Dormco SICA ((in Liquidation)) v S B L Carston Ltd
| Jurisdiction | England & Wales |
| Judge | Jones |
| Judgment Date | 01 December 2021 |
| Neutral Citation | [2021] EWHC 3209 (Ch) |
| Docket Number | CASE NO: CR-2017-006695 |
| Court | Chancery Division |
[2021] EWHC 3209 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (CHD)
IN THE MATTER OF DORMCO SICA LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF THE INSOVENCY ACT 1986
Remote Hearing
INSOLVENCY AND COMPANIES COURT JUDGE Jones
CASE NO: CR-2017-006695
and
Mr David McIlroy (instructed by Glaisyers Solicitors LLP) for the Respondent
Mr Munn and Mrs Munn in person
Hearing dates: 4, 6–8 and 11–12 October 2021
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
…………. CHJ 1/12/21 …………….
INSOLVENCY AND COMPANIES COURT JUDGE Jones
I.C.C. Judge
JUDGMENT SUMMARY
This is one of those cases for which many hoops have to be jumped through before the outcome can be determined. The result is a lengthy judgment showing how I have reached my decision. However, I am conscious that Mr and Mrs Munn are not represented and, bearing in mind the impact this judgment will have upon them, I have decided to provide the following summary of the outcome of the judgment below. I must emphasise, however, that my decision is reached for the reasons stated within the judgment.
In summary:
Mr and Mrs Munn and Mr Rees, ETL, SICA and SBL entered into a series of inter-linking contracts. The overall arrangement was that ETL would buy 40% of CHL's shares when CHL owned two subsidiaries, SICA and SBL and (in essence) SICA had “hived across” its business to SBL whilst retaining its liabilities.
Under the terms of the Share Purchase Agreement, Mr and Mrs Munn and Mr Rees received the initial consideration for their CHL shares from ETL totalling circa £2.3 million between them and the possibility of further consideration of circa £0.575 million to bring the total to circa £2.875 million. This valuation of CHL's shares was attributable to the fact that although SBL now owned SICA's business assets and SICA retained the liabilities, SBL had paid relatively little for the business. In particular it had purchased the Goodwill sold by SICA for only £1.00. The price paid for those CHL shares would have been substantially reduced otherwise. This occurred in the context of SICA having substantial creditors who would not be paid because only £1.00 was received for this intangible asset.
I cannot accept that the Goodwill was only worth £1.00. The defence seeking to justify that consideration by distinguishing between the Goodwill sold and the personal goodwill of or attributable to Mr Munn and Mr Rees has to be rejected. The reasons include the facts that: there is no reference to this distinction in the contemporaneous documents including the 6 February 2015 contracts; the accounts record that SICA had purchased goodwill from two businesses in 2013 for over £3 million; and the factual evidence does not support the existence of personal goodwill either in terms of ownership belonging to Mr Munn and Mr Rees or in terms which would produce the result that the value of the Goodwill sold should be reduced to £1.00 because of the consideration needed to be paid to ensure they remained with the Business.
That being so, the creditors of SICA have lost out because SICA did not receive the money it ought to have received for the purchase of its Goodwill. Instead, Mr and Mrs Munn have benefited by the amount of the consideration paid for their CHL shares which is attributable to the fact that SBL only paid £1.00 for the Goodwill. Whether viewed from the perspective of the contract for the sale of the business (including the Goodwill) between SICA and SBL only or from the perspective of the overall arrangement, the wide discretionary power conferred by ss.423–425 of the Insolvency Act 1986 enables the Court to order Mr and Mrs Munn to pay to SICA the amount of that benefit. It is right to make that order.
Mr Rees has not been sued and is not a party. However, that does not prevent the order to be made. It is not dependent upon any decision being reached concerning the liability of Mr Rees to contribute.
In addition, Mr Munn, as a director of SICA, must bear responsibility because he breached his duties by allowing SICA to enter into a sale at an undervalue. He must provide compensation for that breach, namely the amount SICA ought to have been paid less £1.00.
There is no need to refer here to the breach of warranty claim.
In these circumstances SBL is able to claim a contribution having settled the claim against it by SICA. I am satisfied it is a bona fide settlement.
The judgment follows:
I.C.C. Judge
A) Introduction and the Application to Adjourn
On 6 February 2015 a series of agreements (“the Agreements”) were entered into to achieve: (i) a “hive across” sale of the accountancy business (“the Business”) of Dormco SICA Limited (“SICA”) to SBL Carston Ltd (“SBL”) for £141,201; and (ii) to enable ETL Holdings (UK) Ltd (“ETL”) to become a 40% shareholder of the parent of SICA and SBL, Carston Holdings Ltd (“CHL”). ETL purchased those shares from Mr and Mrs Munn and Mr Rees for a circa £2.3 million initial payment rising, subject to performance, to potentially just under £2.8 million. ETL is ultimately owned by the ETL Group, apparently one of Germany's largest accountancy practices.
Mr Munn was a director of SICA, SBL and CHL at the time of and after the Agreements. Mr Rees, who is not a party to this claim, was: (i) a director of CHL before and after the Agreements; (ii) a director of SICA from its incorporation on 13 August 2010 until completion of the Agreements; and (iii) appointed a director of SBL on completion of the Agreements on 6 February 2015, from which date it started trading. He is SBL's managing director and remains a CHL shareholder. Mr and Mrs Munn's CHL shares have been forfeited in circumstances which fall outside the scope of this trial.
On 30 October 2017 the Court ordered that SICA should be compulsorily wound up. From the perspective of its joint liquidators the sale of the Business was a transaction at an undervalue designed for the purpose of putting assets beyond the reach of SICA's creditors. In particular, SBL had paid a mere £1.00 for the goodwill purchased (“the Goodwill”) when it was worth substantially more than £2 million. That was because, they asserted, the true value of the Business had been included in the share purchase price paid to Mr and Mrs Munn and Mr Rees, an initial consideration of circa £2.3 million, potentially increasing to circa £2.8 million. In 2019 the liquidators started proceedings against SBL relying on section 423 of the Insolvency Act 1986 (“ s.423”). That required them to prove that its purchase of the Goodwill was for a consideration significantly less than its value and for the purpose (“the Prohibited Purpose”) of placing that asset and value beyond the reach of a person who is making, or may at some time make, a claim against it or for the purpose of otherwise prejudicing the interests of such a person in relation to the claim which they are making or may make.
The claim was defended by SBL but without prejudice to their defence on 3 December 2019 they brought a Part 20 claim for an indemnity or contribution from Mr and Mrs Munn, not Mr Rees. SBL relies on the Civil Liability (Contribution) Act 1978 (“ the 1978 Act”) by asserting that Mr and/or Mrs Munn are responsible for the same damage as SICA alleged against SBL. That liability arose under s.423 and/or because Mr Munn breached his fiduciary duty as a director of SICA by causing it to enter into a sale of the Business (“the Asset Sale Agreement”) at an undervalue and for a Prohibited Purpose. In the further alternative, SBL claims Mr and Mrs Munn should provide an indemnity or contribution under the 1978 Act because they breached various warranties provided by them to SBL in the Asset Sale Agreement. In summary, four warranties were breached by the failure to disclose that a connected company, Dormco Candco Limited (“Candco”), was still owed a liability of £1.8 million at the time of the Agreements. This was the consideration for the goodwill it had transferred to SICA in 2013. Further or alternatively breach resulted from the non-disclosure of facts which gave rise to the potential for a s.423 claim.
This is not the only litigation resulting from the Agreements. On 23 April 2021 ETL obtained summary judgment for an assessment of damages against Mr and Mrs Munn in a claim alleging fraudulent misrepresentation concerning the CHL Share Purchase Agreement and/or breaches of their warranties. The headline descriptions of the breach of warranty claims addressed in the judgment are: breach of warranty in failing to disclose a debt owed by CHL to Candco; breach of warranty in failing to disclose that CHL had declared and paid an unlawful dividend; breach of warranty in failing to disclose the fact of investigations by HMRC; and breach of warranty arising from the failure to disclose that the 2014 Dividend could give rise to a dispute with HMRC. The assessment was listed over two days starting 3 November 2021.
On 24 September 2021 SBL accepted SICA's Part 36 offer made on 27 July 2021 whereby it would pay £2,650,000 in settlement of SICA's claim. That left the Part 20 claim by SBL against Mr and Mrs Munn for this trial. On 29 September 2021 SBL issued an application to adjourn the trial and for it to be heard instead by the Chancery Master determining the ETL assessment of damages. Mr and Mrs Munn agreed to this...
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