Application of Section 212 of the Insolvency Act 1986 to recover misapplied funds

We were instructed by the joint liquidators of a Company.

Investigations established that the directors of the Company had agreed to pay themselves bonuses in the form of a credit to clear their outstanding directors’ loan account (DLA). Such payments were in addition to the remuneration being paid to them by way of gross PAYE salaries.

The sum of circa £850,000 was credited to their DLA but they continued to draw sums from the company.

At the time the directors had resolved to pay themselves bonuses, the company was insolvent.

We pursued a claim against the directors on the basis that the directors were liable in misfeasance pursuant to section 212 of the Insolvency Act 1986. Further and alternatively, the facts gave rise to a claim that the set-offs against the DLA constituted a transaction at an undervalue pursuant to section 238 of the Insolvency Act 1986.

A settlement was reached with the directors within 9 months of us being instructed whereby the directors agreed to pay the sums due. The payment was received in full within 5 months of the settlement being reached.

Appointment of Interim Receivers to protect assets from being dissipated

We were instructed on behalf of a liquidator in connection with an overdrawn directors’ loan account (DLA) in the sum of £100,000.

A settlement agreement had been reached with the director to make payment in full, from the proceeds of sale of the director’s property.

The director failed to sign the settlement agreement and sold his property.

Investigations were conducted and it was established that the police had seized a six-figure sum.

We issued a bankruptcy petition against the director who despite acknowledging the debt, failed to sign the settlement agreement and subsequently instructed solicitors to seek the transfer of funds from the police to them.

Our concern was the director had no intention of reaching a resolution with the liquidator and if he successfully recovered the funds from the police, he would abscond and leave the jurisdiction.

We, therefore, made an application to appoint interim receivers pursuant to section 286 of the Insolvency Act 1986 to take control of the sums held by the police pending determination of the bankruptcy petition.

The interim receivers were appointed, and a settlement agreement was reached whereby the funds held by the police were transferred to the interim receivers who in turn paid the liquidators the sums due (being the DLA).

Payment of dividends to shareholders and breach of duty

We were instructed by liquidators in connection with a claim against the directors of a company.

Investigations established that the Company’s accounts did not reflect a true and fair view of the company’s assets, liabilities, financial position and profit or loss and therefore did not constitute properly prepared accounts pursuant to section 837(2) of the Companies Act 2006.

The Company’s net position each year relied upon a substantial intercompany loan to the company’s wholly-owned subsidiary. However, the subsidiary was heavily insolvent.

It was clear from the subsidiary’s statutory accounts that the company funded its accumulated losses by way of the intercompany loan and that its borrowings from the company were several times its annual turnover. There was no prospect of the intercompany loan to the company is repaid.

The directors were directors of both the Company and subsidiary and had signed the accounts of the subsidiary which showed that the subsidiary was heavily insolvent and reliant on the intercompany loan of the company to continue trading.

The directors subsequently declared and approved a £150,000 dividend despite the company having no distributable reserves and being balance sheet insolvent.

Proceedings were issued on the grounds that the directors were guilty of misfeasance and breach of duty pursuant to section 212 of the Insolvency Act 1986 for misapplying company funds and that the payment of a dividend when the company had no distributable reserves and was insolvent constituted a transaction at an undervalue pursuant to section 238 of the Insolvency Act 1986.

A settlement was reached with the directors within 5 months of us being instructed.

Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale Electrical Limited [2020] UKSC 25

We changed the law in the UK. The Supreme Court agreed with Pythagoras’ view that a construction company has an unfettered right to use the adjudication process – even if it is in an insolvency process.

The first instance court granted, and the Court of Appeal upheld, an injunction stopping Bresco from running an adjudication against Michael J Lonsdale. We challenged that on several legal grounds – and the Supreme Court unanimously granted our appeal.

We removed a substantial roadblock for insolvent companies to recover debts owed to them. Enforcement of adjudication decisions was left open by the Supreme Court, but see Meadowside and Astec Projects.

Balfour Beatty Civil Engineering Limited and Balfour Beatty Group Limited v Astec Projects Limited (in liquidation) [2020] EWHC 796

This was the first time a court accepted that the “net position” between two parties after liquidation could be decided by multiple adjudications.

Waksman J found in favour of Astec Projects, and declined to issue an injunction in favour of Balfour Beatty. Part of the decision in Astec Projects will effectively now have been overturned by the Supreme Court decision in Bresco. However, one of the key parts of the decision approved Pythagoras’ proposal on enforcement. The court agreed that there could be a short window after a successful adjudication decision, for Balfour Beatty to issue court proceedings to overturn the decision. If they failed to do so within that window, Astec would be permitted to enforce the adjudication decision.

Meadowside Building Developments Limited (in liquidation) v 12-18 Hill Street Management Company Limited [2019] EWHC 2651

The Court approved the types of arrangements that Pythagoras proposed on behalf of Meadowside, to permit a company in liquidation to enforce an adjudicator’s decision by way of summary judgment.

Meadowside was heard in light of the (now reserved) Court of Appeal decision in Bresco, but remains good law as regards the mechanisms for enforcing an adjudicators decision by way of summary judgement. Indeed, Lord Briggs in Bresco expressly referred to some of the arrangements discussed in Meadowside.