Dickinson v. NAL (Realisations) Staffordshire Ltd is a useful case on how directors’ duties are looked at following a formal insolvency and ways in which an office holder can challenge transactions if there is evidence of wrongdoing or a concerted strategy to frustrate creditors’ recourse to a Company’s asset base which would ordinarily be available to them in an insolvency, subject of course to valid security and/or third party rights.

Interestingly the court, when analysing a potential breach of fiduciary duty, found that a director did not have to give priority to creditor interests under the general duties of a company director. This was a narrow finding that there was no breach of fiduciary duty in respect of a transaction which took place at a time when the company was solvent even though there was a recognised risk of an adverse event which might result in a large liability leading to insolvency.

The Court did however find against the director on a number of grounds in respect of several arrangements that he orchestrated which were adjudged to be transactions at undervalue (S.238 IA86) and/or transactions defrauding creditors (s.423 IA86)

Background

The case concerned an aluminum smelting company called Norton Aluminum of which the claimant was formerly a director. Norton Aluminum went into administration in 2012 following claims for nuisance brought by local residents being upheld in part by the High Court. The Company subsequently entered liquidation. The former managing director and controlling shareholder of the company brought a claim to recover various sums in the liquidation totaling circa £1m.

The liquidators brought various counterclaims against the former directors of the company including claims against the former managing director including:-

• seeking to avoid a transfer of the company’s factory premises made in 2005 on the basis that it was not properly authorised according to Section 18 of the Companies Act 2006, and

• seeking on various grounds, to set aside or recover compensation for transactions entered into in 2010 and thereafter in which:

  • The company bought back most of its shares from the former managing partner and connected parties for £2.5m, which was left outstanding as a secured loan,

  • The company sold a subsidiary (Norse Castings Ltd or “Norse”) to the former managing partner at an alleged undervalue; and

  • The company made further investments in, loans to and made supplies on credit to a related company in India, notwithstanding that former managing partner had arranged that shares in that company be issued to him (paid for out of the proceeds of the share buy-back) such that he became the majority shareholder.

These transactions, it is said, formed a scheme by which the former managing director restructured the affairs of the company to effectively defraud creditors and buy back the business from the eventual office holders. The Liquidators challenged the transactions on various grounds including breach of duty, transaction at undervalue and transaction to defraud creditors.

Findings

Sale and leaseback of factory site

The Court analysed the arrangements employed to effect the sale and leaseback and held that the transaction was at an undervalue. There was no independent valuation to support the price paid and the evidence suggested that no real benefit was derived by the company from selling the site of the factory; therefore the transaction was not in the best interests of the company and void.

Share buy-back

A limited company could not purchase its own shares except in accordance with s.18 of the Companies Act 2006. When consideration is not paid at the time of a transaction this does not amount to payment ‘on purchase.’ The loan arrangement in respect of the share purchase was entered into with the purpose of diluting the Company’s assets and by securing the loan debt in favour of the managing partner put the assets out of reach of creditors and therefore prejudiced their interests. Accordingly the transaction was deemed to fall foul of section 423 IA1986 as being an arrangement defrauding creditors.

However, interestingly the Court found that the former managing partner’s removal of circa £2.5m of net assets from the Company’s asset pool at the relevant times did not place the company on the verge of insolvency. It was trading healthily and had sufficient capital to enter into the arrangements; at the time. The court considered BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch) and concluded that the general duties of directors did not require directors to give priority to creditors simply because they recognised a threat of adverse events which may cause a liability leading to insolvency. Accordingly there had been no breach of fiduciary duty in that respect.

The share buy-back and the sale of the subsidiary for a nominal sum were adjudged on the evidence to have been sales at undervalue and part of the former managing partners attempts to put Company assets out of reach of creditors. Therefore he was liable under section 423 IA1986.

Summary

In circumstances where technically there has been no breach of fiduciary duty by a director because of the financial environment of the Company at the relevant time there may still be grounds for the arrangements to challenged. Office holders investigating dilution of a company’s assets should not necessarily be disparaged if there appears to be no breach of fiduciary duty. There may still be alternative actions that can be deployed to enable recoveries.

Directors must be careful to ensure all transactions are validly authorised and that the purpose behind them is genuinely in the best interests of the Company. This can and should be properly explained in minutes of board meetings and backed up with independent valuations, where necessary.