Stacks Living Limited & Ors v Balvinder Shergill & Anor

The joint liquidators of Stacks Living Limited and Staffs Furnishing Limited succeeded in applications under the Insolvency Act 1986 for (i) a declaration and contribution for fraudulent trading under section 213 against Mr Balvinder Shergill; (ii) wrongful trading under section 214 against both Mr Shergill and Ms Miranda Smith (the latter limited to her period of directorship); and (iii) misfeasance in relation to unexplained payments. The court found that Mr Shergill had repeatedly used successive companies to continue the same furniture retail business while incurring and avoiding payment of involuntary liabilities (notably National Non-Domestic Rates), such that his conduct involved actual dishonesty and an intent to defraud involuntary creditors. Ms Smith was found honest but to have abdicated her directorial duties and so was liable under section 214 and for misfeasance in respect of payments made during her directorship. The court refused relief under section 1157 of the Companies Act 2006.

Orders were to be made requiring contributions and compensation sufficient to meet the totality of losses (including liquidation costs), with a further hearing or submissions to quantify precise sums or to determine a mechanism for calculation.

Background and parties

The Applicants were the joint liquidators of two insolvent companies, Stacks Living Limited ("Stacks") and Staffs Furnishing Limited ("Staffs"), which operated a retail furniture business from the same premises in Stafford and were wholly owned and controlled by the first respondent, Mr Balvinder Shergill. Ms Miranda Smith was briefly appointed director of Staffs but took no part in its management and was treated as a de facto director during that period.

Nature of the applications

• Fraudulent trading under section 213 IA 1986 (against Mr Shergill).
• Wrongful trading under section 214 IA 1986 (against both respondents, Ms Smith limited to her period of directorship).
• Misfeasance and recovery of unexplained or improper payments (against both respondents; payments made during Ms Smith’s directorship were challenged).
• Application of section 127 IA 1986 (void dispositions after presentation of winding-up petition) and consideration of relief under section 1157 CA 2006.

Issues framed

• Whether the business was carried on with intent to defraud (actual dishonesty) so as to justify a section 213 order.
• Whether, and from what date, the directors knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation and whether they failed to take every step to minimise creditor loss under section 214.
• Whether certain payments and cash withdrawals were properly for company purposes or unexplained misapplications of company property (misfeasance).
• Whether relief was available under section 1157 CA 2006.

Court’s reasoning and findings

The court found on the evidence that Mr Shergill had a long history of operating the same business through successive companies, evading liabilities to the local authority and HMRC, and that both Companies were insolvent and incapable of meeting their business rates liabilities. The judge concluded that Mr Shergill knowingly ran the business so as to incur liabilities which he knew would not be paid, intending to continue trading while avoiding involuntary creditors; that conduct satisfied the two-stage test for dishonesty and established intent to defraud under section 213. The court rejected the respondents’ asserted belief in rate discounts or pending appeals as unsupported by the documentary record.

Ms Smith was accepted as an honest witness but had abdicated any exercise of directorial duties; she ought to have informed herself of the company’s affairs and so was liable under section 214 for the period of her directorship and for misfeasance in respect of payments made while she was director. The court rejected the defence under section 1157 CA 2006 because inactivity or abdication of responsibility is unreasonable and cannot attract relief.

Remedy

The judge declared Mr Shergill liable to contribute under section 213 a sum sufficient to meet the companies’ total losses (creditors’ claims and liquidation costs) and ordered contributions under section 214 and compensation for misfeasance against both respondents as appropriate. The court reserved detailed quantification for further submissions or a hearing.

First instance: The applications by the joint liquidators were allowed in substantial part. The court held that (i) Mr Shergill carried on the businesses with intent to defraud involuntary creditors and is liable under section 213 to contribute to the Companies' assets; (ii) both respondents are liable for wrongful trading under section 214 (Ms Smith only for her period as director); (iii) both respondents are liable for misfeasance in respect of unexplained payments; and (iv) relief under section 1157 CA 2006 was refused. The court ordered contributions and compensation but reserved detailed quantification and the mechanism for calculation for further submissions or directions.