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Case law update

An insolvency case law update prepared by Tanya Barrett of Manolete Partners PLC.


Brown v Bashir & Anor [2021] EWHC 337 (Ch)

Hearing dates: 24-26 November 2020

Date of judgment: 26 February 2021

Judge: ICC Judge Prentis


Background

This matter involved Shahi Tandoori Restaurant run by Abdul Monnan Bashir and his son Adbul Bahar Bashir (“the Respondents”) since 1990. It was then incorporated into Shahi Tandoori Restaurant (“the Company”) on 29 October 2018. The Respondents were initially appointed as directors but at different points resigned, leaving a gap in directorships.

The Company ceased trading on 31 March 2015. On 14 March 2017, HMRC presented a winding-up petition against the Company in the sum of £362,317, which led the Respondents to approach an Insolvency Practitioner. The Company was placed into creditors voluntary liquidation which commenced on 12 May 2017.

The Claim

The liquidator of the Company applied for a declaration that transactions in the sum of £771,918 comprising of monies belonging to the Company retained for the benefit of the Respondents constituted misfeasance within the meaning of s 212 of the Insolvency Act 1986 (IA 1986). Further, that the company was entitled to the total sum under IA 1986 s 234(2) together with an order that the respondents make good the amount. This latter ground was not pursued on the basis that it did not add anything.

The sum claimed represented cash which the liquidator says was removed from the Company’s takings during its trading by one or both Respondents, without those sums being accounted for in the books.

Additionally, HMRC had been investigating the Company during the course of its trading and found that sales were being under-declared for some years, whereby cash takings were not being declared. The liquidator alleged that customers’ bills were destroyed in order to match takings to the bills and that the underdeclared cash was then taken by the Respondents from the Company. The Respondents had on multiple occasions stated that the Company’s records were within their possession, but did not ever deliver them up.

The Court’s Decision

The court considered whether the sums represented cash removed by the respondents from the company over the course of its trading without being accounted for in the books in breach of ss 171 and 172 of the Companies Act 2006 (“CA 2006”).

On the facts, the court was satisfied without the “slightest doubt” that cash was being diverted away from the Company and that there had been an illicit removal of cash from the company by the respondents from the commencement of trade until 31 July 2013. Such removals had been outside the proper use of the company’s money, and could “never have been considered in its best interests, solvent or not”.

The Respondents as directors had a duty to deliver up evidence to explain their actions and the Company’s affairs but did not do so and failed to provide adequate justification for such failure.

Limitation defences were raised by both Respondents but the judge held that no limitation defence applied because this was a case of direct receipt under section 21 (1) (b) of the Limitation Act 1980 (“LA 1980”) applying Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14, [2018] AC 857.

Additionally, pursuant to section 32(1)(b) LA 1980, the judge found there was deliberate concealment because of the Respondents’ failure to assist the liquidator in circumstances where the Company had no independent board at the material times to “discover the truth” of what the Respondents were doing, applying Haysport Properties Ltd v Joseph Ackerman [2016] EWHC 393 (Ch), [2016] BCC 676.

However, the Court held that although it was established that the directors caused loss to the Company through their misfeasance, the evidence was not sufficient to quantify that loss. The argument that the loss should be aligned with HMRC’s findings was not accepted and deemed to be “wrong in principle”.

Accordingly, the court required a further account to be taken to resolve that question, noting that this would be an additional expense “albeit one that an appropriate costs order can mollify” given that the Respondents had a full opportunity to comply with their fiduciary duties to produce books and records but had not done so.

To conclude his judgment, ICC Judge Prentis stated at paragraph 116:

 “Should it be the case that the Respondents continue to refuse to produce the Company’s books and records and all other relevant information, then the Court may be constrained to arrive at the best figure it can in the circumstances; and at that stage I anticipate that, at least as to outputs, the best, swiftest and cheapest evidence it will have is likely to be Mr Mortell’s, founded as it is in HMRC’s expertise.

Implications

This case highlights the importance to Insolvency Practitioners to pay close attention to evidencing and demonstrating the extent of the quantum of losses caused by the directors where misfeasance is alleged against them. Where loss cannot be identified on the documents, the court may require an accounting exercise to be undertaken.

Doing this early may incur additional costs initially, but it might avoid further delays later as a result of having to participate in an accounting exercise and further hearing, even after judgment has been awarded in favour of the Insolvency Practitioner.  

The decision also highlights the fact that directors of a company are required to deliver up the books and records of the company even though the burden of proof rests on the Insolvency Practitioner. Failure to do so may result in the relevant limitation period being disapplied due to a finding of concealment, adverse costs consequences, and the court relying on the best figure it can in the circumstances to determine quantum.

Content courtesy of IPA corporate partner Manolete Partners PLC.