In Re IT Protect Ltd (in liquidation)

This is a first-instance misfeasance claim under section 212 of the Insolvency Act 1986 brought by the joint liquidators of IT Protect Ltd. The court applied the statutory and common law duties of directors (in particular sections 171, 172 and 174 of the Companies Act 2006) and the test for de facto directorship drawn from Re Paycheck Services, Smithton and related authorities.

The court dismissed the claim against the Second Respondent (Dawn Montague) on the basis that the applicants had not proved she acted as a de facto director: the contemporaneous evidence was scant, available documents were unreliable, and her admitted tasks were administrative rather than directorial. No adverse inference was drawn against her for non-production of company books and records.

The court allowed parts of the claim against the First Respondent (Warren Pye). It found he had failed to acquire and maintain the necessary knowledge about regulatory requirements (PECR) and had failed to monitor and supervise the company’s bank account. Those breaches of duty (s.174 CA 2006 and s.172(3) where insolvency was or was likely) caused loss to the company: (i) failure to ensure PECR-compliant data led to the £40,000 ICO monetary penalty; (ii) repayment to himself of £10,000 when the company was at an end was a breach of the creditors’ interest duty; (iii) an unexplained £600 was not shown to be proper and must be repaid; and (iv) failure to monitor banking transactions caused further misapplications totalling £63,908.50 (alternatively, £44,262.42 measured from cessation of trading). Remedies were ordered under s.212 IA 1986.

Background and parties. IT Protect Ltd traded as a telephone sales business. The First Respondent was the sole de jure director and shareholder; the Second Respondent worked in the business and was alleged to be a de facto director. The company received numerous complaints to the TPS/ICO and on 11 January 2017 received a £40,000 monetary penalty under the Privacy and Electronic Communications (EC Directive) Regulations 2003 for calling TPS subscribers. The company ceased trading on 10 March 2017 and was wound up in February 2018. The joint liquidators issued a misfeasance application seeking declarations and repayment of £144,613 said to comprise the ICO penalty and various payments made from the company account after the penalty.

Nature of the claim and issues. The applicants relied on s.212 IA 1986 to pursue misfeasance claims against both respondents, alleging (a) causing or allowing breaches of PECR that led to the ICO penalty, (b) causing or allowing improper payments (salaries, transfers to associated entities, cash withdrawals), (c) unexplained transactions and void dispositions, and (d) alternatively that the First Respondent had abdicated his duties and failed to supervise, thereby enabling misapplications. The court framed issues as (i) whether the Second Respondent was a de facto director, and (ii) whether the First Respondent had 'caused or allowed' the breaches or, alternatively, had negligently abdicated duties or failed to supervise, and whether causation was established.

Court’s reasoning and findings. On de facto directorship, the judge applied the multi-factor factual inquiry from Re Paycheck, Smithton and related cases and declined to draw adverse inferences from missing documents because there was no evidence the Second Respondent was responsible for non-production; the contemporaneous PIQ and OR interview notes were unreliable and inconsistent. The Second Respondent’s evidence described an administrative role (data entry, wages transmission, petty cash, stationery) which did not amount to directorial functions. The claim against her was dismissed.

As to the First Respondent, the court held his primary 'caused or allowed' case required evidence of activity or conscious inactivity; absent that, the applicants pursued an abdication/failure to supervise case requiring a three-step counterfactual analysis: (1) what he knew or ought to have known; (2) what steps he should have taken; and (3) what would have happened had he done so. The judge found he should have informed himself of PECR and ensured the company used TPS-screened data or carried out due diligence on opt-in data; failure to do so caused the ICO penalty of £40,000. Separately, by failing to monitor and supervise the company’s bank account (weekly reviews of cashflow and transactions) from February 2017 (or at least from cessation of trading on 10 March 2017), he ought to have discovered substantial and unexplained payments being made to associated parties and cash withdrawals; had he acted the misapplications could have been stopped. The court therefore ordered restoration/compensation for the ICO penalty (£40,000), repayment of £10,000 (loan repayment made on 20 March 2017), restitution of £600 (not shown to be proper), and further compensation for misapplications totalling £63,908.50 (alternatively quantified as £44,262.42 from cessation of trading). The judge explained causation by reference to the counterfactual that, with timely supervision and control of the bank account, the misapplications would have been discovered and prevented.

Wider comment. The court emphasised the need for particularity in claims based on abdication of duty and underscored that absent direct knowledge or conscious acquiescence a 'caused or allowed' case will fail unless the alternative counterfactual negligence case is properly pleaded and proven.

This is a first-instance judgment in which the application was allowed in part against the First Respondent and dismissed against the Second Respondent. The court dismissed the claim against the Second Respondent because the applicants failed to prove she acted as a de facto director; her role was held to be administrative. The court found the First Respondent breached his duties: he failed to inform himself about and guard against PECR non-compliance (breach of s.174 CA 2006) causing the ICO fine and failed to monitor and supervise the company’s bank account (breach of s.174 and, when insolvency was present or likely, s.172(3) CA 2006), thereby causing further loss. Remedies were ordered under s.212 Insolvency Act 1986 to restore and compensate the company for sums identified in the judgment; causation was established by counterfactual analysis of what would have occurred had the director exercised proper supervision and control.