Katherine Merry and Ben Dyer & Anor v Sabir Esa

The Liquidators brought claims under section 212 Insolvency Act 1986 for breach of fiduciary duty, alleging transactions at an undervalue (section 238 IA 1986), preferences (section 239 IA 1986) and transactions defrauding creditors (section 423 IA 1986), together with wrongful trading under section 214 IA 1986. The court found that the respondent, as sole director, caused the profitable parts of the company’s business (the Bury and Blackburn businesses and accrued trade debtors) to be transferred to Stone Key Ltd at no proven consideration while the company was insolvent or on the verge of insolvency.

The court held that there was insufficient evidence to attribute a monetary value to the Birkenhead customer list and dismissed that head of claim for lack of valuation evidence. The transfers of the Bury and Blackburn businesses and the Birkenhead debtors were transactions at an undervalue in breach of duties under the Companies Act 2006 (notably sections 172 and 175 and section 174 as to care, skill and diligence). The court rejected relief under section 1157 Companies Act 2006 because the respondent had not acted reasonably or shown that it would be fair to excuse liability. On wrongful trading, the court held that the respondent should have known by 29 September 2016 that there was no reasonable prospect of avoiding insolvent liquidation and therefore was liable for the increase in the deficiency to creditors resulting from continued trading.

The court awarded the company compensation of £46,345.79 for the value of trade debtors taken by Stone Key and £90,513.10 for losses caused by wrongful trading, giving a total award of £136,858.89, and reserved directions as to further orders.

Background and parties: Safe Depot Limited (the company) was wound up on petition and Ms Katherine Merry and Mr Ben Dyer were appointed joint liquidators. The applicants alleged that Mr Sabir Esa, the company’s sole registered director from 1 March 2015, caused transfers of parts of the company’s business and assets to a company, Stone Key Limited, controlled by him while the company was insolvent or close to insolvency.

Nature of the application / relief sought: The Liquidators applied under section 212 IA 1986 for misfeasance and breach of fiduciary duty, seeking recovery of company property or compensation; they advanced alternative statutory claims under sections 238 and 239 IA 1986 (transactions at an undervalue and preferences), section 423 IA 1986 (transactions defrauding creditors) and for wrongful trading under section 214 IA 1986. The Liquidators sought restitution/compensation for value abstracted and loss caused to creditors.

Procedural posture and evidence: The respondent did not attend trial and provided limited documentary/material disclosure; the Liquidators relied on company records, interviews, contemporaneous correspondence and witness evidence from the liquidator and a former site manager. The court accepted the Liquidators’ witnesses and proceeded in the respondent’s absence, applying established authorities on the burden of proof where records are missing.

Issues: (i) whether transfers of the customer list, the Bury and Blackburn businesses and accrued trade debtors to Stone Key were transactions at an undervalue, preferences or transactions defrauding creditors; (ii) whether the respondent breached duties under the Companies Act 2006 (sections 171, 172, 174, 175) and was liable under section 212 IA 1986; (iii) whether relief under section 1157 CA 2006 was appropriate; and (iv) whether the respondent was liable for wrongful trading under section 214 IA 1986 and, if so, the appropriate measure of compensation.

Court’s reasoning and findings:

• The company was cashflow insolvent by April 2016 and at least probably insolvent by August 2016; insolvency was clear by 29 September 2016.
• The Birkenhead customer list had not been the subject of admissible expert valuation evidence and, despite being transferred for no consideration, the court could not ascribe more than a nominal value and dismissed that head of claim for lack of proof of value.
• The transfers of the Bury and Blackburn businesses and the Birkenhead trade debtors to Stone Key occurred within two years of winding up, at a time the company was unable to pay its debts, and there was no persuasive evidence of consideration having been paid; those transfers therefore amounted to transactions at an undervalue under section 238 IA 1986 and breaches of duties (including sections 172 and 175 CA 2006).
• The evidence did not establish the requisite dishonest or specific purpose required for a successful section 423 claim (transactions defrauding creditors), so that head failed.
• No relief under section 1157 CA 2006 was available because the respondent had not acted reasonably nor shown it would be fair to excuse liability; the court was particularly unwilling to relieve where the director (through Stone Key) retained benefits.
• On wrongful trading, the court concluded the respondent ought to have known by 29 September 2016 that the company could not avoid insolvent liquidation and did not take steps to minimise creditor loss; the appropriate compensatory sum for the increase in creditors’ deficiency from that date to liquidation was £90,513.10.

Disposition: The court ordered compensation in the figures found: £46,345.79 for trade debtors taken and £90,513.10 for wrongful trading, totaling £136,858.89, and reserved any remaining directions.

The claim succeeded in part. The court held that transfers of the Bury and Blackburn businesses and of accrued trade debtors to Stone Key were transactions at an undervalue in breach of the respondent’s duties under the Companies Act 2006 and ordered the respondent to compensate the company. The court dismissed the claim as to the Birkenhead customer list for lack of evidence of value and rejected the transaction-defrauding (section 423) claim and any application for relief under section 1157 CA 2006. The court also held that the respondent wrongfully traded from 29 September 2016 and must compensate for the resulting increase in the deficiency to creditors. The total award ordered was £136,858.89, with further directions reserved.