Chapter 6 Case Flashcards
Re MC Bacon (No. 2)
The liquidators of MC Bacon claimed costs for an unsuccessful litigation. He claimed that he was entitled to be reimbursed as the proceedings were properly brought and the expenses were part of the winding up and were therefore recoverable.
The Court held that the earlier litigation was not one which could be brought by the company and thus it was not just for the court to order that the company pays for it.
Re Oasis Merchandising Services Ltd, Ward v Aitken
Wrongful trading
Liquidator of Oasis Merchandising Services brought an action against the directors/shadow directors for wrongful trading under IA 1986, s.214. He entered into an agreement with London Wall Litigation Claims Ltd to finance the proceedings. The directors or alleged shadow directors later appealed against an order that the liquidator may enter into such agreement with LWL. They succeeded and the liquidator appealed.
The Court held that the power of liquidators to sell company properties does not include the rights under s.214. Public Policy demanded that it be regarded as champertous and sch. 4 did not authorise the agreement as being necessary for the winding up.
Re Marini
The liquidator of Marini sought relief against the directors for (1) repayment of dividends paid to them as it was paid out of profits that were not available, (2) wrongful trading, (3) a second hand car purchased from the company at an undervalue.
The Court held that even though they had acted reasonably and honestly, and the dividends were paid on advise of the accountant, they had to repay it in part which represented an unlawful deficiency in the available profits. No evidence was found that the net deficiency increased between the relevant dates made the wrongful trading claim ineffective neither was the purchase of the car found to be at an undervalue.
Rubin v Gunner
The liquidator applied for a declaration that the respondents (G) were liable for wrongful trading. They ran a film production company and asked a wealthy investor to join the board. The investor promised to provide funds but never paid the amount promised. A new company was formed and G moved to it but continued trading from the same premise. Payments were made from the old company’s bank account until it went into creditors’ voluntary liquidation. The liquidator claimed that G should not have continued to incur liabilities once they know liquidation was likely. The business and goodwill was also transferred to the new company at no consideration.
The Court held that F ought to have been aware six months prior that liquidation was unlikely to avoid. Before that, it was reasonable to believe that the investor would contribute to prevent that but after that, no reasonable diligent director with the skill and experience reasonably expected of a director could have decided that liquidation was not inevitable. G was liable to contribute to the assets of the company.
Re MDA Investment Management Ltd, Whalley v Doney
Doney had been the principal shareholder and director of MDA Investment Management Ltd. He entered into an agreement where its business was sold to a third party. The consideration was split between MDA IM and MDA Partnership. Whalley claimed that the transaction was made at an undervalue. Certain payments was also made by Doney after the sale of its business before its liquidation. The liquidator of MDA Investment claimed that all proceeds from the sales should go to MDA Investment alone and he sought the repayment of the payments made by Doney.
The Court held that there MDA Partnership was entitled to part of the consideration, however as it has received more than it should, it should repay the amount to MDA Investment. The transaction was indeed at an undervalue, but a restoration of the company to the position prior to the transaction, in this case, would have done more harm than good. Doney was also required to repay the sum authorised by him after the sales of the business.
Lord v Sinai Securities
Transacting at an undervalue
One of the parties who disputed the ownership of R, which was in liquidation, assigned the benefits of his claims to Sinai Securities. He abandoned his claims in consideration of an agreement by R to pay Sinai. The liquidator of R argued that it had received no or inadequate consideration for the agreement.
The Court held that R had clearly received some consideration for its covenant to pay. However, it was not clear if the consideration received were significantly less than the value of the consideration it provided. It was open to the liquidator to establish the difference in the value.
Re Exchange Travel (Holdings) Ltd
Preferential payments
The 3 directors each had an account with Exchange Travel Ltd which they used in the manner of a bank account. The group made losses and had huge excess of liabilities over assets. Two directors with positive balance in their account paid themselves a sum and used the remainder to pay off the third’s deficit. The group incurred greater liabilities and an order for winding up was subsequently passed. The liquidators argued that the payment to the two directors were preferential payments.
The Court at first instance held that the presumption to the intention behind payments to connected persons had not been rebutted. So the two directors were liable to repay the sum they received. The remainder used to discharge the third’s deficit was not a preferential payment.
Wills v Corfe Joinery Ltd
Preferential payments
The Court held that for the purpose of determining whether loan payments to directors of a company about to go into voluntary liquidation were preferential payments was the date on which such payments were actually made, not the date when payment was originally due. Because directors were connected with a company, the burden of proof was on them to rebut the statutory presumption that the company’s actions were motivated by a desire to give preferential treatment to them. If they fail to do so, they will be required to repay the payments.
Re Agriplant Services Ltd
Preferential Payments
Agriplant leashed some equipment from CAF Ltd and owed a sum which was guaranteed by Mr George Sagar. An accountant advised no payments should be made to any creditors. But when agriplant got more money, Mr Sagar authorised a payment to CAF and went into liquidation shortly after. The liquidator sought an order for Sagar or CAF to repay the sum.
The Court ordered CAF Ltd to repay the sum. The repayment of debt improved Mr Sagar’s position as he was the guarantor. He had his own liability in mind when he authorise the repayment. It was therefore a voidable preference.
In The Matter of Cityspan Ltd v Nicholas Clark
Preferential payments
Cityspan bought a property which was partly paid by Clark. The property operated at a loss and was sold. Clark later authorised the repayment of loan and a transfer to other directors. Cityspan then entered into creditors’ voluntary liquidation. The liquidator claimed that the repayment of loan was voidable preference and the transfers to the other directors were in breach of his fiduciary duties. Clark argued that he had an agreement with the liquidator to accept a sum in full and final settlement of all his claim against Clark. He had already made part payments.
The Court held that the repayment constituted preferences to a connected person and Clark received a benefit from the payments. Further, Clark had failed to establish that an agreement had been made for the liquidator to accept a lesser sum. Clark was ordered to repay the sum of transfers plus interest. He knew that the creditors would be detrimentally affected by his removal of the sums and thus he was in breach of both his fiduciary and common law duties. Clark was ordered to pay compensation in the amount of the transfers authorised.
Secretary of State for Trade and Industry v Swan
Grounds of disqualification
The practice of cheque kiting was found among a corporate group. The SOS applied for disqualification orders of 2 former directors, S and N, of the parent company. S was the Chairman and CEO while N was a non-executive director. The issue was brought up to N and he made it known to S and the finance director. However, no further action was taken (they’re probably the ones doing it).
The Court granted the application to disqualify both directors. The Court held that S ought to have been aware of the practice as the sums on the cheques were unusually significant. His failure to properly enquire the reasons of the cheques and signing them allowed the practice to continue and was a serious dereliction of his duty as a director. No evidence proved that N had known of the practice before. His conduct, however, fell seriously below expectations of someone of his position and experience, in his reaction to the allegations on irregularities. It was unacceptable for him to not pursue further actions when S and the finance director did not act. He should have brought it out in front of the Board. His conduct fell below the level of competence expected of a director in his position.
Re Queen’s Moat House plc, Secretary of State for Trade and Industry v Bairstow
Grounds of disqualification
Mr Bairstow founded Queen’s Moat House and served as its chairman and joint managing director. The hotel operated an incentive scheme where managers pay a fee in 12 months instalments and in return they retain all income along with the responsibility for running costs. The fees were however shown in the company accounts at the start of the 12 months. Following a recession, a projected profit of £90m fell to a loss of £1m. Inspectors appointed by the SOS found that the financial statements were false and misleading. The SOS sought to disqualify Mr Bairstow. Mr Bairstow argued that he was not an accountant and was entitled to rely on his finance director and the auditors who did not qualify the accounts.
The Court held that Mr Bairstow could not rely on the fact that it was not prepared by him and that it was not qualified to show that he had discharged his director’s duties. Although he was not expected to oversee the work of the finance director, his business experience and knowledge should allow him to be aware of the false and misleading treatment of profits, losses and costs. Although there was no dishonesty, he knew that it did not accurately reflect the financial situation and that parties would rely on the accounts. Disqualified.
Re Blackspur Group plc, Secretary for Trade and Industry v Davies
Purpose of Disqualification
Lord Woolf MR: “The purpose of the 1986 Act is the protection of the public, by means of prohibitory remedial action, by anticipated deterrent effect on further misconduct and by encouragement of higher standards of honesty and diligence in corporate management, from those who are unfit to be concerned in the management of a company.”
Re Barings plc (No.5)
Approach of courts towards disqualifying a director
A dishonest futures trader fraudulently doctored documents and reported large profits while trading at losses. His actions were later unveiled. The Secretary of State sought director disqualification against 3 directors of Barings for failure to supervise his activities.
The Court held that the 3 directors should be disqualified. Unfitness was determined by the objective standard that should ordinarily be expected of people fit to be directors. They must inform themselves of company affairs and join in to supervise those affairs. Having inadequate system to monitor this was therefore a breach of this standard. They may delegate function but still remain responsible for it. The degree of a director’s remuneration will be a relevant factor in determining the level of responsibility he must reckon.
