Cavendish IP Solutions Limited v On And On Consultants Limited & Anor

A person may be a de facto director without a valid appointment. The court must examine the company’s governance structure, the person’s actual acts and the cumulative effect of those acts objectively. A shadow director is subject to the general duties in Companies Act 2006 where those duties can apply.

Balance-sheet insolvency may exist while debts are paid as they fall due if the business creates a longer-term deficiency. When a company is on the verge of insolvency, creditor interests become paramount. A breach of the section 172 duty is not automatically fraudulent, but knowing or recklessly indifferent disregard of creditors can defeat limitation under Limitation Act 1980. Payments for reasonable remuneration are not transactions at an undervalue; voluntary payments for personal benefit may be.

The claimant, a litigation funder, pursued claims assigned by the liquidator of One Property Group (UK) Limited against On And On Consultants Limited and Neil Macpherson. The consolidated proceedings concerned transactions at an undervalue and preferences under the Insolvency Act 1986, breaches of directors’ statutory duties under the Companies Act 2006, constructive trusteeship and limitation.

The defendants were debarred from defending after serious disclosure failures. The court nevertheless subjected the claimant’s evidence to critical appraisal. The central issues were whether Macpherson was a de facto or shadow director, whether the company was insolvent and connected with On And On, whether the payments benefited Macpherson, whether the breaches were fraudulent for limitation purposes, and whether the company’s continuing business model itself breached duty.

Disposition. The claimant established liability. Quantum and consequential relief were left for further directions.

1. Directorship. The court applied the fact-and-degree approach in Revenue and Customs Commissioners v Holland [2010] UKSC 51 and Smithton Ltd v Naggar [2014] EWCA Civ 939. It considered the governance structure, Macpherson’s actual acts and the cumulative effect of his activities. Applying the governance analysis in Re Mumtaz Properties Ltd [2012] 2 BCLC 109, it found that Macpherson controlled the company’s finances, staff, payments and significant decisions, and directed the de jure director. He was both a de facto and a shadow director and owed the general statutory duties in Companies Act 2006.
2. Insolvency and connected persons. Applying BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3 BL plc [2013] UKSC 28 and Bucci v Carman [2014] EWCA Civ 383, the court held that the company was balance-sheet insolvent throughout the challenged period. On And On was connected with the company because it was an associate of Macpherson and was itself controlled by him as a shadow director.
3. Payments. Payments representing reasonable remuneration for Macpherson’s services were not transactions at an undervalue. The remaining payments to On And On were gifts or involved substantially less consideration and were transactions at an undervalue. The reasonable-remuneration element was not an unlawful preference; sums beyond any obligation were voluntary payments rather than preferences.
4. Fraud and limitation. The payments, except to the extent of reasonable remuneration, breached the section 172 duty and engaged the creditor duty identified in BTI 2014 LLC v Sequana SA [2022] UKSC 25. Applying Armitage v Nurse [1998] Ch 241 and Gwembe Valley Development Company Ltd v Koshy [2003] EWCA Civ 1048, the court found dishonest breaches. The limitation defence therefore failed under Limitation Act 1980.
5. Continuing business. The business model was not inevitably doomed if adequate funding was forthcoming. Once the company was on the verge of insolvency, however, creditor interests were paramount. Macpherson failed from no later than 31 May 2012 to take protective steps and knowingly allowed trading to continue for his and Mr Goddard’s benefit. The continuing fraudulent breach caused an increase in the deficit of £912,126.
6. Relief. Repayment of the transactions at an undervalue and damages or equitable compensation for fraudulent breaches remained to be assessed. The court directed that relief must avoid double counting and could be resolved by agreement or written submissions.