Katherine Merry and Ben Dyer & Anor v Sabir Esa

A director who transfers company assets to a company he controls, while the company is insolvent or approaching insolvent liquidation, must justify the transaction and account for value received. A transfer for no consideration is ordinarily a transaction at an undervalue. Where the director has not shown that he considered the company’s interests, the court may assess the duty to promote the company’s success objectively. The creditor duty is engaged when insolvency is imminent or insolvent liquidation is probable. Wrongful trading liability is compensatory and is measured by the loss caused by continuing to trade after the point when insolvent liquidation became unavoidable, subject to excluding losses that would have arisen in any event.

The joint liquidators of Safe Depot Limited sought relief against its former sole director and shareholder, Sabir Esa. They alleged breaches of statutory and fiduciary duties, transactions at an undervalue, preferences, transactions defrauding creditors and wrongful trading.

The respondent did not attend trial or give evidence for cross-examination. The court determined the claims principally on the documentary evidence and the liquidators’ evidence. The central issues were whether assets and debtors had been transferred to a company controlled by the respondent without consideration, whether those transactions breached the Insolvency Act 1986 and the Companies Act 2006, and the date and consequences of the company’s insolvency.

1. The claims succeeded in substantial part. The court found that Safe Depot was cash-flow insolvent by April 2016 and, at the latest, by August 2016. Stone Key Limited was connected with Safe Depot because both were controlled by Mr Esa.

2. The transfer of the Bury and Blackburn businesses, including accrued debtors valued at £29,825.79, and the Birkenhead debtors valued at £16,520, was made without proved consideration. It was therefore a transaction at an undervalue under section 238 of the Insolvency Act 1986. The evidence did not establish the prohibited purpose required for relief under section 423.

3. Mr Esa breached his duties under sections 172 and 175 of the Companies Act 2006. He had not shown that he considered the interests of creditors or the propriety of transferring company property to a company of which he was sole director and shareholder. In those circumstances the exercise of the section 172 duty was assessed objectively. The court found no basis for relief under section 1157.

4. The Birkenhead customer list claim was dismissed because, although it may have had more than nominal value, the liquidators produced no sufficient valuation evidence on which the court could make an order.

5. Wrongful trading under section 214 of the Insolvency Act 1986 was established from 29 September 2016. By then Mr Esa knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. He should have stopped incurring liabilities and entered an insolvency process. The proper measure was the increase in the deficiency caused by continued trading, excluding the dilapidations liability assumed to have arisen in any event.

6. Mr Esa was ordered to compensate Safe Depot in the total sum of £136,858.89, comprising £46,345.79 for the transferred debtors and £90,513.10 for the increase in the deficiency. Further orders were to be addressed after hearing counsel.