SQN Global Limited v Marcus Hughes & Ors

Under section 213 of the Insolvency Act 1986, a claimant must prove that a company’s business was carried on with intent to defraud creditors and that each defendant was knowingly party to that conduct. Dishonesty is assessed by identifying the defendant’s actual knowledge or belief and applying the objective standards of ordinary decent people. Intent to defraud one creditor may suffice.

The jurisdiction extends to de facto and de jure directors, employees and others who actively and dishonestly assist. A contribution order restores the value removed through fraudulent conduct. Liability must be confined to loss proved against the defendant’s involvement.

SQN Global Limited, having taken an assignment of the liquidators’ cause of action, brought a claim under section 213 of the Insolvency Act 1986 against six individuals connected with Genesis (2014) UK Ltd. The claim alleged that the company’s assets and receipts were diverted after its operator’s licence was revoked and after a worldwide freezing order was served.

The defendants did not file defences and were debarred from defending. At the disposal hearing, the court had to decide whether fraudulent trading was proved, which defendants were knowingly involved, and the proper measure of any contribution. The central issues concerned the evidential effect of the default and freezing order, alleged transfers to Clarence Road Vehicle Services Ltd, and the loss attributable to each defendant.

Disposition

The claim failed against Mr Plant and Ms Walker. It succeeded against Mr Marcus Hughes, Ms Greening, Mr David Hughes and Mr Clarke to the extent established in the judgment. A further hearing was directed on the amount payable by Mr Clarke, interest and costs.

Reasons

1. Although the defendants were debarred and did not attend, the claimant still had to prove every fact necessary for its claim on the balance of probabilities. The court applied the effect of a debarring order described in Michael v Phillips [2017] EWHC 1084 (QB).
2. Section 213 of the Insolvency Act 1986 requires proof of fraudulent intent and knowing participation. Dishonesty required the court to determine the defendant’s subjective knowledge or belief and then apply the objective standards of ordinary decent people. There was no requirement that the defendant appreciated the conduct was dishonest. The court applied the approach in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 and Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614. An intent to defraud one creditor could suffice, applying In re Gerald Cooper Chemicals Ltd (in liquidation) [1978] Ch 262. The jurisdiction also extended to persons who actively and dishonestly assisted the company, applying Morris v Banque Arabe Internationale d’Investissement SA (No.2) [2001] 1 BCLC 263.
3. The court did not treat the traffic commissioner’s factual findings as proof of the facts found, in accordance with Hollington v Hewthorn [1943] 1 KB 587. It nevertheless relied on the commissioner’s decision to show that the company’s business was likely to end. Payments after effective service of the freezing order on 24 May 2021, and transfers of assets to CRVS without consideration or at a substantial undervalue, supported an inference of fraudulent trading. Unsupported assets based on Facebook posts and an unverified conversation were excluded. Payments before 24 May 2021 were treated as ordinary trading liabilities rather than fraudulent diversions.
4. Mr Marcus Hughes was a de facto director, Ms Greening a de jure director, and Mr David Hughes a de facto director from June 2021. They were knowingly and dishonestly involved and were jointly and severally liable for the proven loss. Mr Clarke dishonestly facilitated the use of CRVS, but his liability was limited to loss attributable to assets proved to have been transferred to CRVS and the related rental income. The amount required further assessment. The evidence did not establish fraudulent involvement by Mr Plant or Ms Walker.
5. A contribution under section 213 is restorative. It should return to the company the value removed through fraudulent conduct and must be limited to loss proved against the relevant defendant. The court directed a further hearing and ordered service of the judgment.