Hedger v Adams

A director’s duty to consider creditors’ interests remains subjective where the company is insolvent. The question is whether the director honestly believed that the transaction was in the company’s or creditors’ interests. Reliance on professional advice is a relevant factor, although the director must exercise independent judgment. A transaction involving deferred consideration is not necessarily improper where immediate payment is unavailable and the director reasonably assesses the purchaser’s ability to pay. A claim under the substantial property transaction provisions must be properly framed and brought under the statutory procedure. Loss may be assessed by valuing lost opportunities, including the respective chances of a going-concern sale and an auction sale.

The liquidator of Pro4Sport Limited applied under section 212 of the Insolvency Act 1986 against the company’s former director and majority shareholder. Shortly before liquidation, the director caused substantially all the company’s assets to be transferred to an associated company for deferred consideration.

The liquidator alleged breaches of sections 172, 174 and 190 of the Companies Act 2006, and sought compensation for the unpaid balance. The respondent denied breach and disputed the loss. The issues were whether the transaction breached the director’s duties, whether the substantial property transaction provisions could be pursued in the application, and how any loss should be assessed.

1. Application dismissed. The respondent had not breached his duties under sections 172 or 174 of the Companies Act 2006.
2. Because the company was insolvent, the respondent owed duties to consider creditors’ interests. The duty under section 172 was subjective. The question was whether he honestly believed that the transaction was in the interests of the company and its creditors, not whether the court would objectively have made the same decision. The respondent had considered the creditors’ interests, obtained professional advice, obtained a valuation and assessed the purchaser’s ability to fund the deferred payments. His belief was honestly held.
3. The respondent was entitled to take account of the possibility that a liquidator would be unable to sell the business as a going concern. An immediate payment was unavailable, so the relevant question was whether deferred consideration was better for creditors than no sale. The transaction’s risks did not establish a breach of section 174. Reliance on advice was an important factor, although it did not remove the obligation to exercise independent judgment.
4. The proposed claim under sections 190 to 195 was not proportionate to determine. The court accepted that the claim under section 195 was materially different from a misfeasance claim under section 212, that the relevant cause of action lay with the company, and that the prescribed Part 8 procedure under Part 49 of the Civil Procedure Rules applied. There was no evidence of any gain by the respondent, and the claim under section 195(3)(a) therefore failed.
5. Although unnecessary to the result, the court assessed loss. The appropriate approach was to value the lost chances of a going-concern sale and an auction sale. The going-concern chance was assessed at one third and the auction chance at two thirds. After allowing for goodwill, VAT and sale costs, the estimated recovery was £32,400, below the £35,910 actually received. Loss would therefore have been assessed at nil.
6. If a breach had been established, relief would have been granted under section 1157 of the Companies Act 2006, since the respondent had acted honestly and reasonably and ought fairly to be excused.