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

The court determined claims brought by the joint liquidators of Octavian Security Limited under the Insolvency Act 1986 and the Companies Act 2006. The applicants relied on s.238 (transactions at an undervalue) and s.212 (misfeasance) of the Insolvency Act 1986 and on directors' duties in the Companies Act 2006.

The judge found that Mr and Mrs Ghuman acted as directors de facto of OSL at all material times and that OSL was insolvent throughout the relevant period (from 1 January 2009 onwards). Payment records lacked documentation or credible commercial explanation. Payments of approximately 174,682.29 to Mr Ghuman and 38,333.48 to Mrs Ghuman were treated as gifts and thus transactions at an undervalue; those payments also amounted to breaches of directors' duties and misfeasance. Payments of 125,591.86 to the third respondent were distributed onwards to Mr Ghuman and, together with a further liability of 68,827.01 incurred because of the respondents' conduct in relation to the factoring facility, constituted misfeasance by the respondents.

Accordingly, the respondents were held jointly and severally liable under s.212 to restore or account for the sums identified. The claim against the third respondent was compromised by Tomlin order and is confidential.

This is a first instance Companies Court judgment in proceedings by the joint liquidators of Octavian Security Limited (OSL) against Mr Sukhjit Ghuman, Mrs Kiranjit Ghuman and C E Security Limited (formerly Octavian Continental Ltd). The applicants sought recovery of multiple categories of payments and liabilities said to have been caused by or paid to the respondents during 2009 and 2010. The relief sought included avoidance of transactions at an undervalue under s.238 of the Insolvency Act 1986, claims for preferences as an alternative, and recovery for misfeasance and breaches of directors' duties under s.212 of the Insolvency Act 1986 and the Companies Act 2006.

Procedural context and evidence: the trial proceeded in December 2016. The claim against the third respondent was compromised by a Tomlin order on the first day of trial and that compromise is confidential. The respondents did not attend the second day of trial; the judge read witness statements and evidence from the related freezing and bank proceedings and heard oral evidence from one of the joint liquidators. The judge refused an application for an adjournment.

Issues framed by the court included:

• whether Mr and/or Mrs Ghuman were directors (including de facto directors) of OSL in 2009;
• whether OSL was insolvent in the relevant period;
• whether the identified payments to the first and second respondents and payments to the third respondent were transactions at an undervalue or otherwise misapplied company property;
• whether the respondents breached fiduciary and statutory directors' duties and were accountable under s.212; and
• whether any defences or grounds for release under s.1157 of the Companies Act 2006 applied.

Reasoning and findings: the judge found compelling evidence that both Mr and Mrs Ghuman occupied the position of directors despite formal register entries, and concluded on the evidence that OSL was insolvent from at least 1 January 2009. Documentary records did not support the respondents' purported explanations for the payments; the judge treated undocumented payments to Mr and Mrs Ghuman as gifts and therefore transactions at an undervalue under s.238. The insolvency condition for avoidance was satisfied (and inferences were drawn given the respondents' connection to the company). On the misfeasance claims under s.212, the judge found breaches of directors' duties (including dishonesty by ordinary standards and failure to account), and held the respondents jointly and severally liable to restore or account for the relevant sums. The judge made no express order on release under s.1157 and gave no finding that such relief was appropriate.

The judge's decision emphasised the evidential consequences of being a connected recipient, the requirement for documentary or credible independent explanation for significant payments by an insolvent company, and the availability of s.212 to recover misapplied company funds.

First instance judgment: the court upheld the applicants' claims. The judge found that Mr and Mrs Ghuman were de facto directors of OSL, that OSL was insolvent throughout the relevant period, that undocumented payments to Mr and Mrs Ghuman amounted to transactions at an undervalue and breaches of duty, and that the respondents were jointly and severally liable under s.212 to restore or account for the sums identified. The claim against the third respondent had been compromised by a Tomlin order and is confidential.