Warning to liquidators claiming against non-active directors for misfeasance (Re IT Protect)

Warning to liquidators claiming against non-active directors for misfeasance (Re IT Protect)

The case concerned a misfeasance application against a director who had taken no active involvement in the running of the company, seeking to recover losses arising from the actions of those managing the company. While the application succeeded, the judge found that, where liquidators seek to recover losses from a director on the basis that they abdicated their duties, they are subject to a strict requirement to particularise and, where possible, evidence three matters: first, the alleged knowledge the non-active director ought to have had of the company’s affairs had they performed their duties; second, the steps the director should have taken in light of that knowledge; and third, that their failure to act caused the company loss. This level of rigour is required not only where pleadings are ordered, but also where the claim proceeds by application notice and witness evidence only. Written by Jessica Brooke, barrister at Enterprise Chambers.

What are the practical implications of this case?

The judge found that, in a case based upon a director’s abdication of duties, liquidators should particularise and evidence their case as they would a common law negligence claim, even where the claim is proceeding by application notice and witness statement. Liquidators must identify the relevant director’s duty breached, give particularity of the breach by setting out with some detail what it is that the director ought to have done, and show, on a ‘but for’ basis, that the breach caused the loss or damage complained of.

The level of detail required where the application is proceeding by witness evidence only may come as a surprise. When claiming against a non-active director, care should be taken to ensure that liquidators specifically state (whether in pleadings or witness evidence) what actions the director should have taken and how this caused the loss on a ‘but for’ basis, and particular thought should be given as to whether there is evidence to substantiate the allegation of causation.

The judge also made some interesting findings in respect of the allegations made by the liquidators in the application notice. This alleged that the non-active director had caused, allowed or permitted various losses to the company, and also that the director had abdicated his responsibilities and failed to supervise, causing the company loss. The judge found that in taking no involvement in the company’s affairs the director had not caused, allowed or permitted the company’s losses, but that the director was liable on an abdication of responsibility/failure to supervise basis. Those acting for liquidators should, therefore, be careful to ensure that an application under section 212 of the Insolvency Act 1986 against a non-active director does not proceed on too narrow a basis, and that the case is not based solely on allegations that the director caused, allowed or permitted the company’s loss.

What was the background?

The company operated a telephone sales business, and cold-called members of the public to sell call-blocking devices. The sole director had no involvement in the company and did not pay any attention to it. Just prior to the company ceasing to trade, the company was issued with a monetary penalty by the Information Commissioner’s Office (ICO) as a result of the company cold-calling members of the public who had given notice to the ICO that they did not wish to receive unsolicited marketing calls, and had been entered on the register of the Telephone Preference Service (TPS). In calling TPS subscribers the company breached the Privacy and Electronic Communications (EC Directive) Regulations 2003 (PECR 2003), SI 2003/2426, reg 21(1)(b). The penalty went unpaid, and substantial company monies were misappropriated from the company’s bank account after the penalty fell due.

What did the court decide?

The judge found that, where a non-active director is alleged to have caused, allowed or permitted certain events and transactions, liquidators must prove either activity on the part of the non-active director, or conscious (ie knowing) inactivity. This was subject to the caveat that, where a director knew of an improper practice being perpetrated by those managing a company’s affairs, and does nothing about it, the director may be treated as having permitted not only those examples of misconduct of which they are actually aware, but also the subsequent continuation of that practice.

The judge further found that, where activity or conscious inactivity on the part of the director is not proved, and it is alleged that a director’s abdication of responsibility has led to loss, liquidators must demonstrate three matters:

• first, what the director knew, or ought to have known, had they performed their duties as a director

• second, what steps the director should have taken, consistent with their duties, in light of the knowledge that they had or should have had

• third, what would have happened if the director had complied with their duties, and that, but for the breach, the transaction or loss complained of would not have occurred

The company’s director was found not to have caused, allowed or permitted the company to cold-call TPS subscribers, or the misappropriation of company monies, because at no point was the director aware that this was occurring. The director was, however, found liable in respect of both of these matters on the basis that the director had abdicated his duties and failed to supervise. Applying the three-stage test referred to above, the judge found that, in respect of the ICO penalty, the director should have known about the provisions of PECR 2003, and should have taken steps to ensure that TPS subscribers were not called, and that, the director had done so, the ICO penalty would have been avoided.

The judge further found that, at the date of the first misappropriation of company monies, the director ought to have known that the company was subject to the ICO penalty. The director should then have taken steps to review the company’s cashflow position, which would have alerted him to the fact that company monies were being misappropriated. This should have prompted him to take control of the company’s bank account, in which case the misappropriations would have been prevented.

Case details

• Court: Insolvency and Companies List (Chancery Division), Business and Property Courts of England and Wales, High Court of Justice

• Judge: Insolvency and Companies Court Judge Barber

• Date of judgment: 24 September 2020

 

 

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