Dormco Sica Limited (in liquidation) & Ors v SBL Carston Limited

Contribution proceedings under the Civil Liability (Contribution) Act 1978 redistribute responsibility between parties liable for the same damage. The court must first identify the total “same damage” for which the claimant, the contribution claimant and the proposed contributors are each liable. It must then apportion that liability justly and equitably, having regard principally to responsibility, but also to causative potency, moral blameworthiness, benefits retained and the financial consequences of insolvency.

Under section 423 of the Insolvency Act 1986, the court has a wide remedial discretion. A recipient’s change of position is not a complete defence, particularly where the transferor is insolvent, but may be relevant in exceptional circumstances. A contribution order should not be made where the contribution claimant will not pay its own just and equitable share.

The applicants sought contributions and indemnities from Mr and Mrs Munn following SBL’s settlement of SICA’s claim under section 423 of the Insolvency Act 1986. The underlying arrangement transferred SICA’s goodwill to SBL for £1 and diverted value to the shareholders of SBL’s parent company.

SBL was liable to SICA under the settlement. Mr Munn was liable for breach of directors’ duties. Mr and Mrs Munn were liable under section 423 to restore benefits attributable to the transfer of the goodwill, although Mrs Munn’s innocence was accepted. The assessment concerned the market value of the goodwill, the amount of the share-sale proceeds attributable to it, joint ownership, change of position, apportionment, and the effect of SBL’s liquidation.

1. Same damage. The court applied the two-stage approach under the Civil Liability (Contribution) Act 1978. It first identified the damage for which the relevant parties were each liable, then apportioned that damage justly and equitably. SBL’s settlement sum was not itself the measure of the contributors’ liability.
2. On the accepted expert evidence, the market value of the goodwill was £2,524,600. SICA’s loss caused by the transfer for £1 was therefore £2,524,599. That was the same damage for which SBL and Mr Munn were liable. The lower valuation advanced by Mr Mesher was rejected.
3. For the section 423 claims, £1,814,820 of the consideration received by Mr and Mrs Munn for their jointly owned shares was attributable to the goodwill. They were treated as being in the position of a single owner, although the court retained discretion to distinguish between them when fashioning relief.
4. Section 423 relief is discretionary and must pursue restoration and creditor protection. Change of position is not a complete defence. It may be considered as a factor, but in an insolvency case exceptional circumstances are required before it can outweigh the statutory distribution principle. Mrs Munn’s expenditure on holidays and her husband’s liabilities was accepted as expenditure that would not otherwise have occurred, but the case was not exceptional.
5. For contribution purposes, the starting point was an equal division because SBL and the Munns had each benefited from the arrangement. Mr Munn’s design and implementation of the scheme justified a 75:25 apportionment between SBL and Mr Munn of the £2,524,599 liability. Mrs Munn’s innocence justified limiting her contribution to 25 per cent of £1,814,820, to the extent Mr Munn did not pay.
6. SBL’s liquidation meant that no contribution order should take effect unless SBL paid, or was going to pay, its own just and equitable share. The appropriate relief was conditional indemnities. Mr Munn was to indemnify SBL for liability above £631,150, and Mrs Munn for liability above £1,361,115, subject to those sums being paid or payable by SBL. Mr Munn was also to indemnify Mrs Munn for payments she had to make. Contributions could be paid directly to SICA, or held for SICA outside SBL’s insolvent estate, once the conditions were satisfied.