The Official Receiver & Anor v Omar Shazaad Nadeem (Bodystretch (UK) Limited, Re)

The Official Receiver, as liquidator of Bodystretch (UK) Limited, brought proceedings under section 212, section 238 and section 239 of the Insolvency Act 1986 seeking recovery of payments made to the respondent director, Mr Omar Shahzaad Nadeem, and payments of the sale proceeds of the company's principal asset. The court found that Bodystretch was insolvent by April 2015 and that significant payments were made to the respondent and to third parties from the net sale proceeds in September 2015.

Applying the duties in the Companies Act 2006 (notably sections 171 and 172 and the duties in chapter 2 of part 10) and the statutory causes of action in the Insolvency Act (transactions at an undervalue under section 238 and preferences under section 239), the court held that the respondent had not shown entitlement to the payments alleged to be salary, expenses or repayment of a loan, and that the payments constituted breaches of duty, transactions at an undervalue and preferences. The respondent failed to produce documentary evidence to support his asserted loan, salary or expense claims and had not availed himself of opportunities to inspect the company records.

The court ordered repayment to the company of the Pre-September Payments (£95,079.39), the September Payments (£140,939.50) and the Third Party September Payments (£170,153.10), with interest from 21 September 2015, and refused relief under section 1157 of the Companies Act 2006.

Background and parties. Bodystretch (UK) Limited, a clothing manufacturer, ceased trading around September 2015 shortly after selling its principal asset (the Property). The Official Receiver, as liquidator, and the company commenced proceedings against the sole director and one-time sole shareholder, Mr Omar Shahzaad Nadeem, alleging breaches of duty and insolvency-related causes of action in respect of payments made from March 2014 to September 2015.

Nature of the application. The Official Receiver sought orders under section 212 (misfeasance / breach of duty), section 238 (transactions at an undervalue) and section 239 (preferences) of the Insolvency Act 1986 requiring repayment or compensation for improper dispositions of the company’s assets, and claimed specified sums representing (i) Pre-September Payments to the respondent, (ii) payments to the respondent on or about receipt of the sale proceeds in September 2015, and (iii) payments to various third parties from those sale proceeds.

Procedural posture. First instance hearing before ICC Judge Mullen. The respondent did not provide disclosure or verified witness statements and did not inspect the company records despite repeated invitations; the Official Receiver relied on documentary material and witness evidence from his deputy.

Issues framed by the court.

• When the company became insolvent (on the evidence the court found insolvency by April 2015).
• Whether the contested payments were properly payable (as salary, redundancy, expense reimbursements or repayment of an alleged loan) or were misuse/misfeasance, transactions at an undervalue or preferences.
• Whether the respondent had discharged the evidential burden to justify the payments and whether relief under section 1157 Companies Act 2006 was available.

Court’s reasoning. The court applied the statutory duties in the Companies Act 2006 (notably sections 171 and 172 and the duty of care under section 174 and duty to avoid conflicts under section 175) and the Insolvency Act provisions (sections 238, 239 and the relevant time provisions in section 240). It found contemporaneous evidence of unpaid Crown taxes and creditor litigation, and correspondence with major customers and the bank, supported the conclusion that the company was unable to pay its debts by April 2015. The respondent failed to produce documentation (bank records, loan agreements, minutes or employment contracts) to substantiate asserted loans, salaries, expense reimbursements or redundancy entitlements. Where payments were not justified, they were treated as either breaches of duty (section 212) and/or as transactions at an undervalue or preferences within the relevant statutory periods. The court declined to grant relief under section 1157 CA 2006, finding the respondent had not acted honestly and reasonably in the relevant circumstances.

Result. The court ordered repayment of the identified sums with interest from 21 September 2015 and reserved the precise rate of interest to submissions if the parties could not agree.

First instance: The claim succeeded. The court held that Bodystretch was insolvent by April 2015; the respondent had failed to justify payments claimed as salary, expenses or loan repayments; the September Payments and the Third Party September Payments were made in circumstances amounting to breaches of duty, transactions at an undervalue and preferences. The respondent was ordered to repay specified sums with interest from 21 September 2015; relief under section 1157 Companies Act 2006 was refused.