Flatman v Wiles & Anor

For the purposes of Insolvency Act 1986, section 239, the requisite desire to prefer is subjective. It may, however, be inferred from the director’s deliberate acts and knowledge, even where payments are made through an automatic banking arrangement. A case is not a pure omission case merely because the director did not stop the arrangement.

A finding of breach of duty under section 212 requires the court to identify the duty breached and make the factual findings necessary to establish that breach. A court may uphold a preference finding while setting aside an inadequately reasoned alternative breach-of-duty finding.

The liquidators of Paul Flatman Limited obtained orders against its director, Paul Flatman, following payments from the company’s bank account to an account used for his personal trading business. The District Judge held that the payments were preferences under section 239 of the Insolvency Act 1986 and also constituted a breach of duty under section 212.

On appeal, Mr Flatman challenged the findings concerning the subjective desire to prefer, the treatment of an automatic bank-account sweep, the factual reasoning, and the section 212 breach-of-duty finding. The central issues were whether the preference finding was legally and evidentially sound, and whether the alternative breach-of-duty finding was sufficiently identified and supported.

1. Appeal partly allowed. The appeal was dismissed on Grounds 1 to 4 and 7. The preference finding under section 239 of the Insolvency Act 1986 stood. The section 212 breach-of-duty declaration was set aside.
2. Section 239 requires a subjective desire to produce the preferential effect. That desire may be inferred from the director’s conduct and knowledge. The automatic operation of a banking sweep did not make the case one of pure omission, because Mr Flatman deliberately drew cheques knowing that they would be funded by transfers from the company account. His failure to stop the sweep could therefore be considered alongside those acts.
3. The District Judge was entitled to find that Mr Flatman knew how the sweep operated, knew that payments for feed no longer discharged company liabilities, and deliberately allowed the arrangement to continue. The reference to what he ought to have concluded was treated as a misexpression of an otherwise subjective conclusion.
4. The section 212 reasoning was inadequate. Although a refusal to find dishonest misfeasance did not necessarily preclude a non-dishonest breach of duty, the District Judge did not identify the duty breached or make the findings necessary to establish it. Possible duties under sections 172, 173 and 174 of the Companies Act 2006 were not properly analysed in the judgment. Grounds 5 and 6 therefore succeeded.
5. The challenge based on insufficient notice failed. No attempt had been made to obtain greater particulars, and the District Judge’s decision to proceed was a trial-management decision that the appellate court would not second-guess.

• High Court (Chancery Division): On appeal from the order of District Judge Rouine dated 17 June 2019, the preference finding was upheld, but the section 212 breach-of-duty declaration was set aside.