Stacks Living Limited & Ors v Balvinder Shergill & Anor

Fraudulent trading under section 213 of the Insolvency Act 1986 requires actual dishonesty, assessed by determining the defendant’s state of knowledge or belief and then applying the objective standards of ordinary decent people. The fraud may target involuntary creditors, including public authorities, where liabilities are incurred without an honest belief that they will be paid.

Wrongful trading requires knowledge, or the conclusion which a reasonably diligent director ought to reach, that insolvent liquidation or administration has no reasonable prospect of being avoided. A director cannot rely on inexperience, inactivity or abdication of responsibility. Contributions under sections 213 and 214 are compensatory and must bear a proper connection with the loss caused.

The joint liquidators of Stacks Living Limited and Staffs Furnishing Limited brought applications against Balvinder Shergill and Miranda Allison Smith. They alleged fraudulent trading, wrongful trading and misfeasance in relation to unpaid non-domestic rates and unexplained company payments.

Mr Shergill controlled both companies and continued substantially the same furniture-retailing business through successive companies. Ms Smith was the sole appointed director of Staffs for part of the relevant period but took no part in its affairs. The central issues were whether the business was carried on dishonestly, when Staffs had no reasonable prospect of avoiding insolvent liquidation, whether the challenged payments were justified, and whether relief under section 1157 of the Companies Act 2006 was available.

1. Fraudulent trading. The claim against Mr Shergill under section 213 of the Insolvency Act 1986 succeeded. He knowingly operated the Companies’ businesses with intent to defraud the Council and potentially HMRC. The Companies could not meet their non-domestic rates liabilities, and he had no honest belief that those liabilities would be discharged or reduced. His use of successive companies, attempts to avoid liquidation and continuation of the same business formed part of a dishonest scheme.
2. The court applied the two-stage approach in Ivey v Genting Casinos: the fact-finder first determines the defendant’s actual knowledge or belief as to the facts, then applies the objective standards of ordinary decent people. A defendant need not appreciate that the conduct is dishonest. The court rejected the contrary suggestion in Joint Liquidators of Tiuta International Ltd v Booth.
3. Fraudulent intent may exist in relation to involuntary creditors. It consists in continuing to incur liabilities such as rates or tax without an honest belief that they will be paid when due or shortly afterwards.
4. Wrongful trading. The claim under section 214 succeeded against both respondents. Staffs had no reasonable prospect of avoiding insolvent liquidation or administration by 31 July 2018, at the latest. Mr Shergill knew that fact. Ms Smith ought to have concluded it because she failed to undertake even the minimum inquiry required of a director.
5. A director cannot rely on lack of expertise or complete inactivity. The office carries an irreducible responsibility to inform oneself about the company’s affairs. Mr Shergill’s payments to suppliers did not amount to taking every step to minimise creditor loss; they facilitated continued trading.
6. Contributions under sections 213 and 214 are compensatory. Mr Shergill was ordered to contribute to each liquidation the totality of the loss, including liquidation costs and expenses. Under section 214, the relevant measure was the increase in Staffs’ net deficiency during the applicable period. Exact sums or a calculation mechanism would be determined after further submissions.
7. Misfeasance and relief. The challenged payments were unexplained and unjustified. Once company money received by a director or under his control is shown, the director must explain and justify its proper use. Ms Smith’s complete abdication of responsibility breached her duties and made her liable for payments during her directorship. Relief under section 1157 of the Companies Act 2006 was refused because honesty alone was insufficient; her conduct was not reasonable.