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RECENT CASES |
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Director not in breach of duties in complying with tipping-off legislation See CLM: ¶2333+, ¶2505+, ¶7457+, ¶7811+ |
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Re Ortega Associates Ltd (in liquidation), Green v Walkling and others [2007] EWHC 2046 (Ch) |
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Mr W was a director of OA Ltd, a company in liquidation. The liquidator brought a claim against him for breach of duty, misfeasance and/or for a declaration that a sum paid by OA Ltd to its holding company was a transaction at an undervalue. Mr W, in turn, denied that he had done anything wrong and asked the court to relieve him of any liability it might attribute to him. Mr W was put in a very difficult position. He was sales manager of OA Ltd when it was bought by ABF Corp, an American company owned by Mr M and his wife Mrs E. Mr M and Mrs E became directors of OA Ltd. Mr W was then asked to take Mr M’s place as director because Mr M said he had to concentrate on his business commitments in America. Unknown to Mr W, Mr M had actually been disqualified from acting as a director in the UK. However, Mr M carried on running the company as a de facto director despite his disqualification. Mr W discovered that Mr M was defrauding HM Customs & Excise (as it was then). He sought advice form his solicitor as to whether he should confront Mr M directly. He was advised to report the fraud to Customs & Excise in accordance with the relevant legislation (Proceeds of Crime Act 2002), which he did. Customs & Excise said it would investigate, but they did not follow the matter up. Mr W was by then under an obligation not to “tip off” Mr M that he had disclosed the fraud to Customs & Excise (this is an obligation under the Proceeds of Crime Act 2002). This meant that he could not act in any way that would make Mr M suspicious that the fraud had been discovered. This was a particular concern to Mr W because OA Ltd was in the process of being sold to another company. He wanted to warn the purchasers, but could not. He suggested that OA Ltd’s creditors to be paid off out of the purchase price, but this was not accepted. He could not prevent the sale. Some of the purchase money was paid into an escrow account, but most of it was paid directly to OA Ltd and then transferred to ABF Corp. Mr W continued to work as a sales manager for OA Ltd, as required by the sale and purchase agreement (although he was no longer a director). OA Ltd failed and was wound up by a creditor. Mr W was made redundant. Although the liquidator obtained orders against Mr M, Mrs E and ABF Corp, they were unenforceable as the parties and purchase money had disappeared in America. The liquidator commenced proceedings against Mr W. The judge found that Mr W had not acted in breach of his duties as a director. He had sought legal advice at an early stage and had continued to do so. He followed his solicitor’s advice, which was to go along with the sale and purchase of OA Ltd and await the Customs & Excise investigation. He felt unable to take any other action, given the advice he had received as to his potential liability for tipping off. He had not benefited personally in any way from the sale, nor had he expected to do so. Since the judge decided that Mr W was not in breach, he did not have to rule on whether to relieve him from liability. However, he noted Mr W’s honesty and found that he had acted reasonably in the circumstances. On these facts, Mr W would have been relieved from any liability on his part. |
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Disqualified director refused leave to act See CLM: ¶3076 |
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Re Morija plc, Kluk v Secretary of State for Business, Enterprise and Regulatory Reform [2007] EWHC 3055 (Ch) |
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Mr K was one of 3 directors of M plc. He returned from holiday in 2003 to discover frauds perpetrated by his company in his absence. However, he did not notify his bank (which was the victim of the frauds) or anybody else. The company subsequently went into administrative receivership. Disqualification proceedings were commenced against him, and he entered into a disqualification undertaking for 10 years. The “matters of unfitness” for which he was disqualified were set out in a schedule to the undertaking. They stated that he had discovered the frauds immediately on his return from holiday, but had not reported them. Mr K then applied for leave to act as a director of S Ltd and IG Ltd (S Ltd's holding company). In his supporting evidence, he asserted that he had actually discovered the frauds after the administrative receivers were appointed. His application was dismissed by a Registrar. Mr K appealed against this decision on the basis that the Registrar had given too much weight to Mr K disputing when he discovered the frauds. On appeal, the Judge agreed with the Registrar's decision. Although the Registrar had given that particular issue too much weight, his decision was based on other factors as well. The Registrar had found that Mr K did not seem to appreciate the seriousness of his misconduct, and therefore still posed a risk to the public. He had been disqualified for a long time. It would send out the wrong message to other directors if he were allowed to act for a similar company in a similar field of business, devaluing the “deterrent factor” of the disqualification regime. The Judge therefore considered that the Registrar would have reached the same conclusion if the issue of when the frauds were discovered had not been raised. |
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Statutory demand set aside See CLM: ¶7594 |
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Collier v P & M J Wright (Holdings) Ltd [2007] EWCA Civ 1329 |
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Mr C was in partnership with Mr B and Mr F. P Ltd was a judgment creditor of the partnership (therefore, the debt was owed jointly by all three partners). Mr C came to an arrangement with P Ltd under which he agreed to pay one third of the debt in instalments over 5 years, which he did. He understood that this arrangement meant that he would not be liable for the other two-thirds of the debt and that P Ltd would pursue the other partners separately. However, the other partners were both declared bankrupt and P Ltd served a statutory demand on Mr C for the balance of the judgment debt plus interest. Mr C applied to have the statutory demand set aside. The court found that his agreement with P Ltd to meet one third of the debt was not binding because he had not given any consideration for it (this principle is known as “the rule in Pinnel’s Case”, after the leading case on the subject: Pinnel’s Case (1603) 5 Coke’s Rep 117a). However, he was able to rely on the doctrine of promissory estoppel, which exists to prevent the rule in Pinnel’s Case from having unfair consequences in situations like this one (the leading case on this is Central London Property Trust v High Trees House Ltd [1947] 1 KB 130). This doctrine prevents a person from reneging on his promise that he will not enforce his contractual rights where the other party has relied on that promise, if it would be inequitable to do so. In this case, Mr C had offered to pay one third of the debt he owed and P Ltd had voluntarily accepted that offer. Mr C acted on that agreement and paid the instalments. P Ltd was bound by the doctrine of promissory estoppel to accept the agreed payment as full and final settlement of the total debt due from Mr C. In order to set aside a statutory demand, the debtor must show that there is a dispute on the debt that constitutes a “genuine triable issue”. Mr C had satisfied this test and so the statutory demand was set aside. Although this case concerned a statutory demand against an individual, similar principles apply where the debtor is a company. The issues this case raises as to agreements to accept a lesser sum in satisfaction of the whole of a debt are also relevant to agreements between companies. In this case, there would have been no doubt as to the extent of Mr C’s liability if Mr C had given consideration for the agreement. The easiest way to do this would have been for the parties to execute a simple written agreement as a deed (see ¶3492). |
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Appeal on insolvency offences See CLM: ¶265, ¶7464 |
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R (on the application of Griffin) v Richmond Magistrates’ Court [2008] EWHC 84 (QB) |
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A director was appealing against his conviction on two charges concerned with the insolvency of his company. His conviction under s 216 Insolvency Act 1986 on “phoenix” companies was upheld. This is where a director of a liquidated company abuses the concept of limited liability by using a similar company name for a new company, thereby carrying on trading with what is essentially the same business but having left behind the debts of the liquidated company. The conviction on concealing or removing assets was overturned on the basis that this offence required the defendant to have had intention to defraud and there was no evidence of such an intent (s 206 IA 2006). |
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Discretion of the court to dissolve a company See CLM: ¶7491+ |
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There were 5 directors of M Ltd. Two of them (the group A directors) were in dispute with the other 3 (the group B directors). The company's shares were held equally between the two groups of directors, and so the shareholders were deadlocked. However, the group B directors had a majority on the board so were able to dominate the management of the company. The group A directors commenced unfair prejudice proceedings (with the group B directors and M Ltd as respondents), on the basis that they had been excluded from management and that the group B directors had deprived M Ltd of assets and business opportunities to their own benefit. The group A directors also alleged that the group B directors were in breach of their duties towards the company. While the unfair prejudice petition was ongoing, the group B directors presented a winding up petition against M Ltd. The group A directors were opposed to the petition. At the winding up petition hearing, the court found that M Ltd was insolvent on the cash-flow test, but not the balance sheet test. The unfair prejudice proceedings were due to be concluded soon, and possible outcomes included an order that the group B directors must compensate M Ltd for the property and business opportunities diverted away from it, and/or an order authorising breach of duty proceedings against the group B directors (which could in turn result in them being ordered to pay money to M Ltd). If either of these outcomes was achieved, M Ltd would no longer be insolvent. Therefore, the Judge ordered the winding up proceedings to be adjourned pending the outcome of the unfair prejudice petition. |
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Re Minrealm Ltd [2007] EWHC 3078 (Ch) |
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Extradition follow-up |
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Norris v Government of the United States [2007] EWHC 71 (Admin) |
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Following the discussion of the problems of extradition to the US in CLM Newsletter 2007 issue 10, the case of Ian Norris has reached the House of Lords. He is alleged to have engaged in price fixing at a time when such behaviour was not a specific offence in the UK. The government therefore has to prove that he was guilty of an equivalent common law offence involving a prison sentence of at least 12 months before it would be possible to extradite him. Judgment is usually given 6 to 8 weeks after the hearing. |