Important case on directors’ misfeasance principles: Katherine Hallett reviews the Bodystretch case

Katherine Hallett, who successfully acted for the Official Receiver in Bodystretch (UK) [2023] EWHC 2735 (Ch), looks at the implications of the case for practitioners.

Introduction

Katherine Hallett successfully acted for the Official Receiver (‘OR’) as Liquidator in this claim against the Company’s director for misfeasance, breach of duty, preference, and transaction at an undervalue. The claim arose out of the sale of the Company’s principal asset, its premises, and the dissipation of the proceeds. Katherine was instructed by Stephanie Bishop of Clarke Willmott.

Facts

8 months prior to compulsory liquidation, the director had caused the Company to sell the Company’s premises, receiving c.£420,000 in net proceeds. The director then caused the proceeds to be dissipated predominantly to (1) himself (‘the September 2015 Payments’) and (2) various third parties including his father (‘the Third Party September Payments’). Furthermore, in the 18 months preceding the sale, the director had received a total of nearly £100,000 in unexplained payments from the Company (‘the Pre-September 2015 Payments’).

Decision

Access to Company records

The director alleged that he had not been provided with access to the Company’s books and records which would have allowed him to prove his defence. The Judge rejected that allegation. The evidence showed that the OR had repeatedly offered the director an appointment to view the (voluminous) books and records, copies had been offered, and the director had never made his own proposals for inspection, nor had he asked for specific documents, despite having been provided with an inventory. The Judge therefore refused to infer that there was anything in the records which would assist the director or undermine the OR’s case, as the director had had ample opportunity to inspect but had chosen not to do so.

Insolvency

The Judge accepted the OR’s case that the Company became insolvent by April 2015, 5 months before the premises were sold. The Judge also rejected the director’s case that insolvency was triggered by the Company’s dispute with Barclays Bank under its debt factoring contract or its dispute with the Arcadia Group, which refused to pay for clothing supplies in the summer of 2015.

September Payments

Part of the director’s case was that the September Payments to him reflected the repayment of a loan he (and his father) had previously made to the Company. However, there was no evidence of any such loan, except the director’s own oral evidence, which the Judge rejected.

The director also alleged that the September Payments reflected payment of salary, expenses and redundancy pay due to him. However, there was no evidence of a salary having been approved for him as required under the articles. Nor was there any documentary evidence in support of any expense claim.

The Judge thus concluded that the September Payments were made to the director in breach of his duties to the Company. In any event, even had the Judge accepted the director’s case on these payments, they would have amounted to preferences.

Third Party September Payments

The Judge accepted the OR’s case that all of the Third Party September Payments (including to the director’s father) constituted preferences. There was no legitimate commercial reason to pay Company creditors at this stage, as it was ceasing to trade.

Pre-September Payments

As a fiduciary, the director was obliged to explain the Pre-September Payments received by him. However, he had shown no entitlement to these payments (e.g. as salary), and they were therefore made in breach of his duties to the Company. They also constituted transactions at an undervalue.

Relief under s.1157 CA 2006

The Judge refused the director relief in respect of his breaches of duty: it was “not so much an “informal winding up” as a wholesale subversion of the principle of equal treatment of creditors on an insolvent winding up” (para.77).

Takeaways

This case provides a good example of the application of the director’s misfeasance principles.

In particular, it gives assistance to officeholders in countering the oft-cited “I was due salary” argument raised by directors in such cases. As the Judge said, the director’s statement that drawing a salary was “for work that you do for a company” was “to misunderstand the position” (para.56).

In addition, the case is also useful in reinforcing the obligation on the director when it comes to Company documentation: he or she must take positive action if it is said that there are documents helpful to the defence amongst the Company’s books and records. Equally, it also demonstrates the importance of officeholders offering directors every opportunity to inspect, in order to undermine the defence’s position at trial.

 

If you would like more information, please contact Justin Brown.