Equitable Law Capital, Re

A person may be liable for fraudulent or wrongful trading, breach of directors’ duties and related remedies without being a formally appointed director. The question is whether the person assumed the status and functions of a director within the company’s corporate governance structure. For transactions at an undervalue, value is assessed from the company’s perspective by reference to the bargained-for benefits and detriments within the transaction. A company’s subsequent failure, or the fact that its business was fraudulent, does not by itself make a transaction entered into at a genuine market price an undervalue. Where a settlement is made with some defendants, the court must construe its terms and context. A settlement made on a means basis for a small proportion of the claim may support an implied reservation permitting claims against the remaining defendants.

The joint liquidators of Equitable Law Capital Limited brought claims arising from an investment scheme against several respondents, including David Clarkson, Mr Flaton, Mr Arnison and Belmonte Limited. The claims included fraudulent trading, wrongful trading, dishonest assistance, breach of directors’ duties, constructive trusteeship and transactions at an undervalue. The liquidators had previously settled with Graham and Lillie Milner under a settlement agreement. The principal issues were Mr Clarkson’s role and state of mind, the liability of Mr Flaton and Mr Arnison, whether payments were transactions at an undervalue, and whether the Milner settlement barred the remaining claims.

1. David Clarkson. The claims against Mr Clarkson succeeded. He was knowingly dishonest, was a de facto director, breached the statutory duties applicable to directors, was liable for fraudulent trading and wrongful trading, became a constructive trustee of money paid to him, and received payments at an undervalue. He and Lillie Milner operated ELC as co-equals, made strategic and financial decisions, controlled significant areas of the business and acted at the highest level of its governance. His liability did not depend on formal appointment.
2. Dishonesty and assistance. Dishonesty required the court first to ascertain the respondent’s knowledge or belief as to the facts and then to assess the conduct objectively by ordinary standards of honesty. The claims against Mr Flaton and Mr Arnison failed. Neither was shown to have known of the wider Ponzi-style fraud, acted recklessly, or turned a blind eye. Their misunderstanding of the contractual and insurance arrangements was not itself dishonest.
3. Wrongful trading. Mr Clarkson knew that ELC was insolvent from the outset and that its deficiency would increase while trading continued. His contribution was causative but need not have been the sole cause of loss. The statutory defence was unavailable because he had not taken every step to minimise creditor losses.
4. Transactions at an undervalue. Mr Clarkson’s payments were vastly disproportionate to the value of the introductions and other services he provided, so repayment of all sums received was appropriate. The claim against Belmonte failed. The insurance was negotiated at arm’s length and the court rejected the argument that a transaction at an appropriate price became an undervalue merely because the company’s business was doomed or later failed.
5. Milner settlement. The settlement did not bar the claims against the remaining respondents. Clauses requiring Lillie Milner to provide evidence and information clearly contemplated continuation of those claims. A term permitting their continuation would be implied, particularly because the settlement was made on a means basis and represented only a small proportion of the claims. The claims against Mr Flaton, Mr Arnison and Belmonte nevertheless failed on their merits.
6. Relief and costs were adjourned to a further hearing, together with any applications for permission to appeal.