Official Receiver v Atkinson (Discontinued) & Ors

The court considered whether the Official Receiver could, by way of submissions in a skeleton argument served shortly before trial, seek findings that certain loan repayments were preferences voidable under section 239 of the Insolvency Act 1986 and that the defendants breached duties under sections 172, 173 and 174 of the Companies Act 2006. The governing procedural rule is rule 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987, which requires the Official Receiver's report to state the matters by reference to which respondents are alleged to be unfit.

The judge held that the Official Receiver was limited to the matters properly pleaded in the report unless the court, in the exercise of its discretion, permits additional allegations where no injustice is caused. Applying established authorities, the judge concluded that permitting the new allegations would cause procedural unfairness: the report and pre-action correspondence did not properly put the defendants on notice of allegations under section 239 or breaches of sections 172 and 173, and the evidence had not been prepared with those issues in mind. The court therefore ruled that the Official Receiver may not seek findings that there were preferences voidable under section 239 nor that there were breaches of sections 172, 173 or 174 Companies Act 2006. The Official Receiver accepted he could not maintain a section 239 allegation in respect of the December 2014 payment to Ms Atkinson and abandoned preference allegations against Ms Bolton.

Background and parties: The Official Receiver brought disqualification proceedings against the former directors and trustees of Kids Company, alleging generally that they caused and/or allowed the charity to operate an unsustainable business model. The Official Receiver's case was presented by way of a report (as required by rule 3(3) of the Insolvent Companies (Disqualification of Unfit Directors) Proceedings Rules 1987) and later supplemented by a skeleton argument served two weeks before the hearing which advanced additional contentions.

Nature of the application: The defendants challenged certain submissions in the Official Receiver's skeleton argument that were not set out in the report, namely that specified loan repayments were preferences voidable under section 239 Insolvency Act 1986 and that the defendants had breached statutory duties under sections 172, 173 and 174 Companies Act 2006. The defendants sought a ruling whether the Official Receiver could properly rely on those matters at trial.

Issues framed: (i) Whether, consistent with rule 3(3) and the requirements of fairness and natural justice, the Official Receiver could add or press new allegations not contained in his report; (ii) whether allegations that particular payments were voidable preferences under section 239 could be advanced when section 239(5)'s key element (that the company was influenced by a desire to prefer) was not pleaded; (iii) whether allegations of breaches of fiduciary or statutory duties (s172, s173, s174) could be relied on notwithstanding their absence from the report; and (iv) whether permitting such additions would cause injustice to the defendants.

Court's reasoning and findings: The court began from the principle that the Official Receiver is ordinarily bound by the matters set out in his rule 3(3) report but has a discretion to allow changes provided no injustice results. The court emphasised the particular features of director disqualification proceedings: they are penal in consequence, pleadings are limited because the report functions as the statement of case, and defendants must have clear notice of the case they have to meet and an opportunity to prepare evidence. The judge reviewed authorities on the need for clarity in the report and caution before allowing changes.

On section 239: the report referred to preferential payments as factual matters but did not plead that the transactions were voidable under section 239, nor did it address the requirement in section 239(5) that the company was influenced by a desire to prefer. The Official Receiver accepted that he could not pursue a section 239 allegation as to the December 2014 payment to Ms Atkinson and abandoned preferences against Ms Bolton. The judge concluded that permitting reliance on voidable preference would be unfair because the defendants had not been put on sufficient notice and the evidence was not prepared to meet the statutory test.

On statutory duties (s172, s173, s174): the court distinguished between section 174 (care, skill and diligence), which is primarily relevant to unfitness but not a fiduciary breach, and sections 172 and 173 which involve fiduciary considerations and may carry stigma of lack of probity. The judge concluded it would be unfair to permit findings of breach of sections 172 or 173 given the absence of those allegations from the report and their qualitative difference from the pleaded allegation of incompetence. The judge permitted parties to refer to the tests in section 174 for relevance to unfitness but ruled that the Official Receiver could not seek findings that the defendants had breached section 174 because the allegation had not been timely made and defendants had not prepared evidence on that basis.

Subsidiary matters: The court took account of pre-action correspondence, Part 18 responses, the investigation period available to the Official Receiver, and potential regulatory consequences for particular defendants. The Official Receiver's long investigation and subsequent reports did not justify late addition of these substantive allegations.

First instance ruling: the court decided that the Official Receiver is not permitted to seek findings that there were preferences voidable under section 239 Insolvency Act 1986, nor to seek findings that the defendants breached sections 172, 173 or 174 Companies Act 2006. The rationale was that those matters were not properly put in the Official Receiver's rule 3(3) report, the defendants lacked fair notice and opportunity to prepare evidence on those specific statutory tests, and permitting them would risk procedural unfairness and stigma beyond the single pleaded allegation of causing or allowing the operation of an unsustainable business model.