Fraudulent Trading Without A Positive Act

The case of Stacks Living Ltd & Ors v Shergill & Ors [2025] EWHC 9 (Ch) shows how a positive act is not required for fraudulent trading.

This is a good case for a director to consider as it shows a number of issues that directors should be aware of such as matters of credibility, director abdication of responsibility and how fraudulent trading can arise without a positive act.

The liquidators brought an application about two companies run by Balvinder Shergill that went into compulsory liquidation. In relation to one of the companies Mr Shergill was for a period a de facto director.

The liquidators’ claims were for fraudulent trading, wrongful trading and payments made by the companies that were unexplained or deemed unjustified, which perhaps highlights why directors need to keep company records.

Credibility Of Witnesses

The Court had this to say about matters of credibility:

On behalf of the Applicants, it was accepted by Mr Fagan (and I too accept) that Miss Smith was an honest witness, who did her best to assist the court, although, as I will explain, she failed completely to appreciate or act according to her duties as a director of Staffs.

By contrast however, Mr Shergill’s evidence was neither honest nor helpful – it was characterised by a repeated failure to recall anything at all about significant events potentially unhelpful to his case, and by inconsistencies and self-contradiction, but more than that, it was fundamentally inconsistent in crucial respects with known facts and documents. I shall explain the numerous deficiencies in his evidence in the explanation of my findings.

Fraudulent Trading With No Positive Act

For a finding of fraudulent trading, the court needs to find an intention to defraud creditors rooted in dishonesty:

In summary, in the present case under section 213, the court must find an intent to defraud a creditor or creditors, involving actual dishonesty and real moral blame according to the objective standards of fair trading among ordinary decent, commercial people.

Mr Shergill had been a director of some companies and as the Court noted:

Plainly, apart from his involvement in relation to the “Houghton” companies, Mr Shergill had, by 2012/2013, acquired some experience as a director of several companies, and of the protection from personal liability that they afforded (or might have seemed to afford) their directors and owners, even where insolvent; in addition, he had acquired personal experience of certain liabilities to HMRC which a company might involuntarily come to owe.

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My conclusion, for the following reasons, is that Mr Shergill operated the business of Stacks, and the subsequent business of Staffs, with “intent to defraud” the Council and/or HMRC (acting in each case with actual dishonesty and real moral blame) such that he is liable to make a contribution to the Companies’ assets.

From the background, I draw the following conclusions.

83.1. Mr Shergill has had, since at least 1992, experience acting as a director and shareholder of a company. Before the incorporation of Stacks, he had been a director of at least eight other limited liability companies, three of which went into insolvent creditors’ voluntary liquidation, and at least two of which were dissolved, without prior liquidation, but whilst insolvent (or at least, without having paid their debts); he had experience of “involuntary” creditors, such as the Council, and HMRC. More generally, he has been involved in commerce of one sort or another for over forty years.

83.2. The business of “Houghton Furnishing” was operated over the course of about five years through three different companies. Each was owned, operated and managed by Mr Shergill – it was his first sole venture, without the involvement of his brothers or father; each failed to meet its obligations to pay NDR to the Council, and in each case the Council was forced to resort to enforcement action, including instructing bailiffs and issuing summonses; each was dissolved, and in respect of Stafford and Net, the Council was compelled to write off substantial debts – as Mr Shergill knew. As I have said, I infer that Mr Shergill concluded that it was possible by this method to trade with impunity at the expense of the Council (and possibly others), to avoid any personal liability, and to escape payment of unaffordable, historic debt.

83.3. Mr Shergill intended to use (and in fact used) the same method in respect of the “Stacks” business, which was operated from the Premises (without any real distinction between the business of each company) first by Stacks, then Staffs, and then Montgomery, the latter both “phoenix” companies, albeit that in respect of Montgomery, there was an attempt to conceal the truth of Mr Shergill’s control by means of Jack’s nominal appointment as a director, and possibly, to some extent, a similar attempt by means of Miss Smith’s brief appointment as a director of Staffs.

83.4. The attempt to have Stacks struck off the register in February 2018 was (albeit ultimately thwarted) a deliberate step in a conscious attempt to evade payment of outstanding debt, to avoid liquidation and the scrutiny of a liquidator, and to continue the same business through Staffs, shorn of historic debt; it was part of Mr Shergill’s overall scheme.

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Finally, although as I shall explain, the scope of the appropriate remedy under section 213 is not affected by the position of HMRC, it was also the Liquidators’ case that the Companies had carried on business with intent to defraud HMRC, essentially, by their failure to register to pay VAT, PAYE or NIC, and their failure to maintain the financial records to allow the Liquidators to understand the extent to which HMRC were creditors who ought to have paid.

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In my judgment, Mr Shergill was conscious (if for no other reason than by virtue of his previous experiences) that liabilities to HMRC either did or might arise, but chose deliberately to foreclose (and obscure) that possibility by failing to take advice and by choosing not to register for VAT, NIC or PAYE; the absence of records makes it now difficult if not impossible to know the extent to which, if at all, net liabilities might have been incurred but gone unpaid. In my judgment, Mr Shergill deliberately engineered that outcome because he had no intention of exposing the Companies to the risk of liabilities which he had no intention of causing them to pay (and possibly no means of paying); that approach would be consistent with the essence of the scheme which he attempted to operate through the Companies, which was to trade at the expense of involuntary creditors.

Director Abdication Of Responsibility Is A Breach Of Duty

If a director steps in for another person but does not supervise the financial affairs of the company they have been shown to breach their director duties and cannot then rely upon relief available under Section 1157 of the Companies Act 2006 to avoid liability for a breach of duty:

In the present case, in respect of the claim concerning payments by Staffs, Miss Smith sought to rely on section 1157, on grounds that despite her unwillingness, she had been prevailed upon to become a director of Staffs by her partner, and given in that regard only the “illusion of choice”; that she had been a director for a comparatively short time; and that during that time, she had neither been nor had she been expected to be, responsible for the conduct of the business, in which she was wholly uninvolved.

As a matter of principle, that submission fails, despite in this regard, Miss Smith’s honesty. In Lexi Holdings Plc (In Administration) v Luqman [2007] EWHC 2652, it was held by Briggs J (as he then was) that complete inactivity by a director was by definition unreasonable, and precluded reliance on section 727 of the Companies Act 1985 (which was in the same terms as section 1157 of the CA 2006). At [219], Briggs J said:

“… it is in my judgment now firmly established as a matter of law that no company director may simply leave the management of the company’s affairs to his or her colleagues, or to other delegates, without committing a breach of duty. The reason for this is because, although the law permits and to an extent encourages delegation by directors of their functions, every act of delegation gives rise to a concomitant obligation to supervise the delegate… every director had to take such care as an ordinary man might be expected to take in relation to his own affairs.”

Even without that authority, I would have reached the same conclusion. Neither (for the sake of completeness) was the defence under section 1157 available to the Respondents in respect of the case against them under section 214 of the IA 1986 (see Re Produce Marketing Consortium Ltd [1989] 1 WLR 745, at 750E-752A) or, for obvious reasons, given the need to show dishonesty, in respect of the case against Mr Shergill under section 213 of the IA 86.