Re Idessa (UK) Ltd

The liquidator brought derivative claims under section 212 of the Insolvency Act 1986 for misfeasance and other statutory remedies, alternative claims under ss 238/423 for transactions at an undervalue, and a claim under section 214 for wrongful trading. The court found that Dr John Morrison acted as a de facto director and that both Dr Morrison and Christopher Povey breached their fiduciary duties by causing and authorising a range of payments from company funds (including via a Hibernia bank account) for improper purposes and by failing to account for PAYE and National Insurance. The court ordered repayment/compensation under s.212 for a number of specific heads of loss and, after adjusting for overlap, made a substantial contribution order for wrongful trading under s.214. The court also referred the matter of possible director disqualification to the Secretary of State.

This was a first instance trial brought by the liquidator of Idessa (UK) Limited seeking (i) recovery for misfeasance and breaches of fiduciary duty under section 212 of the Insolvency Act 1986, (ii) alternative relief for transactions at an undervalue under sections 238 and 423, and (iii) a contribution for wrongful trading under section 214.

Background and parties: The company, engaged in electoral software, was balance sheet insolvent in the years before liquidation. The liquidator alleged that substantial receipts under an AVS contract were diverted through a United States entity (Idessa Management) and a Hibernia bank account and that the two respondents (one statutory director, Mr Povey, and Dr Morrison, held to be a de facto director) benefited personally without proper accounting to the company or to HMRC.

Principal issues:

• Whether Dr Morrison was a de facto director;
• Whether various payments (salary, card payments, transfers from the Hibernia account, payments to third parties) were authorised, for proper company purposes or in breach of fiduciary duty (s.212);
• Whether any of the challenged payments constituted transactions at an undervalue (ss.238/423);
• Whether the respondents became liable for wrongful trading and, if so, the appropriate quantification of any contribution (s.214), taking account of any recoveries under s.212 to avoid double recovery.

Court's reasoning: The judge analysed witness credibility, documentary material (including bank records showing references to "Idessa UK Ltd" in transfer details and extensive Hibernia account activity) and accounting evidence. The judge concluded Dr Morrison acted as a de facto director from incorporation to liquidation on multiple factual grounds (titles, holding out, participation in management, access to banking). The AVS receipts and Hibernia transfers were used to fund company expenditure and payments to the respondents. Many payments lacked adequate documentary justification and, in the judge's view, were not for proper company purposes. The judge accepted the liquidator had discharged the evidential burden of showing the payments had been made and that, in many instances, the respondents failed to offer satisfactory explanations.

On wrongful trading the judge concluded that by about 30 June 2005 (or shortly thereafter) the respondents knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation and that they failed to take every step to minimise potential loss to creditors. The court set out a methodology to quantify s.214 liability and adjusted for recoveries under s.212 to avoid double recovery.

The court made a series of orders under section 212 of the Insolvency Act 1986 directing repayment or compensation in specified sums for a number of challenged payments, and made a declaration under section 214 that the respondents were liable to contribute for wrongful trading. The judge found Dr Morrison to have been a de facto director. The orders made respondents jointly and severally liable for most sums and Mr Povey solely liable for a small additional sum. The rationale was breaches of fiduciary duty, misapplication of company funds, failure to account for PAYE and National Insurance, and continuing to trade when there was no reasonable prospect of avoiding insolvent liquidation. The court also directed that the judgment be referred to the Secretary of State for consideration of disqualification under the Company Directors Disqualification Act 1986.