Director liable for £1.2 million over sale of insolvent company

A director who sold a company when it was insolvent and diverted a significant amount of the proceeds to himself and his wife rather than paying the company’s creditors was liable for repaying £1.2 million.

Sam Lyon Head of Corporate & Commercial reports on this recent case.

The wife was also held liable.

The company’s liquidator brought the claim of misfeasance against the director and a claim of dishonest assistance and knowing receipt against his wife.

The director owned and ran a marketing company. In 2012, the business was in serious financial difficulties.

In 2013 the director sold it for £1.2 million. The transaction was structured so that a large slice of the proceeds went to the director and his wife rather than to creditors.

The High Court upheld the misfeasance claim.

It held that the director knew by late 2012, if not earlier, that the company was insolvent on the cash-flow test as well as the balance-sheet test.

He also knew that the entire consideration for the sale of the company’s business should have been paid to the company and that he was acting contrary to the interests of its creditors when he transferred some to himself.

He committed a breach of fiduciary duty in signing documents which diverted £573,000 of the purchase price to himself. He had also transferred some of the sale proceeds to various family members, such as his mother and his father-in-law, to repay loans they had made to the company.

However, no credit should be given for those sums because they were incapable of being a defence to breach of duty; the payments to selected creditors were themselves wrongful; and the court was not satisfied to whom the money was paid or what liabilities it discharged, given the paucity of evidence.

Accordingly, the director was liable for the full sum of £1.2 million.

The court also found that the director’s wife was liable as a constructive trustee for the same £1.2 million because she had assisted him by signing various documents necessary for the transactions to proceed.

She realised that the documents she was being asked to sign were important, and that the transaction was dependent on her signing them. The honest and reasonable course would have been to read the documents and ask for the transaction to be explained to her. She had not done so but had signed at her husband’s request because she said she trusted him.

That amounted to wilful blindness and was not the way that an ordinary decent person would have behaved.

If you would like more information about the issues raised in this article or any aspect of company law, please contact Sam on 01228 516634 or click here to send him an email.