Where the liquidator of a company in liquidation commences proceedings[1] for unlawful preference[2] under section 239 of the Insolvency Act 1986 against the recipient of the unlawful preference, the liquidator may also[3] decide to bring a misfeasance claim against the company’s directors. Where a misfeasance claim is made, the liquidator may allege that all or some of the company’s directors breached their directors' duties to the company, because they were responsible for the company making the impugned preferential transfer/transaction.
This article will give an overview of directors duties, before considering, firstly, whether it always follows that a director will have committed a breach of directors duty/misfeasance when the company is found to have made an unlawful preference; and then, secondly, what acts/omissions by directors connected to the unlawful preference will be sufficient for liability.
The article will review the cases of West Mercia Safetywear Limited v Dodd (1988) 4 BCC 30 (‘West Mercia’), Re Brian D Pierson (Contractors) Ltd [1999] B.C.C. 26 ('Pierson'), Singer v Beckett (also known as: Re Continental Assurance Co of London Plc (In Liquidation)) [2007] 2 B.C.L.C. 287 (‘Singer’)[4], Re Palmier Plc; Sandhu v Sidhu [2009] EWHC 983 (Ch) (‘Sandhu’), Wilson v Masters International Ltd (also known as Re Oxford Pharmaceuticals Ltd) [2010] BCC 834 ('Wilson'), GHLM Trading Ltd v Maroo [2012] 2 BCLC 369 (‘GHLM Trading’), Re HLC Environmental Projects Ltd [2014] B.C.C. 337 (‘HLC Environmental’), Davies v Ford [2020] EWHC 686 (Ch)('Davies'), the privy council case of Byers v Chen [2021] UKPC 4 (‘Byers’) and Kelmanson v Gallagher [2022] EWHC 395 (Ch)('Kelmanson'). It will also consider Re Barton Manufacturing Co Ltd [1998] B.C.C. 827 ('Barton') on a similar antecedent voidable transaction cause of action - transaction at an undervalue.
Directors Duties to the Company
Directors[5a] owe directors duties to their company. Formerly, directors duties were found in the common law and in Equity [5b]. But with the enactment of the Companies Act 2006, Parliament put these directors’ duties into statutory form[6]. Sections 171 to 177 of the Companies Act 2006[7] now contain the duties upon directors[8].
When a director fails to fulfil one or more of these directors duties, that director will breach his/her duties and will, generally speaking, be liable to the company for loss caused[9] to the company by the breach, unless relief is granted under section 1157 of the Companies Act 2006[10]. When the company is in liquidation, such directorial misconduct is actionable by a liquidator within a misfeasance claim under section 212 of the Insolvency Act 1986.
For present purposes, reference is made to 3 key directors duties, the first and third being based upon a duty of loyalty.
Firstly, section 172 is entitled ‘Duty to promote the success of the company’ and reads (so far as relevant)[11]:
'(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…
…
(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.’
Secondly, section 173(1) imposes a duty upon a director to '...exercise independent judgment.'
Thirdly, section 175(1) of the Companies Act 2006 provides:
‘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’.[12a]
Where the company’s solvency is doubtful[12b], that duty under section 172 is to consider and act in good faith in what he/she believes to be in the best interests of the company - the interests of the company being the interests of the creditors of the company. Lord Kitchen pithily summarised this in Byers, at paragraph 79:
‘Once it became apparent that [the company] was insolvent, it was the duty of the directors to have regard to the interests of the creditors of the company because the creditors had the primary interest in the assets of the company.’[13a]
This duty is to consider and act in the interests of all of the company’s creditors - that is, the whole general body of creditors. Similarly, the duty is to exercise his/her directorial powers for proper purposes which would further the interests of the company’s creditors as a whole.
With that overview of directors duties in mind, we can now consider whether it always follows that a director will have committed a breach of directors duty/misfeasance when the company is found to have made an unlawful preference, and the authorities on point.
West Mercia
A convenient starting point[13b] is West Mercia, still the leading case. In West Mercia, there were 2 companies. The parent company D Ltd and its wholly owned subsidiary Safetywear Limited. Mr Dodd was a director of both. Mr Dodd was a guarantor for D Ltd’s substantial overdraft with the bank. When Mr Dodd knew that Safetywear Limited (and D Ltd) were insolvent, Mr Dodd caused Safetywear Limited to transfer £4,000 of Safetywear Limited’s money to D Ltd, in part satisfactory of D Ltd’s overdraft debt to its bank. Both Safetywear Limited and D Ltd entered liquidation. D Ltd had no assets to repay the £4,000 to Safetywear Limited and the bank refused to return the money to Safetywear Limited.
The liquidator of Safetywear Limited claimed that Mr Dodd had, in effect[14], breached his directors duties to Safetywear Ltd when he caused Safetywear Limited to make the £4,000 transfer.
In the Court of Appeal[15], it was held that Safetywear Limited’s transfer of £4,000 to D Ltd was a fraudulent preference (the cause of action later reformulated into unlawful preference).
Dillon LJ phrased the consequence from that as follows, at 32:
‘To my mind it is quite clear that there was a fraudulent preference of the Dodd company. It follows that there was misfeasance on the part of Mr Dodd as a director who owed a fiduciary duty to [Safetywear Limited] in making that transfer by way of fraudulent preference…’[16][bold added]
Later, Dillon LJ said this was '...such a blatant misfeasance.’ (Page 34)
What Mr Dodd had done was, ‘…in fraud of the creditors of [Safetywear Ltd], made the transfer to the [D Ltd’s] account for his own sole benefit in relieving his own personal liability under his guarantee.’ (Page 33).
In other words, Mr Dodd was ‘…guilty of breach of duty when, for his own purposes, he caused the £4,000 to be transferred in disregard of the interests of the general creditors of this insolvent company’[17] (the insolvent company here referred to being Safetywear Ltd; page 33). His own purposes being, to reduce his exposure under the personal guarantee he had given, by reducing what the principal debtor D Ltd owed the bank. It had not been in the interests of Safetywear Ltd (then being the interests of the general body of unsecured creditors of Safetywear Ltd) for Mr Dodd's personal exposure be reduced.
The key point to extract from West Mercia is the almost automatic finding that the director was guilty of a misfeasance where he had caused the company to make an actionable preference. This position has been the subject of later comment and potential refinement.
Pierson
In Pierson, Hazel Williamson QC sitting as a deputy High Court Judge, considered West Mercia. Her comments on West Mercia were obiter as she held that the misfeasance claims against the 2 directors in Pierson were based on transfers/payments which were not in fact unlawful preferences[18]. Having found no unlawful preferences upon which a misfeasance claim could be based, she said, at 46:
‘If I were wrong about this, however, and the payment to [1 recipient/director] were to be regarded as a preference by virtue of the operation of the presumption, then the question would arise whether the giving of a preference in those circumstances would be a misfeasance by the directors. [Counsel for the liquidator] submits that this follows from the decision in West Mercia…citing Re Washington Diamond Mining Co [1893] 3 Ch 95 [19a]
However in both of those cases the preference in question consisted of acts by the directors found to be a conscious application of the company's funds for the known purpose of preferring their own, or their associate's, interests, and therefore a misapplication of those funds. I do not read West Mercia as saying that in all cases where a preference under s. 239 can be made out, the directors responsible necessarily commit a misfeasance or breach of duty. That would be tantamount to saying that directors simply have a duty not to allow s. 239 to be breached. In my judgment this is too sweeping. It must be a matter of fact, in any particular case, whether the acts of a director which are held to constitute the giving of a preference are also, in their own right, acts which amount to misfeasance and breach of duty. This test will be applied bearing in mind that in the case of imminent liquidation the directors owe duties to creditors as well as shareholders.’ [bold added]
Wilson
In Wilson, Mark Cawson QC (sitting as a deputy High Court Judge) found that a certain April 2001 payment had been an unlawful preference. However, he found that the director had not breached his directors duties (which were, as they existed '...prior to the adoption of a statutory code in respect of directors’ duties in Ch.2 of Pt 10 of the Companies Act 2006.' (paragraph 92)). The deputy High Court Judge was able to find that there was no breach of directors duties because he rejected the argument that West Mercia held that it followed that whenever there was an unlawful preference, there was a breach of directors duty. He relied on Pierson to do this. The deputy High Court Judge in Wilson said, at paragraph 93:
'In [Pierson], Hazel Williamson QC also pointed out that:
(1) Liquidator of West Mercia Safetywear v Dodd involved a specific finding that there had been a conscious application of the company’s funds for the known purpose of preferring the directors’ own interests, or those of their associates; and
(2) a claim for misfeasance depends upon positive proof, and thus that a significant additional burden is placed upon the liquidator where a preference has been established by application of the relevant burden of proof under s.239(6).'
before finding, on the facts, that the misfeasance claim failed (paragraph 93)[19b].
GHLM Trading
Newey J in GHLM Trading in 2012 took the view that the existence or otherwise of a s.239 unlawful preference is not always determinative of whether the company’s director breach his director’s duties. It is more nuanced than that. He said, at paragraph 168:
‘A director of a company has a duty to 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' (see s172 of the Companies Act 2006). Where creditors' interests are relevant, it will similarly, in my view, be a director's duty to have regard to the interests of the creditors as a class. If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty. Whether or not s239 of the Insolvency Act 1986 (dealing with preferences) is in point cannot be determinative. A director responsible for a preference vulnerable under that section will not necessarily commit a breach of duty…Conversely, the fact that the conditions laid down by s239 are not all met should not, of itself, preclude a finding of breach of duty.’[bold added][19c]
Sandhu and HLC Environmental
Earlier, in a case called Sandhu decided in 2009, Proudman J recorded that counsel for the defendant director accepted that West Mercia was ‘…authority for the proposition that a right of action exists against a director responsible for a preferential payment made at a time when the company was insolvent.’[20]
This was a stricter approach than adopted in Pierson and perhaps GHLM Trading. But while a concession, as was highlighted by John Randall QC, sitting as a deputy High Court judge in HLC Environmental in 2014, Proudman J had herself adopted that proposition as correct. The deputy High Court Judge in HLC Environmental said about Sandhu, at para 140:
‘At [18]–[19] Proudman J. records the concession that a right of action exists against a director responsible for a preferential payment made at a time when the company was insolvent. However she made clear her approval of it as rightly made (at [18] “as she must”).'[21]
Directors Role
We now turn to the question: what acts/omissions by a director(s) connected to the unlawful preference will be sufficient for the director(s) to be liable.
Directors are only liable in respect to an unlawful preference if they breach their directors duties. This raises the question when exactly will a director’s involvement (to use a neutral term) in the company making the impugned unlawful preference transaction, amount to a breach of that director’s duties. Two cases throw light on this, Davies and Byers. Davies is illuminating for the basic position in relation to a director causing or knowingly allowing an unlawful preference to occur. Byers in relation to omitting to take reasonable steps to prevent an unlawful preference and a more nuanced understanding of causing an unlawful preference.
Davies
In Davies, a company (System Building Services Group Ltd) and its liquidator brought an application seeking, amongst other things, a declaration that the director Mr Michie, ‘by causing or allowing the company to make payments totalling £19,000 to CB Solutions UK Ltd just days after the company had entered administration, was in breach of his duties as a director...' (paragraph 1(2)).
At paragraphs 162-163, ICC Judge Barbar said:
‘I am satisfied on a balance of probabilities that, following the company’s entry into administration, Mr Michie either caused or knowingly allowed the CB Solutions payments made … Whether he effected the payments himself, or passed on the access codes to another individual who did it for him, is largely irrelevant. Either way…he was complicit in the payments being made. I so find.
In causing or knowingly allowing the CB Solutions payments to be made after the company was placed in administration, Mr Michie (1) failed to give proper consideration to the interests of the creditors as a whole, in particular their entitlement to share rateably in the company’s assets on a pari passu basis, contrary to s.172 of the CA 2006 ; (2) failed to exercise reasonable care, skill and diligence, contrary to s.174 of the CA 2006: and accordingly (3) was guilty of misfeasance under s.212 of the IA 1986.’
Byers
This brings us on to Byers, a very recent decision of the Judicial Committee of the Privy Council ('Privy Council'). This case shows how a director that does not cause or procure the payment of an unlawful preference, but is aware of it and could stop it, can be in breach of directors duties - for failure to take reasonable steps to stop the company’s assets being misapplied/payments being made for improper purposes.
Firstly though, two points to note:
(1) as it is a Privy Council decision, without a direction[22a] in the judgment to the courts of England and Wales that they must treat it as a decision representing the law of England and Wales, it is not binding authority. It is merely (very) persuasive authority;
(2) the statutory provisions were those contained in two BVI statutes: (1) BVI Companies Act 2004 ("the 2004 Act”), in particular, sections 120 to 125 on directors duties[22b]; and (2) BVI Insolvency Act 2003, sections 244, 245 and 249 on unfair preference[22c]. On BVI directors duties, Lord Kitchin for the Privy Council (the ‘Board’) said, at paragraph 90:
‘The general duties owed by a director are well known and are codified in sections 120 to 125 of the 2004 Act. They include the duty to act honestly and in good faith and in what the director considers to be the best interests of the company, and a duty to exercise his or her powers for a proper purpose: see, respectively, sections 120(1) and 121 of the 2004 Act.’
These are therefore similar to those in England and Wales.
The basic facts in Byers were that:
(1) a company, PFF, had borrowed money from a lender Zanato. PFF had then lost in English High Court litigation and was insolvent. It then repaid the lender Zaneto (‘the Repayment’). Liquidators were appointed over PFF and they brought a claim for breach of directors duties against the sole de jure director, Miss Chen, in respect to the Repayment.
(2) Miss Chen was the sole de jure director and was the sole authorised signatory on the account from which the Repayment was made. PFF’s shares were owned by PISG and Miss Chen owned the whole beneficial interest in the PISG’s shares;
(3) Mr Chen (no relation to Miss Chen), who was the ‘Chief Operating Officer and Director of Risk Management’ but was not in fact a board director of PFF, was responsible for the Repayment being made;
(4) Miss Chen had not caused or procured the Repayment but Miss Chen did know of and did not object to the Repayment. She had not intervened to prevent the Repayment;
(5) At all times since the adverse English High Court judgment, PFF’s insolvent liquidation or some other protective insolvency regime was inevitable. Such was under active discussion (Miss Chen being a participant to those discussions) a matter of days afterward the Repayment.
Lord Kitchin for the Board said, at paragraphs 91 to 94 inclusive:
‘…the Board has no doubt that, in the circumstances we have described, when making or authorising payments from PFF's account, Miss Chen had a fiduciary duty to act honestly and in good faith in what she believed to be the best interests of PFF and, through PFF, as an insolvent company, in the best interests of its creditors. Similarly, she had a duty to exercise her powers as a director for proper purposes, that is to say, once PFF became insolvent, for purposes which would further the interests of PFF's creditors.
Miss Chen could not evade these duties to PFF and, through PFF, to its creditors, simply by delegating to an employee or a de facto director her authority to make payments from PFF's account. It has been held in a number of cases, correctly, in the Board's opinion, that a director may not knowingly stand by idly and allow a company's assets to be depleted improperly: see, for example, Walker v Stones [2001] QB 902, at 921D-E per Sir Christopher Slade; Neville v Krikorian [2006] EWCA Civ 943; [2007] 1 BCLC 1, paras 49-51 per Chadwick LJ; Lexi Holdings v Luqman [2007] EWHC 2652 (Ch), paras 201-205 per Briggs J (as he then was). To the contrary, a director who knows that a fellow director is acting in breach of duty or that an employee is misapplying the assets of the company must take reasonable steps to prevent those activities from occurring.
The judge found that Mr Chen was responsible for repaying the Zenato loan and that by this time he was in charge of PFF's affairs as sole de facto director. He also found that banking transactions were in practice conducted electronically by PFF's staff without Miss Chen having to sign anything, and that the payments to Zenato were made in this way. However, Miss Chen was, on the judge's findings, aware of these payments. What is more, Miss Chen had a fiduciary duty to PFF to take all reasonable steps to intervene to prevent a payment being made from a trading account of which she was sole signatory for an improper purpose. The repayment of the whole of the Zenato loan was undoubtedly improper. It was made at a time when PFF was insolvent and without any proper reason. Yet Miss Chen took no steps to prevent it. Moreover, given Miss Chen's position in relation to PFF as de jure director and sole beneficial owner and given further that she was the sole signatory on the account, there can be no doubt that, had she intervened, the payments would not have been made. She was, as the judge described, "ultimately the boss". In these circumstances the Board is satisfied that her inaction amounted to a breach of her fiduciary duty to PFF.
…By delegating to Mr Chen the ability to make payments from the account and by failing to take any action to prevent the improper payments to Zenato, Miss Chen did authorise those payments to Zenato and she relevantly caused them to be made.’
Other Antecedent Voidable Transactions
It might be helpful to briefly touch on breach of directors duties in relation a company making a different type of antecedent voidable transaction - a transaction at an undervalue[23]. In Barton, the 2 directors (Mr Walter Barton and Mr Philip Barton) caused the company to pay out gifts to the 2 directors, as well as the wife of one of the directors. After finding that the gifts were transactions at an undervalue contrary to section 238 of the Insolvency Act 1986, and ordering them to be repaid, Harman J said, at 833:
‘...there are also the claims against Mr Walter Barton as a director and Mr Philip Barton as a director for misfeasance. Firstly, it must have been misfeasance by the directors of the company to make gifts of the company's property for no proper trading purpose. The trading purpose alleged was…to keep the company afloat by financing the group overdraft by circulating cheques. It seems to me that that cannot be a transaction carried out in good faith which directors could properly have entered into. In my view, therefore, there was clearly misfeasance in causing the company to make those payments to all three recipients’[24a]
Where Director did not actually Consider the Best Interests of the Company
A linked point is: how is a director's compliance with his s.172 duty judged where the director did not consider consider the best Interests of the company, before making the impugned decision? The answer is that an objective test will be applied, in substitution for the usual subjective test.
In Kelmanson, Deputy ICC Judge Curl QC said, at paragraph 131:
'In reviewing a director's conduct, the court will ordinarily apply a subjective approach, i.e. the question is whether the director believed in good faith that the act or omission in question was in the interests of the company: Re Regentcrest Plc v Cohen [2001] 2 BCLC 80, [120] , per Jonathan Parker J (as he then was). But the subjective test only applies where there is evidence of actual consideration of the best interests of the company and, where there is no such evidence, the proper test is objective, namely whether a reasonable director in the position of the director in question could reasonably have thought that the transaction was for the benefit of the company: Extrasure Travel Insurances Ltd, [138], per Mr Jonathan Crow (sitting as a deputy High Court judge); Re HLC Environmental Projects Ltd [2014] BCC 337, [92] , per Mr John Randall QC (sitting as a deputy High Court judge).'[24b]
See also Manolete Partners Plc v Dalal [2022] EWHC 1597.[24c]
Causation and the West Mercia Proviso
While not the focus of this article, readers may be assisted by noting a couple of matters:
(1) causation[25] - the Supreme Court in AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503 (‘AIB’) reviewed the law on causation for breach of fiduciary duties. As demonstrated by Brewer v Iqbal [2019] EWHC 182 (Ch) (‘Brewer’), this equally applies to misfeasance claims (see Brewer paragraph 98);
(2) the West Mercia Proviso - where a director who did not receive the unlawful preference, is ordered to replenish, and crucially does replenish, the company estate by the sum transferred out as an unlawful preference (or some part of it), the company’s unsecured creditors might stand to receive a larger dividend than if no unlawful preference had ever occurred. This would be unfair to the deliquent director. The risk exists because the (former) creditor of the company/receipient of the unlawful preference, will no longer be the company's creditor. He/she will not therefore be entitled to put in a proof of debt nor receive a slice of the money distributed by the liquidator to the company's unsecured creditors. In such a scenario, there will be the same amount available for distribution but it will be divided amongst 1 fewer unsecured creditors, resulting in each unsecured creditor receiving more pence in the pound than if no unlawful preference had ever occured. That is not the result the Court will be aiming to achieve.
The solution to this, favoured in West Mercia[26], and now referred to the ‘West Mercia proviso'[27], is for the Court to order that the administration of the company estate is to treat the deliquent director, after he/she has satisfied the order, as notionally being an unsecured creditor for the equivalent sum. That way, the other unsecured creditors would share what was available for distribution to them, amongst an equivalent sized (value and number) general body of creditors. The delinquent director would then get some pence in the pound back as part of the general dividend distribution to unsecured creditors. The order in HLC Environmental contained a West Mercia Proviso[28].
Conclusion
A director owes various directors duties to the company, including the duty contained in section 172 of the Companies Act 2006. Based upon a fiduciary duty of loyalty, that duty is to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (in solvent times) and for the benefit of its creditors (in doubtful solvency times). In time of doubtful solvency, this requires the director to act, in essence, for the benefit of all the creditors of the company - the general body of creditors as a whole. The company’s assets must be managed in such a way as to protect the creditors' interests as a whole.
It is very likely that a director displaying favouritism, through the company's grant of an unlawful preference, to one or more of the company's creditors during doubtful solvency times - that is, bettering the position of one or more chosen/favoured creditors, with a corresponding reduction in the position for all other creditors within the general body of creditors - will be breaching his/her director's duties to the company, and such behaviour will be conduct that could found a liquidator’s misfeasance claim under section 212 of the Insolvency Act 1986. Such behaviour is very likely to be categorised as the misapplication and/or improper use of the company’s assets. As Wilson demonstrates however, it is possible for an s.239 unlawful preference to be found but for there to have been no linked breach of directors duties. Seemingly, this is because, the cause of action unlawful preference includes some presumptions in favour of the liquidator. But these same presumptions do not also exist in breach of directors duties causes of action. So it is possible for an unlawful preference claim to succeed because an ingredient to the cause of action is established by the application of a presumption, and for the linked breach of directors duty claim to fail because the similar ingredient in the breach of directors duty cause of action cannot be established on the evidence and there is no corresponding presumption to apply in favour of the liquidator.
In terms of when a director will be responsible, it is clear that, typically at least, it will be a breach of directors duties for a director to cause, permit, knowingly allow, or fail to take reasonable steps to prevent, an unlawful preference occuring. A director may not knowingly stand by idly and allow a company's assets to be depleted improperly.
SIMON HILL © 2021-2022
BARRISTER
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
[1] Typically, a liquidator of a company will bring proceedings against the company’s (allegedly) delinquent director under the summary misfeasance procedure in section 212 of the Insolvency Act 1986. Section 212 states that, in granting relief:
‘The Court may ….examine into the conduct of the person …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.’
As was common ground in Sandhu v Sidhu [2009] EWHC 983 (Ch), at paragraph 11, ’s.212 is procedural and itself creates no new cause of action: See Re National Funds Assurance Co (1878) 10 Ch D 118, relating to the Companies Act 1862 s.165’
[2] This cause of action is sometimes called ‘unlawful preference’, sometimes ’voidable preference’ or ‘unfair preference’, or just ‘preference’. However, the label 'preference' is sometimes used to refer to the act of preferring one, say, creditor, over any of the others in the general body of creditors. An act that might not be actionable (because, for instance, it was not done within a relevant time). The cause of action used to be called ‘fraudulent preference’ but since then the cause of action has been reformulated and it is no longer correct to refer to it as ‘fraudulent preference’. In Singer v Beckett (also known as: Re Continental Assurance Co of London Plc (In Liquidation)) [2007] 2 B.C.L.C. 287, Park J said, at paragraph 420 ‘…hence the commonly used expression ‘fraudulent preference’, although ‘unlawful preference’ is an alternative and more accurate way of putting it.)’
Unlawful preference falls into the wider group of causes of action called 'Antecedent Voidable Transactions' or 'Voidable Antecedent Transactions'. Other, less accurate and helpful, labels are sometimes used, such as 'adjustable transactions' or 'challengable transactions'.
[3] The liquidators are not required to bring an unlawful preference claim against the recipient of the preference, to claim against the directors for causing the company to make that unlawful preference. In Re Brian D Pierson (Contractors) Ltd [1999] B.C.C. 26, the deputy Judge noted, under the subheading 'Payment of £2,548 to Paul Mould', that 43:
‘'These sums were paid over to [Mr John Pierson] and Mr Mould as supposed redundancy money. The liquidator claims to recover them from [Mr Brian Pierson and Mrs Ann Pierson], for alleged misfeasance as directors, on various grounds.
…
The liquidator … goes on to argue that payment of redundancy money was therefore prima facie a preference by the company,…'
The liquidator did not '...seek to recover the payments from Mr John Pierson and Mr Mould. Instead he relies on the proposition that the giving of a preference by the directors of a company is itself a misfeasance and breach of fiduciary duty by those directors (see West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 ) and he claims to recover the sums from [Mr Brian Pierson and Mrs Ann Pierson].'
[4] Singer v Beckett (also known as: Re Continental Assurance Co of London Plc (In Liquidation)) [2007] 2 B.C.L.C. 287 ('Singer') is referred to in one leading textbook but on close reading it need only occupy a footnote here. In Singer, Park J found that two payments made by the company to IATA/ABTA had not been unlawful preferences (missing the motivation ingredient). Park J found, at paragraph 420 that ‘Those payments were made with the best of motives…’ and, at paragraph 422, in relation to the directors of the company - ’Their evaluation at the time was that it was more likely to be in the interests of the general body of creditors to make the payments than to refuse to make them.’
Since there was no unlawful preferences found, any comments about consequent breach of directors duties will be obiter.
On breach of directors duties, Park J said, at paragraph 420 and 422 respectively ‘I do not think that they constituted breaches of duty owed by the directors to Continental.’ and ‘With hindsight it can now be seen that the judgment which the directors formed did not work out, but that does not mean that it was a breach of duty on their part to form it.’
[5a] There are 3 types of director: (1) De Jure Directors (2) De Facto Directors; and (3) Shadow Directors.
In Re Keeping Kids Co [2021] EWHC 175 (Ch), a case about the Company Director Disqualification Act 1986 ('CDDA') but which has wider application, types (1) and (2) were explained. Falk J said, at paragraphs 186 to 188:
'The provisions of the CDDA cover not only de jure directors, meaning those who are validly appointed as directors under the company’s constitution, but also individuals who are or were de facto directors. This follows from s 22(4) CDDA, which provides that the term “director” includes “any person occupying the position of a director, by whatever name called” (see for example Secretary of State for Trade and Industry v Hollier [2007] Bus LR 352 (“Hollier”) at [61]).
As explained by Lord Collins in Revenue and Customs Comrs v Holland, In re Paycheck Services 3 Ltd [2010] 1WLR 2793 (“Holland”) at [82], the term de facto director was originally used to refer to individuals who had been appointed as a director but whose appointment was in some way invalid, or whose appointment had ceased. However, its use has been extended to cover a person who has never been appointed as a director but, in broad terms, assumes that role.'
As to Shadow Directors, section 170 (5) of the Companies Act 2006 provides:
‘The general duties apply to a shadow director of a company where and to the extent that they are capable of so applying’
For former directors, section 170(2) of the Companies Act 2006 provides:
A person who ceases to be a director continues to be subject–
(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and
(b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director.
To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.’
Another dichotomy is between: (1) executive directors; and (2) non-executive directors, the duties owed are the same but the application of them need not be the same. ICCJ Prentis in BEIS v Selby [2021] EWHC 3261 (Ch) (a directors disqualification case) considered this, under the subheading Law: non-executive directors', at paragraphs 26 and 27:
'In common with the CA06, in treating directors' duties the CDDA draws no explicit distinction between the duties owed by executive and non-executive directors. But if the duties are the same, their application need not be. As indicated by the wording of s.174 CA06 the objective and subjective requirements are circumscribed by the actual role of the director. It follows that, as with the law concerning directors generally, the title the director carries is not necessarily conclusive as to function. To quote from Hoffmann LJ in Bishopsgate Investment Management v Maxwell [1993] BCC 120, 139 , the extent of what is now the s.174 duty "must depend upon how the particular company's business is organised and the part which the director could reasonably have been expected to play". In many cases, not least because of the extensive risks they would run otherwise, the precise role of the particular non-executive director will be formalised in written terms of engagement, so director and company are clear about their duties and obligations. Absent that, the court must seek to discern the role from objective factors. Whatever the ambit of a non-executive's role, it cannot properly be discharged without at the least an ongoing enquiry into and knowledge of the company's business which pertains to it: in other words, a restrictive modification of one of the basic duties on a company director.
Where there has been a prescription or, put another way, delegation of roles between the directors then it is the longstanding law that a director is "entitled to rely upon the judgment, information and advice, of the chairman and general manager as to whose integrity, skill and competence he had no reason for suspicion": Lord Davey in Dovey v Cory [1901] AC 477, 492 . Teased out, the director whose functions have been circumscribed remains under duties to supervise that delegation (see Kids Company at [859]: "Proper delegation does not involve abdication") and to assess its product (see Norris J in Sharp v Blank [2019] EWHC 3096 (Ch) at [628] : "reliance must in the particular circumstances be consistent with the discharge of the duty of reasonable skill and care").'
In Re Asset Land Investment plc [2022] EWHC 21 (Ch), Deputy ICCJ Greenwood considered the role of a non-executive director in the context of whether a non-executive director's conduct rendered him unfit to be concerned in the management of a company (for the purposes of section 6 of the Company Directors Disqualification Act 1986). The most relevant part of the judgment is from paragraph 125. It is more an example of how a non-executive director's role and responsibility might be viewed, rather than a general exposition of the law related to non-executive directors.
[5b] Those originally in Equity were based around the director’s duty of loyalty to the company. The duty originally imposed by the common law was a duty to use reasonable care, skill and diligence.
[6] Though in statutory form, Parliament has directed that the duties are to be interpreted and applied '...in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.’ This comes from section 170(3) and (4) of the Companies Act 2006, which read:
‘The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.
The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.’
For breach of directors’ duties, section 178 of the Companies Act 2006, entitled ‘Civil consequences of breach of general duties’, states:
‘(1) The consequences of 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.’
[7] Sections 171 to 177 are contained in Chapter 2 of Part 10 of the Companies Act 2006
[8] The statutory directors duties are:
Section 171, entitled '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.’
Section 172, entitled '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.
(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.'
Section 173, entitled '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.'
Section 174, entitled '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.'
Section 175, entitled '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.'
Section 176, entitled '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.'
Section 177, entitled '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.'
Further, in Secretary of State for Trade and Industry v Baker (No 6) [1999] 1 BCLC 433; [1998] All ER (D) 659, at 489 (also paragraph B7), Jonathan Parker J said:
In summary, the following general propositions can, in my judgment, be derived from the authorities to which I was referred in relation to the duties of directors(84):
(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors.
(ii) Whilst directors are entitled (subject to the Articles of Association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.
(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company.'
[9] In HLC Environmental, the deputy High Court judge, said, at paragraphs 140 to 144:
'...Nor did Proudman J. give any hint that she disapproved or doubted the parties’ agreement referred to later in her judgment at [185] that:
“the court is not concerned with the assessment of loss or damage to [the company]; [the defendant] is required to restore to [the company] the sums which he has caused to be misapplied …”
...
A company is to be treated as in an equivalent position so far as its directors are concerned to that of a trust fund so far as its trustees are concerned (see Re Duckwari Plc [1999] Ch. 253 at 262A–D; [1999] B.C.C. 11 at 17F–H per Nourse L.J.; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347; [2012] Ch. 453 at [34] per Lord Neuberger of Abbotsbury M.R.).
...
The liability of a defaulting fiduciary who has, by his or her default, allowed the trust fund to become denuded is, or includes, a liability to restore the fund to what it should have been. As Lord Browne-Wilkinson put it in Target Holdings Ltd v Redferns [1996] A.C. 421 at 434C–E:
“The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries’ rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate: see Nocton v. Lord Ashburton [1914] A.C. 932, 952, 958 , per Viscount Haldane L.C. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed: Caffrey v. Darby (1801) 6 Ves. 488 ; Clough v. Bond (1838) 3 M. & C. 490 .”
In Sinclair v Versailles (above) at [40] Lord Neuberger cited this passage with approval in the context of claims arising out of directors’ breaches of fiduciary duty.
In cases concerning a depletion of the moneys not of a trust fund but of a limited company, a refinement to this rule ought, however, to be noted. A claim for an order of the type which the applicants here seek will only be of any practical relevance if an insolvency ensues. If the company in question has not become insolvent, and has continued to discharge all its liabilities, then the making of an order for repayment against a director would be pointless and produce circuity of action, because the director would thereby become entitled to a pro tanto credit from the company for having discharged one of its liabilities.'
[10] In Burnden Holdings (UK) Ltd (In Liquidation) v Fielding [2019] Bus. L.R. 2878, Zacaroli J summarised the availability of this relief as follows, at paragraph 409:
‘The court has a broad discretion to grant relief (in whole or in part) from liability in proceedings against (among others) a director for negligence, default, breach of duty or breach of trust where it appears that the director acted honestly and reasonably and, having regard to all the circumstances, he ought fairly to be excused’
Section 1157 of the Companies Act 2006, entitled 'Power of court to grant relief in certain cases', reads:
'(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.
(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.
(3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge, after hearing the evidence, may, if he is satisfied that the defendant (in Scotland, the defender) ought in pursuance of that subsection to be relieved either in whole or in part from the liability sought to be enforced against him, withdraw the case from the jury and forthwith direct judgment to be entered for the defendant (in Scotland, grant decree of absolvitor) on such terms as to costs (in Scotland, expenses) or otherwise as the judge may think proper.'
In Liquidator of Marini Ltd v Dickenson [2003] EWHC 334 (Ch); [2004] BCC 172 ('Marini'), Judge Richard Seymour QC (sitting as a Judge of the High Court) considered section 727 of the Companies Act 1985 (now obsolete), a section which was later restated (without substantive amendment) by section 1157 of the Companies Act 2006. The deputy High Court Judge said, at paragraph 57:
'The trigger conditions for the exercise of the discretion conferred by s.727 of the 1985 Act are thus met. 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.'
Applying this approach to the facts of Marini, the deputy High Court Judge said, at paragraph 57:
'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.'
In Re Broadside Colours and Chemicals Ltd [2012] EWHC 195 (Ch), HHJ Behrens sitting as a judge of the High Court had to consider whether to set aside an order made against a former director, on the basis that the former director/applicant, had not known of the proceedings/trial (the documents having been sent to an address he no longer lived at). As part of this, the judge had to consider whether, if he set aside the order, the former director/applicant had at least a reasonable prospect of success on his defences. At paragraph 20, the judge said:
'Under section 727 the Court has power to relieve a director for breach of duty if he has been honest, acted reasonably and the court considers he fairly to be excused. There are a number of factors here in [former director/applicant's] favour. He was very much the junior director who was not concerned with the financial aspects of [the company]; he was acting on advice from [the accountant] and believed that the procedure adopted was lawful. Furthermore it cannot be said that the overall remuneration (treating the loan/dividend package as remuneration) was in any way excessive. In my view therefore there is a realistic possibility that the defence under section 727 could succeed or succeed in part.'
In Re Sherwood Oak Homes Limited (also known as Kendall v Ball) [2024] EWHC 746 (Ch), ICC Judge Greenwood held that directors (Mrs and Mrs Ball, husband and wife; the Respondents) had wrongly had a ransom type strip of land (the 'Land'), next to a development site owned by their parent (Holdings) / subsidary (Homes) companies, transferred into their own name. The directors said they did it to “to protect their position” (paragraph 76) i.e. in their own personal interests, not those of the comapnies for which they were fiduciaries (paragraph 76). A constructive trust was imposed, with the legal title to the Land held by Mr and Mrs Ball, but the beneficial interest in the Land held by 'the companies' (paragraph 82). As a last line of 'defence' (so to speak), the directors sought relief under s.1157. ICC Judge Greenwood rejected this. He said, at paragraph 80 (removing an irrelevant procedural point):
'Finally, it was suggested that the Respondents might seek relief under s. 1157 of the CA 2006 on the basis that the Respondents relied on the professional advice of [their solicitors], and that they intended to re-sell the Land to Holdings as soon as the re-financing was completed without any intention of profiting from the arrangement.... I do not agree:
81.1. ...
81.2 Secondly, Mr Ball’s evidence was that a purchase price for the future sale to Holdings would have had to be agreed; it was not his evidence that he had no intention of making a profit; moreover, it was not his evidence that the Respondents were obliged to sell the Land to Holdings at all, or even to negotiate for its sale;
81.3. third, whether or not they acted honestly and/or on advice and/or with any intention to make a profit on re-sale (rather than merely to reduce Mr Ball’s exposure as a creditor) the Respondents acted in breach of their duties as directors; the disputed arrangement entailed an acute conflict of interest, and was not beneficial to the companies’ creditors as a class; I was given no basis upon which to conclude that it was reasonable of the Respondents to protect their own interests - even if intended as some sort of temporary measure - at the expense of other creditors, or to conclude that the court ought now, in the exercise of its discretion, relieve them of liability to the detriment of the creditor class of companies in administration.'
[11] For completeness, a more extensive extract of section 172, entitled ‘Duty to promote the success of the company’, is:
(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.
…
(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.’
[12a] Explaining this, ICC Judge Mullen in Re St John Law Ltd [2019] B.C.C. 901 (2019) said, at paragraph 9:
‘The duties under the Companies Act 2006 include, at s.172 , a duty upon a director to act in the way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. This is 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. Such a requirement arises where the directors know, or should know, that the company is insolvent or is likely to become insolvent (see West Mercia Safetywear Ltd (in liq.) v Dodd (1988) 4 B.C.C. 30 at 33; [1988] P.C.C. 212 per Dillon LJ; and BTI 2004 LLC v Sequana SA [2019] EWCA Civ 112; [2019] B.C.C. 631 at [220] per David Richards LJ).’
[12b] The exact threshold has been expressed through various phrases. ‘Doubtful’ solvency, ‘on the verge of insolvency’. In Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 BCLC 153 Mr Leslie Kosmin QC (sitting as a Deputy High Court Judge) put the position as follows (at paragraph 74):
‘Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors' money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.’
The issue was resolved though in BTI 2014 LLC v Sequana SA [2019] 2 All E.R. 784. The interest of the company become the interests of the creditors (rather than those of the company's members) when the directors know or should know that the company is or is likely to become insolvent. In this context, “likely” meant probable.
[13a] In GHLM Trading Ltd v Maroo [2012] 2 B.C.L.C. 369, Newey J said, at paragraph 164:
'While the interests of a company are normally identified with those of its members, the interests of creditors can become relevant if a company has financial difficulties. In West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 , Dillon LJ (with whom Croom-Johnson LJ and Caulfield J agreed) approved (at 252–253) the following statement of Street CJ in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 :
“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”
It has been said that the interests of creditors can “intrude” even when a company may not strictly be insolvent. For example, in Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 BCLC 153 Mr Leslie Kosmin QC (sitting as a Deputy High Court Judge) put the position as follows (at paragraph 74):
“Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors' money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.” (The emphasis has been added.)
See now BTI 2014 LLC v Sequana SA [2019] 2 All E.R. 784 on the threshold/tipping point when the interests of the creditors intrude.
On the interests of the company being the interests of the company's creditors, in insolvent times, Vos MR in the Court of Appeal in Stanford International Bank (in liquidation) v HSBC Bank Plc [2021] EWCA Civ 535, referred, at paragraph 32, to Dillon LJ in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 as being 'The classic statement of this proposition...'
[13b] There is an earlier case, that of Re Washington Diamond Mining Co [1893] 3 Ch 95 (‘Washington’). Washington was a case cited as supportive of the conclusion in Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 (1987), at 32. The basic facts in Washington, were summarised by Kay LJ in Washington, at 113:
‘…two of the directors whose shares were not fully paid up, without any call being made for the unpaid amounts, paid these amounts to the banking account of the company, which was at the time in credit only for a trifling sum of about £2, and then, with the concurrence of some of the other directors, drew out the exact amounts so paid in, and retained them in respect of debts which the company owed to them for their directors' fees.’
The second stage, the payment out stage, in satisfaction of debt the company owed the directors, was ‘undoubtedly’ (at 114) a preference to those creditor directors.
Important for present purposes, is what Kay LJ said about the other directors in Washington having concurred in the company making the payment out. Kay LJ said, at 115:
‘I think that all the directors who concurred in making the payments were guilty of a misfeasance, and that the order should direct them jointly and severally to repay the amounts…’
[14] To be precise, in Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 (1987), the liquidator applied for a declaration that Mr Dodd was ‘guilty of misfeasance and breach of trust.’ (Page 32) and sought an order for repayment of the sum plus interest.
[15] Dillon LJ gave the only reasoned judgment in Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 (1987); Croom-Johnson LJ and Caulfield J simply agreed.
[16] Later, Dillon LJ said in Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 (1987), at 34 ‘…there had been a blatant fraudulent preference and misfeasance.’
[17] In Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 (1987, Dillon LJ approved the following statement of Street CJ in Kinsela & Anor. v. Russell Kinsela Pty. Ltd. (in liq.) [1986] 4 N.S.W.L.R. 722, at p. 730; (1986) 4 ACLC 215, at 221, where Street CJ said:
‘In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.’
[18] In Re Brian D Pierson (Contractors) Ltd [1999] B.C.C. 26, there were four sets of potential claims. In the first set, there were preference claim against the husband and wife directors of the company. In the second set, there were wrongful trading claims against the husband and wife directors. In the third set, the liquidators claimed 2 non-directors, namely, the directors’ son (John Pierson) and son in law (Paul Mould) had received transfers/payments, supposedly redundancy money, which were in fact unlawful preferences. But the liquidators had not issued the third set of preferences claims against the directors’ son and son in law as recipients, but had issued only a four set of claims (along with the first set and second set), that of, misfeasance claims against the husband and wife directors for causing the company to make such unlawful preference transfers/payments (see the commencement of the deputy Judge's judgment, page 30)
The deputy Judge recorded the liquidator’s argument, at 44:
‘The liquidator … goes on to argue that payment of redundancy money was therefore prima facie a preference by the company, and, in respect of Mr John Pierson and Mr Mould…he relies on the proposition that the giving of a preference by the directors of a company is itself a misfeasance and breach of fiduciary duty by those directors (see West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 ) and he claims to recover the sums from Mr and Mrs Pierson.’
The deputy Judge found John Pierson had been made redundant, but Paul Mould’s apparent redundancy was not genuine. The deputy Judge said, at 45:
‘It follows that I must find that the payment to Mr Mould was a misfeasance and breach of fiduciary duty by the directors of the company.
The next question is therefore whether the payment of redundancy to Mr John Pierson was, in principle, a preference within s. 239 of the Insolvency Act 1986, so as to cast liability for breach of trust and misfeasance on the directors for having procured it. These are two separate questions.’
After noting evidence that 4 other unconnected employees had also got redundancy payments, at 46, the deputy Judge said:
‘It follows, in my judgment, that this evidence is sufficient to rebut the presumption in the case of Mr John Pierson (and Mr Mould if necessary) as well, since it supports the likelihood that all six payments were made in the same state of mind. Demonstrating the actual state of mind rebuts the presumption. Only, therefore, if the relationships of Mr Pierson (and Mr Mould) to the directors of the company led to the inference that the necessary desire to prefer were present in their particular cases as a matter of actual fact, rather than presumption, could these two payments be distinguished from the others. I am not satisfied, on the evidence, that there was any such distinction, and I find that Mr Pierson has rebutted the presumption that the payments to Mr Pierson (and Mr Mould) were influenced by the relevant ‘desire’.
There were therefore no unlawful preferences found underlying this fourth set of claims.
[19a] See footnote 13b for summary of Re Washington Diamond Mining Co [1893] 3 Ch 95
[19b] In Wilson v Masters International Ltd (also known as Re Oxford Pharmaceuticals Ltd) [2010] BCC 834, Mark Cawson QC sitting as a deputy High Court Judge said, at section G of his judgment, paragraphs 91 to 94 (855):
(G) Alleged misfeasance on the part of Dr Masters in respect of the payments alleged to amount to preferences
(i) Liability
91. The fiduciary duties relied upon, and which it is said that Dr Masters breached, are set out in [64] above. The case advanced by [Counsel for the Liquidator] on behalf of [the Liquidator] is neatly articulated in para.114 of his skeleton argument as follows:
“The Preferential Payments and the Void Dispositions were both positive breaches of Dr Masters’ fiduciary duties to the Company. They were not payments bona [fide] in the interest of the Company and nor were they for the benefit of the Company. Furthermore, the making of the payments were for the personal advantage of Dr Masters as outlined above. All of the payments being made at a time when the Company was insolvent, the matter has to be looked at from the point of view of creditors as a whole.”
92. We are here concerned with the law prior to the adoption of a statutory code in respect of directors’ duties in Ch.2 of Pt 10 of the Companies Act 2006 . A couple of initial points should be noted:
(1) The duty to act in good faith and in the best interests of the company is more correctly expressed as a duty imposed on directors to act “bona fide in what they consider – not what the Court may consider – is in the interests of the company” Re Smith & Fawcett Ltd [1942] Ch. 304 , at 306 per Lord Green M.R.
(2) It is indeed right that where a company is insolvent, as at all relevant times OPL was, the interests of creditors displace those of members, such that the creditors’ interests are paramount—see e.g. Liquidator of West Mercia Safetywear v Dodd [1988] 4 B.C.C. 30 at 33, and Re MDA Investment Management Ltd [2003] EWHC 2277 (Ch); [2005] B.C.C. 783 at
[70]. The fiduciary duty referred to in [92(1)] above is thus qualified such that the “interests of the company” are to be equated primarily with the interests of creditors.
93. [Counsel for the Liquidator] places reliance upon Liquidator of West Mercia Safetywear v Dodd (above), a case in which causing a company to make a fraudulent preference under s.320 of the Companies Act 1948 was held to amount to a breach of fiduciary duty and misfeasance. However, the key to liability under s.320 was not that a desire to prefer was an influencing factor, but rather that the predominant motive had been to prefer. Further, in Re Brian D Pierson (Contractors) Ltd [1999] B.C.C. 26 at 44 and 46, Hazel Williamson QC, sitting as a deputy judge of the High Court, rightly in my judgment, rejected a submission based on Liquidator of West Mercia Safetywear v Dodd that it followed that the causing of a preference in itself amounted to misfeasance. In Re Brian D Pierson (Contractors) Ltd , Hazel Williamson QC also pointed out that:
(1) Liquidator of West Mercia Safetywear v Dodd involved a specific finding that there had been a conscious application of the company’s funds for the known purpose of preferring the directors’ own interests, or those of their associates; and
(2) a claim for misfeasance depends upon positive proof, and thus that a significant additional burden is placed upon the liquidator where a preference has been established by application of the relevant burden of proof under s.239(6) .
94. I am not satisfied that a case of misfeasance is made out against Dr Masters in respect of the April 2001 payments in the circumstances of the present case. As I have found, the primary motive for making the payments was part of the process of stabilising the two companies (OPL and MIL) with a view to them both continuing to trade with the support of the bank, as ultimately given expression through the new facilities negotiated with the bank, for the ultimate benefit of OPL’s creditors as a whole, and in particular its trade creditors. By application of the statutory presumption under s.239(6) , I have held that MIL and Dr Masters have failed to rebut the presumption that OPL was influenced in making the payments by a desire to improve the position of MIL in the event of an insolvent liquidation, but it does not follow from this that a case of breach of fiduciary duty is made out. In reaching the above view, I have taken into account the state of the Curaderm claim and Dr Masters’ perceptions as to the merits thereof as at April 2001. However, I am not satisfied that at the time the relevant payments was made, Dr Masters did not hold a reasonable belief that OPL could overcome its difficulties, including those presented by the Curaderm claim, with the support of MIL and the bank provided that new facilities could be agreed with the bank, as they were, following the making of the relevant payments so as to enable MIL to reduce its indebtedness to the bank.
95. I thus reject the claim in misfeasance based upon the payments that I have held to have been preferences.'
[19c] In Bright Future Software Ltd (also known as Manolete Partners Plc v Ellis) [2020] EWHC 1674 (Ch), Richard Spearman QC (sitting as a Deputy Judge of the Chancery Division) noted, at paragraph 313, that, though he didn't have to decide the point, counsel for the claimant relied upon GHLM Trading Ltd v Maroo [2012] 2 BCLC 369, and this passage at paragraph 168, for the purpose of making its claim that there had been a breach of directors duty in relation to the company making the preference.
[20] In addition, in Sandhu v Sidhu [2009] EWHC 983 (Ch), Proudman J accepted, at paragraph 28, propositions submitted by counsel for the claimant. Those propositions included, paragraph 25:
‘…the proposition that a director of a company of doubtful solvency owes a duty to the company to take into account the interests of the company's creditors. …Secondly, … to prefer a creditor within the meaning of s. 239 is capable of being a breach of that duty.’
[21] In Sandhu v Sidhu [2009] EWHC 983 (Ch), on the facts, Proudman J found, at paragraph 157 that ‘[the impugned director] authorised the transfer to [the recipient] of the …sum for purposes unconnected with [the company’s] business.’ This was a breach of fiduciary duty by the director.
Proudman J later found, at paragraph 165, that ‘[the impugned director] was prepared to milk [the company] in order to protect his other interests.’ The impugned director was ordered to restore to the company an amount equivalent to the sum (known as the ‘rebate payment’) he improperly caused the company to transfer to the preference recipient. See paragraph 185-186 of Sandhu v Sidhu [2009] EWHC 983 (Ch).
Another authority is Knight v Frost [1999] B.C.C. 819, in which Hart J considered a derivative claim made by a shareholder, on behalf of a company (ZUK), that, amongst other things, ZUK had paid a sum to another entity (Wildey) in satisfaction of a debt, and that Mr Frost, the director, breached his directors duty to ZUK by causing that payment to be made. The payment was said to be a preference to Wildey.
Hart J said, at 834
'[Counsel for the Claimant] submission was that, since ZUK was insolvent in April 1995, Mr Frost was in breach of his duty as a director of ZUK in causing it to discharge its debt to Wildey in preference to its debt to the plaintiff and was, accordingly, liable to make good to ZUK the money so paid away. In my judgment, the authorities relied on do not support that proposition. In both the West Mercia Safetywear and Washington Diamond Mining Co cases, the payment in question had been a fraudulent preference because it had been made within the relevant statutory period prior to the commencement of a winding up. They are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside that statutory period is liable to replace the money at the suit of the company. It is through the mechanism of liquidation that the creditors are protected and the plaintiff has in this case chosen to pursue a derivative action as a shareholder rather than to petition, as creditor, for ZUK to be wound up.'
Arguably, this passage is unclear. it is not clear how a preference can be initially made 'outside that statutory period'. The impugned payment is always within the statutory period (assuming of course that the company is insolvent or rendered insolvent by the transaction), it just may be that enough time passes so that it ceases to be within, say 2 years/6 months, of the onset of insolvency, and so later ceases to be actionable (i.e the transaction cannot be avoided) against the recipient of the preference. But the company's breach of director's duty cause of action against the rogue director causing the company to make the preference is unaffected by that passing of time.
[22a] See Willers v Joyce (No 2) [2016] UKSC 44
[22b] It would seem that the BVI Business Companies Act 2004, including sections 120 to 125 on directors duties, can be viewed here.
[22c] It would seem that the BVI Insolvency Act 2003, including sections 245 to 252 on voidable transactions, can be viewed here.
[23] In Re Brian D Pierson (Contractors) Ltd [1999] B.C.C. 26, the company sold its business to the two directors’ son John Pierson, transferring the goodwill (valued at £5,000) for no consideration (fee). Though not expressly state to be a transaction at an undervalue, that was what it would amount to. The deputy Judge said, at 43:
‘…my conclusion is that it would have been reasonable to expect the directors of the company to negotiate a payment of £5,000 for the goodwill of this part of the business upon its transfer to John Pierson, and I find that this is the extent of the loss to the company caused by their failure to do so.’
At 57, the husband director was ordered to pay to the company £5,000.
[24a] See also in Re Barton Manufacturing Co Ltd [1998] B.C.C. 827, where the company made payments to another company called Suits Plus. The net payments were wholly unexplained and so Harman J found there was no proper justification for the payments. Harman J said, at 834:
‘They, therefore, are plainly misapplications of the company's funds at a time when the company was insolvent and in those circumstances they fall to be repaid by Mr Philip Barton and Mr Walter Barton as a misfeasance by directors in permitting payment away of the company's moneys improperly.’
Also, plant and machinery was misapplied in that the plant and machinery disappeared from the company and was not available in the liquidation. Upon that footing, Mr Philip Barton and Mr Walter Barton as directors were misfeasant in permitting that misapplication, and were ordered to repay its (estimated) value (see 834-835)
In GHLM Trading Ltd v Maroo [2012] 2 B.C.L.C. 369, Newey J said, at paragraph 149:
‘…once it is shown that a company director has received company money, it is for him to show that the payment was proper. In a similar way, it seems to me that, where debit entries have correctly been made to a director's loan account, it must be incumbent on the director to justify credit entries on the account.’
This was based upon his view, at paragraph 148, that:
‘The close analogy between directors and trustees suggests, to my mind, that, much as a trustee “must show what he has done with [trust] property”, it is incumbent on a director to explain what has become of company property in his hands.'
In turn, in support for the proposition that directors and trustees are in closely analogous positions - that is, that the principle that the “trustee must show what he has done with that [i.e. trust] property”. …"applies to company directors as it does to trustees”, Newey J relied upon Lord Neuberger MR (with whom Richards and Hughes LJJ agreed) in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 3 WLR 1153. Lord Neuberger MR said (in paragraph 34):
‘Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: per Nourse LJ in In re Duckwari plc (No 2) [1999] Ch 253, 262. Similarly a person entrusted with another person's money for a specific purpose has fiduciary duties to the other person in respect of the use to which those moneys are put.’
See also: (1) Re Purpoint Ltd [1991] BCC 121; (2) Re MDA Investment Management Ltd [2003] EWHC 227 and [2004] EWHC 42; (3) Re Sunlight Incandescent Gas Lamp Co Ltd (1900) 16 TLR 535; (4) Re Halt Garage Ltd [1982] 3 All ER 1016; (5) Re DKG Contractors Ltd [1990] BCC 903; (6) Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102
[24b] In Kelmanson v Gallagher [2022] EWHC 395 (Ch), Deputy ICC Judge Curl QC also said, at paragraph 130:
'Where a director pays a preference as part of a scheme to benefit themselves, that payment may itself be a breach of the duty now found under s.172 of the CA 2006: see In re Washington Diamond Mining Company [1893] 3 Ch 93, 113-115 , per Kay LJ. Further, if a payment treats some creditors more favourably than others, it is not always necessary that it should meet all the conditions to be a statutory preference within the meaning of s.239 of the IA 1986 for it nonetheless to be a breach of a director's duty to have regard to the interests of the company's creditors as a class, although the applicability of s.239 may have a bearing on what, if any, remedy is available: GHLM Trading Ltd v Maroo [2012] 2 BCLC 369, [166][169] , per Newey J (as he then was).'
Deputy ICC Judge Curl QC applied the objective test to the facts before him. His analysis can be read from paragraphs 132 to 136 (Mr Gallagher was sole director of the company that made the s.239 unfair preference):
'132. In the instant case, there is no evidence that the interests of the Company were properly considered. I have found that the Company was actually insolvent at the date of the sale of the Premises on 8 February 2017 and that Mr Gallagher was well aware of that. The Company had also long since ceased to trade and no longer had any business. Following the payment of HSBC as its only secured creditor, it had no assets other than the net proceeds of sale, which were insufficient to pay the unsecured creditors in full. In those circumstances, as a matter of substance, the interests of the Company were to be equated for practical purposes with those of its unsecured creditors as a class. The evidence indicates that Mr Gallagher failed to consider, as he should have done, the right of the unsecured creditors to share in the proceeds of sale on a common footing with the Respondents and was instead preoccupied with the need, as he saw it, to ensure that the Respondents were repaid come what may.
133. Although the evidence shows that the existence of certain creditors, in particular Fournier, was in Mr Gallagher's mind at around the time of the sale of the Premises, that does not mean that their interests were considered in the necessary way. To the extent that the unsecured creditors other than the Respondents were considered at all as part of Mr Gallagher's decision to pay away £315,750 to Design on 9 February 2017, it was solely in the context of ensuring that the Respondents were paid ahead of them. In failing to have proper regard to the interests of the creditors, Mr Gallagher failed to consider the interests of the Company and an objective test must be applied.
134. Applying an objective test, in my judgment a reasonable director in the position of Mr Gallagher on 9 and 10 February 2017 could not have reasonably thought that repaying the Respondents was in the interests of the Company. Mr Gallagher's actions amounted to paying the Respondents' debts at face value and leaving behind only £20,000 or so for the rest of the unsecured creditors. Given that the Company was categorically insolvent and no longer trading, in my judgment Mr Gallagher's actions were positively adverse to the interests of the Company as those interests fell to be regarded at that time.
135. The points made by Mr Gallagher in his defence about the market conditions occasioned by the EU referendum and the depressing effect this had on the property market are in my judgment irrelevant to his liability. Supposing Mr Gallagher is right and the EU referendum had an effect on the value of the Property, then this was a misfortune that befell the Company. Given the Company's insolvency, the consequences of that misfortune should have been suffered in common by its unsecured creditors as a class. That there proved to be a shortfall to the class does not begin to disclose a defence to Mr Gallagher's actions in paying the Respondents and leaving the rest of the class with almost nothing.
136. Accordingly, in my judgment, Mr Gallagher breached his duty to the Company under s.172 of the CA 2006 in paying away £315,750 on 9 February 2017 and the claim under s.212 of the IA 1986 is made out.'
[24c] In Manolete Partners Plc v Dalal [2022] EWHC 1597, Stephen Jourdan QC sitting as a deputy High Court Judge said, at paragraphs 210-211:
'It is apparent that [the director] did not give any thought to the interests of the creditors. In those circumstances, an objective test applies to determine whether there was a breach of his duty, rather than the subjective test which usually applies under s.172 of the 2006 Act: see Re HLC Environmental Projects Ltd (in liquidation) [2013] EWHC 2876 (Ch); [2014] BCC 337 at [92(b)]. 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 person 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.
In my judgment, an intelligent and honest person in [the director's] position could not have reasonably believed that causing the Company to pay £250,000 to him in repayment of money it owed him was for the benefit of the creditors as a whole. The creditors were essentially him and HMRC. The payment was for his own benefit, because it enabled him to make a generous gift to his son and daughter-in-law which would enable them to buy a house. But his duty was to consider the creditors as a class, not just himself: see GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] BCLC 369 at [168]. The payment was not for the benefit of the creditors as a class. Accordingly, I consider that [the director] did act in breach of his duty to the creditors when he caused the payment to be made.'
[25]The Supreme Court in AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503 (‘AIB’) reviewed the law on causation for breach of fiduciary duties. As demonstrated by Brewer v Iqbal [2019] EWHC 182 (Ch) (‘Brewer’), his equally applies to misfeasance claims (Brewer, paragraph 98 - 'I shall, therefore, consider in brief the principles applicable to assessing equitable compensation for breach of fiduciary duty, and make an assessment.'). Brewer involved a misfeasance claim brought by a company in liquidation, against a former administrator of the company, but the same should apply to misfeasance claims against directors breaching their directors’ duties.
In AIB:
(1) both Lord Toulson and Lord Reed gave reasoned judgments (with whom Lord Neuberger, Baroness Hale and Lord Wilson agreed (paragraph 143));
(2) reference was made to passages from Target Holdings Ltd v Redferns [1996] AC 421 ('Target Holdings') and McLachlin J in the Canadian case of Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534; 85 DLR (4th) 129 ('Canson Enterprises').
(3) At paragraph 87, Lord Reed said:
‘Liability was however not unlimited. There was in the first place a requirement of causation: “Just as restitution in specie is limited to the property under the trustee’s control, so equitable compensation must be limited to loss flowing from the trustee’s acts in relation to the interest he undertook to protect”: p 160. A further limitation arose from the plaintiff’s responsibility not to act unreasonably. When the plaintiff, after due notice and opportunity, failed to take the most obvious steps to alleviate his or her losses, then it could rightly be said that the plaintiff had been the author of his own misfortune. I would comment that, rather than being a distinct principle, this might be regarded as following from the requirement of a direct causal connection.’
At paragraph 88 to 89 of AIB, Lord Reed said:
‘A further potential limitation related to the interventions of third parties. McLachlin J distinguished between cases such as Caffrey v Darby (1801) 6 Ves 488, where the failure of the trustees to take reasonable steps to recover payments owed to the trust had enabled a third party to default, and cases such as the instant case, where the plaintiff suffered loss as a result of the act of a third party after the fiduciary’s obligation had terminated and the plaintiff had taken control of the property. These cases illustrate how the intervention of a third party may, or may not, interrupt the causal connection between a breach of trust and subsequent loss.<
McLachlin J summarised her conclusions in another passage 85 DLR (4th) 129, 163 which was cited with approval in Target Holdings:
“In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, i e the plaintiff’s lost opportunity. The plaintiff actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach. The plaintiff will not be required to mitigate, as the term is used in law, but losses resulting from clearly unreasonable behaviour on the part of the plaintiff will be adjudged to flow from that behaviour, and not from the breach. Where the trustee’s breach permits the wrongful or negligent acts of third parties, thus establishing a direct link between the breach and the loss, the resulting loss will be recoverable. Where there is no such link, the loss must be recovered from the third parties.”’
(4) Under General Conclusions, Lord Reed in AIB said, at paragraphs 133 to 135:
‘…there appears to be a broad measure of consensus across a number of common law jurisdictions that the correct general approach to the assessment of equitable compensation for breach of trust is that described by McLachlin J in Canson Enterprises and endorsed by Lord Browne-Wilkinson in Target Holdings….
Following that approach, …the model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee has performed his obligation…
The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken control of the property, and was unrelated to the defendants earlier breach of fiduciary duty.’
(5) Lord Toulson said, at paragraph 76 ‘My analysis accords with the reasoning of Lord Reed JSC and with his general conclusions, at paras 133—138’.
In an unreported case, an interesting argument was made on causation. It was contended that there had been a break in the chain of causation and so the director was not liable. The break in the chain of causation was that the liquidator, could and should, have applied for an injunction against the receipient of the unlawful preference (a security over a company property), forbidding her from enforcing that security through sale of the property. The liquidator had not made the application and months later the property had been sold.
The Court can grant an interim injunction in favour of a potential/actual claimant, a liquidator, in an Unlawful Preference claim. In Bailey & Groves Corporate Insolvency Law and Practice, 5th Edition, the authors state, at 23:24:
‘After a transaction has been carried out, but before the hearing of an application to set it aside under IA 1986, s.238, 239 or 423, injunctive relief may be sought to restrain particular use of the transferred asset, for example, re-branding a business which has been transferred. Such an application will proceed on American Cyanmid principles. The nature of undervalue and preference claims are such that the court will usually be able to from (sic) a clear view as to the merits and thus of the office-holder’s prospects of success, and the requirement of the statute that the court should seek to restore the position to what it would have been if the company had not entered the transaction will readily lead to the conclusion that damages will not be an adequate remedy.’ [footnotes removed]
Walker v WA Personnel Ltd [2002] BPIR 621 is an illustrative example of the Court granting an interim injunction in favour of a liquidator, to protect the subject matter of the Unlawful Preference claim from harm. The threat to the property transferred, a business, was the proposed rebranding of the business. The liquidator successfully applied for (and had continued) an injunction to stop the re-branding.
In the unreported case, the legal basis for the argument was not challenged. However the Court held the facts were not sufficient to break the chain of causation. The director was still liable.
[26] In Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 B.C.C. 30 (1987), Dillon LJ said, at 35:
’In my judgment the appropriate course of administration in the present case is to order Mr. Dodd to repay the £4,000 with interest and to direct that in the distribution of the assets of [Safetywear Ltd] to unsecured creditors the debt due from [Safetywear Ltd] to [D Ltd] is to be taken as notionally increased by £4,000 to what it would have been if there had not been a fraudulent preference, and then any dividend attributable to the extra £4,000 thus added back to the debt of [D Ltd] is to be recouped to Mr. Dodd rather than being paid to [D Ltd]. That, as I see it, is a rough and ready way of achieving justice on both sides.’
[27] In Re HLC Environmental Projects Ltd [2014] B.C.C. 337 (2013), John Randall QC, sitting as a deputy High Court judge, said at para 135:
‘[Counsel for the Applicants] accepted that since the NordLB payments discharged what are accepted to have been genuine liabilities of the company, and that the Engenharia payments discharged what may (subject to the liquidators being satisfied as to the same) also have been such liabilities, orders for repayment should in those cases be subject to a form of proviso similar to that applied by the Court of Appeal to the orders made in the West Mercia case (above) (“the West Mercia proviso”), adapted as appropriate to fit the particular factual circumstances here. The proviso considered appropriate in the West Mercia case itself, and the basis for it, was indicated in the judgment of Dillon L.J. as follows ((1988) 4 B.C.C. 30 at 33 and 35):
“Prima facie the relief to be granted where money of the company has been misapplied by a director for his own ends is an order that he repay that money with interest, as in Re Washington Diamond Mining Co . The section in question, however, sec. 333 of the Companies Act 1948 [the predecessor to s.212 of IA86] , provides that the court may order the delinquent director to repay or restore the money, with interest at such rate as the court thinks fit, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication as the court thinks fit. The court has a discretion over the matter of relief, and it is permissible for the delinquent director to submit that the wind should be tempered because, for instance, full repayment would produce a windfall to third parties, or, alternatively, because it would involve money going round in a circle or passing through the hands of someone else whose position is equally tainted.
…
In my judgment the appropriate course of administration in the present case is to order Mr. Dodd to repay the £4,000 with interest and to direct that in the distribution of the assets of the West Mercia company to unsecured creditors the debt due from the West Mercia company to the Dodd company is to be taken as notionally increased by £4,000 to what it would have been if there had not been a fraudulent preference, and then any dividend attributable to the extra £4,000 thus added back to the debt of the Dodd company is to be recouped to Mr. Dodd rather than being paid to the Dodd company. That, as I see it, is a rough and ready way of achieving justice on both sides.”
[28] In Re HLC Environmental Projects Ltd [2014] B.C.C. 337, John Randall QC, sitting as a deputy High Court judge said, at paragraph 145:
‘There is, in my judgment, no legal obstacle to relief being granted here in the form which the applicants primarily seek, and I consider the grant of such relief to be just and appropriate on the facts (subject to the inclusion of a suitable adaptation of the West Mercia proviso where that is called for).’
See also paragraph 150.