Can The Official Receiver Bring Claims Against A Director?

Can The Official Receiver Bring Claims Against A Director Overview

The answer to the question Can The Official Receiver bring claims against a Director? is yes they can.

Whilst it seems relatively rare to see the Official Receiver appearing in reported case listings having issued legal proceedings against a Director, the case of Official Receiver & Anor v Nadeem (Re Bodystretch (UK) Ltd – Insolvency Act 1986) [2023] EWHC 2735 (Ch) shows it can happen.

The Company ceased trading at the end of September 2015, shortly after selling its main asset a property for £725,000, receiving £426,382.82 by way of net proceeds of sale on 21st September 2015. It then went into Compulsory Liquidation on 10 May 2016 and the claim was not issued until 8 March 2021.  

The case has several notable features. It involved claims brought by the Official Receiver as Liquidator concerning payments from Bodystretch (UK) Limited (“the Company”) that were said to be a breach of duty and or a transaction at undervalue and or a Preference.

A Relatively Rare Event

Why is the case notable? Well, apart from the fact that it is a relatively rare event for the Official Receiver to go to trial on such claims the case shows the importance for a Director facing claims, to inspect company records to support the assertions they might look to rely upon, otherwise they risk having their evidence substantially rejected:

I am unable to accept Mr Nadeem’s evidence at face value. Had it been true I have no doubt he would have applied himself to examining the Company’s records when the opportunity was given to him so as to find documentary evidence to support his case. He did not do so.

The case was a classic one about payments and the duty of a Director to be able to evidence entitlement to monies they receive from a company. The case at its core was about payments made to Mr Nadeem (the Director) and also third parties after the company had sold its main asset (the company premises).

Why A Director Needs To Inspect Company Records

Given the duty of a Director to be able to justify payments made by a company, particularly when it is insolvent and when the Creditor Duty kicks into effect, the importance at such a point in time to be able to provide documentary evidence seems all the more pertinent.

The judge highlighted the opportunities offered to the Director to inspect the company’s records which were many but it seems no inspection took place:

Mr Nadeem’s reply to that was not to make an appointment but to complain of Ms Ahmed’s “infernal nerve” in telling him what the Official Receiver’s role was. He said that he would not correspond with her office again, other than to look at the Company’s books and said that he had “made a complaint”. He did not seek to make an appointment and said in his evidence that this was because he had only been offered one date. He did not, in the correspondence that I have seen, suggest any other date or dates.

… Mr Nadeem said that by this point it was too late and copies should have been offered before. In fact they had been, albeit obliquely, in Ms Ahmed’s email of 29th March 2021. Mr Nadeem had offered no alterative proposals for inspection and nor did he ask for sight of any particular documents, or classes of document, despite having been provided with an inventory describing the contents of the boxes held by the Official Receiver in general terms.

What the correspondence shows is that Mr Nadeem was willing to engage assertively with the Official Receiver’s staff, who made reasonable proposals for him to inspect Bodystretch’s records. Mr Nadeem, in my judgment, was more than able to arrange to inspect the records at a location convenient to him, or to identify categories of documents to be copied for him. He conspicuously avoided doing so, preferring instead to express a degree of indignation at the Official Receiver’s approach.

… I cannot infer that there is anything in the records of the Company that would assist Mr Nadeem or undermine the Official Receiver’s case where Mr Nadeem has had ample opportunity to inspect those records and identify the documents available that would support his case. He has chosen not to do so.

The Burden On The Director

It seems the way the Director may have approached this litigation might have been to look to put the burden on the applicant (the Official Receiver) to prove its case. However, the problem is that may overlook the rule in Toone & Anor v Robbins & Anor [2018] EWHC 569 (Ch) that once a Liquidator has proven a payment was made the burden shifts to the respondent Director:

I take as my starting point the ruling of the Chief Registrar that there was an absence of clear evidence one way or the other, so that he had to decide the matter on the burden of proof. The nature of the burden of proof was conveniently summarised by Lesley Anderson QC in Re: Idessa (UK) Ltd [2011] EWHC 804 (Ch) at paragraph [2] in this way: –

“I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate that [Counsel] is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for [Counsel] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes”

The point was perhaps notably highlighted as an issue as follows:

…he has not produced evidence from his father or his accountant to corroborate the making of the loan, and said that he did not know that he could. Nor has he produced any bank statements, which would have been the most obvious way to evidence the alleged sums being paid. I am satisfied that, had this loan been made, Mr Nadeem would have been able to produce some evidence of it. There is simply none.

I do not accept that there was an outstanding loan due to Mr Nadeem, or indeed his father, in respect of the Property purchase. Nor do I accept that any payment towards its acquisition was made by them. Mr Nadeem’s alterative case on the alleged payment to acquire the Property – that the payment gave him and his father an interest in the Property under a trust so that they were entitled to a share of the proceeds, which does not sit comfortably with his primary position that he and his father made a loan, cannot therefore succeed in any event.

…

There is no evidence of a salary having been approved for Mr Nadeem by a resolution of the Company as required by article 83 of the articles of association. Mr Nadeem stated that drawing a salary was “for work that you do for a company”, but that is to misunderstand the position. A director, while an officer of the company, is not necessarily its employee. Where, as here, the director is also a shareholder, it may be that he or she will received dividends out of distributable profits. That has not been said to be the arrangement here.

No evidence has been adduced from Mrs Nadeem, as her husband’s fellow shareholder, to show that she assented, whether formally or informally, to the remuneration of her husband. There are no minutes of members’ meetings to evidence such assent and no contract of employment has been produced or otherwise evidenced. Indeed, the amounts and dates of payment since March 2014 do not suggest a regular payment by way of salary. They instead appear to be ad hoc payments, presumably taken as and when Mr Nadeem wished. It follows that in the absence of a relationship of employee and employer between Mr Nadeem and Bodystretch, or other entitlement to remuneration, that Mr Nadeem was not entitled to redundancy pay.

Mr Nadeem also says that he was due to be reimbursed expenses incurred on behalf of the Company. While the reimbursement of expenses is provided for in the articles of association there is simply no satisfactory evidence of such expenses being incurred in the first place. Mr Nadeem has not explained what these related to. In the absence of any evidence from Mr Nadeem, as a fiduciary, to show the propriety of these payments, they fall to be repaid to the Company.

Payments Made To Third Parties

Payments made to various third parties were rejected by the Court as to the commercial rationale in the evidence for them.

The Court said:

These payments plainly constituted preferences. It is self-evident that the six parties who received monies from the Company were bettered by the payments, assuming that they were creditors at all. They received payment while other creditors were left to await the outcome of a recovery from Arcadia Group, which was wholly unrealistic. Mr Nadeem knew, as indeed he accepted, that Arcadia was not going to pay the Company and it was therefore not going to be in a position to meet further orders. There was no commercial basis to pay these creditors given that the Company could not continue to trade, having disposed of its trading premises, dismissed its staff and having, it seems, no plan to allow it to continue in business. The only inference is that these creditors were selected in order to place them in a better position than the general body of creditors on an insolvent liquidation, and indeed such an intention is presumed in the case of Mr Nadeem senior. Again, I cannot accept that Mr Nadeem considered the interests of the general body of creditors at all. A reasonable and honest director could not have come to the conclusion that these payments could have been made. The only proper course would have been to enter an insolvency process so as to enable creditors to be paid pari passu.

Equal Treatment Of Creditors

It is apparent in this case that the Court seemed concerned upon the sale of the Company’s premises with how those proceeds were then deployed when the Company was insolvent:

I cannot find Mr Nadeem to have acted reasonably here. On no basis can it have been reasonable in the face of the insolvency of the Company and inevitable cessation of business to have dissipated the proceeds of sale to a group of creditors and to himself. Even if one were to accept that there was some prospect of a recovery in relation to Arcadia Group or C&A, and even if that would have allowed for full recovery by those creditors, Mr Nadeem’s actions had the effect of throwing the risk of there being no recovery onto those creditors. That is not so much an “informal winding up” as a wholesale subversion of the principle of equal treatment of creditors on an insolvent winding up. As I have said, I was not given any evidence that might justify an equitable allowance to reflect an appropriate level of remuneration for Mr Nadeem that might similarly allow a partial relief from liability. In my judgment there is no basis on which to grant relief, in whole or in part, to Mr Nadeem.

From a review of the judgment, it might be considered surprising, that the case went to trial.

Regardless of whether or not a case is to be decided on the burden of proof perhaps a helpful highlight from this case is the proposition that if you wish to rely upon a positive assertion where you have acted in the capacity of a fiduciary when it might be perceived you could readily obtain evidence in support of it, then with some alacrity you might want to seriously consider deployment of the same to bolster your position.