This is the next in my series of blogs for The Directors Friend.
In respect of a risk under Section 423 of The Insolvency Act 1986 (the “Act”) a Director must be very mindful where their own interests in respect of a company take precedence over those of the company or perhaps creditors as a risk of personal liability (amongst other risks that may follow). In this particular case, we focus upon where the company assets are moved with the objective of putting assets beyond the reach of or otherwise prejudicing the interests of persons making or who may make a claim against the company.
This case (Henry George Dickinson and NAL Realisations (Staffordshire) Limited and others  EWHC 28(Ch)) concerned a company Norton Aluminium Limited (“Norton”) which operated an aluminium smelting foundry in Staffordshire. Norton went into Administration following the circulation of a draft judgment that upheld in part claims of nuisance brought by a group of local residence against Norton. The Managing Director and controlling shareholder of Norton Mr Dickinson brought the claim to recover in the liquidation various sums totalling just over £1M which he alleged were due to him and secured by debenture over Norton’s assets.
Materially for this article the liquidators brought various counterclaims to include setting aside or recovering compensation for transactions entered into in 2010 to include that Norton bought back most of its shares from Mr Dickinson and connected parties for £2.5M, which was left outstanding as a secured loan and again materially Norton sold a subsidiary (North Castings Limited) to Mr Dickinson for £1, which was alleged to be at an undervalue.
Section 423 of the Act is concerned with transactions that defraud creditors that the Court has jurisdiction to review.
NOTABLE COMMENTS BY THE JUDGE:
His Honour Judge David Cook made various findings in respect of Section 423 from paragraph 95 onwards to include as follows:
In respect of the share buyback:
(1) At paragraph 105 the Judge commented that he was satisfied that Mr Dickinson had embarked on the various transactions now challenged in order to ensure that if the worst came to the worst he would be able to retain control of the business and its future profit potential and little would be available in the terms realisable assets from which an adverse judgment could be satisfied. This, the Judge found, was not merely a substantial purpose but the dominant one in Mr Dickinson’s mind.
(2) At paragraphs 109 and 110 the Judge found that net assets in the accounts of circa £2.7M did not disprove the Section 423 purpose as there was nothing in the evidence to disprove that. In fact, the Judge found that there was evidence to the contrary.
(3) At paragraph 111 the Judge found that the converting of the rights of shareholders into claims for secured debt both prejudiced the interests of the environmental claimants and put assets beyond their reach by ensuring that shareholder debt had prior claim on the assets. Thereby the pool of liabilities was increased and therefore Mr Dickinson’s dominant intention and therefore the buyback fell within Section 423 and that the Court may order relief.
THE NORTON SHARES
In respect of the Norton shares at paragraph 145 onwards the Judge found that he could also exercise the jurisdiction under Section 423.
Interestingly relief was not available under section 1157 of the Companies Act 2006 and the reason for that (as set out at paragraph 154) was that Mr Dickinson’s …”liability arises because he was party to the transaction that is to unwound, not because he was a director. It would be illogical to have a power to grant relief in favour of a beneficiary of a transaction who happens to be an officer of the company where no such power will exist in favour of an equally honest outsider”.
Be aware that there is no requirement for the application of Section 423 that the company be insolvent, in liquidation or in administration.
Following this decision it can be seen that a director who is found to have had a dominant intention to put assets beyond reach of persons bringing a claim or prejudicing the interests of persons bringing a claim in these particular circumstances is at risk of being found liable for these transactions and it shows the risks of that director. However, with the early and right advice the well-advised director could mitigate or perhaps avoid this outcome.
WHAT TO DO NOW:
If you are faced with insolvency issues with your company, a claim for transactions defrauding creditors or a transaction at under value claim for personal liability please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558411 and speak to me without obligation, protect your costs.
If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.
Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.
Until the next time…
THE DIRECTORS FRIEND