Nicholson & Anor v Ghuman & Ors, Re Octavian Security Ltd

For the purposes of directors’ duties and insolvency remedies, the factual position governs whether a person is a director, regardless of the company’s formal records. Payments by an insolvent company to its directors or connected persons may constitute transactions at an undervalue where they are unsupported by credible documentary or independent evidence and amount to gifts. Directors who procure, permit, or fail to recover such payments may be liable for misfeasance and breach of duty. The court may impose joint and several liability under Insolvency Act 1986, s.212, including for losses caused by directors’ wrongdoing.

The applicants were the joint liquidators of Octavian Security Ltd. They sought relief against former officers, Sukhjit and Kiranjit Ghuman, concerning undocumented payments made by the company to them, payments made to a connected company, and liability arising from costs incurred under a factoring arrangement.

The respondents did not attend the trial and were not represented. The claim against the connected company was compromised. The live issues included whether the Ghumans were directors despite their formal resignations, whether Octavian Security was insolvent during the relevant period, whether the payments were transactions at an undervalue or misfeasance, and whether the respondents were liable for the factoring-related loss.

1. The court found that both respondents were directors of Octavian Security at all material times. Under s.250 of the Companies Act 2006, the factual position is decisive: a director includes a person occupying the position of director, by whatever name called.

2. The company was insolvent throughout the relevant period. Its substantial and increasing arrears to HMRC, together with the absence of provision for PAYE and national insurance in respect of the respondents, showed an inability to pay debts as they fell due.

3. The payments to Mr Ghuman and Mrs Ghuman were unsupported by documentation or credible independent evidence. The court therefore treated them as gifts and transactions at an undervalue. The insolvency and connected-party conditions under ss.238 and 240 of the Insolvency Act 1986 were satisfied. The statutory defence in s.238(5) was not established.

4. The respondents had procured or permitted the payments and failed to recover them. That conduct was dishonest by ordinary standards and unreasonable, and constituted breach of directors’ duties and misfeasance. They were jointly and severally liable under s.212 to restore the sums paid to them.

5. The payments to the connected company were rapidly transferred to Mr Ghuman and were not credibly explained as inter-company liabilities. The respondents were jointly and severally liable for those payments under s.212.

6. The liability incurred under the factoring arrangement resulted from the respondents’ wrongdoing in diverting customer payments. It was an obvious breach of their fiduciary duties, for which they were also jointly and severally liable under s.212.

The claims against the first and second respondents succeeded. The claim against the third respondent had been compromised.