SSF Realisations Ltd ((in Liquidation)) v Loch Fyne Oysters Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 21 December 2020 |
| Neutral Citation | [2020] EWHC 3521 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2017-000194 |
[2020] EWHC 3521 (Ch)
Mr Justice Zacaroli
Case No: BL-2017-000194
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
7 Rolls Building
Fetter Lane, London
EC4A 1NL
Alexander Cook (instructed by Sherrards LLP Solicitors) for the Claimants
Philip Hinks (instructed by Brodies LLP Solicitors) for the First, Second and Fifth Defendants
The Third Defendant appeared in person
The Fourth and Sixth Defendants were not present or represented
Hearing dates: 25, 26 and 27 November 2020
APPROVED JUDGMENT
Introduction
This claim concerns the lawfulness of a distribution made by the claimant company (the “Company”) to its shareholder, the first defendant, Loch Fyne Oysters Limited (“LFO”) in November 2011.
The Company was incorporated on 18 April 1974 under the name Shrewville Limited. It carried on business as a supplier of fresh, frozen and live fish to shops and restaurants, trading under the name Simson's Fisheries. On 6 June 2008 the Company's entire share capital was acquired by LFO from the Company's then shareholders, Mr Tim Lucas (“Mr Lucas”, the third defendant), Mr Richard Organ (“Mr Organ”, the fourth defendant) and Mr Charles Organ, for a consideration of approximately £1.9 million, of which a substantial portion was deferred.
In November 2011 the directors of the Company were: Mr Robert Craig (“Mr Craig”, the second defendant); Mr Lucas; Mr Organ; Mr Bruce Davidson (“Mr Davidson”, the fifth defendant); and Mr Stephen Sutherland (“Mr Sutherland”, the sixth defendant).
LFO is also in the wholesale and retail seafood business. Its main customer in 2008 was Loch Fyne Restaurants Limited (“LFR”) which operated a restaurant chain. In November 2011 its directors included Mr Craig, Mr Davidson and Mr Sutherland.
Following LFO's acquisition of the Company, the inter-company account between them consisted of an increasing balance due from LFO to the Company: £262,929 (as at June 2008); £317,734 (as at June 2009); £793,342 (as at June 2010) and £904,414 (as at June 2011). In the Company's October 2011 management accounts the debt due from LFO stood at £944,089.
The debt had built up principally in two ways: the Company sourced and supplied fish, at its own cost, to customers of LFO in the south of England and also bore the cost of transportation of LFO's products delivered to customers in the south of England.
By 2011 LFO and the Company were in financial difficulties. By September 2011 a plan had emerged for the acquisition of LFO by Scottish Salmon Company Limited (“SSCL”). Before it would acquire LFO, however, SCCL required a clean break between LFO and the Company. It required that the Company be sold to a third party and that nothing be owed by way of debt from LFO to the Company.
In relation to the first of those conditions, LFO entered into negotiations with James Knight of Mayfair Limited (“JKM”) for the sale of the Company.
In relation to the second of the two conditions, at a board meeting of the Company held on 21 November 2011 the directors resolved upon two matters with a view to reducing the debt due from LFO to the Company. The first was to approve an interim dividend and the second was to assume a management charge in favour of LFO. Each of these was to be offset against the debt due from LFO.
Sometime in the weeks following the board meeting, an interim dividend in the sum of £500,000 (the “Dividend”) and a management charge in favour of LFO in the sum of £330,000 (the “Management Charge”) were entered in the Company's books and records, with an effective date of 27 November 2011.
The claimant contends that the Management Charge was itself a disguised distribution to LFO and that the Dividend and the Management Charge together comprised an unlawful distribution out of capital in breach of Part 23 of the Companies Act 2006 (the “2006 Act”).
The Company's management accounts for November 2011 indicated that, as a result of the Dividend and Management Charge, the Company was insolvent (with net liabilities of £142,710).
The negotiations with JKM ultimately failed and on 17 February 2012 the Company was sold to Mr Lucas for £1. It continued to trade for a number of years, albeit it never returned to solvency. On 2 June 2016 Mr Andrew Hosking and Mr Simon Bonney of Quantuma LLP were appointed administrators of the Company. On 10 November 2016, the Company entered creditors' voluntary liquidation. Mr Hosking and Mr Bonney were appointed joint liquidators.
This claim was commenced by a claim form dated 25 October 2017.
The Defendants
Mr Craig, Mr Davidson and Mr Lucas provided witness statements and attended trial to be cross examined on them.
Mr Craig was the chairman of both LFO and the Company. He had extensive accountancy experience, having been a partner in an accountancy practice for over 25 years.
Mr Davidson, as well as being a director of the Company, was the managing director of LFO. He had extensive prior commercial experience, having sat on the board of the Imperial Tobacco Group for 6 years.
Mr Sutherland was the director with principal responsibility for the financial affairs of the Company. He had previously been a partner in Cook & Co, the auditors for LFO and the Company. He prepared the management accounts for the Company and was the main point of contact between the Company and its auditors. Following the acquisition by LFO the accounting functions of the Company were moved to LFO's head office in Scotland. Mr Sutherland worked there alongside Ms Helen Seaborne, the company secretary to the Company, who undertook similar responsibilities in relation to LFO. Mr Sutherland has never been served with these proceedings and he has taken no part in them.
Mr Lucas was the operations director of the Company. He worked from the Company's premises in the south of England. He had no accounting experience.
Mr Organ was the sales director of the Company. The claimant reached a settlement with Mr Organ and he played no part in the trial.
I also heard evidence from Mr Hugh Johnston (“Mr Johnston”), the financial controller and employee elected director of LFO at the relevant time.
Mr Craig, Mr Davidson, Mr Johnston and Mr Lucas were honest witnesses doing their best to assist the Court. In circumstances, however, where their recollection of events which occurred over nine years ago was (as they each acknowledged) poor, the contemporaneous documents and inherent probabilities are likely to be a more accurate guide to what happened.
Circumstances leading up to the board meeting on 21 November 2011
The first mention in the contemporaneous documents of a possible dividend by the Company is in a letter from Mr Sutherland (as director of LFO) to JKM. Mr Sutherland indicated that the intercompany loan position between the Company and LFO would be resolved by a dividend “in the region of £800k”.
The minutes of the LFO board meeting of 7 September 2011 (at which, among others, Mr Craig, Mr Davidson and Mr Sutherland were present) also referred, under the heading “Disposal of Simson's”, to a “plan to create Dividend to clear intercompany balance.”
At this stage, the plan appeared to be to offset the whole of the intercompany debt by way of a dividend and there was no mention of an offsetting management charge.
The Company's board meeting of 21 November 2011 was (according to the draft minutes of the meeting) its first formal board meeting for three years. It was first mooted in an email of 17 November 2011 from Mr Craig to Mr Lucas, Mr Organ, Mr Davidson and Mr Sutherland. Mr Craig said that it was “high time” they had another proper board meeting “as there are answers to be given to audit queries…”. Nothing was said in this email about the proposal to declare a dividend at the meeting.
On 18 November 2011 (the Friday before the board meeting on the Monday) Mr Craig emailed Mr Sutherland a draft agenda for the board meeting which included, under the heading “Report on Financial Position”: “Draft Statutory Accounts to 30th June 2011 and audit queries; Adjustments to be agreed.” There was no indication that the meeting was being convened in order to declare a dividend. In his covering email, however, Mr Craig asked Mr Sutherland, among other things, what the Company's balance sheet would look like once the inter-company dividend was voted through and what were the outstanding audit points. Mr Craig emailed the agenda to the other directors, including Mr Lucas, later that day.
Early in the morning of 21 November 2011 Mr Sutherland emailed a copy of the management accounts for October 2011 (the “October management accounts”) to among others, Mr Craig and Mr Davidson, but not Mr Lucas.
Prior to the board meeting, Mr Sutherland met with Mr Craig and Mr Davidson over breakfast.
It is an important factor in this case that the October management accounts contained a significant error in that they understated the liabilities of the Company by approximately £178,000 and correspondingly overstated the distributable profits in the same amount, in circumstances which I describe briefly in the following paragraphs.
By November 2011, the audit in respect of both companies would have been well under way.
On 8 November 2011, Jennifer...
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