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Directors have duties and if they breach those duties they can be held liable for the consequences of such a breach.

Introduction To Director Breach Of Duty

Insolvency litigation can arise in cases when Directors appear to have breached their duty to their companies. This is known as misfeasance and a Liquidator may bring legal proceedings against a Director to seek to recover the company’s losses arising from such a breach.

In cases of insolvency litigation that arise due to a Director failing to comply for example with their Companies Act 2006 duties, significant losses can arise in instances of insolvent companies. Directors’ duties have been codified in the Companies Act 2006.

In the case of Wexham Drinks Ltd v Corkery [2005] EWHC 1731 (Ch), Oliver Elliot’s CEO, Elliot Green was the Liquidator that successfully brought the legal proceedings due to a Director breach of duty.

Wexham Drinks v Corkery

This was a Director breach of duty case in which Mr Corkery transferred the trade of Wexham Drinks to a new phoenix company, Superstrokes Limited and in the process transferred book debts along with the trade.

Judgment:

  1. This is the hearing of an originating application brought by the first applicant (“the Company”) and the second and third applicants (“the Liquidators”) in which they claim a declaration that certain book debts of the Company were appropriated by the Respondents and that they are entitled to appropriate relief. The facts are briefly as follows

  2. The Company was incorporated on the 13thof August 2001. It supplied ‘slush puppy’ soft drink dispensing machines and other products including paper cups and syrup to its customers, operating under the trade name “King Kwench”. Mr Corkery was a director of the Company from its institution until March of 2002 at which date he says he was compelled to resign by both his fellow director and the company accountants for what was described as tax reasons. He continued however in much the same role as before, in a managerial capacity subject to the overall direction of the remaining sole director, a man called Mr Barney Curley.

  3. At the end of its first accounting period the draft accounts of the Company disclosed a balance sheet deficit of just over £70,000. It seems to be the case that the overall business was profitable, but it had been formed with an injection of over £420,000 of capital from a company called Curley Leisure Ltd and the deficit was due in the main to the liability to repay those loans.

  4. It appears, from evidence which was given orally before me by Mr Corkery, that in early July 2003 he and Mr Curley decided to go their separate ways. An oral agreement was made between them of which – surprisingly – there is not a single piece of documentary evidence. The agreement was that Mr Corkery would leave the Company and set up in business on his own account taking with him twenty seven of the two hundred or so customers of the Company and in consideration for this he would pay Mr Curley the sum of £60,000 per annum for each of the following three years. It seems also to have been agreed that Mr Corkery should take steps to recover the debts owed by those twenty seven customers and pay the proceeds to Mr Curley personally; Mr Corkery was also given permission to help himself to such of the Company’s stock of syrup as he wanted but, he said that he took only 50 cases. He understood that the Company would then cease to trade and proceed to an orderly liquidation and dissolution.

  5. For his part, Mr Corkery intended to start up in business with a newly incorporated company called Superstrokes Limited using the trade name “the Slush Company” with effect from 31stJuly 2003. On that day an announcement was made unofficially to the handful of employees of the Company that they would be made redundant with effect from 29th August 2003; Mr Corkery planned to trade from the Company premises until 29th August with whatever assistance he needed from the Company’s employees (though there was apparently little call on them).

  6. In pursuance of this agreement, at the direction of Mr Corkery, the company book keeper sent a letter dated 23rdJuly 2003 to the customers of the Company in the following terms:

Dear Customer,

This letter is to inform you that, as from the 31st of July, our company will change its name from King Quench to the Slush Company. This is purely a commercial decision and will not affect your terms and conditions in any way.

At some time during the first two weeks of August, one of our staff will visit your location to provide you with all new Point of Sale material and a new loan agreement for you to sign. As of this date all outstanding invoices and all new invoices should be made payable to the Slush Company. From those of you who paid by means of BACS payment the new account details for your remittance are as stated below ….”

  1. It is clear that at least some of the customers of the Company who received this letter responded by discharging the debts which they owed to the Company by making payment to the Slush Company. The Liquidators have identified a number of payments amounting to a sum in excess of £29,850. I am satisfied on the present evidence that the sum of £28,453.80 represents the value of the Book Debts referred to in Application.
  2. In the result, on 29thAugust 2003, according to Mr Corkery, Mr Curley froze the Bank Account of the Company, terminated the employment of all remaining employees and ceased to trade. On 24th November 2003 a winding up Order was made against the Company and on 11th March 2004 the Second and third Applicants were appointed Joint Liquidators over the Company. In a statement dated 23rd March 2005 the second applicant has stated that the level of creditors who have submitted a claim within the liquidation is £455,987.92. Of this, £14,590 is claimed to be due to H.M. Customs & Excise; £420,630 is claimed by Curley Leisure Limited, in respect it seems of capital introduced by Mr Curley’s company into the business. The remaining £20,000 or so appears to be due to other trade creditors.
  3. Mr Corkery moved the Slush Company on 1stSeptember 2003 to the garage at his own home until he found new premises from which he continues to trade. The business has now grown and has over one hundred customers and he now carries it on with the benefit of two former employees of the Company.
  4. On the basis of the above, the Applicants contend, inter alia, that Mr Corkery was in breach of his fiduciary duties to the company, was guilty of misfeasance and breach of trust; he must therefore provide an account of the monies which were diverted from the Company and repay them. They say that the position is worse than they had thought: until Mr Corkery gave evidence they had thought that he had taken only the book debts of the Company but now it is clear that by taking twenty seven of its customers he has taken also the Company’s good will and part of its business.
  5. As against the Slush Company they say that, because Mr Corkery is the directing mind of that company, his knowledge is imputed to it; it therefore received the Company’s property with actual knowledge of its provenance so as to make it unconscionable for it to retain the property. They seek an order that the Slush Company is liable to account to the Joint Liquidators for the Book Debts, including but not limited to the sum of £29,858.93, as a constructive trustee on the ground of knowing receipt of trust property transferred in breach of trust.
  6. , Mr Corkery admits that by virtue of his position, he was under a fiduciary duty to the Company equivalent to that imposed on a director. He contends that he was not in breach of that duty because, had Mr Curley not unexpectedly frozen the Company’s Bank Account on 29thAugust 2003 there would have been an orderly transition to him of the business, the Company would have been wound up and no one would have been the loser.
  7. He also argues that the Company has failed to show that it has suffered any loss: this argument is based on his evidence, supported by documentation and evidence from Miss Chapple, that he and his wife have paid some of the debts which would otherwise have fallen upon the Company in the total sum of over £84,000. That arises in large part because he assured the Company’s former suppliers that he would discharge the Company’s debts to them and would continue to use them. He paid other debts, such as those to former employees, because he felt a moral obligation towards them after they had been treated badly by Mr Curley.
  8. I mention in passing that this Application has been advanced by the Liquidators against Mr Corkery alone. They have chosen not to join Mr Curley for reasons which do not stand up to examination. Mr Corkery has recently issued Pt 20 proceedings for service on Mr Curley. Because Mr Curley has not appeared, I propose to confine my observations and findings to the position of Mr Corkery alone.

The Duty on Mr Corkery:

  1. The extent of the duty, to which Mr Corkery was subject, is not in doubt. It comprised three elements first a duty to act bona fide in the best interests of the Company; second, to act for a proper purpose and not to act for a purpose collateral to the purposes conferred by the Company’s Memorandum and Articles; and thirdly, not to act so as to place himself in a position in which his personal interests did or might conflict with the interest of the Company.

  2. Although his experience as a director of a company under the Companies Act was gained in fairly small companies and has lasted for only a few years, I am quite sure that he knew well enough that he was not entitled to appropriate to a business of his own the Company’s property and use it for his and its own purposes. By taking the Company’s book debts and goodwill in order to use them for the collateral purpose of starting up his own business, he was in breach of all three elements of his fiduciary duty and acted in breach of trust. As a director of the Slush Company, Mr Corkery’s knowledge that the property was trust property transferred in breach of trust is imputed to that Company. It also received the property as a volunteer and gave no consideration for it.

  3. I reject also the contention that the Company has not suffered any financial loss. First of all, the Liquidators are aware at the present time of only a limited number of instances, where the book debts of the Company have been diverted from the company, amounting to just under £30,000. There may be more. Quite apart from this, they were unaware, until Mr Corkery gave oral evidence, of that part of the arrangement whereby the Slush Company appropriated the business of customers of the Company without payment. Even if it were to transpire that the payments made to creditors of the Company exceeded the value of the property of the Company which he appropriated, that misses the point. The Company was entitled to expend its own money and where, as here, it was insolvent, was obliged to do so with due respect to the appropriate priority of creditors.

  4. In the alternative, Mr Corkery seeks relief under section 727 of the Companies Act 1985 on the grounds that he was not dishonest, acted reasonably and but for the action of Mr Curley (in closing the account in breach of the agreement) there would have been no loss to the Company or its creditors. Whatever Mr Corkery says about his overall motives, I cannot accept that he was not dishonest nor that he acted reasonably. Accordingly, in my judgment it is not appropriate to excuse him or relieve him from liability in respect of his respective defaults.

  5. In these circumstances, I am of the view that the claimants are entitled to a declaration against both Mr Corkery and the Slush Company in the terms of paras 1 and 6 of the prayer for relief in the Originating Application, that is to say that the respondents are both liable to account to the second and third applicants for the book debts.

  6. Since it is clear to me that the debt owed by the Company to H.M. Customs & Excise must have priority to any debt owed by Wexham to any of the other creditors of the Company, whom the respondents claim to have paid, I conclude also that there must be an order against both respondents that they should pay the sum of £14,590 to the first and second applicants forthwith.

  7. I propose to hear further argument from counsel as to what other relief in the Originating Application ought to be incorporated in the Order.

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