Examining the interplay between the Companies Act and the Insolvency Act—Re Pro4Sport Ltd (in Liquidation)

Did Pro4Sport v Adams clarify how a claim under the Companies Act 2006 (CA 2006) may also be brought as part of proceedings under the Insolvency Act 1986 (IA 1986)? James Morgan, barrister at St Philips Chambers, explores this recent case.

Original news

Re Pro4Sport Ltd (in Liquidation); Subnom Hedger (Liquidator of Pro4Sport Ltd) v Adams [2015] EWHC 2540 (Ch), [2015] All ER (D) 12 (Sep)

The Chancery Division dismissed an application by the liquidator of a company, under IA 1986, s 212 against the respondent—a former director and majority shareholder of the company. It held, among other things, that the claim under CA 2006, s 172 failed and the respondent had not been in breach of his duty under CA 2006, s 174.

What was the background to the application?

In 2012, very shortly before the creditors’ voluntary liquidation of Pro4Sport Ltd (the company), its director and majority shareholder caused it to sell its assets to an associated company, Pro4Sport.co.uk (Pro4) for deferred consideration of £56,400. The only security provided was a retention of title clause. Pro4 paid £35,910 of the purchase price before going into creditors’ voluntary liquidation in 2014.

The liquidator of the company brought misfeasance proceedings against the director under IA 1986, s 212, alleging the sale was in breach of his duties under CA 2006, ss 172, 174 and (possibly) 190, resulting in loss to the company of £20,490 (that being the difference between the price and the sum in fact paid by Pro4). The claim was brought despite:

  • business advisors associated with the liquidator advising the director as to the sale, and
  • post-liquidation—the liquidator had adopted the sale contract and agreed a payment schedule with the director

What were the legal issues that the judge had to decide in this application?

The judge was required to deal with four issues:

  • whether the director was in breach of duty under CA 2006, ss 172, 174
  • whether he should deal with the claim under CA 2006, ss 190–195 at all (and if so, whether the director was liable)
  • whether the director should be entitled to relief from any liability under CA 2006, s 1157
  • what loss the company had suffered as a result of any actionable breaches of duty

Why did these issues arise?

The breach of duty issues arose because the director, while accepting that the company was insolvent at the relevant time, argued that he had taken into account the interests of the company’s creditors and had, in essence, obtained as good a deal for the assets as was possible in the circumstances. This point flowed into whether the company had in fact suffered any loss. The separate issue as to CA 2006, s 190 arose because such a claim was that of the company (and not the liquidator), it had not been properly pleaded and there was doubt as to whether any aspect of such a claim could be included within an action under IA 1986, s 212.

What were the main legal arguments put forward for each of the issues at hand?

In relation to the first issue, it was common ground that the director was required to consider the interests of the company’s creditors as ‘paramount’ and to exercise his powers with reasonable care and skill—whether he had done so turned on the facts.

As to the second issue, the main legal arguments were whether a breach of CA 2006, s 190 could form the basis of a claim under IA 1986, s 212.

The third issue turned on whether the director had acted honestly and reasonably and in all the circumstances should be excused from any liability.

The fourth issue raised the question as to what sums (if any) the liquidator would have obtained on a sale of the assets and how, applying a ‘loss of a chance’ approach, damages should be calculated.

What did the judge decide?

The judge decided the issues as follows:

  • the director was not in breach of CA 2006, ss 172, 174
  • it was not proportionate for him to deal with the claim under CA 2006, ss 190–195
  • if he had found the director to have been in breach of duty, then he would nevertheless have granted him relief from liability under CA 2006, s 1157
  • the loss suffered by the company was less than the sum paid by Pro4 and therefore, in any event, there was no loss

Why did he reach these conclusions?

In relation to the first issue, the judge accepted the evidence of the director that he honestly considered that the terms of the sale (on deferred consideration) were better than the likelihood of no sale at all and that he obtained a reasonable price for the assets. In so doing, the judge was influenced by the fact that the director relied on advice and a pre-sale valuation that was not out of line with the sale price. This was underlined by the fact that after his appointment the liquidator took no steps to avoid the sale contract.

Regarding the second issue, there was no claim by the company under CA 2006, s 190—rather it was relied on as a ground of misfeasance under IA 1986, s 212. The judge, however, was not satisfied that it was clearly pleaded and decided that it was not ‘proportionate’ (which appears to have been another way of saying ‘fair’) to deal with it—thereby obviating the need for him to decide the ‘by no means straightforward question’ of the extent of the jurisdiction under IA 1986, s 212.

The third issue did not strictly arise, but the judge’s findings above led to the conclusion that the director should in any event be relieved from any liability.

As to the fourth issue, the judge assessed damages by calculating the value of:

  • a one-third chance of the liquidator selling the assets as a going concern, and
  • a two-thirds chance of him selling them at auction, that figure being £32,400 (and therefore less than had been paid for the assets)

To what extent is the judgment helpful in clarifying the law in this area?

This was primarily a decision on the facts and the judge declined to clarify the extent to which a claim under CA 2006, s 190 may be brought as part of proceedings under IA 1986, s 212. His approach to loss is a useful reminder that ‘loss of chance’ claims may arise in misfeasance proceedings.

What practical lessons can those advising take away from this case?

Those advising office-holders need to bear in mind that just because assets are transferred shortly before liquidation this does not necessarily mean that a claim arises. That is particularly so when the price obtained is within the range of reasonable valuations and the office-holder has adopted the contract post-appointment.

Further, if an alternative claim may arise under CA 2006, s 190, then a separate Part 8 claim should be brought in the name of the company (see Civil Procedure Rules Practice Direction 49A, para 5) or, at the very least, the company should be named as a co-applicant and the claim properly set out in the evidence and/or Points of Claim.

Interviewed by Hannah Giles.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

A summary procedure under section 212 of the Insolvency Act 1986 and the process for bringing a misfeasance claim

Director's guide to dealing with a company in financial difficulty

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First published on LexisPSL Restructuring and Insolvency

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