Silverburn Finance (UK) Ltd v Guest

Where a company’s bank account is unfrozen after presentation of a winding-up petition, its directors must preserve the company’s money for rateable distribution in the liquidation. They must not prefer selected creditors, repay personal debts, or transfer funds to a phoenix company for the benefit of its directors or operatives.

Contempts involving deliberate false statements, forged documents and concealment of assets may justify a substantial custodial sentence. The sentence may be suspended on strict conditions designed both to punish the contempt and to restore the money to the liquidator for the benefit of creditors.

The petitioner had presented a winding-up petition against R&B Civils Ltd. Before the winding-up order, the respondent, its former director, obtained a validation order under section 127 of the Insolvency Act 1986 after undertaking to pay the petition debt.

After the company’s bank account was unfrozen, the respondent took £52,423 from it. The subsequent committal application alleged breach of the undertaking, false statements, forged bank statements, concealment of personal accounts and further attempts to mislead the court. The central issues were whether the alleged contempts were proved and what sentence was appropriate.

1. All eight alleged contempts were proved beyond reasonable doubt. They included breach of the undertaking, false statements verified by statements of truth, forged bank statements, inaccurate disclosure of bank-account details and further attempts to mislead the court.

2. The purpose of section 127 of the Insolvency Act 1986 is to preserve money in the company’s account after presentation of a winding-up petition. The money is to be distributed rateably under the insolvency legislation, rather than dealt with at the directors’ discretion.

3. A director cannot establish a phoenix business, transfer operatives to it and use the original company’s money to pay those operatives at the expense of the original company’s creditors. Nor may company funds be used to repay a director’s personal debt or to prefer a chosen creditor.

4. The respondent’s conduct merited an immediate custodial sentence in principle. The court imposed 547 days’ imprisonment, suspended for two years, on condition that he repay the liquidator £52,423 with interest at 8 per cent per annum from 21 July 2017 in 12 equal instalments beginning on 26 January 2019.

5. The suspension would cease to protect the respondent if the instalments were not maintained, in which event the custodial sentence would be activated.

This was a first-instance committal application arising from the winding-up proceedings concerning R&B Civils Ltd. The judgment records several earlier procedural hearings and orders, including the winding-up order made on 9 October 2017, but no appeal to this court.