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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> RJH Stanhope Ltd, Re [2020] EWHC 2808 (Ch) (04 November 2020) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2020/2808.html Cite as: [2020] EWHC 2808 (Ch) |
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BUSINESS AND PROPERTY COURT IN LEEDS
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF RJH STANHOPE LTD
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
B e f o r e :
(sitting as a Judge of the High Court)
____________________
MR ANDREW POXON (1) MR MARTIN MALONEY (2) (AS JOINT LIQUIDATORS OF RJH STANHOPE LTD) |
Applicants |
|
- and – |
||
MR JOHN ROBERT HARRISS |
Respondent |
____________________
Mr Andrew Shaw counsel for the Respondent
Hearing date: 8, 9 and 10 September 2020
Date draft circulated to the Parties: 24 September 2020
Date handed down: 4 November 2020
____________________
Crown Copyright ©
If this Transcript is to be reported or published, there is a requirement to ensure that no reporting restriction will be breached. This is particularly important in relation to any case involving a sexual offence, where the victim is guaranteed lifetime anonymity (Sexual Offences (Amendment) Act 1992), or where an order has been made in relation to a young person.
His Honour Judge Saffman:
Introduction
Background
Ryegate £4,700 Lili Okwok £18,950 Barbara Needham £2,000 Paxton PF LLP £24,000 Druce & Co £2,000 S Gollings £13,797.91 Savills £160.80 Taylors Solicitors £30,781.29 Total £96,390
The Statutory provisions relevant to director's duties;
Insolvency Act 1986
212 Summary remedy against delinquent directors, liquidators, etc.
(1)This section applies if in the course of the winding up of a company it appears that a person who—
(a)is or has been an officer of the company,
(b)…….
(c)……..
has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
(2)……..
(3)The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him—
(a)to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or
(b)to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.
(4)……….
(5)………
Companies Act 2006
172 Duty to promote the success of the company
(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company.
(2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
S 173 Duty to exercise independent judgment
(1)A director of a company must exercise independent judgment.
(2)This duty is not infringed by his acting—
(a)in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
(b)in a way authorised by the company's constitution
S 174 Duty to exercise reasonable care, skill and diligence
(1)A director of a company must exercise reasonable care, skill and diligence.
(2)This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.
S 175 Duty to avoid conflicts of interest
(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
(3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
(4) This duty is not infringed—
(a)if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(b)if the matter has been authorised by the directors.
(5) Authorisation may be given by the directors—
(a) where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
(b) where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.
(6) The authorisation is effective only if—
(a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
(b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
(7) Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.
The claim against John
a. John knowingly permitted Robert to act as a de facto/shadow director during the period 13 July 2011 to 17 November 2011 at a time when he knew that Robert was subject to undertakings not to so act. It is contended that this is a breach of section 172 Companies Act 2006.
b. In permitting Robert to so act John allowed the Company to become liable for monies had and received from Ms Birkhead, contrary to section 172
c. John knowingly or negligently allowed the Company to make payment out of sums which the company held on trust for Ms Birkhead or for which it was otherwise liable to her such that the Company was unable to transfer the sums back to her or discharge its liability to her. It is alleged that this is contrary to the interests of the Company and thus breaches sections 172 and section 174
d. John knowingly and/or negligently allowed the Company to make the payments which stripped it of the ability to repay Ms Birkhead despite the fact that the Company received no proper consideration, security or other benefit in respect of these payments. It is alleged this was contrary to the interests of the Company and thus offended section 172 and section 174.
e. That over £328,000 was paid to Project Management, a company of which John was a director in contravention of the provisions of section 175.
a. In breach of section 173, there has been a failure by John to exercise independent judgment. Instead, he is allowed himself to be suborned to his father's will.
b. In not independently satisfying himself as to the basis upon which Ms Birkhead paid this £400,000 to the Company but rather instead simply relying on what he was told by Robert, he failed to comply the duties imposed upon him by sections 172 to 175 Companies Act 2006.
"2. at a time when (John) admits he was a director of (the Company), he admits that he allowed his father to act as a de facto and/or shadow director of the Company despite knowing that (Robert) was disqualified from doing so. This enabled Robert to perpetrate a fraud upon a third party (Heather Birkhead) and ultimately led to the Company entering into CVL on 3 September 2012. Had (John) not allowed his father to act as a de facto and/or shadow director the company would never have become mixed up in (Robert's) fraud.
3. By allowing his father to act as a de facto and/or shadow director (John) has caused the Company to fail when it would otherwise have succeeded and, by so doing, has breached his statutory duties under ss171 to 177 companies act 2006……"
a. That no reasonable director would allow a person whom he knows to be disqualified from acting as a director to act in the capacity in which Robert acted. The unchallenged evidence is that John knew that Robert was a person unfit to be involved in the management of the Company. It is asserted that that fact should have put John on enquiry as to the basis upon which Ms Birkhead had paid the not inconsiderable sum of £400,000 to the Company. In other words, that it was incumbent upon him to check with her the basis upon which she had put the Company in funds to the extent of £400,000.
b. That this obligation was compounded by virtue of the fact that he was aware that the £400,000 had not come from a commercial entity but from an individual, indeed a family friend, who was providing this money out of a divorce settlement.
c. That had John taken the trouble to contact Ms Birkhead he would have known that she wanted her money back on the basis of her assertion that she had been misled into paying it in the first place and she had discovered this on the day she made the payment.
d. As I have said, approximately £329,000 of this money was paid to Project Management, a company of which John was a director along with Mr Chaudry and Mr Douglas. There is no evidence of the basis upon which this money was paid to that company or the terms of repayment or, if an investment, the terms of the investment. It was simply paid away to Project Management almost immediately after its receipt by the Company. It is correct that the evidence suggests that by 20 July 2011, only a matter of 6 days after being credited to the Company's account it had paid £302,000 to Project Management and there is no paperwork to explain the basis of that payment.
e. That the Company itself was a non-trading company with no assets and no revenue. The manner in which the payments were made, particularly those to Project Management and which involved a complete absence of any agreement as to the terms upon which that company received the money made the Company's position wholly and unjustifiably vulnerable.
The defence to the claim for breach of duty.
a. That he was not privy to the conversations between Ms Birkhead and Robert but that it was his understanding that Ms Birkhead would ultimately receive a return on her investment through a sale of properties in the Margate Development which was to be funded at least in part by her investment.
b. That he was not surprised that Ms Birkhead was agreeing to invest in a development. Using money from investors to fund developments such as the Margate Development was not an unusual financing option.
c. That he was not particularly concerned with or involved in the mechanics of how Ms Birkhead actually invested her money. It was not his area of expertise. His focus was more on getting the Margate Development physically built rather than how it was financed. Paperwork and administrative functions were more the province of his co-directors Mr Chaudry and Mr Douglas who, as professional men, he trusted to ensure firstly, that the investment was "effected properly and that suitable arrangements would be put in place to reflect the terms of Ms Birkhead's investment" and secondly "to ensure that suitable arrangements were put in place to reflect the onward transmission of the relevant part of the money from the Company to Project Management".
d. That when he authorised payments out, particularly those to Project Management he assumed that Mr Chaudry and Mr Douglas had put in place the necessary arrangements to which I refer immediately above.
e. That so far as he was concerned the payments made to Project Management were for legitimate commercial purposes. He believed that they were made "firmly with the intention of allowing Project Management to invest in progress the Margate Development so as to ensure that it would be possible to achieve a return on Ms Birkhead investment and a profit on it generally."
f. That, it is his unchallenged evidence that he thought that the monies emanating from Ms Birkhead would be utilised "wholly and fully to enhance and progress the Margate Development and a return on Ms Birkhead's investment in that development". He asserts that that was clearly in the best interests of the company.
Conclusion as to breach of duty
Causation
Does the Company have a liability to Ms Birkhead?
Insolvency Act 1986
79 Meaning of "contributory".
(1) In this Act the expression "contributory" means every person liable to contribute to the assets of a company in the event of its being wound up, and for the purposes of all proceedings for determining, and all proceedings prior to the final determination of, the persons who are to be deemed contributories, includes any person alleged to be a contributory.
(2) The reference in subsection (1) to persons liable to contribute to the assets does not include a person so liable by virtue of a declaration by the court under section 213 (imputed responsibility for company's fraudulent trading) or section 214 (wrongful trading) in Chapter X of this Part.
(3) A reference in a company's articles to a contributory does not (unless the context requires) include a person who is a contributory only by virtue of section 76.
112 Reference of questions to court.
(1) The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court.
(2) The court, if satisfied that the determination of the question or the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just.
(3) A copy of an order made by virtue of this section staying the proceedings in the winding up shall forthwith be forwarded by the company, or otherwise as may be prescribed, to the registrar of companies, who shall enter it in his records relating to the company.
Insolvency (England and Wales) Rules 2016
Admission and rejection of proofs for dividend
14.7.—(1) The office-holder may admit or reject a proof for dividend (in whole or in part).
(2) If the office-holder rejects a proof in whole or in part, the office-holder must deliver to the creditor a statement of the office-holder's reasons for doing so, as soon as reasonably practicable.
Appeal against decision on proof
14.8.—(1) If a creditor is dissatisfied with the office-holder's decision under rule 14.7 in relation to the creditor's own proof (including a decision whether the debt is preferential), the creditor may apply to the court for the decision to be reversed or varied.
(2) The application must be made within 21 days of the creditor receiving the statement delivered under rule 14.7(2).
(3) A member, a contributory, any other creditor or, in a bankruptcy, the bankrupt, if dissatisfied with the office-holder's decision admitting, or rejecting the whole or any part of, a proof or agreeing to revalue a creditor's security under rule 14.15, may make such an application within 21 days of becoming aware of the office-holder's decision.
(4) …….
(5) ………..
(6) ………..
(7) ………..
"where the court is asked to exercise a statutory power, therefore, the applicant must show that he is a person qualified to make the application. But this does not conclude the question. He must also show that he is a proper person to make the application….. This means that he has a legitimate interest in the relief sought"
"the responsibility of a judge to make his or her own independent assessment of the evidence entails that weight ought not to be attached to conclusions reached by another judge – all the more so whether party to whose interests to conclusions are adverse was not a party to the earlier proceedings"
Is the adjudication determinative?
The adjudication
There is nothing owing as a matter of law by virtue of a settlement
36 "Accordingly, the current state of the law is that, in order for the creditor to reserve his rights against co-debtors he should expressly reserve those rights in his agreement. If he does not make an express reservation the court will need to determine whether a term is necessarily to be implied from the circumstances which existed at the time of the agreement."
And at paragraph 37:
37 "…. The second, and alternative, question was whether, notwithstanding the absence of an express reservation, it was necessary by virtue of the surrounding circumstances to imply such a reservation."
a. Ms Birkhead had a judgment against the Company which she had obtained in November 2012.
b. That the Company was in creditors voluntary liquidation and had no assets.
c. That John (along with Messrs Chaudhry and Douglas) had only been added as a party to the claim against the Company and Robert after the Company had gone into liquidation and when her judgment against it was still unsatisfied.
Conclusion as to the question of settlement.
Arithmetical issues with the adjudication
£629,787.58
In respect of the £475,000 received pursuant to the Tomlin order the proof of debt gives credit for £334,739.33 leaving a proof of debt of £295,048.25. The £140,000 odd deducted from the amount received as a result of the Tomlin order was apparently to defray two thirds of the costs that Heather Birkhead had incurred in her action resulting in her judgment against the Company and the Tomlin order.
Conclusion as to the adjudication
Abuse of process
"the desirability, in the general interest as well as that of the parties themselves, that litigation should not drag on forever and that a defendant should not be oppressed by successive suits when one would do. That is an abuse at which the rule is directed."
"The underlying public interest is the same: there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all."
In the same speech (at 32H-33A) Lord Bingham stated:
"An important purpose of the rule is to protect a defendant against the harassment necessarily involved in repeated actions concerning the same subject matter. A second action is not the less harassing because the defendant has been driven or thought it prudent to settle the first; often, indeed, that outcome would make a second action the more harassing."
Section 1157 Companies Act 2006.
1157 Power of court to grant relief in certain cases
(1) If in proceedings for negligence, default, breach of duty or breach of trust against—
(a) an officer of a company, or
(b )a person employed by a company as auditor (whether he is or is not an officer of the company),
it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.
(2) If any such officer or person has reason to apprehend that a claim will or might be made against him in respect of negligence, default, breach of duty or breach of trust—
(a) he may apply to the court for relief, and
(b) the court has the same power to relieve him as it would have had if it had been a court before which proceedings against him for negligence, default, breach of duty or breach of trust had been brought.
(3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge, after hearing the evidence, may, if he is satisfied that the defendant (in Scotland, the defender) ought in pursuance of that subsection to be relieved either in whole or in part from the liability sought to be enforced against him, withdraw the case from the jury and forthwith direct judgment to be entered for the defendant (in Scotland, grant decree of absolvitor) on such terms as to costs (in Scotland, expenses) or otherwise as the judge may think proper.
"it may seem odd that the person found to have been guilty of negligence which involves failing to take reasonable care can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of s727 despite amounting to lack of reasonable care at common law."
a. Insofar as Ms Birkhead may have been misled into making her investment, John did not mislead her nor did he know that she had been misled. He believed that the Company had legitimately come into possession of the £400,000 on the basis that she was going to receive a return on her investment. His evidence is that it was not unreasonable for him to take that view because this form of finance was typical in the industry.
b. Further, the receipt of the money into the Company was managed by Robert and that the process of acquiring capital in this way was not necessarily the exclusive act of a director. Furthermore, that John essentially left back office functions to his co-director's both of whom were qualified practising accountants and that he believed that they would ensure that suitable arrangements were in place to reflect the terms of Ms Birkhead's investment. His attention was consistently directed to the actual hands on work of building the Margate Project.
c. Insofar as John's breaches of duty revolve around the paying away of this money rather than the receipt of it, John's evidence is that he had no reason to believe that the monies could not be used in the main for the purpose for which he authorised their disbursement. It was used predominantly to enable the Margate Project to be advanced by ensuring that creditors of Project Management were paid. Additionally, his unchallenged evidence is that he relied on his professional co-directors "to ensure that suitable arrangements were in place to reflect the onward transmission of the relevant part of the money from the Company to Project Management".
Conclusion as to reasonableness
a. The fact that John has paid to Ms Birkhead the sum of £475,000.
b. That he appears to be the only officer of the Company who has made good to Ms Birkhead.
c. That his co-directors including two qualified accountants inexplicably have not been pursued with the vigour that the applicants have pursued John. In fact, these proceedings although started against Mr Chaudry and Mr Douglas have been dismissed by consent simply on a drop hands basis.
d. That no steps have been taken by the applicants to seek to enforce the judgment that the applicants have against Robert dated 17 March 2020
e. That John has recognised his breaches to the extent of having given a four-year directors disqualification undertaking
Are my findings as to reasonableness and all the circumstances sufficient to fairly give rise to the conclusion that John should be fairly excused from some or all of this liability and, if so, to what extent?
Final remarks
Once again, I wish to express my gratitude to counsel for their very able assistance in this matter.
HHJ Saffman
Note 1 It is not lost on me that the figures do not appear to add up arithmetically. [Back]