Manolete Partners Plc v Clifford Norman Smith
| Jurisdiction | England & Wales |
| Judge | Burton |
| Judgment Date | 23 February 2022 |
| Neutral Citation | [2022] EWHC 364 (Ch) |
| Docket Number | Case No: CR-2020-003226 |
| Year | 2022 |
| Court | Chancery Division |
[2022] EWHC 364 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF CITY BUILD (LONDON) LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF ISS LONDON LTD (IN LIQUIDATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
The Rolls Building
London, EC4A 1NL
Insolvency and Companies Court Judge Burton
Case No: CR-2020-003226
James Hannant (instructed by CooperBurnett LLP) for the Applicant
Simon Hunter (instructed by HA Law) for the Second and Third Respondents
The First Respondent appeared in person
Hearing dates: 18 to 20 January 2022
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.
INSOLVENCY AND COMPANIES COURT JUDGE Burton
ICC Judge
This is the trial of an action brought by Application, originally dated 30 July 2020 and amended on 8 March 2021, by Manolete Partners plc as assignee of claims by Mansoor Mubarik (the “Liquidator”) in his capacity as liquidator of City Build (London) Ltd (“City Build”) and ISS London Ltd (“ISS”) (together the “Companies”).
The Applicant seeks relief against:
i) the First Respondent, Clifford Smith (“Mr Smith”) as a de jure director and the Second Respondent, Charles Dartmouth (“Mr Dartmouth”) as a de facto or shadow director of the Companies in the form of damages or equitable compensation for alleged breaches by them of their duties as directors of the Companies by causing or acquiescing in the Companies making payments between 19 September 2013 and 14 September 2015 (listed in Schedules attached to the Liquidator's witness statement dated 30 July 2020 (the “Payments”)) to Mr Dartmouth and/or Charles Dartmouth Limited (“CDL”) in circumstances where the Companies were under no legally enforceable obligation to make them, and that the Payments were therefore made in breach of trust; and
ii) against Mr Dartmouth and CDL, declarations that each of the Payments which post-dated 6 November 2013 were transactions at an undervalue within the meaning of section 238 of the Insolvency Act 1986 (“the Act”) and consequential relief.
Background
City Build was incorporated on 19 September 2011. Its sole director at the date of incorporation was Mr Dartmouth's son, Andrew Dartmouth. Mr Smith is recorded as having been appointed a director on 1 November 2012 with Andrew Dartmouth resigning the following day. City Build's records show that at the time of incorporation, there were 100,000 allotted shares with a nominal value of £1 per share. City Build's annual returns for the years 2012 to 2014 each state that the shares remain unpaid. The shares are shown as initially issued to Andrew Dartmouth, transferred on 1 February 2013 to Mr Dartmouth and transferred on 28 August 2013 to Mr Smith.
A resolution was passed on 6 November 2015 for City Build to enter creditors' voluntary liquidation and the Liquidator was appointed.
ISS was incorporated on 12 July 2012. Its sole director at that time was Claire Lucas whom Mr Smith described in his witness statement as his and Mr Dartmouth's secretary. Mr Smith was appointed as a director on 22 July 2013. Ms Lucas resigned on the same date. ISS's annual return states its entire issued share capital to be a single share, initially held by Ms Lucas and transferred in 2014 to Mr Smith.
The Liquidator was appointed to ISS on 6 November 2015 when it entered creditors' voluntary liquidation.
Mr Smith's written evidence states that the “overriding purpose” of each Company's business was to be engaged in business with Keltbray Limited (“Keltbray”).
The statements of affairs signed by Mr Smith on behalf of the Companies showed an estimated deficiency for City Build of £230,064 and £232,316 for ISS. The vast majority of the debts were said to be due to HMRC. It initially lodged proofs of debt for £23,391 for City Build and £32,694 for ISS. Since then, by an email to the Liquidator dated 11 January 2022, Mr Axeby, HM Inspector of Taxes informed the Liquidator that having received copies of the Companies' bank statements a day earlier, and having noted that neither Company submitted any returns during their trading history (and paid only £345 by way of a contractor's CIS deduction) and “having briefly reviewed the bank statements, it appears that the following estimated figures are owed to HMRC”. He sets out a table showing HMRC's estimated liabilities for each company in respect of PAYE, NIC, CIS tax and VAT and concludes that he has estimated City Build's total liability for tax to be £2,195,311.16 and £1,031,690.72 for ISS, to which, in each case, interest and penalties would apply.
Despite several requests, Mr Smith failed to provide the Liquidator with any books and records for either Company, other than what the Liquidator describes as “a series of inconclusive VAT calculations and a limited number of invoices”. He obtained copies of each Company's bank statements from which he identified several payments which appeared to be to Mr Dartmouth and CDL and which, in the absence of any books, records, invoices or receipts, were unexplained. The payments are variously described in the bank accounts as: “CHARLES DARTM(REHTS)”; “C DARTMOUTH BX WOODBRIDGE”; “C DARTMOUTH MATERIALS”; “C DARMOUTH LTD”; “CJ BE DARTMOUTH (RPY)”; “CHARLES DARTM(RENTS)”; “CHARLES DARTMOUTH”; “C DARTMOUTH BACS”.
The liquidator identified 68 such payments in respect of City Build between 18 September 2013 and 14 September 2015 totalling £853,476.83 – of which £545,216.62 took place in the two years preceding City Build entering CVL.
He has identified similar payments in respect of ISS. Between 28 March 2014 and 6 August 2014 (ie within two years of ISS entering CVL) payments totalling £831,530.57 were made in respect of entries bearing a Charles Dartmouth or CDL reference.
The total value of the Payments is £1,685,007.40 of which £1,376,747.19 were made in the period of two years before the Companies entered CVL (the “TUV Payments”).
It is not in dispute that each of the Payments was made, nor that one or other of Mr Dartmouth or CDL was the recipient of the Payments.
Relevant legal principles
The Applicant's application notice sealed on 3 August 2020 initially referred only to Mr Smith's alleged breaches of duties owed by him as a director of each of the Companies and/or for breach of trust.
By order of ICC Judge Jones dated 5 March 2021 the Applicant was permitted to amend its application notice to include damages and/or equitable compensation against Mr Dartmouth for breaches of duties owed by him to the Companies in his alleged capacity as a de facto and/or shadow director of the Companies and/or for breach of trust.
De facto / shadow director
The Companies Act 2006 (“CA06”) simply defines a director as “including any person occupying the position of a director, by whatever name called”. A person who has been formally appointed as a director is known as a “ de jure director”. A de facto director is someone who acts as a director but who has not been formally appointed as such. A de facto director is subject to the same duties and liabilities as a de jure director under common law, the Companies Acts and the Company Directors Disqualification Act 1986.
Section 251 of the CA06 defines the term “shadow director”:
“(1) In the Companies Acts ‘shadow director’, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.”
Helpful guidance on factors to assist in the identification of a person acting as a de facto director was given by Arden LJ (with whom Elias and Tomlinson LJs agreed) in Smithton v Naggar [2014] EWCA 939. At paragraph 33 she said:
“Lord Collins [in Holland v HMRC] sensibly held that there was no one definitive test for a de facto director. The question is whether he was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were director. However, a number of points arise out of Holland and the previous cases which are of general practical importance in determining who is a de facto director. I note these points in the following paragraphs.”
At paragraph 34 she continues:
“The concepts of shadow director and de facto are different but there is some overlap.
35. A person may be a de facto director even if there was no invalid appointment. The question is whether he has assumed responsibility to act as a director.
36. To answer that question, the court may have to determine in what capacity the director was acting, (as in Holland).
37. The court will in general also have to determine the corporate governance structure of the company so as to decide in relation to the company's business whether the defendant's acts were directorial in nature.
38. The court is required to look at what the director actually did and not any job title actually given to him.
39. A defendant does not avoid liability if he shows that he in good faith thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant's motivation or belief.
40. The court must look at the cumulative effect of the activities relied on. The court should look at all the circumstances ‘in the round’ (per Jonathan Parker J in Secretary of State v Jones).
41. It is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.
42...
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