Case law update

IPA Insolvency Practitioner newsletter, August 2023

Contents

• Paul Smith, CEO
• Paul Davis, President
• Director Loan Accounts written-off as part of corporate insolvencies
• Financial sanctions guidance
• Supreme Court ruling means many Litigation Funding Agreements are unenforceable
• The importance of consumer protection in insolvency: Understanding Section 75 of the Consumer Credit Act
• Safeguarding your insolvency practice against cyberattack and ransomware threats: Lessons from the Wannacry attack
• HMRC updates
• Just a week to go to the Scotland Roadshow! (CPD: 4h)
• Spotlight on Anti-Money Laundering and Fraud (CPD: 5h)
• IPA Learning | Pension Claims in Insolvency – Are You Getting it Right? (CPD: 2h)
• New speakers announced for the 15th Personal Insolvency Conference (CPD: 6h)
• Do you know someone in the profession who deserves recognition this year?
• Discounted meeting facilities from Office Space in Town (member login required to view)
• Save money on your airport parking with APH! (Member login required to view)
• Need new IT products? Claim exclusive IPA membership offers from Dell
• CPI training with BPP – special offer for IPA members (member login required to view)
• Make savings on essential CPD with exclusive discounts on training from the IPA and our partners
• An opportunity for Registered Property Receivers!
• Committee Chair vacancy
• Clearway: Protecting people, property and assets
• IPA exclusive industry update from Insolvency Insider

An insolvency case law update prepared by Andrew Cawkwell, Associate Director at Manolete Partners PLC.

Legal Case Summary: Liquidators of Safe Depot Limited v Sabir Esa and Stone Key Limited [2023] EWHC 2011 (Ch) Case No: CR-2017-004190

The recent case of Ms Katherine Merry and Mr Ben Dyer, Joint Liquidators of Safe Depot Limited v. Sabir Esa and Stone Key Limited, provides a useful reminder of the pertinent issues when considering breach of duty, transactions at an undervalue, and wrongful trading under the Insolvency Act 1986.

Safe Depot Limited (the “Company”), incorporated on 8 April 2002, offered storage spaces for rent across three sites in north-west England at Blackburn, Bury, and Birkenhead.

The Company was wound up on 24 July 2017, upon the petition of Mr Geoffrey Carmel, the landlord of the Birkenhead premises. Ms Katherine Merry became the liquidator on 14 September 2017, followed by Mr Ben Dyer’s joint appointment.

The case revolved around allegations made by the liquidators against Mr Sabir Esa, the Company’s director and shareholder, that he failed to fulfil his fiduciary responsibilities. The liquidators accused Mr Esa of permitting the Company to participate in transactions at an undervalue, granting preferences, engaging in activities to defraud creditors and wrongful trading.

Central to the case was certain transactions involving Stone Key Limited (“Stone Key”). Mr Esa was one of the founders of Stone Key in 2015 and was its sole shareholder and director at the relevant time. Proceedings were also issued against Stone Key but were stayed following Stone Key entering creditors voluntary liquidation.

The liquidators advanced that the Company faced financial difficulties since 2014, becoming cash flow insolvent from April 2016 and in any event by August 2016. In August 2016, Mr Esa facilitated the transfer of the business and assets carried on at the Bury and Blackburn premises by the Company to Stone Key, including goodwill, customer lists and the debtor book, without proper consideration. He later facilitated the transfer of the customer list for the business carried on at the Birkenhead premises to a competitor in November 2016 without proper consideration.

The liquidators asserted that these asset transfers occurred at an undervalue and in breach of Mr Esa’s fiduciary duties. They claimed Mr Esa disregarded the interests of the Company and creditors, prioritising his own personal gains. The alleged breaches of duty included not only Mr Esa’s failure to exercise care, skill and diligence in his decision-making but also his failure to avoid conflicts of interest.

Although Mr Esa did not dispute that the Birkenhead customer list was given to the competitor for no consideration, the liquidators’ claims in relation to that transaction were dismissed due to the lack of valuation evidence. Whilst the judge acknowledged that Mr Esa may have breached his duties, it was not possible to quantify the loss to the Company. 

A lack of clarity also surrounded the transfer of businesses from Bury and Blackburn premises in terms of the value ascribed to the transactions by the parties and the value paid (or not paid). Mr Esa alleged that Stone Key took over debt collection on behalf of the Company and paid some of its bills. However, the details remained unclear and there was limited documentation to validate Mr Esa’s claims.

However, it was evident that Stone Key had at least benefitted from the Company’s debtor book and there was no evidence that any consideration whatsoever had been paid, despite Mr Esa’s assertions. The judge concluded that Stone Key had gained a benefit equivalent to £46,345.79 from the debtor book alone and that amounted to a transaction at an undervalue. The judge also found that, in allowing the Company to enter into that transaction, Mr Esa had not considered the interests of creditors or his wider duties at all. He also placed himself in a position of conflict. As a result, Mr Esa was ordered to compensate the Company in this amount.

The judge reached a firm conclusion based on the evidence presented in the case. It was established that the Company was unable to meet its financial obligations by April 2016. Mr. Esa was well aware of this dire financial situation and yet proceeded to transfer profitable segments of the Company’s business to Stone Key, a company he was associated with. In doing so, Mr. Esa clearly breached his fiduciary duty to (amongst other things) act in the best interests of the company and the Company’s creditors.

The liquidators also claimed that as from the end of September 2016, Mr Esa knew or ought to have known that there was no reasonable prospect of the Company avoiding an insolvent liquidation and yet allowed it to trade until it was placed into compulsory liquidation on 24 July 2017. During that time the Company’s creditors increased by at least £433,964.10. The judge agreed that the end of September 2016 was the trigger point for wrongful trading; the Company had disposed of much of its business, its inability to pay its debts had caused Mr Esa to seek professional insolvency advice to place the Company into CVL and there was nothing to suggest any possibility of a rescue. Further, there was nothing to suggest that Mr Esa had taken any steps to minimise the loss to creditors.

However, in determining the quantum of Mr Esa’s liability, the judge disregarded a dilapidations claim of £343,451 on the basis that it would have arisen in any event. The increase in deficiency, for which Mr Esa was liable to compensate the Company, was therefore limited to £90,513.10.

The total amount Mr Esa was ordered to pay for both the breach of duty and wrongful trading claim was £136,858.89.

The case underscores the intersection of fiduciary duties, insolvency law and corporate behaviour.

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.