Wood & Anor v Mistry

The claimants, as joint liquidators, applied under section 16(2) of the Company Directors Disqualification Act 1986 for a disqualification order under section 4 of that Act against Mr Kirankumar Mistry, a licensed insolvency practitioner. The court held that section 4 permits disqualification of a liquidator for fraud or breach of duty but that, as a matter of practice, the discretion will be exercised only in cases of serious misconduct.

The judge concluded that Mr Mistry caused or permitted payments of company funds (notably £750 per company) to be made to IIAS and that a substantial part of those receipts was diverted to an offshore vehicle, Dreamcast, which he controlled. The court found that the payments were not for legitimate additional work, that the justifications given were false, and that Mr Mistry acted dishonestly in relation to those payments. The judge also found failures in Mr Mistry’s investigative duties under SIP 2, in particular his failure to challenge implausible claims made by the Safe Solutions companies and to pursue recovery of sums retained for tax liabilities.

On that basis the court exercised its discretion under section 4 and made a disqualification order for 12 years. The decision also addressed the standing of liquidators to bring s.4 applications and concluded that liquidators may bring such applications in rare and appropriate cases, particularly where creditors (here HMRC) support the application.

Background and parties. The claim was brought by Grant Thornton partners, the joint liquidators of a number of personal service companies (PSCs) formed under a Safe Solutions tax scheme, against Mr Kirankumar Mistry, who had acted as liquidator or administrator for many of those PSCs. The defendant was a licensed insolvency practitioner and a partner in HKM. The claim sought a disqualification order under the Company Directors Disqualification Act 1986 (the CDDA), section 4.

Nature of the application. The liquidators applied under s.16(2) of the CDDA for a disqualification order under s.4 (disqualification for fraud, etc., in winding up). The relief sought was a disqualification order preventing Mr Mistry from acting as a director or insolvency practitioner for a specified period.

Issues framed by the court.

• Whether liquidators had standing to bring an application under s.4 and whether the court should exercise restraint in allowing such applications;
• The scope of s.4 and whether it requires serious misconduct for a disqualification order to be made;
• The factual allegations: whether payments of company funds to IIAS were properly made, whether IIAS forwarded sums to Dreamcast (an offshore company controlled by Mr Mistry), and whether Mr Mistry acted dishonestly;
• Whether Mr Mistry breached his investigative duties (SIP 2) by failing to challenge sums alleged by the Safe Solutions companies and by failing to seek recovery of monies retained for tax and national insurance contributions;
• The appropriate period of disqualification if misconduct was established.

Evidence and credibility. Key witnesses included the claimant liquidators, a Grant Thornton investigator, and an HMRC officer. The court found the defendant to be an unreliable witness and concluded that he knowingly gave untruthful evidence on matters including the fictitious nature of Dreamcast invoices and transfers to the Prosper Trust. Interviews and handwritten records, documentary trails and timing of invoices supported the inference that IIAS payments were passed on to Dreamcast and that Dreamcast retained funds for Mr Mistry while passing on a smaller sum to the Prosper Trust.

Court reasoning and disposition. The court held that s.4 permits disqualification of a liquidator but that the discretion will be exercised only for serious misconduct. Liquidators were held to have standing in appropriate cases; the judge distinguished Re Adbury Park Estates Ltd and relied on authorities explaining legitimate interest and the public role of liquidators. On the facts, the judge found that the £750 payments to IIAS were not for additional work, were approved by Mr Mistry, were paid from the liquidation estates, were passed on to Dreamcast (whose invoices to IIAS matched the pattern of payments) and that Dreamcast retained sums for Mr Mistry. The judge also found SIP 2 failures in relation to failing to challenge implausible claims by the Safe Solutions companies and to pursue recoveries from them. Taking the totality of misconduct into account, and applying sentencing guidance in In re Sevenoaks Stationers, the judge found the case to be particularly serious and imposed a 12-year disqualification order under s.4.

Contextual note. The judgment emphasised that applications by liquidators under s.4 will be relatively rare and assessed the competing public interest considerations, including HMRC’s support and the Secretary of State’s position.

The court made a disqualification order under section 4 of the Company Directors Disqualification Act 1986 for 12 years. The judge concluded that Mr Mistry had dishonestly caused company monies to be paid to IIAS and thence to Dreamcast, an offshore company he controlled, retained funds for his benefit and breached his duties as liquidator (including investigatory duties under SIP 2). Given the seriousness and sustained nature of the misconduct the court exercised its discretion to disqualify.