Summary

Summary judgment was not granted on an insolvent company's claim that its directors had caused its insolvency by dishonestly distributing the share capital of one of its subsidiaries where they had a real prospect of successfully defending the claim. Further, it was possible that the directors were entitled to claim relief under the Companies Act 2006 s.1157 as there was no invariable rule that relief should not be granted to the detriment of the creditors of an insolvent company.

Facts

The first claimant insolvent company and its liquidator, the second claimant, applied for summary judgment on their claim against the defendant company directors. The defendants applied for security for costs.

The defendants were husband and wife and were the principal shareholders as well as directors of the first claimant, which was the holding company of a company group. They made loans to the first claimant that totalled some £4 million, and in July 2007 they obtained charges over the assets of the first claimant and its subsidiaries to secure those loans. In October 2007 they set up a new holding company of which they were the principal shareholders. They distributed the entire share capital of one of the first claimant's subsidiaries, being some £10.48 million, to the new holding company. They then sold 30% of the share capital and used the proceeds to lend £3 million to the first claimant as it was suffering cash flow problems, but the first claimant went into administration just under a year later. The claimants claimed that the defendants' distribution of the subsidiary's shareholding had been unlawful and the consequent benefit to them was unauthorised.

The claimants contended that summary judgment should be granted as the defendants' distribution decision had dishonestly breached their duty to the first claimant and its creditors, as their obtainment of charges over their existing loans three months earlier showed that they had anticipated the first claimant's doubtful solvency. They further contended that the distribution was based on inaccurate interim accounts of the first claimant. The defendants argued that they had taken advice from the first claimant's solicitors and accountants in deciding on the distribution.

Held

Summary judgment on claim of doubtful solvency? - No. The defendants had a real prospect of successfully defending the claim. Their obtainment of a charge concerning their existing loans to the first claimant prior to the distribution did not necessarily mean that they had anticipated the first claimant's insolvency. The court could not ignore their evidence that they would not have subsequently provided the first claimant with an unsecured £3 million loan had they anticipated its insolvency when they distributed the shareholding, they had truly believed that the £3 million would help the first claimant get through its cash flow difficulties, and the insolvency was caused by the unforeseen and unprecedented financial crisis of 2008. Their explanation of events could withstand scrutiny at the instant pre-trial interlocutory stage and raised issues that had to be determined at trial. Further, they took their decision with the benefit of advice from the first claimant's solicitors and accountants, and it could not be determined via summary judgment that no intelligent and honest director could have honestly and reasonably believed that the transaction was for the benefit of both the first claimant and its creditors. Those were matters that had to be investigated at trial (see paras 70-74 of judgment).

Summary judgment on interim accounts claim? - No. The underlying facts surrounding the first claimant's interim accounts remained unclear. It was at least arguable that the defendants were entitled to rely on the accounts as proper interim accounts for the purposes of the Companies Act 1985 s.270. Even if the accounts were not proper, the defendants might be entitled to claim relief under the Companies Act 2006 s.1157 as there was no invariable rule that relief should not be granted to the detriment of creditors of an insolvent company, Inn Spirit Ltd v Burns [2002] EWHC 1731 (Ch) considered. If there had been reliance on inaccurately drawn interim accounts endorsed by the first claimant's professional advisors, and if accurately drawn accounts would have enabled a distribution properly to be made, relief under s.1157 might not be excluded. Those were all matters for trial, not summary judgment (paras 79-84).

Security for costs - The evidence did not show that the claimants were highly likely to succeed at trial. Nor did it show that an order for security would cause them any injustice or significant problems. They had funded the ongoing litigation in substantial sums and had discharged interim adverse costs orders. Also, appropriate adverse costs insurance or a contractual undertaking from a litigation funder might be available. Accordingly, they were ordered to provide security by way of such a policy or contractual indemnity for at least £790,000 plus VAT, Premier Motorauctions Ltd (In Liquidation) v PricewaterhouseCoopers LLP [2016] EWHC 2610 (Ch) applied (paras 91-93).

Claimants' application refused, defendants' application granted