Brown v Bashir & Anor

Insolvency Act 1986 section 212 is a procedural gateway for misfeasance proceedings, not a free-standing cause of action.

Directors must account for dealings with company property and maintain proper records. Once a company-director transaction is shown, the director must explain it; failure to produce records cannot assist the director.

Equitable compensation must reflect the company’s actual loss. An HMRC best-judgment VAT assessment is not automatically equivalent to compensation, so an account may be required where the evidence does not establish a reliable fixed sum.

The liquidator of Shahi Tandoori Restaurant Ltd brought proceedings against two respondents, who had been directors and shareholders, alleging that company takings had been diverted for their benefit. Alternative claims concerned failures of stewardship, statutory duties and failure to challenge an HMRC VAT assessment.

The claim was brought under Insolvency Act 1986 section 212. The proposed proprietary claim under section 234(2) was not pursued in light of Re Charlotte Street Properties Limited [2020] EWCA Civ 687. The central issues were the respondents’ liability, limitation and the appropriate method of quantifying equitable compensation.

Disposition. The court found the First Respondent liable for diversion of company cash and found the Second Respondent liable either as a recipient or, alternatively, for knowingly permitting the diversion and failing to exercise independent judgment. A taking of an account was ordered to quantify the equitable compensation.

1. Legal framework. Section 212 of the Insolvency Act 1986 was a procedural gateway, not an independent cause of action. The relevant duties arose under sections 171 to 174 of the Companies Act 2006. The section 172 duty was subjective, subject to an objective inquiry where no reasonable director could have reached the decision or where the issue had not been considered.
2. Records and explanation. Directors owed fiduciary obligations to keep proper records and account for dealings with company property. The court applied the principles in Re Mumtaz Properties Ltd [2012] 2 BCLC 109, Re Idessa (UK) Ltd [2011] EWHC 804 (Ch) and Toone v Robbins [2018] EWHC 569 (Ch). The respondents’ failure to produce relevant records supported the findings against them.
3. Findings. The evidence established that cash was diverted from the Company, probably from the commencement of trading until 31 July 2013. The First Respondent was involved throughout. The Second Respondent’s continuing involvement as a director and his failure to explain the Company’s affairs justified liability on the alternative stewardship analysis. The court also found that no limitation defence arose on direct receipt under section 21(1)(b) of the Limitation Act 1980, and that deliberate concealment defeated limitation under section 32(1)(b) or section 32(2).
4. Assessment and remedy. The HMRC VAT assessment under section 73(1) of the Value Added Tax Act 1994 was not equivalent to equitable compensation. Some diverted cash appeared to have been used for the Company’s benefit, and a flat rate based on HMRC’s output-tax assessment would be inappropriate. Under section 178 of the Companies Act 2006, the appropriate remedy was an account. If the respondents continued to withhold records, the court might determine the best figure available, with HMRC evidence likely to be the most efficient evidence on outputs.