Wexham Drinks Ltd & Ors v Corkery & Anor

A person who performs managerial functions equivalent to those of a director owes fiduciary duties to the company. Those duties include acting bona fide in the company’s interests, acting for proper purposes, and avoiding conflicts between personal and corporate interests. Appropriating the company’s book debts, goodwill or customers to establish a competing business breaches those duties and constitutes a breach of trust. A recipient company may be liable where the directing individual’s knowledge is imputed to it and it receives the property as a volunteer. Payments made towards company debts do not necessarily eliminate loss, particularly where the company is insolvent and its funds must be applied according to creditor priorities.

The company, in liquidation, and its liquidators sought declarations and an account from Charles Corkery and The Slush Company. Corkery had continued to manage the business after ceasing formally to be a director. He agreed with the remaining director to leave, take 27 customers, recover their debts, and establish a competing business. Company customers were instructed to pay outstanding and new invoices to The Slush Company.

The liquidators alleged breach of fiduciary duty, misfeasance and breach of trust. They also alleged that The Slush Company was liable as a constructive trustee for knowing receipt. Corkery relied on an alleged intended orderly transition and payments made towards the company’s debts. The central issues were whether Corkery had misappropriated company property, whether the company had suffered loss, whether The Slush Company was liable, and whether relief should be granted under section 727 of the Companies Act 1985.

1. The court held that Mr Corkery owed fiduciary duties equivalent to those imposed on a director. These comprised duties to act bona fide in the company’s best interests, to act for proper purposes, and not to place himself in a position where his personal interests conflicted, or might conflict, with those of the company.
2. By taking the company’s book debts and goodwill, including the business of customers, for the collateral purpose of starting his own business, Mr Corkery breached all three elements of his fiduciary duty and acted in breach of trust. His knowledge that the property was trust property transferred in breach of trust was imputed to The Slush Company. That company received the property as a volunteer and gave no consideration.
3. The company’s loss was not avoided by evidence that Mr Corkery and his wife had paid more than £84,000 towards debts which might otherwise have fallen on the company. The liquidators had identified diverted book debts of nearly £30,000, and further property had been appropriated through the transfer of customers and goodwill. In an insolvent company, the company’s money had to be applied with proper regard to creditor priorities.
4. Relief under section 727 of the Companies Act 1985 was refused. The court rejected the contention that Mr Corkery was not dishonest or had acted reasonably. It was therefore inappropriate to excuse him or relieve him from liability.
5. Declarations were made against both respondents that they were liable to account to the liquidators for the book debts. Both respondents were ordered to pay £14,590 to the company and the second applicant forthwith, representing the debt owed to H.M. Customs & Excise, which had priority. Further argument was directed on the remaining relief sought.