Wessely & Anor (Liquidators of Laishley Ltd) v White

The liquidators sought equitable compensation for alleged breaches of fiduciary duty by the company's managing director in executing two deeds of release in May 2010. The court applied the duties in sections 171 and 172 of the Companies Act 2006 and, because the director had considered the interests of the company and its creditors, applied the subjective test of honest belief. The judge found that the director genuinely (if naively) believed that signing the deeds would assist novation of contracts and thereby benefit creditors, and therefore did not breach his duties.

The court also excluded the applicants' valuation evidence given by a surveyor who had not been admitted as an expert and who based assessments on contracts not before the court, so there was no admissible evidence of the value of unpaid applications or retentions. The respondent's own evidence of what would have been paid to novate was admissible as evidence of value. Finally, even if there had been a breach, causation was not established: the company had already ceased work and was in breach, employers could have terminated, market interest was minimal and the single high bid was unreliable. The claim was therefore dismissed.

This was a first-instance trial of an application by the joint liquidators of Laishley Limited for equitable compensation against the managing director, arising from two deeds of release executed in May 2010 which discharged the parties from future performance and released the employers from liability for accrued but unpaid payments.

Background and parties:

• The company was a building contractor which ceased trading in May 2010 and entered administration in June 2010; it was placed into creditors' voluntary liquidation in May 2011.
• The respondent was the managing director; the employers on the two relevant contracts were Health Investments No 2 Ltd (Bersted Green health centre) and Imperial Property Company (Farnborough) Ltd (aparthotel conversion).

Nature of the application: The liquidators sought equitable compensation for alleged breaches of fiduciary duty by the respondent in executing two deeds of release which, it was said, caused loss by (a) the loss of the contracts' value (loss of novation proceeds) and (b) loss of accrued but unpaid stage payments and retentions ('equity').

Issues framed:

• Whether the respondent breached duties under sections 171 and 172 Companies Act 2006.
• What standard of inquiry applied (objective or subjective) given the insolvency context.
• Admissibility and sufficiency of valuation evidence relied on by the applicants.
• Causation: whether any losses were caused by the execution of the deeds.
• Whether any burden-shifting was warranted because of the respondent's conduct.

Court's reasoning and findings:

• The court found the respondent had considered the interests of creditors and other stakeholders and therefore applied the subjective test of honest belief: the issue was whether he honestly believed the course taken promoted the company's (creditors') interests. The respondent genuinely believed deeds would facilitate novation and protect employees and creditors; accordingly there was no breach of duties under ss171 and 172.
• Valuation evidence of unpaid applications and retentions was provided by a surveyor retained as part of prospective administrators' team but not admitted as an expert. The court held that the surveyor's 'assessments' amounted to expert opinion and were inadmissible because no permission had been given for expert evidence; therefore there was no admissible evidence of the company's 'equity' under the contracts.
• The respondent's own evidence of what he and directors would pay to novate was admissible as evidence of transactional value (akin to market bids) and not expert opinion.
• On causation, the court held that the company had already ceased work and therefore was in breach of the contracts, employers could have terminated regardless of the deeds, and the only meaningful market interest (one bidder) was unproved and unreliable; accordingly losses were not shown to be caused by the deeds.
• Arguments to shift or reduce the applicants' burden of proof were rejected: this was not an accounting case of concealment and the applicants had failed to adduce admissible evidence of loss.

Outcome: The application was dismissed.

The application is dismissed. The judge held that the respondent, although mistaken and inexperienced in insolvency procedures, honestly believed signing the deeds would assist novation and protect creditors, so he did not breach his duties under sections 171 and 172 Companies Act 2006. Further, the applicants' valuation evidence was inadmissible as expert opinion without permission and causation of any loss by the deeds was not established.