Avoiding abuse of liquidation to defeat a landlord or contingent creditors

The Contingent Claims

A contingent or prospective creditor has been defined as someone with the standing as a creditor to wind up a company, as a “person [or entity] towards whom under an existing obligation the company may or will become, subject to a present liability on the happening of some future event or at some future date.”: Re William Hockley Ltd [1962] 2 All ER 111, per Pennycuick J at 113.

A wider definition was adopted in Re SBA Properties Ltd [1967] 1 WLR 799 (per Pennycuick J), and in Re Sutherland [1963] AC 235 and in Re T&N Ltd [2005] EWHC 2870 (Ch), [2006] 2 BCLC 563 and Re T&N Ltd [2006] EWHC 1447 (Ch), [2007] 1 BCLC. In Re Sutherland, the majority of the House held that an existing legal liability was not essential to the creation of a contingent liability – a contingent liability was a liability which, by reason of something done by the person bound would necessarily arise or come into being upon an event or events which might or might not happen.

Insolvency

A company is insolvent if its assets are exceeded by liabilities (including future ones) and it is insolvent if it cannot pay its debts when they fall due.

Cash flow insolvency was considered in Re Cheyne Finance plc (No.2) [2008] Bus LR 1562, where Briggs J held that the effect of the words “unable to pay its debts as they fall due” in s.123(1)(e) was to create a flexible and fact-sensitive requirement to consider present and any future liabilities. At [51] he contrasted “a momentary inability to pay…as a result of temporary liquidity soon to be remedied” with “an endemic shortage of working capital” which renders “a company…on any commercial view insolvent, even though it may be able to pay its debts for the next few days, weeks or months before an inevitable failure.”.

The Risk of Abuse

If the effect of appropriation of property of a company makes the Company insolvent or leaves a company incapable of discharging its liabilities under a lease or to contingent creditors then the same can be unwound. The risk is such appropriation of company property can leave a company at a point of no return and with an incurable deficiency in its assets (BNY Corporate Trustee Services Ltd v Eurosail [2011] EWCA Civ 227).

In so far as a company is (or was on the verge of becoming) insolvent, a Director has a duty to have regard to and so as to protect the general interests of creditors: GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch) (“GHLM”).

What therefore matters is how a Director causes or permits appropriation of a company’s property when in their hands, particularly when insolvent or when causing an insolvent position. Directors of a company are treated as trustees in respect of its assets, which come into their hands or under their control: GHLM at [148]. This has the consequence that, once it is shown that a director has received company property, the burden is on him to show that the an appropriation of a company’s property was proper: GHLM at [149].

In GHLM at [168], Newey J said: “If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty.”

Any exercise of a director’s powers for an improper purpose will be set aside regardless of the fact that a director honestly believed he was acting in the best interests of the company: Hogg v Cramphorn Ltd [1967] Ch 254.

The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same.

If you have a specific query then you should seek independent legal advice on the same.

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