Mullarkey & Ors v Broad & Anor

A creditor, or an assignee of a creditor, may bring an application under section 212 of the Insolvency Act 1986. The applicant must prove the alleged misfeasance and, where fraud is relied on, must plead and prove dishonesty clearly and distinctly. A deliberate breach of duty is not necessarily fraudulent. Dishonesty requires conduct contrary to normally acceptable standards of honest conduct, together with consciousness of, or deliberate blindness to, the features making the conduct dishonest. A prohibited loan to a director is not, without more, fraudulent. Suspicion, imprudence and unexplained accounting entries do not establish fraudulent breach of duty on the balance of probabilities.

The claimants alleged that Mr John Broad had fraudulently misapplied or dealt with funds of Southill Finance Limited, a company which entered creditors’ voluntary liquidation in January 1995. They claimed as assignees of companies said to have been creditors of Southill. The allegations concerned a property transfer, loans to connected companies and unidentified recipients, and accounting entries said to conceal indebtedness.

The court first considered standing, limitation, pleading and proof of dishonesty, and then examined each allegation. It concluded that Sedgemere Estates plc was a creditor and that the claimants were entitled to pursue the application, but that fraudulent misfeasance had not been established.

1. Standing. Section 212 of the Insolvency Act 1986 permits an application by a creditor or contributory. The claimants themselves were not creditors, but could sue as assignees if their assignors were creditors. The court was not satisfied that London or Southern remained creditors at liquidation, because their former debts had been novated to Sedgemere. It was, however, more probable than not that Southill still owed Sedgemere all or part of the December 1993 balance. Sedgemere was therefore a creditor, and the assignments gave the claimants standing.
2. Limitation and dishonesty. Section 212 creates no new cause of action, so limitation runs from the underlying cause of action. A fraudulent breach of trust attracts no limitation period under section 21(1) of the Limitation Act 1980, and the same principle applies by analogy to fraudulent breaches of pre-existing fiduciary obligations. Following Armitage v Nurse, as explained by Barlow Clowes v Eurotrust International Ltd, the claimants had to prove conduct contrary to normally acceptable standards of honest conduct and consciousness of, or deliberate blindness to, the features making the conduct dishonest.
3. Pleading and proof. Fraud must be distinctly and particularly pleaded and distinctly proved. Allegations consistent with innocence, or allegations that a defendant knew or ought to have known, do not support a finding of fraud. The burden remained on the claimants. The civil standard was the balance of probabilities, with the inherent improbability of serious allegations taken into account when assessing the evidence.
4. Substantive allegations. The property sale was not shown to be at an undervalue, and the outstanding debt was not itself proof of fraud. A prohibited director’s loan under section 330 of the Companies Act 1985 was not necessarily fraudulent. The connected-company loans and unidentified loans raised suspicion but were not proved dishonest. The alleged concealment of indebtedness was not shown to have caused loss to Southill and was not established as dishonest.
5. Disposition. The application was dismissed.