Hedger v Adams

The liquidator brought an application under section 212 of the Insolvency Act 1986 seeking to recover loss from a former director who caused Pro4Sport to transfer its assets to an associated company for deferred consideration shortly before Pro4Sport entered liquidation. The court considered alleged breaches of directors' duties under sections 172 and 174 of the Companies Act 2006 and further addressed (but did not ultimately determine) issues arising under sections 190–195 of the Companies Act 2006.

The judge found that the director had sought and followed professional advice, had honestly believed the transaction to be in the creditors' interests and that the liquidator had adopted the contract and agreed a repayment schedule. On the facts the director was not in breach of sections 172 or 174. The court declined to pursue the statutory property‑transaction claims under sections 190–195 as disproportionate in the circumstances and concluded, on the alternative assessment of loss, that the liquidator had suffered no recoverable loss.

This was a first instance application by the liquidator of Pro4Sport Limited under section 212 of the Insolvency Act 1986 to recover loss from Mr Adams, the former director and majority shareholder, arising from a transaction on 25 June 2012 transferring the company's assets to Pro4Sport.co.uk for deferred consideration of £47,000 plus VAT. The purchaser was associated with Mr Adams and he was a director and majority shareholder of both companies. The purchaser made some payments but later became insolvent leaving an unpaid balance.

• Nature of the claim: an application under s 212 Insolvency Act 1986 for misfeasance / breach of fiduciary duty and alternatively reliance on the consequences of sections 190–195 Companies Act 2006.
• Key factual background: valuation evidence was obtained before the transfer; the agreement was prepared with the involvement of business advisers (BCIA/Seneca); the liquidator adopted the contract and agreed a repayment schedule; receipts from the purchaser totalled £35,910 leaving an unpaid balance; the purchaser later went into voluntary liquidation.
• Issues framed: (i) whether Mr Adams breached his duties under s 172 (duty to promote the success of the company, with regard to creditors when insolvent) and s 174 (care, skill and diligence); (ii) whether the transaction engaged ss 190–195 (substantial property transactions) and the consequences; (iii) assessment of loss if liability established.

The court applied the subjective test for s 172 (whether the director honestly believed his actions promoted the company's interests) and relevant authority (including Re HLC). The judge accepted that Mr Adams had taken advice, had checked with key suppliers, and honestly believed the transaction was in the creditors' interests as a better outcome than no sale and avoided realisation costs. On s 174 the judge held that reliance on professional advice and the surrounding circumstances meant Mr Adams had not failed to exercise reasonable care, skill and diligence. The court declined, as disproportionate, to decide s 190–195 issues in detail and did not pursue any claim for gain under s 195(3)(a). On loss, the judge assessed the chance of a going‑concern sale at one third and an auction sale at two thirds, valued goodwill modestly at £5,000 (going concern) and allowed 10% costs of sale, finding the liquidator would on balance have received c. £32,400 and therefore suffered no loss given the receipts actually obtained (£35,910).

Outcome: the application under s 212 was dismissed. The court also observed that, had it found a breach, relief under s 1157 Companies Act 2006 would have been available because the director had acted honestly and reasonably.

This application by the liquidator under section 212 of the Insolvency Act 1986 is dismissed. The judge held that Mr Adams had not breached his duties under sections 172 and 174 of the Companies Act 2006, having acted honestly, on professional advice, and in what he genuinely believed to be the creditors' interests; the court declined to resolve in detail the ss 190–195 issues as disproportionate and, on an alternative assessment of loss, found the liquidator suffered no recoverable loss.