Aston Risk Management Ltd v Jones

The court found that the First Defendant, Mr Lee Jones, acted as a de facto director of Audiological Support Services Ltd (ASS) from shortly after the Master Services Agreement (MSA) and Shareholders' Agreement (SHA) were entered into, and certainly by the time two founding directors resigned in early June 2014. In reaching that conclusion the court applied the established tests for de facto directorship (see Smithton Ltd v Naggar and authorities such as Re Hydrodam), looking at whether Mr Jones had assumed the status and functions of a director and had become part of ASS's corporate governance structure.

The court held that Mr Jones breached fiduciary and statutory duties owed to ASS (in particular duties under s.171 and s.172 Companies Act 2006 and the general duties in ss.170–177) by causing or allowing certain payments to be made to companies he controlled (Neutrino and, in part, Cumulo) and by arranging that the substance of ASS's business was transferred to Audiological Measurement & Reporting plc (AMR) around the time ASS entered administration. The MSA and its Addendum were held to require Neutrino to provide the reporting system and related development work as part of the agreed consideration for Portfolio 1's "sweat equity", such that many of the contested invoices were not properly payable.

On the knowing-receipt claim the court held Neutrino liable as constructive trustee for monies it had received which were applied in breach of fiduciary duty (equating the company's knowledge with that of its controlling director, Mr Jones). The court made provisional findings of liability figures (subject to further submissions on duplication and quantum) and directed further submissions on remedies and interest.

Background and parties: ARM sued as assignee of ASS's claims, pursuing the First to Sixth Defendants. By trial the claims against Defendants 2–4 and 6 were compromised; the trial proceeded against Mr Lee Jones (First Defendant) and Neutrino Networks Ltd (Fifth Defendant). ARM alleged that Mr Jones had acted as a de facto director of ASS and breached fiduciary duties in causing payments to Neutrino and Cumulo and in arranging transfer of ASS's business to AMR shortly before administration.

Nature of the claim / relief sought: ARM sought equitable compensation and restitution: (i) equitable damages/ account of profits for breaches of fiduciary duties by Mr Jones as a de facto director; (ii) declarations/ remedies under the Insolvency Act (s.238/239 alleged but not pursued at trial); and (iii) a knowing-receipt/constructive trust claim against Neutrino for monies received applied in breach of duty.

Issues framed by the court:

• Was Mr Jones a de facto director of ASS?
• If so, did he breach his fiduciary duties by causing payments to Neutrino (£594,352.03 claimed) and Cumulo (£74,543.43 claimed) for which ARM contended there was little or no authorised consideration?
• Did ASS transfer its business and undertaking to AMR shortly before administration, and was that a breach?
• Were any impugned payments transactions at an undervalue or preferences under the Insolvency Act?
• Was Neutrino liable in knowing receipt as constructive trustee?

Court's reasoning and findings (concise): The judge applied established authorities on de facto directorship (eg. Smithton; Re Hydrodam; Holland distinguished) and considered the cumulative documentary and witness evidence. The judge concluded that:

• Mr Jones did assume de facto directorial functions and was a central part of ASS’s governance from shortly after the MSA/SHA (not merely acting as a shareholder supervisor through ASG).
• The MSA (including its scanned Addendum) and Annex A required Neutrino to provide a complete medicolegal reporting and rehabilitation IT system. Neutrino had taken the commercial risk of developing the system in return for Portfolio 1's "sweat equity"; accordingly many of the later claimed additional invoices were inconsistent with the contractual bargain.
• Certain software-development and consultancy invoices paid to Neutrino were not properly payable and amounted to breach of Mr Jones' duties (notably s.172 and s.175 CA 2006), taking account of conflicts of interest and the company’s insolvency position; some report re-run invoices were, however, held to be justified as falling within the MSA chargeable rates.
• The payments to Cumulo (monthly retainers at a much higher rate than the earlier agreed fee) were partly unjustified; three monthly retainer payments were held to be improper in the circumstances (subject to credit for sums legitimately owed).
• Mr Jones arranged to put AMR into position as a phoenix successor to exploit ASS's relationships and assets (notably the Quindell/QHS relationship and data), and the transfer/appropriation of the ASS business to AMR around administration breached his duties.
• Neutrino was held liable in knowing receipt (constructive trust) for sums received that the court found were applied in breach of fiduciary duty, equating the company's knowledge with Mr Jones'.

Subsidiary findings and procedure: The court applied the shifting evidential burden on fiduciaries to explain payments once receipt by the fiduciary is proved. The judge made provisional calculations (VAT-exclusive) of sums for which Mr Jones/Neutrino were liable (c. £130,418.95 in respect of certain Neutrino invoices and c. £33,900 for Cumulo payments) and held that equitable damages for the transfer to AMR should be assessed by reference to the value the assets would have realisable at administration. Further submissions were directed on quantum, duplication and interest; remedies were reserved.

Claim succeeded in part. The court held that Mr Lee Jones was a de facto director of ASS and, as such, owed fiduciary and statutory duties under ss.170–177 Companies Act 2006. He breached those duties by causing certain unjustified payments to Neutrino and to Cumulo and by arranging for the substance of ASS’s business to be appropriated to AMR around the time ASS entered administration. The MSA (including its Addendum) obliged Neutrino to provide the reporting system and associated development work as part of the bargain for Portfolio 1’s "sweat equity", so many contested invoices lacked proper contractual basis. Neutrino was liable in knowing receipt as constructive trustee for monies received and applied in breach of duty. The court made provisional quantification of liabilities and directed further submissions on remedies, duplication, interest and precise quantum.