In re HLC Environmental Projects Ltd

The liquidators brought a misfeasance claim under s.212, Insolvency Act 1986 seeking repayment of payments the sole dominant director, Mr Carvalho, caused the company to make while the company was insolvent or of doubtful solvency. The court found that the director had breached both pre-codification common law duties and post-codification duties under the Companies Act 2006 (notably s.172 and s.171) by preferring certain creditors and by using company funds for his and related parties' benefit without regard to the interests of the company's creditors, including a contingent creditor (FRIE Grupo) whose put option was commercially inevitable.

The judge held that the company was insolvent across the relevant period (s.123(1)(e) and s.123(2), IA86), that the director knew or ought to have known that creditors' interests had to be considered, and that he had not acted reasonably so as to attract relief under s.1157(1) CA2006. Orders for repayment were made for sums wrongly paid, and where payments had discharged genuine company liabilities the orders were qualified by an adapted West Mercia proviso so as to avoid producing an unjust windfall to third parties.

Background and parties

The applicants were the joint liquidators of HLC Environmental Projects Ltd. They sued the company's principal director, Mr Horacio Luis De Brito Carvalho, under the misfeasance procedure in s.212 of the Insolvency Act 1986 for a series of payments he caused the company to make between November 2005 and October 2008.

Nature of the claim

• Primary relief sought: repayment to the company of sums wrongfully paid out.
• Legal basis: s.212 IA86 (misfeasance) and alleged breaches of directors' duties (common law pre-1 October 2007 and ss.170–181 CA2006 post‑1 October 2007, in particular ss.172 and 171).

Procedural posture

First instance hearing in the Companies Court (Chancery Division). An application to amend pleadings to add a preference claim under ss.239–241 IA86 was refused at the trial outset.

Key factual findings

• The HLC group controlled by the respondent experienced substantial difficulties in its two projects (Neath Port Talbot and Wrexham) and lacked a revenue stream; the company had significant net current liabilities and overall deficits from 2004 onwards.
• The respondent was the dominant decision‑maker and had actual knowledge of the company’s parlous finances and of the contractual position with FRIE Grupo, including the put and call option agreement (CPOA) whose exercise by FRIE Grupo became commercially inevitable.
• The company was unable to pay its debts as they fell due and, taking contingent liabilities into account (notably the put option), was balance­sheet insolvent for the period when the impugned payments were made.

Issues framed by the court

• Whether the respondent breached directors’ duties by causing payments to Engenharia (a related creditor), payments for his personal benefit, payments to Norddeutsche Landesbank (NordLB) and payments to a senior employee (Mr Ferro), whilst the company was insolvent or of doubtful solvency.
• Whether the director was entitled to statutory relief under s.1157(1) CA2006 (replacing former s.727) by establishing he acted honestly and reasonably and ought fairly to be excused.
• The appropriate remedial orders, including whether any orders should be adjusted to avoid producing a windfall to third parties (the West Mercia approach).

Court’s reasoning and decision

• The judge applied established principles that when a company is insolvent or of doubtful solvency directors must have regard to creditors' interests; that the test can be subjective as to the director's state of mind but that an objective test applies where a material interest has been unreasonably overlooked.
• On the facts the respondent had subjective knowledge of the company’s financial predicament and of FRIE Grupo’s put option. He chose which creditors to pay and used company monies to benefit related parties and himself without considering creditors as a whole. The payments were therefore unlawful misfeasance and breaches of s.172 and s.171 CA2006 (and the common law equivalents pre‑codification).
• The respondent failed to establish reasonableness for statutory relief and so was not excused under s.1157(1) CA2006.
• Remedial orders were made for repayment: (i) sums paid to reduce no‑disputed company liabilities were recoverable but the orders were qualified by a West Mercia style proviso to avoid third‑party windfalls; (ii) payments that did not discharge company liabilities (notably payments to the director personally and to Mr Ferro) were ordered repaid in full.

The judgment emphasised the court’s willingness to infer adverse inferences against a director who failed to preserve company documentation and applied established equitable principles (including the analogy to trustees restoring a fund) to directors’ misfeasance claims.

The claim succeeded. The court found that the respondent had breached directors’ duties (both the pre‑codification common law duties and post‑codification statutory duties under the Companies Act 2006, notably s.172 and s.171) by causing the company to make a series of payments while it was insolvent or of doubtful solvency and without regard to creditors’ interests. Statutory relief under s.1157(1) CA2006 was refused because the respondent did not prove he acted reasonably. Orders were made for repayment of the sums wrongfully paid; where payments discharged genuine company liabilities the orders were qualified by an adapted West Mercia proviso to prevent third‑party windfalls.