MBA InvestmentManagement Ltd, Re

A director’s duties to a company continue whether or not it is technically insolvent. Where the company is in financial difficulty and creditors are at risk, the duties require proper regard to creditors’ interests. A director who diverts sale consideration belonging to the company to an associated business breaches those duties. The statutory procedure under Insolvency Act 1986, s.212, provides a remedy for pre-existing breaches but does not itself create the duties. A transaction may be at an undervalue under s.238, yet the statutory restoration order may be unavailable where the company would have been worse off if it had not entered into the transaction. Payments to connected persons may constitute preferences under s.239, subject to the statutory presumption of a desire to prefer.

The applicant was the liquidator of MDA Investment Management Ltd. The principal respondent, George Malcolm Doney, had been its controlling shareholder and director, and was its sole continuing director after the sale of its business.

The liquidator challenged the division of the sale consideration between the company and Malcolm Doney Associates, a partnership in which Mr Doney held an 80 per cent interest. He also challenged payments made after the sale to associated entities, Mr and Mrs Doney, and Mr and Mrs Westgate. The claims relied on misfeasance, breach of fiduciary duty, transactions at an undervalue under s.238 and preferences under s.239 of the Insolvency Act 1986.

1. Division of sale consideration. The company owned the business sold to Farlake. The partnership owned only limited rights to renewal income. None of the proposed justifications for allocating more than half of the consideration to the partnership was accepted, including the alleged ownership of part of the business, procuring consultants, the 1995 agreement, or the suggestion that the purchaser originated the split.
2. Mr Doney was in a dangerous financial position and was required to have regard to creditors’ interests. By causing or allowing consideration which should have been available to the company and its creditors to be paid to the partnership, he breached his common law and fiduciary duties. The claim under s.212 succeeded in principle. The precise compensation, including an allowance for the value of renewal-income rights, required further submissions.
3. The transaction was, in principle, at an undervalue under s.238 because the company transferred a business valued at up to £2.41 million while receiving no more than £1 million. It occurred at a relevant time, and the company was cash-flow insolvent under s.123(1)(e). However, s.238 could only restore the position which would have existed had the transaction not occurred. Since the company would probably have had to close down and obtained nothing for the business, no restoration order was available.
4. Payments to the partnership, unexplained payments to BC Ltd, transfers for Mr and Mrs Doney’s benefit, and the £85,000 repayment to Mr and Mrs Westgate were preferences or breaches of duty to the extent identified in the judgment. The statutory presumption relating to connected persons was not rebutted. Payments shown to discharge the company’s own liabilities or obtain assets for it were not recoverable.
5. The purported preference shares had never been validly issued. Their subscribers were creditors, and repayment was required by the PIA as a condition of the sale. That claim was not pursued.

First-instance decision. No appellate history was stated in the judgment.