and Gas plc [2015] UKSC 71, [2015] Bus LR 1395, per Lord Sumption and Lord Hodge)." (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

Director using powers to influence outcome of general meeting

"[16] A company director differs from an express trustee in having no title to the company's assets. But he is unquestionably a fiduciary and has always been treated as a trustee for the company of his powers. Their exercise is limited to the purpose for which they were conferred. One of the commonest applications of the principle in company law is to prevent the use of the directors' powers for the purpose of influencing the outcome of a general meeting. This is not only an abuse of a power for a collateral purpose. It also offends the constitutional distribution of powers between the different organs of the company, because it involves the use of the board's powers to control or influence a decision which the company's constitution assigns to the general body of shareholders." (Eclairs Group Ltd v JKX Oil and Gas plc [2015] UKSC 71)

Duty to promote the success of the company

 

"(1)     A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a)     the likely consequences of any decision in the long term,

(b)     the interests of the company's employees,

(c)     the need to foster the company's business relationships with suppliers, customers and others,

(d)     the impact of the company's operations on the community and the environment,

(e)     the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)     the need to act fairly as between members of the company.

(2)     Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes." (CA 2006, s.172(1) - (2))

Subjective test unless duty not considered 

"[26] Ms Hilliard and Daniel Lewis, who appears for Mr Bibring, have also each cited the convenient summary of law in Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), [2014] BCC 337 emphasising that the duty now contained in section 172 is primarily a subjective duty, but that where there is no evidence that a director actually considered matters the test becomes objective, "namely whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company": [92]." (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)

Contributions to EBT tax scheme not dishonest

"[164] The Liquidators have not established dishonesty. The written evidence establishes that Mr Bernard decided the Company should adopt the Employee Scheme and make the payments to the Trust without deduction on the basis that he understood the Company's statutory duties and liability for PAYE and/or NIC was avoided. He understood this to be because the Employee Scheme did not produce the result of payment of earnings or emoluments.

...

[177] It is also argued that the loans evidence dishonesty but they do not. They were an artificial element but not in the sense that loans were not made. Loans were requested and granted. The fact that they might be rolled over until death following the employee borrower's request ultimately to achieve inheritance tax benefits does not alter that. Their purpose was to give practical effect to the Employee Scheme but that does not make Mr Bernard's intentions dishonest. It is unnecessary, therefore, for Mr Bernard to rely upon the fact that the Company had no part in that stage of the process.

...

[191] Whilst the general guidance is that independent advice should normally be obtained, the guidance is not absolute and does not determine the subjective, good faith test. In the context of the backdrop evidence and the advice in fact received from Baxendale Walker and later Baxendale Walker MDP, it cannot be concluded that Mr Bernard acted in bad faith because no reasonable director could have concluded that the Employee Scheme and the failure to claim the amounts due in respect of PAYE and NIC from the Parent Company would promote the Company's success." (Re Vining Sparks UK Ltd  [2019] EWHC 2885 (Ch), ICC Judge Jones)

Duty to exercise independent judgment

 

"(1)     A director of a company must exercise independent judgment.

(2)     This duty is not infringed by his acting—

(a)     in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or

(b)     in a way authorised by the company's constitution." (CA 2006, s.173)

Duty to exercise reasonable care, skill and diligence

 

"(1)     A director of a company must exercise reasonable care, skill and diligence.

(2)     This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a)     the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b)     the general knowledge, skill and experience that the director has." (CA 2006, s.174)

Knowledge and consent of only shareholder

"[235] An alternative claim under section 174 was also bound to fail, because even if there had been a breach, which I find impossible to discern given the directors' unchallenged compliance with Part 23 and the accounting requirements as to provisions against liabilities, the May dividend was paid with the knowledge and consent of Sequana as the only shareholder." (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

Duty to avoid conflicts of interest

 

"(1)     A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

(2)     This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

(3)     This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.

(4)     This duty is not infringed—

(a)     if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or

(b)     if the matter has been authorised by the directors.

(5)     Authorisation may be given by the directors—

(a)     where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or

(b)     where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.

(6)     The authorisation is effective only if—

(a)     any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and

(b)     the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.

(7)     Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties." (CA 2006, s.175)

Duty not to accept benefits from third parties

 

"(1)     A director of a company must not accept a benefit from a third party conferred by reason of—

(a)     his being a director, or

(b)     his doing (or not doing) anything as director.

(2)     A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.

(3)     Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.

(4)     This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

(5)     Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties." (CA 2006, s.176)

Duty to declare interest in proposed transaction or arrangement

 

"(1)     If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.

(2)     The declaration may (but need not) be made—

(a)     at a meeting of the directors, or

(b)     by notice to the directors in accordance with—

(i)     section 184 (notice in writing), or

(ii)     section 185 (general notice).

(3)     If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made.

(4)     Any declaration required by this section must be made before the company enters into the transaction or arrangement.

(5)     This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question.

For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware.

(6)     A director need not declare an interest—

(a)     if it cannot reasonably be regarded as likely to give rise to a conflict of interest;

(b)     if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or

(c)     if, or to the extent that, it concerns terms of his service contract that have been or are to be considered—

(i)     by a meeting of the directors, or

(ii)     by a committee of the directors appointed for the purpose under the company's constitution." (CA 2006, s.177)

Breach of directors duty

Burden of proof on director to show lawful dealing with company property

 

"[323] As I understand it, Mr Monks' case on this point is that the use of GBR's funds in this way was justified – indeed required – because it was discharging GBR's own regulatory liability. But to my mind it is unclear that the regulatory liability attaching to the Ashford Site was GBR's liability – after all, it had been in operation only for several weeks, and the relevant WML was held by another company, GAL. Mr Monks is the fiduciary, and the burden rests on him to show that the expenditure was justified. In my judgment he has not done so, even on the basis that the challenged invoices are genuine, or at any rate has not done so sufficiently clearly to avoid a finding of breach of duty in respect of it." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

"[62] It was common ground that the Respondents were each under a duty to act bona fide in the best interests of the Company: Section 172 CA 2006. The Respondents' duties under Section 172 fall to be interpreted and applied in the same way as the previously applicable common law rules and equitable principles: s.170(4) CA 2006. The duty is fiduciary in character.

 [63] The fiduciary character of this obligation impacts upon the evidential burden of proof. As Mr Curl rightly submitted, a fiduciary is obliged to account for his dealings with trust property. In the context of payments to directors (or to parties connected to them), once a liquidator has established that a director is the beneficiary of a transaction, the evidential burden shifts to the director and it is for the director to show that the payment was proper." (Ball v. Hughes [2017] EWHC 3228 (Ch), Registrar Barber)

Burden of proof on director to show lawful dealing with company property

De facto directors

 

"[39]...All one can say, as a generality, is that all the relevant factors must be taken into account. But it is possible to obtain some guidance by looking at the purpose of the section. As Millett J said in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, 182, the liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. As he put it, those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities of the office. So one must look at what the person actually did to see whether he assumed those responsibilities in relation to the subject company." (HMRC v. Holland [2010] UKSC 51)

Director of corporate director not de facto director of underlying company

"[40] The problem that is presented by this case, however, is that Mr Holland was doing no more than discharging his duties as the director of the corporate director of the composite companies. Everything that he did was done under that umbrella. Mr Green QC for HMRC was unable to point to anything that he did which could not be said to have been done by him in his capacity as a director of the corporate director...

...

[42]...One can properly say, as Lord Macnaghten did about the company and its subscribers at p 51, that a company is at law a different person from its directors and that it is the intention of the enactment that this distinction should be recognised. I do not think that one can overcome this distinction by pointing, as Mr Green seeks to do, simply to the quality of the acts done by the director and asking whether he was the guiding spirit of the subject company or had a real influence over its affairs. As a test, that would create far too much uncertainty. Those who act as directors of a corporate director are entitled to know what it is that they can and cannot do when they are procuring acts by the corporate director. That is as true of a case such as this, where the affairs of the corporate director are effectively in the hands of one individual, as it is where there is a board comprised of several directors who always act collectively. As Lord Collins says (see paras 53 and 95, below), the question is one of law and it is a question of principle. I think that the guiding principle can be expressed in this way, unless and until Parliament provides otherwise. So long as the relevant acts are done by the individual entirely within the ambit of the discharge of his duties and responsibilities as a director of the corporate director, it is to that capacity that his acts must be attributed.
[43] It is, of course, right to bear in mind the interests of the creditors. Their protection lies in the remedies that are available for breach of the fiduciary duty that rests on the shoulder of every director. But the essential point, which Millett J was at pains to stress in Hydrodam, is that for a creditor of the subject company to obtain those remedies the individual must be shown to have been a director, not just of the corporate director but of the subject company too. I agree with Rimer LJ that, on the facts accepted by the deputy judge, it has not been shown that Mr Holland was acting as de facto director of the composite companies so as to make him responsible for the misuse of their assets. I also agree with the reasons that Lord Collins gives for reaching this conclusion." (HMRC v. Holland [2010] UKSC 51)

De facto directors

Duty to consider the interests of creditors

(3)     The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company." (CA 2006, s.172(3))

Only triggered if the company is or is likely to become insolvent 

"[203] I would prefer a formulation in which either imminent insolvency (ie an insolvency which directors know or ought to know is just round the corner and going to happen) or the probability of an insolvent liquidation (or administration) about which the directors know or ought to know, are sufficient triggers for the engagement of the creditor duty. It will not be in every or even most cases when directors know or ought to know of a probability of an insolvent liquidation, earlier than when the company is already insolvent. But that additional probability-based trigger may be needed in cases where the probabilities about what lies at the end of the tunnel are there for directors to see even before the tunnel of insolvency is entered." (BTI 2014 LLC v. Sequana SA [2022] UKSC 25, Lord Briggs and Lord Kitchin)

"[231] Further, it appears to me that in order to make sense of the power of the court to impose personal liability for wrongful trading in section 214 it is implicit that there is a point in time at or near the onset of insolvency at which directors are required to consider and in certain circumstances give priority to the interests of the company’s creditors when they are in conflict with the interests of the company’s shareholders. It is consistent with section 214 that where directors know or ought to know that the company has become irretrievably insolvent, they come under a duty to the company to give priority to the interests of its creditors as a body." (BTI 2014 LLC v. Sequana SA [2022] UKSC 25, Lord Hodge)

Weight to be given to creditors' position depends on financial position of company

"[81] Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors’ fiduciary duty to act in the company’s interests has to reflect the fact that both the shareholders and the creditors have an interest in the company’s affairs. In those circumstances, the directors should have regard to the interests of the company’s general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary. Consistently with what was said in Kinsela at p 733 (para 33 above), and with the reasoning in paras 48-59 above, it can I think be said as a general rule that the more parlous the state of the company, the more the interests of the creditors will predominate, and the greater the weight which should therefore be given to their interests as against those of the shareholders. That is most clearly the position where an insolvent liquidation or administration is inevitable, and the shareholders consequently cease to retain any valuable interest in the company." (BTI 2014 LLC v. Sequana SA [2022] UKSC 25, Lord Reed)

Compliance is subjective if interests of creditors actually considered


"[75]  The general principle of subjectivity is however subject to three qualifications: Re HLC Environmental Projects Limited [2013] EWHC 2876 Ch (per Mr John Randall QC sitting as a deputy high court judge) at paragraph 92. These are as follows.

[76] First, where (as in cases of insolvency or dubious solvency) the duty extends to consideration of the interests of creditors, their interests must be considered as 'paramount'.

[77] Second, the subjective test only applies where there is evidence of actual consideration of the best interests of the company. Where there is no such evidence, the proper test is objective, namely, whether an intelligent and honest man in the position of a director of the company could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company.

[78] Third, where there is a very material interest, such as that of a large creditor (in a company which is insolvent or of doubtful solvency) which is without objective justification overlooked and not taken into account, the objective test must equally be applied." (Ball v. Hughes [2017] EWHC 3228 (Ch), Registrar Barber)

Can apply to an otherwise lawful dividend that left company unable to pay debts when due

"[160] Leaving aside the question whether the creditor duty is engaged when there is only a real risk of insolvency (which I address later) there are two reasons why the respondents’ case on this issue must fail. The first is that, subject to two irrelevant exceptions, the whole of Part 23, and the authority which it provides to pay dividends, is subject to any rule of law to the contrary: see section 851(1). If as I have concluded the creditor duty is part of the common law, then it cannot be treated as ousted by Part 23. In that context the respondents expressly concede that the general duty of directors in section 172(1) is not excluded by Part 23. There is no sensible reason why the creditor duty recognised by section 172(3) should be either.
[161] The second reason is that given by David Richards LJ in the Court of Appeal for concluding that this argument is “unsustainable”, at para 224. Part 23 identifies profits available for distribution on a balance sheet basis. A company may well have a balance sheet surplus while being commercially (ie cash flow) insolvent. It cannot be the case that directors of a company already unable to pay its debts as they fall due could distribute a dividend, or do so if the consequence of the payment was to bring about cash flow insolvency. To do so in those circumstances would be to take a foolhardy risk as to the long-term success of the company, by exposing it to the real risk (or at least a gravely increased risk) of being wound up." 
(BTI 2014 LLC v. Sequana SA [2022] UKSC 25, Lord Briggs)

Duty to consider the interests of creditors

Breach of duty: distributing assets without proper provision for debts

 

"[95] I comment that from this date, to enter into an arrangement which sought to achieve a distribution of assets, without regard to the requirements of statute, and without making proper provision for creditors was, itself a breach of duties which directors owe to a company: MacPherson v European Stategic Bureau [2000] 2 BCLC 683 paragraph 48. Having reached the conclusion above, the expenses paid to Mr Flanagan in March 2013 constituted a breach of duties. The Company was not bound, at the date of the expense payment, to make the payment. The Company owed a duty to its creditors to keep its property inviolate and available for the repayment of its debts." (Re Implement Consulting Limited [2019] EWHC 2855 (Ch), ICCJ Briggs)

Provision required to be made if tax liability is more likely than not to exist or arise

"[196] Where, as in the present case, the Composite Companies' last annual accounts plainly did not disclose profit available for distribution, it was necessary in accordance with Sections 270(3) and (4) CA 1985 that any distribution be limited to profits available for distribution as determined "by reference to" accounts that "enabled a reasonable judgment to be made" as to amounts of the items referred to in Section 270(2) CA 1985, including provisions of the kind referred to in paragraph 89 of Schedule 4 to CA 1985. The effective complaint in the present case is that the dividends in question were paid without making provision for HRCT.
[197] I consider that the references in Section 270(4) and paragraph 89 of Schedule 4 to "reasonable judgment" and to "reasonably necessary" point against an intention to render a dividend unlawful if it is only with hindsight that it can properly be said that provision ought to have been made for a particular liability. In my judgment, what the relevant provisions require is the making of a reasonable judgment based on facts as reasonably perceived, or that would have been ascertained by reasonable enquiry. Thus, for example, if there was no reasonable means of knowing that a debt was a bad debt (eg. because it was reasonably not known that the debtor was insolvent) then it does not seem to me that the relevant provisions intended to, or did in fact provide, that a dividend paid in these circumstances was unlawful. However, the necessary consequence of Mr Green's argument is that it would be.
[198] Further, in relation to liabilities of the kind specified in paragraph 89 of Schedule 4 to CA 1985, I consider that, based on the language thereof read together with that of Section 270(4) CA 1985, there is only a requirement to make provision for the purposes of the "interim accounts" if, on a reasonably objective view of the facts as known or reasonably ascertainable by those taking the decision to pay the dividend, the liability is likely (in the sense of being more likely than not) to be incurred.
[199] In opening Mr Green, on behalf of HMRC, accepted that the appropriate definition of "likely" in paragraph 89 of Schedule 4 was more likely than not, and I consider that must be right. A definition based on, say, a "reasonable prospect" of the relevant liability arising would, as I see it, produce a level of uncertainty that the legislation could not sensibly have intended." (HMRC v. Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

Not required to second guess professional advisers

"[285] Although differing in degree, BDO's advice did not change in 2008, nor even in 2009 after the FTT had handed down its decision: it remained confident the Scheme was robust; no further action was needed by the Company. While consideration was to be given to the ongoing NIC liabilities and interest, the most needed in the Company's accounts was a note (and again the auditors were not advising differently). Counsel was to be approached, and in September 2009 his view reported as being that the taxpayer in PA Holdings still had a "strong case" in respect of the NICs element which it had lost. Even near the end, it was to BDO to whom the Respondents turned for advice on liquidation.
[286] The Respondents considered BDO's particular and cumulative and consistent advice and took it at face value. They were entitled to do so. In proper discharge of their duties they had the wisdom to take this top-level advice throughout, and to use BDO to oversee the Scheme to the extent of drafting its ongoing necessary documentation. That the Court of Appeal later found that the equivalent to the Scheme protected neither against NICs nor against PAYE does not affect that reasonable reliance. Ms Hilliard confirmed that it was not Mr Hunt's case that BDO sold a scheme which it knew was inoperable.
[287] In the context of that advice, there was nothing wrong with the Respondents adopting a "sit and wait" policy, or trying to ensure that the Company's issues were at the bottom of the HMRC pile. Neither was there a need to make provision for accruing liabilities of principal, interest or penalties; nor to cease the Scheme. Those were matter for commercial judgments, which were being exercised, informed by the advice which the Respondents had consistently sought and obtained. While the word "robust" was a BDO favourite, that does not undermine its being relied on: the review of relevant documents at trial has a more repetitious effect than would have been apparent at the time. Further, if the word were inapt in its conveying of a sizeable degree of strength and resilience to attack, there was a dictionary of alternatives carrying their different meanings." (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)

Provision required if tax scheme flawed on "any reasonable view"

"[130] The fundamental obstacle which those submissions cannot surmount is that if, as I find all parties must have appreciated, the option to repurchase the WPP was inevitably going to be exercised by Safe Harbour, there was no real trading activity involved in the acquisition of the WPP and the leaseback to Safe Harbour. No rents would ever be received by Microplaza. Microplaza would only acquire title to the WPP for a fleeting moment. The only possible purpose of the transaction was tax mitigation. This was not a case of a transaction which had the characteristics of a genuine trading transaction. The entire transaction was coloured, both in terms of the intention of Microplaza and in terms of the contractual provisions, by the motive of tax mitigation.

...

[133] Accordingly, I find that the Interim Accounts failed to comply with the requirements of s.270 CA 1985 since they failed to make proper provision for the charge to corporation tax on the gain accruing on the sale of the Ronson Business. On any reasonable view, it was likely that the rollover relief claim would fail." (Re Loquitur; IRC v. Richmond [2003] EWHC 999 (Ch), Etherton J)

Breach of duty: distributing assets without proper provision for debts

Duomatic principle

Duomatic principle applies if shareholders actually applied their mind to the transaction

 

"[142] As rightly submitted by Mr Curl however, the Duomatic principle will only come to the aid of persons seeking to uphold a transaction if, as a substitute for a resolution at a general meeting, the shareholders had actually applied their minds to the question whether to ratify the transaction: In re Duomatic [1969] 2 Ch 365 at 373 B to C; In re Queensway Systems Ltd [2006] EWHC 2496 at paragraph 30. Here, he argued, there was no evidence that the Respondent's had applied their minds to the question whether to ratify the transactions in question; quite the contrary.

...

[147] I accept Mr Curl's submissions on this issue. On the evidence before me, I am not persuaded that the Respondents ever applied their minds to the question whether to ratify Credits 1, 2 and 3 as remuneration. Quite the contrary. Their efforts were focused on extracting the monies by other means." (Ball v. Hughes [2017] EWHC 3228 (Ch), Registrar Barber)

Duomatic principle does not apply if company insolvent or likely to become insolvent

"[402] I have considered at paragraph 171 above the application of the Duomatic principle to the question whether the directors of BHUK complied with any formalities required in convening a meeting to consider the Distribution. Aside from that, the issue of ratification does not arise even if my conclusion that there was no breach of duty was wrong. That is because if there was a breach of duty consisting of either (1) breaches of mandatory provisions of Part VIII of the 1985 Act or (2) failing to take into account the interests of creditors in circumstances where the company was, or was likely to become, insolvent it is common ground that the Duomatic principle does not apply."  (Burnden Holdings (UK) Ltd v. Hunt [2019] EWHC 1566 (Ch), Zacaroli J)

"[148] Moreover, even if I am wrong in that conclusion, it was common ground that the Duomatic principle does not apply where the company is insolvent, or is rendered insolvent by the impugned transaction: West Mercia Safetywear Ltd v Dodd [1988] BCLC 250. It was also common ground that it is for the party who seeks to invoke the Duomatic principle to prove, if it be disputed, that the company was solvent at the material time: Lexi Holdings Plc (In Administration) v Shaid Luqman and others [2007] EWHC 2652 per Briggs J at para 193. On present facts the burden is therefore on the Respondents to satisfy me on a balance of probabilities that the Company was solvent at the material times." (Ball v. Hughes [2017] EWHC 3228 (Ch), Registrar Barber)

"The Multinational case was, however, a wholly different case from the present. In the present case the West Mercia company was at the relevant time insolvent to the knowledge of the directors. They had been expressly told not to deal with the company's bank account, and Mr. Dodd had, in fraud of the creditors of the company, made the transfer to the Dodd company's account for his own sole benefit in relieving his own personal liability under his guarantee. In the Multinational case, at the time of the transaction which was in question, the company concerned was amply solvent, and what the directors had done at the bidding of the shareholders had merely been to make a business decision in good faith, and act on that decision. It subsequently turned out to be a bad decision, but the position had to be decided on the facts at the earlier stage where the company was amply solvent and the parties were acting in good faith." (West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, Dillon LJ)

Duomatic principle

Consequences of breach

 

"(1)     The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.

(2)     The duties in those sections (with the exception of section 174 (duty to exercise reasonable care, skill and diligence)) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors." (CA 2006, s.178)

Director obliged to restore moneys wrongfully paid out

"[49] I agree with the Court of Appeal that the obligation is to restore the moneys wrongfully paid out. This, as the deputy judge accepted, is the established remedy. Where dividends have been paid unlawfully, the directors' obligation is to account to the company for the full amount of those dividends: see Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712, [2001] 2 BCLC 531, para 54, per Robert Walker LJ." (HMRC v. Holland [2010] UKSC 51)

Subject to court discretion

"[49]...But there is a discretion under section 212 IA 1986 that it is open to the judge to exercise. This is indicated by the use of the word "may" in subsection (3)." (HMRC v. Holland [2010] UKSC 51)

See further, below, on s.212 and CA 2006, s.1157.

Consequences of breach

Discretion to excuse director in breach

"(1)     If in proceedings for negligence, default, breach of duty or breach of trust against—

(a)     an officer of a company, or

(b)     a person employed by a company as auditor (whether he is or is not an officer of the company),

it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit." (CA 2006, s.1157(1))

 

Right to apply in advance

(2)     If any such officer or person has reason to apprehend that a claim will or might be made against him in respect of negligence, default, breach of duty or breach of trust—

(a)     he may apply to the court for relief, and

(b)     the court has the same power to relieve him as it would have had if it had been a court before which proceedings against him for negligence, default, breach of duty or breach of trust had been brought." (CA 2006, s.1157(2))

Unlawful dividend: must show behaved reasonably in authorising on the basis of interim accounts

"[221] It is not in dispute that Section 727 is capable of applying in the case of payment of an unlawful dividend. However, in addition to showing that he acted honestly, the onus is fairly and squarely on the officer to satisfy the Court that he acted reasonably in authorising and procuring payment of the dividend on the basis of the interim accounts - see Bairstow at 550 per Robert Walker LJ. This is a matter to be tested objectively. Further, if the officer gets over these hurdles, it is necessary for him to demonstrate that, having regard to "all the circumstances of the case", he ought fairly to be excused. The expression "all the circumstances of the case" primarily means the circumstance in which the breach took place – see Ultraframe v Fielding [2005] EWHC 1638 at [1451]." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

Reliance on professional advice may render conduct reasonable

"[223] Genuine reliance on professional advice might well render conduct which would otherwise be unreasonable as reasonable - see eg. Re Claridges Patent Asphalt Company Limited [1921] 1 Ch 543, cf. Loquitur (supra) 488 - 489." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

Relief available even if consequence is to render company insolvent (but less likely)

"[224] The headnote to Loquitur suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider that this reads too much into Etherton J's judgment at 489 - 490. Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of creditors by reason of the payment of a dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the dividend itself." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

 

Particularly relevant to what extent the distribution could lawfully have been made

"[413] While I do not accept that the discretion in s.1157 is fettered such that the court can never relieve a director from liability in circumstances where he or she is the recipient of the unlawful dividend, even where the company subsequently goes into liquidation so that the retention of the dividend can be said to be at the expense of creditors, I nevertheless accept that the fact that a director received an unlawful dividend at the expense of creditors is a powerful factor against granting relief. Whether that factor is enough to preclude relief being granted will depend upon matters such as the causal link between the dividend and prejudice to creditors, the length of time between the dividend and the action being commenced and whether the director retains the benefit of the dividend.
[414] Of particular relevance, therefore, is the extent to which the Distribution could lawfully have been made in the circumstances existing at the time (this being recognised as a potentially relevant factor by Robert Walker LJ in Bairstow v Queens Moat Houses plc [2002] BCC 91, at [36], and by HHJ Seymour in Marini)." (Burnden Holdings (UK) Ltd v. Hunt [2019] EWHC 1566 (Ch), Zacaroli J)

"[57] However, like Rimer J I have the greatest difficulty in seeing that it is ever likely that 'in all the circumstances of the case' it is going to be right that a defaulting director 'ought fairly to be excused for the negligence, default, breach of duty or breach of trust', if the consequence of so doing will be to leave the director, at the expense of creditors, in enjoyment of benefits which he would never have received but for the default. However honestly the director acted, however much it may have appeared at the time of the act complained of that the only person who might be harmed by the act would be the director himself, it just is not fair, as it seems to me, that if it all goes wrong the guilty director benefits and the innocent creditors suffer. For this reason I decline to exercise my discretion under s.727 in favour of any of the respondents in relation to their respective liabilities for breach of s.263 in relation to the dividend. Had I been persuaded that that breach extended to the entirety of the dividend I should, however, have exercised my discretion in favour of the respondents so as to relieve them of liability for so much of the distribution as could lawfully have been paid at that time. Had they limited the distribution to the amount of profits then available for distribution they would not now have incurred any liability in respect of that act.(Re Marini Ltd [2003] EWHC 334 (Ch), HHJ Richard Seymour QC)

Conduct may be reasonable even if amounted to lack of reasonable care

"[225] In Re D'Jan of London Limited (supra) at 564, Hoffman LJ pointed out that the wording of Section 727 itself contemplates that conduct may be reasonable for the purposes of Section 727 despite amounting to lack of reasonable care at common law.
[226] By extension it seems to me that it would be at least possible for conduct to be held to be "reasonable" for the purposes of Section 727 even though the conduct complained of was of a failure to make provision when, on a reasonable objective view, provision ought to have been made for HRCT." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

Examples

Relief granted when relying on professional advice regarding tax until leading counsel advised that the scheme did not work

"[236] Applying the principles considered above, I consider that in the period up to 19th August 2004 either Mr Holland was at no stage liable in respect of the payment of dividends, or if he was, that he ought to be relieved from liability pursuant to Section 727 CA 1985.

...

[239] ... 

239.3 Throughout this period Mr Holland acted on professional advice from Neil Myerson (principally Mr Newton) and Mr Rees, as well as on the advice of Counsel, Mr Ginniff. Until the receipt of Mr McDonnell's Opinion on 9th August 2004, the advice that Mr Holland was receiving was consistent to the effect that either HMRC would accept that it was wrong, or that the fact that HMRC was wrong ought to be capable of being established by way of appeal or judicial review.

...

239.5 The scheme was inherently flawed through no fault of Mr Holland, and as a result of the advice that he had received. It could have been set up in such a way as to be tax efficient, but was not. A number of other similar schemes had been set up which appear to have operated without the difficulties that the Composite Companies ultimately faced, and Mr Holland obtained comfort through the fact that the Composite Companies were by no means a one off.

...

[269] ...  In my judgment, from after the Consultation with Mr Tallon QC on 18th August 2004, Mr Holland, in continuing to cause the Composite Companies to pay dividends, and doing so without taking all appropriate advice and without properly informing himself as to the merits, so far as creditors were concerned, of the alternative courses of action that might have been open to the Composite Companies, took an unacceptable risk at (at least the potential) expense of HMRC with a view to seamlessly getting the new corporate structure in place." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

Not granted where no genuine belief tax scheme would work

"[233] I have so far considered the issue of the potential liability of MV to pay the £1.16 million success fee to EBB on the hypothesis, which is the Respondents' primary case, that the Interim Accounts were prepared, and the Respondents authorised and procured payment of the Dividend, on the reasonable assumption that the rollover scheme would succeed. However, in my judgment, the Respondents have failed to show that the hypothesis is sound. In short, the Respondents have failed to satisfy me that, for the purposes of CA 1985 s.727 , it was reasonable for them to have authorised and procured payment of the Dividend on the assumption that the rollover scheme would be successful and to have acted on the Interim Accounts in the absence of proper provision in them for payment of the corporation tax on the capital gain arising from the sale by MV of the Ronson Business.

...

[237]...the Respondents were well aware that it was a critical part of Mr Thornhill's advice that the gain be rolled over into a genuine trading asset. For the reasons I have given earlier in this judgment, neither of the Respondents could reasonably have believed that was a proper description of the WPP.

...

[239] Although directors are entitled reasonably to rely on specialists and experts (comp. Norman v Theodore Goddard [1991] BCLC 1028 , at pp.1030–1031), on the particular facts of the present case, bearing in mind the Respondents' actual knowledge of Mr Thornhill's advice, Mr Morris' advice, the terms of the WPP transaction, and the fact that the Dividend would effectively withdraw from MV the assets by which any tax charge might be met, I do not consider that the Respondents, as experienced businessmen, can shelter behind their advisers in failing to refer back to Mr Thornhill for confirmatory advice, prior to the payment of the Dividend. If, as they said in their evidence, they believed that the advice of Mr Thornhill was implemented in all material respects, then they were unreasonable in holding that belief, in the light of their actual knowledge of the terms on which the WPP was acquired and was leased back to the vendor." (Re Loquitur; IRC v. Richmond [2003] EWHC 999 (Ch), Etherton J)

"[222] Section 727 relief was refused in Re Loquitur (supra), where, as we have seen, the directors had no genuine belief that the rollover scheme would work, and where an unprovided for success fee would be payable if it did, and Re Bairstow (supra), where there was a specific finding that the directors had falsified accounts." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

Discretion to excuse director in breach

Limitation period (breach of director's duties)

 

"(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use." (Limitation Act 1980, s.21(1))

"Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.

For the purposes of this subsection, the right of action shall not be treated as having accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession." (Limitation Act 1980, s.21(3))

Directors are trustees for the purposes of Limitation Act 1980 s.21

"[18] It is necessary to bear in mind that section 21 is primarily aimed at express trustees, and applicable to company directors by what may fairly be described as a process of analogy. An express trustee, such as a trustee of a strict settlement, might or might not from time to time, or indeed at all, be in possession or receipt of the trust property. The property might consist of land in the possession of a tenant for life." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)
 

Director who receives company property in breach of fiduciary duties is trustee of that property for the company

"[27] It follows, also, from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. But, as Millett LJ explained in Paragon Finance plc v Thakerar & Co [1999] 1 All ER 400, at pp. 408g–409g, his trusteeship is different in character from that of the stranger. He falls into the category of persons who, in the words of Millett LJ (at [1999] 1 All ER 400, 408j) … 'though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves.'

...

[29] The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed."" (JJ Harrison (Properties) Ltd v. Harrison [2001] EWCA Civ 1467, Chadwick LJ)

Purpose of s.21: to protect honest trustees who have not come away with property they ought not to have

"[17] The starting point in the construction of section 21(1)(b) is to pay due regard to its purpose. This was laid down, in relation to its predecessor, in In re Timmis, Nixon v Smith [1902] 1 Ch 176 at 186 by Kekewich J as follows:

“The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, ie, money of the trust received by him and converted to his own use.”

That this is the purpose of what is now section 21 was confirmed by Chadwick LJ in the Harrison case at para 40. Mr Chivers did not, when it was put to him, challenge it in any way." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)

Limitation period (breach of director's duties)

- Default time limit is 6 years

"Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.

For the purposes of this subsection, the right of action shall not be treated as having accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession." (Limitation Act 1980, s.21(3))

"[12] It is also now common ground that, unless section 21(1) applies, the Defendants have the benefit of the six-year period of limitation laid down by section 21(3), because the relevant breach of duty arising from the distribution of the shareholding in Vital occurred on 12 October 2007, and these proceedings were issued more than six years later." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)

"[60]...A claim by a beneficiary against the trustee in respect of trust property wrongly transferred to a third party will be subject to the six-year limitation period in s.21(3) unless made fraudulently. Similarly breaches by trustees involving the investment of trust property on insufficient security; a failure to accumulate income as directed by the trust deed and the failure to deduct tax from annuities have all been held to be covered by what is now s.21(3): see Re Bowden (1890) 45 Ch D 444; How v Earl Winterton [1896] 2 Ch 626; and Re Sharp [1906] 1 Ch 793.

[61] If therefore s.21(3) applies to any breach of trust by an express trustee then the same must be true for s.21(1)(a) where it refers to any fraud or fraudulent breach of trust. The only factor which distinguishes the situations covered by the two sub-sections is the fraud involved in the breach of trust. Otherwise the content and scope of the two sub-sections are the same. The language used is identical.

[62] It seems to me to follow from this that if a director is a trustee for the purposes of s.21 then the phrase 'breach of trust' must encompass any breach of his fiduciary duties as such a director towards the company. If he causes loss to the company as in this case he is accountable in precisely the same way as a trustee would be for any loss caused by his breach of duty to the trust. The director cannot be a class 1 fiduciary for the purposes of s.21(3) but not for the purposes of s.21(1) and for the same reason I do not see how it is possible to treat a director differently as between s.21(1)(a) and s.21(1)(b) depending on the nature of the breach which he commits." (First Subsea Limited v. Balltec Limited [2017] EWCA Civ 186, Patten LJ)

"[313] It follows that in cases involving the misapplication pre-existing corporate assets, the usual six year limitation period will be disapplied." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

- Default time limit is 6 years

- Fraudulent breach of director's duty (no statutory limitation)

 

"(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy;..." (Limitation Act 1980, s.21(1)(a))

Dishonesty/bad faith required​

"[64] For a breach of trust to be fraudulent it is not enough to show that it was deliberate. There must also be an absence of honesty or good faith." (First Subsea Limited v. Balltec Limited [2017] EWCA Civ 186, Patten LJ)

"[336] It follows that the touchstone for identifying a fraudulent breach of trust is dishonesty."  (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

 

Can include recklessness

"[64] This [dishonesty] can include being reckless as to the consequences of the action complained of." (First Subsea Limited v. Balltec Limited [2017] EWCA Civ 186, Patten LJ)

Dishonesty: subjective mental state that is dishonest by ordinary standards

"[336] It follows that the touchstone for identifying a fraudulent breach of trust is dishonesty. Ivey v. Genting Casinos (UK) Ltd [2017] UKSC 67, [2017] 3 WLR 1212, contains a detailed discussion of the meaning of dishonesty, both in the civil and criminal law. The nub of the discussion concerned the relevance of the Defendant's subjective mental state. At paragraph 62, Lord Hughes JSC, delivering the judgement of the Court, referred to the following dictum of Lord Hoffmann in Barlow Clowes International Ltd v. Eurotrust International Ltd [2006] 1 WLR 1476 as correctly summarising the requirement for dishonesty in cases of accessory liability for breach of trust:
"Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards the defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court of Appeal held this to be the correct state of the law and their Lordships agree."
[337] Summarising the position overall, Lord Hughes then said the following at [74]:
"When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual's knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest."" (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

Sufficient that director committed breaches of duty knowing that they would injure the company and intending that they should

"[64] ... The judge's finding was that Mr Emmett was dishonest because he committed his breaches of duty towards the company knowing that they would injure BSW and intending that they should. There is no appeal against those findings of fact as such but Mr Cavender submits that no case of fraudulent breach of trust was pleaded or advanced against Mr Emmett at trial so that the judge was not entitled to find that s.21(1)(a) applied.

...

​[68] I am satisfied from what I have read that it was fairly put to Mr Emmett that he was aware that he was acting contrary to the interests of BSW and that he knew that what he was doing was wrong. The judge in my view had evidence from which he could properly decide whether the breaches of duty alleged against Mr Emmett were dishonest and therefore fraudulent." (First Subsea Limited v. Balltec Limited [2017] EWCA Civ 186, Patten LJ)

Dishonest desire to take over business opportunity for himself/herself 

"[338] Against that background, I turn to consider the case against Mr Monks. I have come to the conclusion that, in taking the steps identified at [272] above, he was acting dishonestly (and therefore fraudulently), and that consequently Mr Davies' claim against him based on those grounds is not time-barred. I say that essentially because, in my judgment, Mr Monks' actions in late 2010 were not inspired as an honest response to the situation he found himself in, but instead by a dishonest desire to take over for himself the opportunity which presented itself to trade from the Ashford Site." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

Participating in multiple tax avoidance schemes without making provision for liabilities and restructuring to put assets beyond the reach of creditor may be fraudulent/dishonest

"[38] ... The restructuring so as to leave the Company without assets at a time when HMRC was raising assessments and pressing for payment is striking. On the face of it, the Company was at that stage insolvent as a result of HMRC assessments and yet the right to receive the consideration for the sale of the Company's businesses was transferred to Holdings. The circumstances of the restructuring do seem to me to colour the carrying on of the Company's business in relation to its tax affairs. I agree with Mr Curl that this does have to be considered as a whole. The Liquidators' pleaded case, if proven, is more than capable of giving rise to an inference of intent to defraud on the part of First and Second Respondent in the conduct of the Company's tax affairs...

...

[44] Mr Curl answers this, first, by saying that if the Liquidators succeed in showing fraud or dishonesty, then no limitation period will apply by reason of section 21(1)(a) of the 1980 Act. This argument depends on my judgment as to whether the claim for fraudulent trading is sustainable. I have already determined that the Liquidators' have a real prospect of showing that these schemes are part of the carrying on of the business of the Company with intent to defraud creditors..." (Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

- Fraudulent breach of director's duty (no statutory limitation)

- Action to recover property in respect of which director had a fiduciary relationship before the breach (no statutory limitation)

 

"(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

[...]

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use." (Limitation Act 1980, s.21(1))

Directors are treated as being in possession of trust property from the outset

"[19] By contrast, in the context of company property, directors are to be treated as being in possession of the trust property from the outset. It is precisely because, under the typical constitution of an English company, the directors are the fiduciary stewards of the company’s property, that they are trustees within the meaning of section 21 at all. Of course, if they have misappropriated the property before action is brought by the company (the beneficiary for this purpose) to recover it they may or may not by that time still be in possession of it. But if their misappropriation of the company’s property amounts to a conversion of it to their own use, they will still necessarily have previously received it, by virtue of being the fiduciary stewards of it as directors." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)

Director who receives company property in breach of fiduciary duties is trustee of that property for the company

"[27] It follows, also, from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. But, as Millett LJ explained in Paragon Finance plc v Thakerar & Co [1999] 1 All ER 400, at pp. 408g–409g, his trusteeship is different in character from that of the stranger. He falls into the category of persons who, in the words of Millett LJ (at [1999] 1 All ER 400, 408j) … 'though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves.'

...

[29] The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed."" (JJ Harrison (Properties) Ltd v. Harrison [2001] EWCA Civ 1467, Chadwick LJ)

Applies to unlawful distributions

"[22] In the present case, (of course only on the assumed facts), the Defendant directors converted the company’s shareholding in Vital when they procured or participated in the unlawful distribution of it to BHUH. It was a conversion because, if the distribution was unlawful, it was a taking of the company’s property in defiance of the company’s rights of ownership of it. It was a conversion of the shareholding to their own use because of the economic benefit which they stood to derive from being the majority shareholders in the company to which the distribution was made. By the time of that conversion the Defendants had previously received the property because, as directors of the Claimant company, they had been its fiduciary stewards from the outset." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)

Remedy claimed can be equitable compensation

"[13]...A preliminary objection was taken in the Court of Appeal by Mr David Chivers QC (who appears also on this appeal for the Defendants) that a claim such as the present, for an account of profits or alternatively equitable compensation, did not fall within section 21(1)(b) at all. This was rejected by the Court of Appeal (at para 38), upon the basis that a claim for equitable compensation, in a case where the trustee’s indirect interest in the trust asset had been converted to the use of the trustee, was an appropriate remedy to seek in an action falling within section 21(1)(b)." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)

Applies to remuneration paid in breach of director's duty 

"Nor is there now any issue over the application of section 21(1)(b) LA80 to the breach of duty claims. By that section
"No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action… to recover from the trustee… the proceeds of trust property… previously received by the trustee and converted to his use".
As Ms Hilliard recognised, the non-barring effected by that section would apply only to the claim against each individual recipient: it would not preserve the possibility of joint and several liability for the receipts of all." (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)

Sufficient that property is transferred to company in which directors had majority stake

"[312] Burnden was thus a case involving a misapplication of pre-existing company property: that was property the directors had "previously received", and they converted it to their use when it was diverted to the separate company, BHUH, in which they had a majority stake and therefore an economic interest. That was enough for the section to be engaged, even though the relevant property was not transferred to the defaulting directors personally.

...

[324] Applying the logic of Burnden Holdings, those funds were property of GBR that Mr Monks had previously received, because he was a director of GBR and therefore custodian of its property. No sufficiently clear case has been made out that the funds were paid away for good reason. The funds were converted to Mr Monks' own use, in the sense that they were paid in order to produce a benefit for GBRK, in which he was majority shareholder, the benefit being the clearing of waste from the Ashford Site in a manner which would enable GBRK to obtain a new Environmental Permit and begin to trade free of any regulatory restrictions or liabilities. That had economic value for Mr Monks personally. I do not think that analysis is at all affected by the assumption that some of the same costs were covered by Mr Monks personally." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

 

s.21(1)(b) does not apply where the director has no pre-existing proprietary relationship with the property of which he is trustee

"[59] The provisions of s.21(1)(b) in respect of the property of the company have no application to cases like Gwembe where there is no misappropriation or receipt of pre-existing company property but only a breach of duty which gives rise to a constructive trust over (for example) the secret profit. This is because in such cases the director is not a trustee virtute officii in respect of the profit. He has no proprietary relationship with what he acquires other than as the recipient of the proceeds of his breach of duty. He is not therefore in the terms of s.21(1)(b) in possession of trust property. But he is at all times a class 1 fiduciary and trustee in respect of the company and its assets so that a breach of his duty towards the company remains a breach of trust within the meaning of s.21 even if it does not involve the misappropriation of company property. He is not in the same position as a stranger to the company or the trust (as in Paragon) who only becomes a trustee in the limited sense of being required to account for the profits of his fraud on a proprietary basis through the medium of a class 2 constructive trust." (First Subsea Limited v. Balltec Limited [2017] EWCA Civ 186, Patten LJ)

Because although he may be a constructive trustee, he is not in breach of that trust

"[62] The criticism of the decision in Gwembe proceeds on the premise that Mr Koshy was not liable under s.21(1)(b) because the only trust property he obtained was not company property but a secret profit subject to a constructive trust. Therefore, so the argument goes, it would be wrong in principle for the same breach to attract the provisions of s.21(1)(a). But that seems to me to confuse what the two sub-sections are dealing with. Mr Koshy was only ever a trustee of the secret profit by virtue of the constructive trust imposed as a result of his fraud. But he was not in breach of that trust. The class 2 constructive trust, as Lord Hoffmann explained in Paragon, imposed no duties on him nor did it make him a fiduciary. He was a fiduciary by reason of his office as director and the fraud which he committed was a breach of those duties; not of the class 2 constructive trust." (First Subsea Limited v. Balltec Limited [2017] EWCA Civ 186, Patten LJ)

Does not apply to diversion of business opportunity or receipt of bribe

"[314] But what of the case of the company director who diverts a maturing business opportunity for his own benefit? Such a case may result in a proprietary remedy, as illustrated by the Bhullar Bros. case already discussed above. Another good example is the case where an agent receives a bribe or secret commission in breach of duty. The Supreme Court has held that in such cases the benefit accruing to the agent is to be treated as having been acquired on behalf of his principal, so that the benefit is owned by the principal who has a proprietary as well as a personal remedy against the agent: see FHR European Ventures LLP and others v. Cedar Capital Partners LLC [2014] UKSC 250, [2015] AC 250.
[315] But do such cases involve any misapplication of "trust property", such that they fall within LA 1980, section 21(1)(b)? The authorities support the view that the answer is no." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

- Action to recover property in respect of which director had a fiduciary relationship before the breach (no statutory limitation)

- Deliberate breach that is unlikely to be discovered from some time

 

(1)Subject to subsection (3), (4A) and (4B) below, where in the case of any action for which a period of limitation is prescribed by this Act, either—
(a)the action is based upon the fraud of the defendant; or
(b)any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or
(c)the action is for relief from the consequences of a mistake;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.
(2)For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.

Query whether "some time" could be a very short period

"[26] The in-depth analysis of this difficult question would take the court into a potential minefield of difficulties which surround section 32 and, in this corporate context, would also involve a consideration of questions of attribution. There cannot be summary judgment in favour of the Defendants in this case, both because of the recent plea of fraud and because of this court’s decision about the meaning of section 21. Whatever the correct interpretation of section 32(2), there would still be fact-intensive issues calling for a trial. In view of the relatively summary way in which this issue has been addressed by counsel (about which I express no criticism at all), I have not therefore considered it appropriate to reach any final view about it. It is sufficient for present purposes for me to conclude that the appeal in relation to section 32 should be dismissed because the issue is unsuitable for summary judgment. I express no view one way or the other on the correctness or otherwise of the interpretation of section 32(2) adopted en passant by the Court of Appeal." (Burnden Holdings (UK) Limited v. Fielding [2018] UKSC 14)

"[53] It is important to remember in this context that a postponement of the limitation period for only two or three days is sufficient to defeat a defence that the claim was time-barred. In discussing the phrase "for some time" in JD Weatherspoon Plc v Van De Berg & Co Ltd [2007] EWHC 1044 (Ch), [2007] PNLR 28, Lewison J (as he then was) said at [40]:

"The other ingredient needed to bring section 32(2) into play is that the breach is committed in circumstances where it is unlikely to be discovered "for some time". Although the quoted phrase is imprecise, it seems to me that the implicit contrast that it is setting up is one between a breach of duty that would be immediately discovered (eg the infliction of a physical injury) and one that would not."

[54] Although Mr Chivers suggested that this passage was wrong, it seems to me that Lewison J was correct in the contrast he drew between a breach of duty which would be discovered immediately and one which would not be discovered for some time. Necessarily on this basis, "some time" could be a very short period, for example a period of a few days. The test propounded by Lewison J later in the same paragraph is: when could the claimant have discovered the breach with reasonable diligence? In my judgment, that question can be answered only after a detailed examination of the evidence relating to the events of October 2007 and the roles played by the various directors. It is simply not possible to determine these issues on an application for summary judgment." (Burnden Holdings (UK) Limited v. Fielding [2016] EWCA Civ 557, David Richards LJ)

Active concealment not required

"[300] These subsections and their interaction have been subject to recent consideration by the Court of Appeal in Potter v Canada Square Operations Ltd [2021] EWCA Civ 339, [2022] QB 1. At [67] Rose LJ confirmed that deliberate concealment within section 32(1)(b) did not require active concealment, and at [75] observed that "Inherent in the concept of 'concealing' something is the existence of some obligation to disclose it… For the purposes of the Act that obligation need only be one arising from a combination of utility and morality to adopt Rix LJ's phrase" in The Kriti Palm [2007] 1 All ER (Comm) 667. She therefore rejected the notion that the section would be "satisfied only if there is a pre-existing legal duty to disclose". In so doing, she preserved its potential application where there was such a legal duty." (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)

Deliberate includes reckless

"[301] In part VI of her judgment Rose LJ turned to the meaning of "deliberate" as used in both subsections, noting at [94] that "Although 'deliberate' is a common English word, I do not consider that there is a clear, 'natural' meaning in this context". She took for granted at [86] that the word would include "subjective knowledge or actual awareness" of the commission of the act or concealment, and wilful blindness to the same. She concluded at [137] that it would also encompass recklessness, as expressed by Lord Bingham in R v G [2004] 1 AC 1034 and which she had summarised at [87]:
"a person acts recklessly with respect to a circumstance when he is aware of a risk that it exists or will exist and it is, in the circumstances known to him, unreasonable to take the risk. A person acts recklessly with respect to a result when he is aware of the risk that it will occur and it is, in the circumstances known to him, unreasonable to take that risk".
[302] The Chancellor agreed with the judgment of Rose LJ and that of Males LJ, who at [199] turned to the series of questions to be asked under section 32(1)(b) on the facts before them: "(1) whether this was a case of active concealment or mere non-disclosure; (2) if the latter, whether the bank was under a duty to disclose the commission, either as an independent duty or as a duty in 'Limitation Act terms'; (3) whether the bank knew that (or was reckless whether) the commission was relevant to a right of action of the claimant". At [200] he confirmed his agreement with Rose LJ "that, in the context of section 32(1)(b), a defendant who is reckless whether a duty exists, or whether a fact is relevant to a right of action, can properly be described… as deliberately concealing the fact in question"." (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)

Failure to disclose own wrongdoing may or may not amount to concealment

"[303] Here, Mr Hunt relies on the dictum of Peter Smith J in Haysport Properties Ltd v Ackerman [2016] EWHC 393 (Ch), [2016] BCC 676 at [56] that "It is well established that a director has a duty to disclose his own wrongdoing", citing the Court of Appeal in Fassihi v Item Software (UK) Ltd [2004] EWCA Civ 1244, [2004] BCC 994 and his own decision in Tesco Stores Ltd v Pook [2003] EWHC 823 (Ch), [2004] IRLR 618. The dictum is, on the authority of Fassihi, an overstatement: with specific reference to Pook, Arden LJ at [41], with whom Mummery LJ and Holman J agreed on the point, declined to find such a "separate and independent duty", instead treating the disclosure obligation as one which might arise on particular facts within "the duty to act in what he in good faith considers to be the best interests of his company". That said, it would be a rare case in which the obligation of single-minded loyalty would be met by a failure to disclose, and it was not suggested by the Respondents that this was such a case.
[304] Here, the failure to disclose did not relate either to the existence of the Scheme, or to the overall figures washing through it. Whether from HMRC or (relevantly) from the Company through its directors, there was no concealment of anything except the exact numbers for each individual; and it is not suggested that they would not have been forthcoming had a director requested them. There has therefore been no failure to disclose which is material to the cause of action on which joint and several liability is sought.
[305] In any event, there could be no such liability in the period up to the resignations of Mr Broadbent, Mr Day and Mr Rodwell on 21 February 2005, as until then there were independent directors capable of discovering matters for themselves."  (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)
 

"[46]...In Haysport Properties , the defendant was sued for breach of duty as director in entering into certain transactions in 2005. He and others were removed as directors of the claimant companies in 2011 and the claim against him was commenced in 2014. Peter Smith J found that the defendant was neither dishonest nor recklessly indifferent to the interests of the companies but nonetheless held that the limitation period did not begin to run until independent boards were put in place in 2011. At paragraph 56, the judge said:
"It is well established that a director has a duty to disclose his own wrongdoing: see Item Software (UK) Ltd v Fassihi [2005] 1 BCL 91 and Tesco Stores Ltd v Pook [2004] IRLR 618 "
and continued at paragraph 116:
"As set out earlier in this judgment Mr Ackerman has a positive duty to disclose his own breaches of fiduciary duty. He has failed to disclose those breaches with the result that he has concealed the existence of the breaches from the Claimants. That position continued in my view until 27th April 2011 when Mr Ackerman, Naomi and Mr Thornhill QC were removed, and Mr Johnson was appointed".
[47]  There is no evidence as to the extent to which any breach of duty on the part of the First and Second Respondents, if there was such a breach, was disclosed to the Company. The question of whether there was a breach of duty that they were under a duty to disclose and, if so, whether disclosure was made, must be a matter for trial. Again, at this stage I am not satisfied that this claim can be said to be an abuse of process by virtue of being statute barred such that it should be struck out, nor that it does not have a real prospect of success." 
(Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

- Laches

- Laches

 

Is it unconscionable for the claimant to be permitted to assert its rights?

"[357] I have been referred to a number of authorities dealing with the doctrine of laches in the context of equitable claims in a commercial context: see in particular Clegg v. Edmondson (1857) 8 De G M&G 787; Patel v. Shah [2005] EWCA Civ 157 (at [14]-[34]); and Excalibur Ventures LLC v. Texas Keystone Inc. [2013] EWHC 2767 (Comm) (at [1458]-[1468]).
[358] In Patel v. Shah, Mummery LJ quoted with approval the following passage from the judgment of Aldous LJ in Frawley v. Neill [2000] CP Reports 20, where Aldous LJ said:
"In my view, the more modern approach should not require an enquiry as to whether the circumstances can be fitted within the confines of a preconceived formula derived from earlier cases. The enquiry should require a broad approach, directed to ascertaining whether it would in all the circumstances be unconscionable for a party to be permitted to assert his beneficial right."
[359] It seems to me that is the question I should seek to address in this case." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

Delay whilst seeking to gather funds to begin claim where position has been made clear to defendant not unconscionable

"[361] I have come to the view that the delay in this case cannot be characterised in the same way, and that Mr Davies is not barred by laches from pursuing his equitable claims. I say that for the following reasons:
i) It does seem to me to be an important point, although not in itself determinative, that Mr Davies had made his position clear in correspondence by, at the latest, November 2012. Mr Monks must have known by then, if not well before then, that he was exposed to the possibility of a claim arising at some stage in the future out of the actions he had taken in late 2010 and early 2011.

ii) It is true that there was no response to the letter from Vertex Law sent on behalf of GBRK in February 2013. However, I do not think that Mr Monks can have considered he was out of the woods from that point onwards. He must be taken to have accepted that there was a continuing risk of a claim materialising, albeit one which he no doubt hoped would diminish over time.

iii) I think the point also needs to be looked at in light of my overall findings as to Mr Monks' motivations and conduct. It seems to me fair to describe Mr Monks as a risk-taker. He was opportunistic and took a risk when he incorporated GBRK in early 2011. He was presented with a situation which he thought he could turn to his advantage. That meant, in part, keeping Mr Davies at bay and hoping he would go away. But there was always a risk that he would return, and Mr Monks pressed ahead with the development of GBRK's business in full knowledge of that risk. The fact that he was willing to do so suggests to me that it is not unconscionable (all other things being equal) to permit Mr Davies to hold him to account, now that the risk has materialised.

iv) Although the period of inactivity between February 2013 and November 2016 is a long one, it is not excessive, and I am not persuaded that Mr Monks must have considered that the risk to which he was exposed – arising, as I have held, out of his own dishonest actions – had entirely dissolved at any point during that period.

v) Although it is difficult to test it, given Mr Davies' failure to produce any banking records, I do attach some weight in this analysis to his explanation that in part the reason for the delay was that it took time to accumulate the funds needed to pursue his claims. Mr Davies was cross-examined about certain aspects of his lifestyle, including the fact that he drives a Porsche; but I have seen nothing which suggests that he has a lavish lifestyle and he did not strike me when giving evidence as a man of significant means. Although one might normally expect a degree of candour in terms of financial disclosure from someone claiming impecuniosity as a reason for not pursuing a claim in a timely manner, I think I also need to make an allowance in my overall assessment for that fact that Mr Davies' only obvious source of income before 2011 seems to have been the Business, which he says was taken from him by Mr Monks. It does seem to me likely that it took time for him to build up his financial resources, after his move abroad.

vi) I also bear in mind the costs of litigation of this type, which are considerable and not easily affordable to anyone of even above-average income, without some effort and (very likely) delay. In this case, Mr Davies' costs budget totals £477,978, and he has had to provide security for costs of £186,000." (Davies v. Ford [2020] EWHC 686 (Ch), Judge Adam Johnson QC)

Transaction at undervalue within 2 years of onset of insolvency

 

"(1)     This section applies in the case of a company where—

(a)     the company enters administration, or

(b)     the company goes into liquidation;

and “the office-holder” means the administrator or the liquidator, as the case may be.

 

(2)     Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.

 

(3)     Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction." (IA 1986, s.238(1) - (3))

 

Transaction at undervalue

"(4)     For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—

(a)     the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or

(b)     the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company." (IA 1986, s.238(4))

 

Relevant time

"(1)     Subject to the next subsection, the time at which a company enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into, or the preference given—

(a)     in the case of a transaction at an undervalue or of a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), at a time in the period of 2 years ending with the onset of insolvency (which expression is defined below),

(b)     in the case of a preference which is not such a transaction and is not so given, at a time in the period of 6 months ending with the onset of insolvency,

(c)     in either case, at a time between the making of an administration application in respect of the company and the making of an administration order on that application, and

(d)     in either case, at a time between the filing with the court of a copy of notice of intention to appoint an administrator under paragraph 14 or 22 of Schedule B1 and the making of an appointment under that paragraph." (IA 1986, s.240(1))

Company must be unable to pay debts (which includes assets being less than liabilities)

"(2)     Where a company enters into a transaction at an undervalue or gives a preference at a time mentioned in subsection (1)(a) or (b), that time is not a relevant time for the purposes of section 238 or 239 unless the company—

(a)     is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or

(b)     becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference;

but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a company with a person who is connected with the company." (IA 1986, s.240(2))

"(1)     A company is deemed unable to pay its debts—

(a)     if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or

(b)     if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or

(c)     if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or

(d)     if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or

(e)     if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

 

(2)     A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

 

(3)     The money sum for the time being specified in subsection (1)(a) is subject to increase or reduction by order under section 416 in Part XV." (IA 1986, s.123)

Onset of insolvency

(3)     For the purposes of subsection (1), the onset of insolvency is—

(a)     in a case where section 238 or 239 applies by reason of an administrator of a company being appointed by administration order, the date on which the administration application is made,

(b)     in a case where section 238 or 239 applies by reason of an administrator of a company being appointed under paragraph 14 or 22 of Schedule B1 following filing with the court of a copy of a notice of intention to appoint under that paragraph, the date on which the copy of the notice is filed,

(c)     in a case where section 238 or 239 applies by reason of an administrator of a company being appointed otherwise than as mentioned in paragraph (a) or (b), the date on which the appointment takes effect,

(d)     in a case where section 238 or 239 applies by reason of a company going into liquidation either following conversion of administration into winding up by virtue of Article 51 of the EU Regulation or at the time when the appointment of an administrator ceases to have effect, the date on which the company entered administration (or, if relevant, the date on which the application for the administration order was made or a copy of the notice of intention to appoint was filed), and

(e)     in a case where section 238 or 239 applies by reason of a company going into liquidation at any other time, the date of the commencement of the winding up." (IA 1986, s.240(3)) 

Defence: good faith transaction intended to benefit company

"(5)     The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—

(a)     that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b)     that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company." (IA 1986, s.238(5))

Transaction at undervalue within 2 years of onset of insolvency

Transaction at undervalue (at any time) for the purpose of prejudicing creditors

 

Legislation

"(1)     This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—

(a)     he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;

(b)     he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or

(c)     he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.

 

(2)     Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—

(a)     restoring the position to what it would have been if the transaction had not been entered into, and

(b)     protecting the interests of persons who are victims of the transaction.

 

(3)     In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—

(a)     of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or

(b)     of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make." (IA 1986, s.423(1) - (3))

 

Meaning of the Court

"(4)     In this section “the court” means the High Court or—

(a)     if the person entering into the transaction is an individual, any other court which would have jurisdiction in relation to a bankruptcy petition relating to him;

(b)     if that person is a body capable of being wound up under Part IV or V of this Act, any other court having jurisdiction to wind it up.

(5)     In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as “the debtor”." (IA 1986, s.423(4))

Persons who may apply for an order

"(1)     An application for an order under section 423 shall not be made in relation to a transaction except—

(a)     in a case where the debtor has been made bankrupt or is a body corporate which is being wound up or is in administration, by the official receiver, by the trustee of the bankrupt's estate or the liquidator or administrator of the body corporate or (with the leave of the court) by a victim of the transaction;

(b)     in a case where a victim of the transaction is bound by a voluntary arrangement approved under Part I or Part VIII of this Act, by the supervisor of the voluntary arrangement or by any person who (whether or not so bound) is such a victim; or

(c)     in any other case, by a victim of the transaction.

(2)     An application made under any of the paragraphs of subsection (1) is to be treated as made on behalf of every victim of the transaction." (IA 1986, s.424)

Not confined to formal insolvency proceedings

"[29] Section 423 is a wide-ranging provision designed to protect actual and potential creditors where a debtor takes steps falling within the section for the purpose of putting assets beyond their reach or otherwise prejudicing their interests. Unlike other provisions of the Insolvency Act 1986, proceedings under it are not confined to formal insolvency proceedings but may be brought at any time by any actual or potential creditor who claims to have been prejudiced..."(BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

Transaction at undervalue (at any time) for the purpose of prejudicing creditors

Meaning of transaction

"“transaction” includes a gift, agreement or arrangement, and references to entering into a transaction shall be construed accordingly." (IA 1986, s.436(1))

Dividend is within the scope of s.423

"[59] I do not say that this question is to be decided purely by a process of linguistic analysis, but I do say that the language does not dictate the answer that the only unilateral act capable of falling within section 423(1) is a gift.
...

[61] I have so far proceeded on the basis that a dividend is ordinarily to be regarded as a unilateral act of the company. I do not, however, accept that this is the right approach. As earlier discussed, a dividend is paid pursuant to and in accordance with the rights of the shareholders under the company's articles of association. A dividend is a return on the shareholders' investment. Shareholders may well not be involved in the decision to pay a particular dividend, and in large companies that will commonly be the case, but given the context in which they come to be paid, I regard it as too narrow to say that a dividend is a unilateral act. It is not, in Mr Bompas QC's words in Re Hampton Capital Ltd, "merely a disposition of money which results in one party's money landing up in the bank account of the other without anything said or done by that other".

...

[63] In my judgment, therefore, the payment of a dividend is within the scope of section 423(1), even if it cannot be said to involve an agreement or arrangement between the company and the shareholders." (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

Meaning of transaction

At undervalue

 

Employee remuneration package not generally transaction at undervalue

“[25] It is not in my judgment possible to take a single element of an employee's remuneration package such as the provision of a benefit in kind and say that the provision of that benefit must be a transaction at an undervalue because the nature of employment did not require that the employee must be provided with that particular benefit. I do not say that a case cannot be made that a remuneration package is so far in excess of the commercial value of the services provided by an employee that it amounts to a transaction at an undervalue, but the assessment to be made must be by comparing the whole value of the package against the whole value of the services provided. If, for instance, those two values were approximately equal, it would not matter whether the employee agreed to be remunerated primarily by the provision of a car for which he had no business need, rather than by salary.” (Kiss Cards Ltd v. Lawson [2016] EWHC 2176 (Ch))

Dividend is not a gift but it is for no consideration

"Once it is accepted that the payment of a dividend involves the payment of funds beneficially owned by a company to its shareholders, the question under section 423(1) remains whether the terms on which the dividend is declared or paid "provide for [the company] to receive no consideration". In my judgment, it cannot be said that the company receives consideration for the payment of a dividend. It is not enough to say that the dividend is paid in accordance with the rights attached to the shares, where those rights are quite different from, for example, the right to receive interest payments on loan notes or the right to be considered for bonus declarations on a with-profits fund. If and when a company pays a dividend to shareholders, the terms of the dividend do not provide for the company to receive any consideration nor will it receive any consideration. It might be said that to come within the second limb of section 423(1)(a) the terms must expressly provide for no consideration but in my view that would be too literal a reading of the provision. Parliament can hardly have intended the operation of the section to depend on the vagaries of drafting styles." (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

At undervalue​

Purpose of prejudicing creditors

 

Focused on the subjective purpose of the debtor

"[29]...It also differs from other provisions in being focused on the subjective purpose of the debtor." (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

Need only be a purpose (rather than a mere consequence)

"[66] This is essentially a question of fact. The purpose of a person in entering into a transaction is matter of the subjective intention of that person: what did he aim to achieve? Section 423(3) does not require the specified purpose to be the sole or dominant purpose. It is sufficient if it "can properly be described as a purpose and not merely as a consequence, rather than something which was indeed positively intended": IRC v Hashmi [2002] EWCA Civ 981, [2002] 2 BCLC 489 at [23] per Arden LJ.

...

[233] The finding required for the section 423 claim was that putting assets beyond the reach of creditors was one of the purposes (and not necessarily a causative purpose), and not just a consequence, of paying the dividend: see the judgment at [489]-[493]. " (BTI 2014 LLC v. Sequana SA [2019] EWCA Civ 112)

"[23] It is sufficient if the statutory purpose can properly be described as a purpose and not merely as a consequence, rather than something which was indeed positively intended. Moreover, I agree with the observation of the judge that it will often be the case that the motive to defeat creditors and the motive to secure family protection will co-exist in such a way that even the transferor himself may be unable to say what was uppermost in his mind.

...

[28] ... In particular, the only explanation for the consistent and considerable under-declarations of profit was an intention to defraud the Revenue. That was a matter which the judge was entitled to infer had been constantly in Mr Ghauri's mind for a number of years by the time of the declaration of trust. I reject the submission that the judge's findings with regard to Mr Ghauri's financial position were unsound for the reasons I have already given. The judge was entitled to reject the evidence of the family members that the purpose of the declaration of trust was family provision." (IRC v. Hashmi [2002] EWCA Civ 981, Arden LJ)

Purpose may, in an appropriate case, be inferred from consequence

"[15] Arden LJ made this very point in the Hashmi case when she said (at para 23) that "there is no epithet in the section and thus no warrant for reading one in". When later in her judgment she referred (at para 25) to a "real substantial" purpose, it is apparent from the context that the reason for using those adjectives at that point was to underline the distinction between a purpose and a consequence of the relevant transaction. As Arden LJ emphasised, it is not enough to bring a transaction at an undervalue within s.423 that the transaction had the consequence of putting assets of the debtor beyond the reach of creditors. That is so even if the consequence was foreseeable or actually foreseen by the debtor at the time of entering into the transaction. Evidence that the debtor believed that the transaction would result in putting assets beyond the reach of creditors may support an inference that the transaction was entered into for the purpose of doing so, but the two things are not the same. To illustrate the distinction using a less homely example than that given by Arden LJ, a commander may order a missile strike on a military target knowing that it will almost certainly cause some civilian casualties. But this does not mean that the missile strike is being carried out for the purpose of causing such casualties.

[16] When judging a person's intentions, we are generally more inclined to accept that an action was not done for the purpose of bringing about a particular consequence, even if the consequence was foreseen, if there is reason to believe that the consequence was something which the actor wished to avoid or at least had no wish to bring about. Hence, in the example just given, where the missile strike had a clear strategic purpose, we may readily accept that it was not ordered for the purpose of causing civilian casualties- particularly if, for example, there is evidence that the commander gave anxious consideration to how many civilians were likely to be in the target area and planned the strike for a time when the number was expected to be low. By contrast, a consequence is more likely to be perceived as positively intended if there is reason to think that it is something which the actor desired. Thus, evidence that a person who has entered into a transaction at an undervalue foresaw that the result would be to put assets out of the reach of creditors and desired that result might lead the court to infer that the transaction was entered into for that purpose. But such a conclusion is not a logical or legal necessity. It is a judgment which has to be based on an evaluation of all the relevant facts of the particular case"." (JSC BTA Bank v. Ablyazov [2018] EWCA Civ 1176, Legatt LJ)

Consequence of tax avoidance scheme may be to put assets beyond HMRC's reach without that being the purpose

"[293] As JSC v Ablyazov makes clear, purpose, which is one of the pre-conditions to liability, is distinct from consequence. Here, it was a consequence of the Scheme that assets which would otherwise have been used for the payment of PAYE and NICs were put beyond the reach of the creditor who would receive such payments, HMRC. That was not its purpose. Nor was its purpose "otherwise prejudicing the interests of HMRC in relation to a claim which it might make at some time and did in fact make", as the amended particulars of claim have it. The Respondents' evidence was that they had no interest in making, and would not have made, payments under the Scheme without the belief that it was likely to be legitimate; and that was their belief. The purpose, then, was to pay monies pursuant to a legitimate scheme, as to which BDO was consulted at all stages." (Hunt v. Balfour-Lynn [2022] EWHC 784 (Ch), ICC Judge Prentis)

Purpose of prejudicing creditors

Consequences of transaction at undervalue prejudicing creditors

 

"(1)     Without prejudice to the generality of section 423, an order made under that section with respect to a transaction may (subject as follows)—

(a)     require any property transferred as part of the transaction to be vested in any person, either absolutely or for the benefit of all the persons on whose behalf the application for the order is treated as made;

(b)     require any property to be so vested if it represents, in any person's hands, the application either of the proceeds of sale of property so transferred or of money so transferred;

(c)     release or discharge (in whole or in part) any security given by the debtor;

(d)     require any person to pay to any other person in respect of benefits received from the debtor such sums as the court may direct;

(e)     provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction to be under such new or revived obligations as the court thinks appropriate;

(f)     provide for security to be provided for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property and for such security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction.

 

(2)     An order under section 423 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the debtor entered into the transaction; but such an order—

(a)     shall not prejudice any interest in property which was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and

(b)     shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.

 

(3)     For the purposes of this section the relevant circumstances in relation to a transaction are the circumstances by virtue of which an order under section 423 may be made in respect of the transaction.

 

(4)     In this section “security” means any mortgage, charge, lien or other security." (IA 1986, s.425)

Consequences of transaction at undervalue prejudicing creditors

Unlawful preference of creditor

 

"(1)     This section applies as does section 238.

(2)     Where the company has at a relevant time (defined in the next section) given a preference to any person, the office-holder may apply to the court for an order under this section.

(3)     Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference." (IA 1986, s.239(1) - (3))

 

Meaning of preference

"(4)     For the purposes of this section and section 241, a company gives a preference to a person if—

(a)     that person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities, and

(b)     the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done." (IA 1986, s.239(4))

 

Must be influenced by purpose of putting person in better position

"(5)     The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b)." (IA 1986, s.239(5))

Presumption if connected

"(6)     A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5)." (IA 1986, s.239(6))

 

Court order does not prevent it being a preference

"(7)     The fact that something has been done in pursuance of the order of a court does not, without more, prevent the doing or suffering of that thing from constituting the giving of a preference." (IA 1986, s.239(7))

Relevant time

See above, Transactions at undervalue, s.238

Unlawful preference of creditor

Limitation period

 

Section 238 - Transaction at undervalue within 2 years of onset of liquidation: 6 years if seeking to recover a sum

"In the light of the foregoing, the legal position is, in my judgment, as follows:
(1)  An application to the court under s.238 to 241 IA86 to set aside one or more transactions is an action on a speciality within s.8(1) Limitation Act 1980 and hence prima facie subject to a twelve year limitation period. The case of Re Farmizer products is clearly distinguishable because the words of s.214 are different and because the claim there was a claim for monetary compensation, not a claim to set aside a transaction. To that extent, I must respectfully differ from the dictum of Mr. Scher Q.C. where he expressed a view as to what the more likely limitation period (6 years or 12 years) was in the case of the equivalent personal insolvency section (399). I accept the submission of counsel for the applicant that the case cited by him at the end of that sentence ( Re Farmizer in the Court of Appeal ) does not on analysis offer any support for his proposition that the 6 year period under s.9(1) of the Limitation Act 1980 is more likely to be that applicable. Particularly given the great experience of the learned Deputy Judge, I do wonder whether *31 the overall result of the Farmizer case — as opposed to a full analysis of the terms of the judgment — is all that had been laid before him. It seems also that the text of Muir Hunter on Personal Insolvency , para.3.296 which was placed before him must have been more similar to the September 1999 edition which I have seen, than the 1996 editions which are the only others which I have seen. That sentence, which runs from lines 19 to 21 of the penultimate page of the transcript of Mr. Scher Q.C.'s judgment, is a further example of what I have called the “look and see” approach, as to which there is no difficulty in reconciling the judgment in the Farmizer case and that which I am now giving.
(2)  There may however be examples of applications under ss.238 to 241 which are taken outside the scope of s.8(1) of the Limitation Act by the combined operation of ss.9(1) and 8(2) of that Act with the effect that the limitation period is reduced from 12 years to 6.
(3)  An application under ss.238 to 241 will come into the latter category if it can fairly be said that the substance or the essential nature of the application is “to recover a sum recoverable by virtue of” those sections. The applicant accepts that some cases under ss.238 and 239 will be caught by s.9(1). Which category will prove to be the more frequent has been the subject of extended debate, and I do not propose to offer any prediction of my own. One example of a case caught by ss.9(1) and 8(2) might be where the transaction to be set aside is a simple payment of a sum of money. Another might be where the only substantive relief available to the applicant is an order for the payment of money, such as where s.241(2) precludes the setting aside of the transaction.
(4)  Where there is doubt as to whether a claim falls into the first (that is, 12 year) category, or the second (that is, 6 year) category, the “look and see” approach adopted by Lord Goddard CJ in the West Riding case and approved by Peter Gibson LJ in the Farmizer Products case at 599F should be applied, and the court should look to see what the substance or essential nature of the relief truly sought by the applicant in the particular case before it is. The court is not limited just to the words of the pleading. The court may look at the substance behind the pleading. However, provided the pleaded claim to set aside is a bona fide claim, which is neither a sham nor bound to fail, the applicant is entitled to pursue it, and it cannot be without significance that the first example of the types of relief which may be granted to implement ss.238(3) and 239(3) given in s.241(1), which is ultimately a list of examples, is that set out at subsection (a), which I have already quoted earlier in this judgment.
(5)  Given the possibility that a six year, rather than a twelve year, limitation period may apply in any particular case, liquidators — and for that matter, other office holders within the meaning of these sections — would be well advised to ensure that any such proceedings are commenced within this shorter six year period. Those who allow such a claim to draft past the first six years after accrual of the cause of action before commencing proceedings, as appears to have occurred here, do so at the risk of finding either all, or  possibly part, of their claim lost." (Re Priory Garage (Walthamstow) Limited 2000 WL 1918580 at 30)

 

Section 423 - Transactions at undervalue for the purpose of prejudicing creditors: usually 6 years

"[143] There is no general rule that an action brought by a trustee in bankruptcy is not subject to the provisions of the Limitation Act 1980, and I can see no justification for there to be an exception in the case of a claim brought under s.423. That is confirmed by such authority as may be said to bear on the point; see in particular Re Priory Garage (Walthamstow) Ltd [2001] BPIR 144, a case relating to the somewhat comparable provisions of section 238 to 241 of the 1986 Act.
[144] The second question is whether the claims of the trustee in bankruptcy fall within section 8(1) or section 9(1) of the Limitation Act 1980. My own view, like that of Judge Weeks QC (pp 915-916), is that, since the main claim was in origin and substance a claim to set aside the settlement, the action as a whole was "an action upon a specialty" within section 8(1). But because the action was commenced on 4 December 2002, more than twelve years after the settlement was made on 10 March 1989 and less than six years after the bankruptcy order was made on 28 January 1999, the question whether the applicable period of limitation was twelve years under section 8(1) or six years under section 9(1) is academic..." (Hill v. Spread Trustee Company Ltd [2006] EWCA Civ 542)

Commencement of time limit for trustee in bankruptcy: date of bankruptcy

"[150] Three further points must be made. First, it is not an objection to the judge's view that the limitation period may begin many years after the transaction. That state of affairs is perfectly capable of arising under other sections of the 1980 Act, e.g. sections 28 and 32. Secondly, I do not agree that the appointment of the trustee in bankruptcy is not an ingredient of the cause of action vested in the trustee. It is not until a bankruptcy order is made that the trustee is identified as the person entitled to sue. Thirdly, it is in my view immaterial that when the bankruptcy order is made there may be other victims of the transaction whose individual claims may already be statute-barred but who may nevertheless be able to claim as creditors in the bankruptcy." (Hill v. Spread Trustee Company Ltd [2006] EWCA Civ 542)

Limitation period

Summary application for remedy by liquidator

 

"(1)     This section applies if in the course of the winding up of a company it appears that a person who—

(a)     is or has been an officer of the company,

(b)     has acted as liquidator or administrative receiver of the company, or

(c)     not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company,

has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

 

(2)     The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who has acted as liquidator of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator of the company.

 

(3)     The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him—

(a)     to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or

(b)     to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.

 

(4)     The power to make an application under subsection (3) in relation to a person who has acted as liquidator of the company is not exercisable, except with the leave of the court, after he has had his release.

 

(5)     The power of a contributory to make an application under subsection (3) is not exercisable except with the leave of the court, but is exercisable notwithstanding that he will not benefit from any order the court may make on the application." (IA 1986, s.212)

Available against de facto directors but not shadow directors

"[38] The remedy that is provided by section 212 IA 1986 may be sought only against persons to whom that section applies, as described in section 212(1). The description that applies to this case is that set out in para (a) of the subsection: "is or has been an officer of the company". The word "officer" includes a director, but it is accepted that the section does not apply to shadow directors because the statute does not provide for this. It follows that HMRC must plead and prove against Mr Holland that he was a de facto director of the composite companies." (HMRC v. Holland [2010] UKSC 51)

Summary application for remedy by liquidator

Discretion as to remedy

"[49]...But there is a discretion under section 212 IA 1986 that it is open to the judge to exercise. This is indicated by the use of the word "may" in subsection (3). Rimer LJ said that the judge's order should have reflected the wrong that had actually been committed and the fact that he had refused relief under section 727 CA 1985 in respect of it. Elias LJ, paras 133-134, and Ward LJ, para 143, disagreed. In their view it was open to the deputy judge to limit the amount that Mr Holland should pay to what HMRC had lost from his unlawful conduct. Had it been necessary to reach a view on this point, I would have agreed with the majority. HMRC is the only creditor. There is no evidence that anyone would have been disadvantaged by limiting the liability in this way. It would have been a different matter if the deputy judge had misdirected himself as to the extent of the obligation. That plainly is not so. As he made clear in para 274 of his judgment, he proceeded on the basis that, while restoration is the established remedy, he had a discretion under section 212 IA 1986 to limit the award to what was required to make up the deficiency of a particular creditor where the claim was made by a party other than the liquidator. In my opinion it was open to him to exercise his discretion in this way, and I do not think that he can be faulted for doing so in this case." (HMRC v. Holland [2010] UKSC 51)

Cannot award no remedy

"[51] Mr Knox submitted that the discretion under section 212 was wide enough to allow the court to reduce the award to nil even if it declined relief under section 727 CA 1985. I agree with Rimer LJ that the discretion under section 212(3), which is essentially procedural in nature, is a discretion as to amount only once liability has been established. It is not so wide as to allow the judge, having determined that the section applies, to decline to make any order at all: paras 108-110. The discretion which he is given by section 212(3) is as to the order that would be appropriate once liability has been established, not to grant relief against liability. It is a discretion as to how much the director should be ordered to pay, so as to do what is just in all the circumstances: Re Loquitur Ltd [2003] 2 BCLC 442, per Etherton J at para 245. The deputy judge was right to reject this argument." (HMRC v. Holland [2010] UKSC 51)

Discretion exercised to limit repayment amount of provision that should have been made

"[271] The core complaint, as established, is, as I see it, the failure to provide for Corporation Tax by making provision for HRCT in respect of continued trading after that date. In these circumstances, in the exercise of my discretion under Section 212 IA 1986, I consider it appropriate to limit the award against Mr Holland to the amount of HRCT that the Composite Companies failed to provide for that fell or accrued due in respect of trading between 23rd August 2004 and the date of administration (19th October 2004), ie. the difference between the outstanding HRCT liability as at 19th October 2004 and that as at 23rd August 2004, reflecting the HRCT arising between those two dates." (HMRC v Holland [2008] EWHC 2200 (Ch), Mark Cawson QC)

"[49] Rimer LJ said that the judge's order should have reflected the wrong that had actually been committed and the fact that he had refused relief under section 727 CA 1985 in respect of it. Elias LJ, paras 133-134, and Ward LJ, para 143, disagreed. In their view it was open to the deputy judge to limit the amount that Mr Holland should pay to what HMRC had lost from his unlawful conduct. Had it been necessary to reach a view on this point, I would have agreed with the majority. HMRC is the only creditor. There is no evidence that anyone would have been disadvantaged by limiting the liability in this way. It would have been a different matter if the deputy judge had misdirected himself as to the extent of the obligation. That plainly is not so. As he made clear in para 274 of his judgment, he proceeded on the basis that, while restoration is the established remedy, he had a discretion under section 212 IA 1986 to limit the award to what was required to make up the deficiency of a particular creditor where the claim was made by a party other than the liquidator. In my opinion it was open to him to exercise his discretion in this way, and I do not think that he can be faulted for doing so in this case." (HMRC v. Holland [2010] UKSC 51 although note that this was obiter and at least two Law Lords disagreed)

"[247] In my judgment, it is appropriate in the present case, notwithstanding that the Court is unable to grant relief under CA 1985 s.727 , to limit the amount which should be paid by the Respondents to MV to less than the full £5.9 million paid by way of the Dividend.
[248] The Interim Accounts failed to comply with CA 1985 s.270 in omitting provision for the full tax liability of MV in respect of the capital gain arising on the sale of the Ronson Business. In my judgment, in all the circumstances I have mentioned earlier in this judgment, it would be just to order the Respondents to pay that amount to MV.
[249] I do not consider, in all the circumstances, that it would be just to order the Respondents personally to repay to MV any further part of the Dividend. If the Interim Accounts had been drawn on the basis that the rollover scheme was unlikely to be successful, there would have been no reason to include in those Accounts provision for the £1.16 million fee payable to EBB on the success of the scheme." (Re Loquitur; IRC v. Richmond [2003] EWHC 999 (Ch), Etherton J)

Discretion as to remedy

Fraudulent trading

"(1)     If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

(2)     The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper." (IA 1986, s.213)

Three elements

"[11]...There are therefore three elements to be established: (1) that the business of the company in liquidation has been carried on with intent to defraud the creditors of the company or for any other fraudulent purpose; (2) that the defendant sought to be made liable …participated in the carrying on of the business of the company in that manner; and (3) that it did so knowingly: i.e. with knowledge that the transactions it was participating in were intended to defraud the creditors of the company or were in some other way fraudulent." (Morris v. Bank of India [2003] EWHC 1868 (Ch), Patten J)

Mere fact that there is fraud in the course of carrying on the business not sufficient

"[14]...As noted by ICC Judge Jones in Re Vining Sparks UK Limited [2019] EWHC 2885 (Ch) the test is extremely wide and can embrace an intent to defraud only one creditor, but the mere fact that there has been fraud in the course of company's business does not necessarily engage the section. In Re Murray-Watson Ltd (unreported) 6 April 1977 Oliver J said in respect of the predecessor to section 213 :

"[The section] is aimed at the carrying on of a business …and not at the execution of individual transactions in the course of carrying on that business. I do not think that the words 'carried on' can be treated as synonymous with 'carried out', nor can I read the words 'any business' as synonymous with 'any transaction or dealing'. The director of a company dealing in second-hand motor cars who wilfully misrepresents the age and capabilities of a vehicle is, no doubt, a fraudulent rascal, but I do not think he can be said to be carrying on the company's business for a fraudulent purpose, although no doubt he carries out a particular business transaction in a fraudulent manner."

In Re Gerald Cooper Chemicals Ltd [1978] Ch 262 , Templeman J adopted that analysis. He said this:

"In the example given by Oliver J… the dealer was carrying on the business of selling motor cars. He did not carry on that business with intent to defraud creditors if he told lies every time he sold a motor car to a customer or only told one lie when he sold one motor car to one single customer. When the dealer told a lie, he perpetrated a fraud on the customer, but he did not intend to defraud a creditor. It is true that the defrauded customer had a right to sue the dealer for damages, and to the extent of the damages was a contingent creditor, but the dealer did nothing to make it impossible for the customer, once he had become a creditor, to recover the sum due to him as a creditor."

In Morphitis v Bernasconi [2003] Ch 552 , at paragraph 43, Chadwick LJ also approved the passage of Oliver J. He went on at paragraph 53 to consider how a respondent's contribution to a company's assets should be assessed in a case of fraudulent trading:

"There must, as it seems to me, be some nexus between (i) the loss which has been caused to the company's creditors generally by the carrying on of the business in the manner which gives rise to the exercise of the power and (ii) the contribution which those knowingly party to the carrying on of the business in that manner should be ordered to make to the assets in which the company's creditors will share in the liquidation. An obvious case for contribution would be where the carrying on of the business with fraudulent intent had led to the misapplication, or misappropriation, of the company's assets. In such a case the appropriate order might be that those knowingly party to such misapplication or misappropriation contribute an amount equal to the value of assets misapplied or misappropriated. Another obvious case would be where the carrying on of the business with fraudulent intent had led to claims against the company by those defrauded. In such a case the appropriate order might be that those knowingly party to the conduct which had given rise to those claims in the liquidation contribute an amount equal to the amount by which the existence of those claims would otherwise diminish the assets available for distribution to creditors generally; that is to say an amount equal to the amount which has to be applied out of the assets available for distribution to satisfy those claims." (Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

But a single transaction may be sufficient

 

"For my part, I would accept that a business may be found to have been carried on with intent to defraud creditors notwithstanding that only one creditor is shown to have been defrauded, and by a single transaction. The Cooper Chemicals case is an example of such a case. But, if (which I doubt) Mr Justice Templeman intended to suggest that, whenever a fraud on a creditor is perpetrated in the course of carrying on business, it must necessarily follow that the business is being carried on with intent to defraud creditors, I think he went too far. It is important to keep in mind that the pre-condition for the exercise of the court's powers under section 332(1) of the 1948 Act - as under section 213 of the 1986 Act – is that it should appear to the court "that any business of the company has been carried on with intent to defraud creditors of the company". Parliament did not provide that the powers under those sections might be exercisable whenever it appeared to the court "that any creditor of the company has been defrauded in the course of carrying on the business of the company." And, to my mind, there are good reasons why it did not enact the sections in those terms." (Morphitis v Bernasconi [2003] EWCA Civ 289, Chadwick LJ)

"In my judgment, when Mr Cooper on behalf of the Cooper companies sought from Harrisons an order for indigo on advance payment terms, Mr Cooper was carrying on the business of the Cooper companies. When the Cooper companies accepted payment of £125,698-odd, Mr Cooper knowing that there was no prospect, or no reasonable prospect or intention of supplying indigo, and no intention of returning the money to Harrisons, the business of the Cooper companies was carried on fraudulently. The subsequent payment to Jimlou of £111,000 made the fraudulent carrying on of the business irremediable and constituted a fraud on the then creditor, Harrisons. The whole transaction between the Cooper companies and Harrisons constituted the carrying on of the business of the Cooper companies with intent to defraud a creditor of the company. Save that only one creditor was involved, the situation appears to meet the requirements of section 332 set forth by Oliver J in In re Murray-Watson to which I have already referred, namely that the section is contemplating a state of facts in which the intent of the person carrying on the business is that the consequence of carrying it on (whether because of the way it is carried on or for any other reason) will be that creditors will be defrauded, "intent", of course, being used in the sense that a man must be taken to intend the natural or foreseen consequences of his act.

...

In the present case, the Cooper companies were carrying on the business of selling indigo. In my judgment, they carried on that business with intent to defraud creditors if they accepted deposits knowing that they could not supply the indigo and were insolvent. They were carrying on business with intent to defraud creditors as soon as they accepted one deposit knowing that they could not supply the indigo and could not repay the deposit. It does not matter for the purposes of section 332 that only one creditor was defrauded, and by only one transaction, provided that the transaction can properly be described as a fraud on a creditor perpetrated in the course of carrying on business. If the Cooper company had fraudulently supplied sub-standard indigo to Harrisons, the Cooper company would have committed a fraud on a customer, but by accepting a deposit knowing that they could or would not supply indigo, and by using the deposit in a way which made it impossible for them to repay Harrisons, the Cooper company, in my judgment, committed a fraud on a creditor." (re Gerald Cooper Chemicals Ltd [1978] Ch 262)

Tax avoidance scheme alone not sufficient

"[195] The absence of dishonesty means the alternative claim of fraudulent trading cannot succeed. For the avoidance of doubt, all the findings above apply and there is no knowledge, actual or as a result of shutting eyes. It also follows from those findings that the business was not carried on with intent to defraud. Indeed, it probably would not have been even had the use of the Employer Scheme been fraudulent. This would have been how the business was carried out not carried on." (Re Vining Sparks UK Ltd  [2019] EWHC 2885 (Ch), ICC Judge Jones)

Tax avoidance scheme plus steps taken to make it impossible for creditor to recover may be sufficient

"[37] Mr Groves submits that, even if proven, the pleaded claim cannot amount to fraudulent trading. He submits that the business "carried on" by the Company was that of a recruitment agent. Its business was not the working of a fraud on HMRC. It is right that section 213 does not apply simply because a fraud has been carried out by a company, but it is not confined to companies that are established for some unstated fraudulent purpose in whole or in part. It is enough that the business of the company should be carried on so as to defraud creditors, whether or not those creditors have become creditors by reason of a fraud or by reason of the company carrying on an entirely legitimate business. That seems to me to be clear from Templeman J's observation in Gerald Cooper Chemicals that, in Oliver J's example in Murray-Watson , the company did not carry on a business with intent to defraud creditors because it had done "nothing to make it impossible for the customer, once he had become a creditor, to recover the sum due to him as a creditor." Here, if the Liquidators are correct, schemes were entered into by which monies were extracted from the Company and the business was artificially restructured so as to prevent recovery by HMRC and creditors more generally. In my judgment, that is capable of amounting to the "carrying on" of a business with intent to defraud creditors.

[38]...The restructuring so as to leave the Company without assets at a time when HMRC was raising assessments and pressing for payment is striking. On the face of it, the Company was at that stage insolvent as a result of HMRC assessments and yet the right to receive the consideration for the sale of the Company's businesses was transferred to Holdings. The circumstances of the restructuring do seem to me to colour the carrying on of the Company's business in relation to its tax affairs. I agree with Mr Curl that this does have to be considered as a whole. The Liquidators' pleaded case, if proven, is more than capable of giving rise to an inference of intent to defraud on the part of First and Second Respondent in the conduct of the Company's tax affairs" (Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

Dishonesty

"[15] The test for dishonesty is set out in Ivey v Genting Casinos (UK) Ltd [2018] AC 391 ." (Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

Entering into tax avoidance schemes not inherently dishonest

"[32] As set out in that case, there is nothing unlawful in a company ordering its affairs so as to avoid a liability to tax, providing that it is not seeking to evade tax properly due. A novel tax scheme might be found to be ineffective to avoid tax but that does not mean that its promotors or those who have sought to participate in the scheme are dishonest." (Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

But doing so repeatedly, without making provision for liabilities and then restructuring to put assets out of HMRC's reach might be

"[36] In my judgment it is not necessary that the Points of Claim should allege that each scheme amounted to tax evasion. Had the fraudulent trading claim been simply based on entry into a tax avoidance scheme, without more, Mr Groves would undoubtedly be correct that the claim could not succeed. The complaint here, reading paragraph 102 in the context of the pleading as a whole, is not simply that that the tax schemes were entered into. It is that the First and Second Respondent caused the Company's business to be carried on so that it entered into a series of tax schemes over an extended period in the knowledge that they might not be effective, and continued to do so, without making provision for the tax that might fall due, even after HMRC raised an assessment at a relatively early stage, and culminating in the restructuring of the business to in such a way that HMRC would be entirely unable to recover any tax ultimately found to be due. Those are "the transactions" that together amount to "the attempt" to defraud and the intention to defraud HMRC by so doing is expressly pleaded. Mr Foster's witness statement glosses that as tax evasion but it is not necessary to plead that as part of the cause of action. It is not necessary that each or any debt to a creditor has been incurred as a result of illegality, fraud or dishonesty in order to sustain a claim of fraudulent trading. What is necessary is that the company carries on its business to defraud creditors, however the debts to those creditors were incurred." (Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

Knowledge

"[15]...Patten J also explored the requisite knowledge in Morris and others v Bank of India [2004] 2 BCLC 279 at paragraph 13:
"The Liquidators have to show that BOI (through its relevant officers and employees) knew that the six transactions (or one or more of them) were being entered into either to defraud the creditors of BCCI or for a fraudulent purpose…Knowledge for this purpose, means what it says. There must have been an actual realisation on the part of BOI that BCCI would, or was likely to, engage in false accounting. A failure to recognise the truth of what was going on is not enough, however obvious that may now seem to have been. The relevant knowledge also has to be contemporaneous with the assistance that was given at the time by entering into the various transactions. Subsequent knowledge based on hindsight is not enough, nor is negligence the test of liability."
Actual knowledge includes shutting one's eyes to the obvious provided that includes the element of fraud. It can, therefore, include a deliberate decision not to seek confirmation of suspicious facts (see Morris v Bank of India [2004] 2 BCLC 236 )." 
(Re Daystreet15 Ltd [2020] EWHC 1140 (Ch), ICC Judge Mullen)

Wrongful trading (trading when ought to have known no reasonable prospect of avoiding insolvent liquidation)

"(1)     Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.

(2)     This subsection applies in relation to a person if—

(a)     the company has gone into insolvent liquidation,

(b)     at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration, and

(c)     that person was a director of the company at that time;

but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986." (IA 1986, s.214(1) - (2))

 

Defence if took every step with a view to minimising losses to creditors

"(3)     The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)) he ought to have taken." (IA 1986, s.214(3))

Determining what a person ought to have known

"(4)     For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both—

(a)     the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b)     the general knowledge, skill and experience that that director has.

(5)     The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him." (IA 1986, s.214(4))

Definitions

"(6)     For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(6A)     For the purposes of this section a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration.

(7)     In this section “director” includes a shadow director.

(8)     This section is without prejudice to section 213." (IA 1986, s.214(6) - (8))

Wrongful trading and fraudulent trading

Limitation period: 6 years from liquidation

"I therefore conclude that s 214 (no less than s 213) proceedings are for the recovery of a sum of money which the court declares the delinquent respondent liable to contribute to the assets of the company. This does not of course preclude the liquidator accepting property other than money to satisfy that liability.

Does the fact that the court has a discretion whether to make a declaration at all, even if it appears to the court that s 214(2) applies, and as to the amount of the contribution, if any, cause the claim made not to be an action to recover any sum recoverable by virtue of any enactment? I do not think so. If one asks, 'By virtue of what is the sum of £1.25m recoverable?', the answer would surely be: 'By virtue of s 214'. It is of course only capable of being recovered if the court chooses to make the declaration after the statutory conditions are shown to be satisfied, but I have no difficulty in holding that s 9 of the 1980 Act applies to such a case." (Re Farmizer (Products) Ltd [1997] 1 BCLC 589 at 599, Peter Gibson LJ)

Limitation period: 6 years from liquidation

Contravention of pari passu principle

 

"Subject to the provisions of this Act as to preferential payments, the company's property in a voluntary winding up shall on the winding up be applied in satisfaction of the company's liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company." (IA 1986, s.107)

Liquidator liable

"[27] As to s.107, where (as in this case) there are no preferential creditors and there will not be a surplus for distribution to the members, the liquidator's task is to apply the company's property in satisfaction of its unsecured liabilities rateably. To achieve this, a liquidator must gather in and realise the non-monetary assets, aggregate the proceeds with monetary assets, ascertain the liabilities, and distribute the available monies on an equal basis; these tasks are regarded duties implicit in s.107.

...

[139] In my judgment, and subject to the various defences raised by Mr Hansen on GS's behalf (causation, discretion, s.1157, and Illegality), when paying out £148,000 from the Sum on 30.11.11 GS acted in breach of the duty implicit in s.107 and acted negligently (i.e. below the standard of care to be expected of an ordinary, skilled insolvency practitioner)." (Re Mama Milla Ltd [2014] EWHC 2753 (Ch))

Contravention of pari passu principle
bottom of page