Capital Green Recycling Limited & Anor v Steven Nicholas Bird & Anor

A creditor duty under section 172 of the Companies Act 2006 requires actual insolvency, or potentially imminent insolvency or probable insolvent liquidation or administration. Mere doubtful solvency or cash-flow pressure is insufficient.

Where a lawful dividend is alleged to have been paid in breach of that duty, equitable compensation requires causative loss. A dividend used as a tax-efficient form of reasonable remuneration may not cause loss where the remuneration could properly have been paid as salary. A party is also held to its pleaded case, and a warranty claim cannot be established by relying on an unpleaded state of affairs.

Capital Green Recycling Limited acquired a majority shareholding in One Stop Recycling Limited from Steven and Amy Bird under a share purchase agreement. Capital Green alleged breaches of contractual warranties and fraudulent or negligent misrepresentations concerning One Stop’s accounts, working capital and use of an invoice-discounting facility. One Stop claimed that the Birds had breached their creditor duty by procuring dividend payments while the company was insolvent. The Birds counterclaimed for release from personal guarantees and alleged that Capital Green was estopped from relying on provisions governing debts over 60 days old in the completion accounts.

The central issues were whether the alleged warranty and misrepresentation claims were proved, whether the creditor duty was triggered and caused recoverable loss, and whether the counterclaims succeeded.

1. The claims were dismissed. The counterclaim succeeded only insofar as Capital Green was required to procure or attempt to procure the Birds’ release from subsisting personal guarantees. The remaining counterclaim was dismissed.
2. The pleaded warranty claim concerning the Purchase Reserve Ledger failed. The relevant warranties concerned the audited accounts to 30 June 2019 and the management accounts to 31 October 2019. They did not warrant the state of liabilities at completion. The court would not permit reliance on witness evidence and closing submissions to bypass the discipline of an application to amend the pleadings.
3. The claim concerning the Bibby Facility failed on the facts. The court accepted that Nirmal Chhabria knew of Advance Invoicing before completion, but Capital Green had pleaded and failed to prove the materially different allegation of Fresh Air Invoicing. The evidence was insufficiently particularised, and the alleged practice was not quantified. The misrepresentation claim also failed for inadequate particularisation and absence of reliance. In principle, an entire-agreement clause did not exclude a misrepresentation claim: MDW Holdings Ltd v Norvill [2021] EWHC 1135 (Ch) at [245]-[247].
4. Applying BTI 2014 LLC v Sequana SA and others [2022] UKSC 25, the creditor duty under section 172 of the Companies Act 2006 was not triggered. Doubtful solvency was insufficient. The evidence did not establish actual balance-sheet or cash-flow insolvency when the dividend was declared. The court noted the possible alternative triggers of imminent insolvency or probable insolvent liquidation or administration.
5. Even if the duty had been triggered, no equitable compensation would have been awarded. The dividend was a tax-efficient means of paying reasonable remuneration, and the same remuneration could have been paid as salary. There was no causative loss. Recovery by One Stop for Capital Green’s benefit would also create circularity through the completion-account price adjustment. Global Corporate Ltd v Hale [2018] EWCA Civ 2618 was distinguished because it concerned dividends unlawful under Part 23, whereas the present case concerned lawful dividends allegedly paid in breach of the creditor duty.

First-instance decision. No appellate history was stated in the judgment.