Mark Simon Reynolds (as Liquidator of CSB 123 Ltd) v Caroline Stanbury
| Jurisdiction | England & Wales |
| Judge | Barber |
| Judgment Date | 23 September 2021 |
| Neutral Citation | [2021] EWHC 2506 (Ch) |
| Docket Number | CR-2019-006007 |
| Court | Chancery Division |
[2021] EWHC 2506 (Ch)
ICC JUDGE Barber
CR-2019-006007
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF CSB 123 LIMITED (IN LIQUIDATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
7 The Rolls Building
Fetter Lane
London
EC4A 1NL
Hugo Groves (instructed by Blake Morgan LLP) for the Applicant
Andrew Trollope QC and Elaine Palser (instructed by RPC) for the Respondent
Hearing dates: 26, 27, 28, 29, 30 April and 4, 5 May 2021 (followed by further written submissions)
Approved Judgment
This judgment was handed down remotely by circulation to the parties' representatives by email. It will also be released for publication on BAILII and other websites. The date and time for hand-down is deemed to be 9.30 a.m on 23 September 2021
ICC Judge Barber
This is an application brought under s.212 of the Insolvency Act 1986 by Mr Reynolds, as liquidator of CSB 123 Ltd (‘SC1’) against Ms Stanbury, a director of SC1. In broad summary, the Applicant claims that the Respondent transferred SC1's business and assets for no consideration to connected parties. The Applicant maintains that this was in breach of the duties owed by the Respondent to SC1 pursuant to ss171–175 of the Companies Act 2006 and an unlawful distribution of capital. The Respondent maintains that the application is misconceived and denies any wrongdoing.
The burden of proof
The parties were at odds on who bears the burden of proof. The Respondent maintains that this is the Applicant's application and that the Applicant bears the burden of proof. The Applicant maintains that where a director is the recipient of a benefit from the company, the evidential burden is on the director to prove that the payment or transfer of the benefit was proper. In this regard I was referred (inter alia) to Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), Re Mumtaz Properties Ltd [2011] EWCA 109, GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), Colin Gwyer & Associates v London Wharf (Limehouse) Ltd [2003] BCLC 153 and Lexi Holdings plc v Luqman [2007] EWHC 2652.
In Burke (Liquidator of Idessa (UK) Ltd) v Morrison EWHC 804 (Ch), Ms Lesley Anderson QC, sitting as a Deputy High Court Judge, had said this:
‘I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate … [counsel for the liquidator] is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for [counsel for the liquidator] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes.’
In GHLM Trading Ltd v Maroo, Newey J, having explored the authorities, confirmed at [149]:
‘In the circumstances, I agree with Mr Miles that, once it is shown that a company director has received company money, it is for him to show that the payment was proper….’
In Maroo, Newey J also referred to as ‘helpful’ a passage from the judgment of Mr Robert Miles QC, sitting as a Deputy High Court Judge, in the case of Gillman & Soame Ltd v Young [2007] EWHC 1245 (Ch). In that case, a company (referred to as ‘GSL’) claimed that a former director (a Mr Young) was liable for breach of fiduciary duty for misappropriating company assets. At paragraph [82], the learned deputy stated:
‘I should also say something about the burden of proof. Where a person in a fiduciary position receives property of his principal the burden is on him to account … This principle applies to company directors as it does to trustees … It is, therefore, for GSL to prove that Mr Young received a particular payment from the company; but where it does so, it is for him to show that the payment was proper.’
At paragraph 115 of Re HLC Environmental Projects Ltd, the learned deputy judge stated:
‘I accept Miss Leahy's submission that in a misfeasance claim where, as here in respect of the Personal Payments, it is proved that a director is himself the recipient of a benefit from the company, the evidential burden is then on him to prove that the payment was proper: see Idessa (UK) Ltd v Morrison [2011] EWHC 804 (Ch)… per Lesley Anderson QC at [28] and GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch).. per Newey J at [149].’
Naturally I accept with gratitude the guidance given in these passages.
In my judgment the correct approach is as follows. Overall, the burden of proof is on the Applicant. He must prove his pleaded case. To the extent, however, that the Applicant's pleaded case rests on the wrongful transfer to the Respondent (or those connected with her) of money or other assets belonging to SC1, a two-stage process is involved. First, it is for the Applicant to prove, within the bounds of his pleaded case, the transfer of given sums or other assets belonging to SC1. As part of this first stage, where ownership of the asset or money in question is in issue, it is for the Applicant to establish on a balance of probabilities that the asset or money in question belonged to SC1. It is only once the Applicant has established the transfer or payment of assets or money belonging to SC1 that the second stage is engaged. At the second stage, the evidential burden is on the Respondent to prove that the payment or transfer was proper.
Approach to the evidence
A number of observations have been made in the caselaw as to the fallibility of human memory and the importance of contemporaneous documents as a means of getting to the truth. The following summary of pertinent observations is drawn, with gratitude, from the judgment of Mrs Justice Joanna Smith in TMO Renewables Limited [2021] EWHC 2033 (Ch) at [103] to [107].
In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), Leggatt J opined (i) (at [18]) that memory is especially unreliable when it comes to recalling past beliefs, which are revised to make them more consistent with our present beliefs (ii) (at [19]) that the process of civil litigation itself subjects the memories of witnesses to powerful biases because witnesses often have a stake in a particular version of events; and (iii) (at [20]) that the process of preparing for trial can of itself interfere with memory, the effect of the process of preparing being to establish in the mind of the witness the matters recorded in his or her own statement and other material and to cause the witness's memory of events to be based increasingly on this material rather than on the original experience of the events.
These observations caused Leggatt J to conclude in Gestmin (at [22]) that:
‘….. the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose — though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of the witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.’
The Court of Appeal made related observations in the case of Simetra Global Assets Ltd v Ikon Finance Ltd [2019] 4 WLR 112. At [48] Males LJ said:
‘[48] In this regard I would say something about the importance of contemporary documents as a means of getting at the truth, not only of what was going on, but also as to the motivation and state of mind of those concerned. That applies to documents passing between the parties, but with even greater force to a party's internal documents including emails and instant messaging. Those tend to be the documents where a witness's guard is down and their true thoughts are plain to see. Indeed, it has become a commonplace of judgments in commercial cases where there is often extensive disclosure to emphasise the importance of the contemporary documents. Although this cannot be regarded as a rule of law, those documents are generally regarded as far more reliable than the oral evidence of witnesses, still less their demeanour when giving evidence.’
I pause briefly to note that the observations of both Leggatt J and Males LJ arose in the context of commercial cases. In Martin v Kogan [2020] FSR 3, the Court of Appeal again addressed the issue of witness evidence. At [88] Floyd LJ said this:
‘[88] Gestmin is not to be taken as laying down any general principle for the assessment of evidence. It is one of a line of distinguished judicial observations that emphasise the fallibility of human memory and the need to assess witness evidence in its proper place alongside contemporaneous documentary evidence...
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Anthony Davidson and Andrew McTear (acting as Joint Liquidators of Kieran Looney & Company Ltd) v Kieran Joseph Looney
...it was for him to show that the payment was proper. The issue of the burden of proof was also considered in Reynolds v Stanbury [2021] EWHC 2506 (Ch) where ICC Judge Barber summarised the position as follows: “8. In my judgment the correct approach is as follows. Overall, the burden of pro......