Case law update

IPA Insolvency Practitioner newsletter, March 2024

An insolvency case law update prepared by Jean Boldero, Associate Director at Manolete Partners PLC.

Jean is an Associate Director for the North West region. Prior to joining Manolete in January 2023, Jean spent 32 years in senior roles with Addleshaw Goddard where she specialised in insolvency and fraud related litigation, including breach of directors’ duties and unlawful dividend claims. Jean has held positions on a number of professional committees in the region, including R3 and she is recognised as a rising star in the 2023 issue of Legal 500.

Destruction of company records – no shield to director’s liability 

Dominik Thiel-Czerwinke and Jamie Taylor (Joint Liquidators of Courtside Recycling Limited) v Nicholas James Crabb [2024] EWHC 337 (Ch)

Summary

The Joint Liquidators of Courtside Recycling Limited (“Courtside”) succeeded in fraudulent trading and misfeasance claims against the company’s former director, Mr Crabb. The judgment addresses the burden of proof where a company’s records have been deliberately destroyed and illustrates the Court’s approach to the issue of quantum.

Background

Mr Crabb was the sole director and shareholder of Courtside, which traded in the scrap metal market. Courtside was wound up compulsorily on the petition of HMRC in 2018.

The Joint Liquidators of Courtside issued a court application against Mr Crabb and pursued three heads of claim:

1. Mr Crabb was liable to contribute to the assets of Courtside because he was knowingly party to the carrying on of the business of Courtside with intent to defraud creditors (in particular HMRC) and/or for a fraudulent purpose within the meaning of s.213 of the Insolvency Act 1986 (“IA 1986”).
2. Mr Crabb was liable for misfeasance (fraudulent breach of duty) pursuant to s.212 IA 1986.
3. Mr Crabb was liable to repay sums which he had caused Courtside to pay to himself and third parties after presentation of the winding-up petition.

Claim 3 was deemed admitted at trial. The Joint Liquidators relied on the following facts in support of Claims 1 and 2:

Mr Crabb had deliberately and persistently:

1. Under-declared the VAT for which Courtside was liable to HMRC;
2. Extracted large cash sums from Courtside for no apparent benefit to the company; and
3. Destroyed Courtside’s books and records.

Decision

In the High Court, ICC Judge Prentis found that Mr Crabb had been knowingly party to fraudulent trading consisting of a dishonest scheme by which he deliberately concealed certain company bank accounts from HMRC and Courtside’s accountants in order to avoid accounting to HMRC for Courtside’s true VAT liability and which enabled him to appropriate large amounts of cash from Courtside for his own benefit. The judge determined that Mr Crabb was liable to contribute c.£2.5m to Courtside’s assets.

Points of Significance

The Court was required to determine the fraudulent trading and breach of duty claims on the basis of fragmentary documentary evidence. This is because, on his own admission, Mr Crabb had destroyed documents, and later had ensured that Courtside did not maintain any trading records. The lack of documents meant that Mr Crabb had no way of verifying that the cash withdrawals he had made from Courtside’s bank accounts, totalling in excess of £2.5m, had been used to Courtside’s benefit, for the purchase of stock. Mr Crabb’s case was not assisted by the judge’s finding that Mr Crabb’s “meticulous evidence” in the witness box was manipulative and given with no regard to the truth.

The judge considered the line of authority on compilation and preservation of company records, including the statutory obligation at s.386 of the Companies Act 2006 and arising as an aspect of fiduciary duty. He referenced the judgment of Arden LJ in Re Mumtaz Properties Ltd [2011] EWCA Civ 610, finding that it was not open to the respondent in that case to escape liability by asserting that, if the books and papers or other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator. The judge also referred to Newey J’s judgment in Re GHLM Trading Ltd [2012] EWHC 61 (Ch): “once it is shown that a company director has received money, it is for him to show that the payment was proper”.

The judge noted that Mr Crabb was right to say that there was no direct evidence of his (personal) retention or use of any of the cash.  He also did not doubt that in fact Mr Crabb did use some of the cash in making purchases for Courtside. He nevertheless found that Mr Crabb was liable to contribute to the assets of Courtside for the full amount of the withdrawals.

 “Considered in the context of his fiduciary duties, Mr Crabb has plainly failed to keep records adequate to explain the use of Courtside’s monies in his own hands.  That is through his own calculated decision, which must have been intended for his own benefit. He cannot bring into this accounting for these monies an unevidenced sum of indefinite amount; indeed, aside from his highly improbable position that all cash was used for purchases, no sum has been proposed.

The deliberate non-maintenance of records was also an aspect of his fraud. It shields the actual use of the monies from outsiders’ prying eyes. Even without the overlay of his fiduciary duties, he cannot pray in aid of his exoneration for these monies his own decision to conceal their use. Mr Crabb’s fraudulent scheme has enabled him to have unhindered use of Courtside’s cash, which in the event has left insufficient funds for payment of the target of the fraud, HMRC. It has been a matter for him what evidence was retained which would explain its use.”

Comment

The absence of company records is not unusual in formal insolvencies. The decision in this case is a timely reminder that although the burden lies with the officeholder to prove misfeasance, once it has been established that the director was in receipt of company funds, it is for the director to show that the funds were properly used for the benefit of the company. The lack of contemporaneous documents will not assist the director’s defence.    

Disclaimer: This article provides a general overview of the case and is not intended to offer legal advice.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Please note that guest content does not necessarily represent the views of the IPA.