Re Shahi Tandoori Restaurant Ltd

The liquidator brought a section 212 Insolvency Act 1986 application for misfeasance and equitable compensation, asserting that cash takings had been diverted from Shahi Tandoori Restaurant Ltd and seeking repayment or contribution. The court treated section 212 as the procedural gateway and applied the Companies Act 2006 duties (sections 171, 172, 173, 174 and section 178 preserving equitable remedies) and the Value Added Tax Act 1994 procedure for assessment (section 73(1)).

The judge accepted the HMRC investigator (Mr Mortell) as a credible witness and found on the balance of the evidence that cash had been taken from the company over the relevant period, that records were not produced by the respondents and that the First Respondent was involved in the removals. The Second Respondent was held likely to have shared responsibility or, at minimum, to have failed in stewardship and independent judgment.

Rather than awarding a specific sum aligned to HMRC assessments, the court ordered that an account be taken to quantify equitable compensation, because HMRC's assessments under VATA and the liquidator's desired fixed figures were not an appropriate substitute for an equitable account. The judge accepted that limitation defences were unavailable if direct receipt was found and that concealment and the lack of disclosure defeated limitation arguments in respect of the Second Respondent.

The applicant, the liquidator of Shahi Tandoori Restaurant Ltd, applied under section 212 Insolvency Act 1986 for declarations and orders that monies totalling substantial sums had been misapplied and should be repaid or compensated for. The application pleaded, alternatively, breaches of Companies Act 2006 duties (including sections 171, 172, 173 and 174), entitlement under section 234 IA86, and misfeasance arising from a failure to pursue an appeal against an HMRC VAT assessment dated 19 August 2014.

Background and parties: The business operated as a restaurant/takeaway. The First Respondent had been the dominant shareholder and director throughout; the Second Respondent held shares and was a director from 2008. HMRC investigated and issued assessments for underdeclared VAT. The company later entered liquidation and the liquidator applied for recovery of sums said to have been removed from company takings.

Relief sought: The liquidator initially sought fixed sums (£771,918 and alternatively £139,846.92) as representing diverted cash or unpaid VAT and interest, and sought orders for repayment, restoration or contribution; the order was amended to permit such other sum as the court thought fit.

Issues framed:

• Whether cash takings were diverted from the company and, if so, by whom;
• Whether the respondents breached fiduciary and statutory directors' duties (sections 171, 172, 173, 174 CA2006) and thus were liable under section 212 IA86 for misfeasance;
• Whether the company had a proprietary entitlement under section 234 IA86;
• Whether failure to pursue an HMRC appeal constituted misfeasance;
• Limitation defences.

Court's reasoning and findings: The judge accepted the contemporaneous HMRC investigation notes and the evidence of the HMRC investigating officer over the respondents' explanations. The court found that cash had been diverted from the company over the period to 31 July 2013, that records and promised schedules were not produced and that the First Respondent had been directly involved. The Second Respondent, who gave no evidence, was found likely to have been a recipient or otherwise failed in his stewardship and independent judgment; alternatively concealment and lack of independent board meant limitation did not bar the claim against him.

The judge rejected the liquidator's submission that the HMRC assessment should be adopted wholesale as the equitable remedy. Because some diverted cash had been used for company expenditure and HMRC's method was an assessment under VATA rather than an accounting for equitable compensation, the appropriate remedy was an order for an account to quantify the sums to be restored, with directions to be given. The court noted that if respondents persistently refuse disclosure the court may use HMRC's evidence as the best available basis for quantification.

Procedural posture: First instance trial (heard 24–26 November 2020). No further appellate history is stated in the judgment.

This was a first-instance application. The court found that cash had been diverted from the company and that the First Respondent was involved; the Second Respondent was likely involved or liable for failure of stewardship. The court refused to award the specific sums sought by reference to HMRC assessments but ordered that an account be taken to quantify equitable compensation. The judge gave reasons that HMRC assessments under VATA are not a direct substitute for an equitable account and that disclosure failures and concealment affected limitation defences.