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The High Court has dismissed a claim brought by a liquidator to recover payments made by an insolvent company. The liquidators claimed that payments to corporate property developers had been made fraudulently. Elliot Green, licensed insolvency practitioner of Oury Clark, London and Slough, considers some of the potential practical implications from this judgment and considers the wider implications for these types of cases.
Instant Access Properties Ltd (in liquidation) v Rosser and others; Murphy and another (as joint Liquidators of Instant Access Properties Ltd) v Rosser and others  EWHC 756 (Ch),  All ER (D) 48 (Apr)
Although the application, pleadings and evidence have not been available for review, there seem to be a number of implications for practitioners which may fall out of the decision in this case:
Instant Access Properties Ltd brought a claim against various defendants, alleging that they had perpetrated a fraud through commission-sharing arrangements with other companies. The company claimed that Mr Rosser, who had interests in the other companies, was a de facto or shadow director of the company because of his involvement in such activities as recruitment, financial reporting and instructing the company’s professional advisers. Article 85 of the company’s Articles of Association allowed a director to be a party to a transaction with the company without liability to account for benefits received, provided that any material interests were disclosed.
The company claimed that Mr Rosser had fraudulently entered into contracts causing the company to give away some of its commission for no or inadequate consideration. The company was placed in liquidation on 21 December 2008. This claim was brought on 18 December 2014 under section 213 of the Insolvency Act 1986 (IA 1986), which allows a court to order a contribution to the assets of a company by persons who had knowingly participated in that company’s fraudulent trading. If IA 1986, s 213, had applied, a six-year limitation period would begin to run from the later date of the company’s liquidation.
The company also brought a claim against Mr Rosser for breach of fiduciary duty, claiming that he was liable to account for profits made as a result of that breach. A negligence claim was also brought against the company’s advisers—solicitor’s firm Mishcon de Reya and tax advisers Jeffcote Donnison LLP.
Mr Rosser’s case was that even if there were a breach of fiduciary duty, his actions had been ratified at a subsequent shareholders’ meeting.
The definition of ‘director’ in section 250 of the Companies Act 2006 (CA 2006) (and its statutory predecessor, section 741 of the Companies Act 1985 (CA 1985)) included any person occupying the position of a director regardless of how they were described. A de facto director was a ‘director’ of the company, and under CA 2006 was a director for the purposes of the duties under CA 2006 ss 171–177. Whether a person was a de facto or shadow director was not subject to any clear legal test, but rather depended on the specific facts of each case and the activities of the individual in question. A de facto director owed the same duties as a regular director. Mr Rosser was a shadow director in relation to some of the company’s activities.
It was difficult to establish that a shadow director owed a fiduciary duty and was in breach of it, and was liable for any resulting loss, where a properly appointed director would not be liable on the same facts. This is because a properly appointed director would be relieved from this duty under CA 2006, s 1157 (or its statutory predecessor—CA 1985, s 727).
Here the company had not made out its claim that the commission payments were made for no or no adequate consideration. Mr Rosser was accordingly not in breach of duty. If Mr Rosser had been a properly appointed director, he would have been obliged to avoid a conflict between his duty to the company and his interests in his other companies, but he would also have benefitted from Article 85 of the company’s articles. It should be noted that the judge appears to have largely declined to address the issue under CA 2006, s 1157, as to how a shadow director cannot obtain relief under that section whereas a de facto director can.
Before a director can rely on shareholder ratification in relation to something which would otherwise be a breach of fiduciary duty, he had to show that the shareholders had full knowledge of the relevant facts so as to be able to make an informed decision. Here the shareholders had been told that the arrangements in issue were on an arm’s-length basis. If Mr Rosser had been in breach of fiduciary duty, the judge ruled that he would have held that those shareholders did not have sufficient information for ratification.
The company’s professional advisers did not owe any duty to the company to assess the commercial value of the consideration provided by the recipients of the commission-sharing arrangements because the terms of their retainers did not cover advice of that nature.
The company’s business had not been carried on with fraudulent intent. There was no basis for a declaration that any of the defendants were liable to make a contribution to its assets. Although one of the company’s directors had created false documents, this had not caused any loss either to the company or anyone else.
Even if the company had established a breach of fiduciary duty by Mr Rosser, it would not have been a fraudulent breach of trust under section 21(1)(a) of the Limitation Act 1980 (LA 1980). The resulting claim did not fall within LA 1980, s 21(1)(b).
Further, this action did not fall within the exceptions for fraud or deliberate concealment under LA 1980, s 32(1)(a) and (b). The result was that this claim was barred by reason of limitation.
If you are a LexisPSL subscriber, click the links below for further information:
De facto and shadow directors (Subscriber access only)
Recovery of unlawful dividends by an insolvency office-holder (Subscriber access only)
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First published on LexisPSL Restructuring and Insolvency
Elliot Green is a chartered account and licensed insolvency practitioner at Oury Clark in London and Slough. He specialises in insolvency with a focus on forensics, litigation, fraud, investigations, asset recovery and creditor services. The matters expressed by him are confined to consideration of the practical implications, not the statements on the background or the above account of what the court decided. He accepts no responsibility or any liability, on the part of himself or his firm for the same or indeed for any reliance placed upon any part this article. It is not legal advice, which should always be sought by someone on the facts of their individual case.
Interviewed by David Bowden.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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