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

A director of an insolvent company must consider the interests of its creditors as paramount where insolvency is imminent or probable. Payments to the director or selected creditors which dissipate the company’s principal asset, without proper entitlement or commercial justification, may constitute breaches of duty and preferences.

The statutory protection for transactions at an undervalue and preferences does not prevent recovery where the statutory conditions are met. A director cannot rely on the absence of company records where he had a reasonable opportunity to inspect them and produce supporting evidence. Relief under Companies Act 2006, section 1157 requires honesty and reasonableness, both of which must be established on the evidence.

The Official Receiver, as liquidator of Bodystretch (UK) Limited, applied under sections 212, 238 and 239 of the Insolvency Act 1986 against the company’s sole director. The application concerned payments made to the director before September 2015 and payments made from the proceeds of sale of the company’s trading premises.

The central issues were whether the company was insolvent when the payments were made, whether the payments breached the director’s duties or constituted transactions at an undervalue or preferences, and whether the director was entitled to relief or to retain any sums as salary, expenses, redundancy pay or repayment of a loan.

1. Outcome. The application succeeded in substantial part. The respondent was ordered to repay £95,079.39 in pre-September payments, £140,939.50 in September payments and £170,153.10 in third-party September payments, with interest from 21 September 2015. The claim concerning other payments to employees and small creditors was not sufficiently particularised and was not determined in the applicants’ favour.
2. The company was insolvent by April 2015. The evidence included unpaid PAYE, creditor claims and substantial unpaid debts arising from the collapse of important customer relationships. The sale of the company’s premises occurred while it was insolvent and removed its principal asset from the pool available to unsecured creditors.
3. The respondent had no established entitlement to the payments as salary, redundancy pay, expenses or repayment of a loan. There was no adequate evidence of a contract of employment, remuneration approval, properly incurred expenses or the alleged property-purchase loan. The payments therefore breached the duty to act within the company’s constitution under section 171 of the Companies Act 2006 and the duty to promote the company’s success under section 172.
4. Once insolvency was established, the interests of the general body of creditors were paramount. The director’s reliance on a speculative recovery from Arcadia was not a reasonable basis for paying himself and selected creditors while leaving the general body of creditors exposed. The payments were preferences within section 239 of the Insolvency Act 1986; the statutory presumption of desire applied to connected recipients.
5. The pre-September payments also constituted transactions at an undervalue under section 238, in the absence of evidence of consideration. The court would alternatively have ordered repayment of payments from 8 July 2014 to 23 July 2015 on that basis.
6. Relief under section 1157 of the Companies Act 2006 was refused. The respondent had not acted reasonably, and there was no evidential basis for a partial equitable allowance.