Flatman v Wiles & Anor

The court considered claims by the liquidators that payments made from the company to the director (trading personally) were recoverable preferences under section 239 of the Insolvency Act 1986 and that the director had committed breaches of duty entitling relief under section 212. The District Judge found that the payments were preferences and ordered their recovery, and separately found a breach of duty under section 212 but declined to find misfeasance. On appeal the judge (Marcus Smith J) upheld the District Judge's conclusion on section 239, rejecting the submission that the automatic bank "sweep" meant the requisite subjective "desire" to prefer could not be inferred. The appeal succeeded, however, in relation to the section 212 finding because the District Judge did not identify the precise duty alleged to have been breached nor make the factual findings necessary to support a non‑dishonest breach.

This was an appeal from an order of District Judge Rouine following a three-day trial concerning the affairs of Paul Flatman Limited (the Company) and payments made to the director, Mr Paul Flatman, who also traded personally as Paul Flatman Farms. The liquidators (the respondents below) sought recovery of payments as preferences under section 239 of the Insolvency Act 1986 and relief under section 212 for breaches of duty. The District Judge found that transfers made from the Company account to a personal account (funding cheques drawn by Mr Flatman) between 26 March 2013 and 30 April 2013 were preferences and ordered recovery of £376,820.30 plus interest; he also found a breach of duty under section 212 but expressly declined to find misfeasance.

Background and facts:

• The business model had changed by early 2013 so the Company bought pre‑fattened birds and ceased paying for feed; bank records showed recurring transfers (a "sweep") between the Company account and the director's personal account to fund payments.
• The director had at least one meeting in mid‑April 2013 with insolvency advisers (Duff & Phelps) and received a letter warning that connected‑party preferences should be avoided.
• Directors resolved that the Company should enter administration on 26 April 2013; administrators took over on 1 May 2013; the Company later went into creditors' voluntary liquidation.

Issues before the court:

1. Whether the transfers constituted preferences under section 239 and, if so, whether the statutory presumption of a desire to prefer (section 239(6)) was rebutted given the automatic nature of the bank "sweep" and whether the inquiry is subjective or objective.
2. Whether a remedy under section 212 was made out, including whether misfeasance or a non‑dishonest breach of fiduciary or other duty had been shown and whether sufficient particulars had been given.

Court's reasoning and decision:

• On section 239 the appellate judge accepted the District Judge had properly considered the distinction between acts and omissions and could infer subjective desire from the director's conduct. The director drew cheques on the personal account, knew or must have known how the sweep operated, and failed to stop transfers that funded payments which no longer benefited the Company. The appellate judge rejected the submission that the automatic sweep precluded an inference of desire and treated expressions in the District Judge's judgment suggesting an "ought" standard as slips of expression.
• On section 212 the appellate judge found the District Judge's reasoning inadequate: the District Judge refused to find misfeasance (understood as dishonest conduct) but nevertheless recorded a breach of duty without identifying the legal duty breached or making the necessary factual findings to support a non‑dishonest breach (for example under the Companies Act duties or duty of care). For that reason the section 212 declaration was set aside and the appeal allowed in part.

The appellate court dismissed grounds attacking the section 239 conclusion but allowed grounds attacking the section 212 conclusion for failing to identify the duty and supporting factual findings.

Appeal allowed in part. The court dismissed the appeal against the District Judge's findings under section 239 (the payments were recoverable preferences and the presumption of desire was not rebutted on the facts) but allowed the appeal against the District Judge's declaration under section 212 because the judgment did not identify the precise duty alleged to have been breached nor set out the factual findings necessary to support a non‑dishonest breach; the section 212 declaration was set aside.

Appeal from the order and judgment of District Judge Rouine dated 17 June 2019 and 4 June 2019 respectively, after a three‑day trial on 5–7 March 2019 in the Business and Property Courts at Birmingham. Permission to appeal was given by order dated 17 October 2019. Appeal heard before Mr Justice Marcus Smith on 5 December 2019, judgment delivered 13 December 2019 ([2019] EWHC 3338 (Ch)).