Stacks Living Ltd v Balvinder Shergill

Hearing dates 8, 9 and 10 October 2024

This judgment was handed down remotely at 4pm on 3 January 2025 by circulation to the parties or their representatives by e-mail.

ICC JUDGE

Introduction

This is the trial of two Insolvency Act applications made by the joint liquidators of two companies, Stacks Living Limited (“ Stacks”) and Staffs Furnishing Limited (“ Staffs”, and together, “ the Companies”) both of which are in compulsory insolvent liquidation as a result of orders made on 4 July 2018 and 19 December 2018 respectively, in each case on an unopposed winding-up petition presented by Stafford Borough Council (“ the Council”) based on a failure to pay National Non-Domestic Rates Tax (“ NDR”) in respect of trading premises at Unit 31–35, Guildhall Shopping Centre, Market Square, Stafford ST16 2BB (“ the Premises”).

Stacks was incorporated on 12 December 2016, and Staffs on 8 February 2018; both were wholly owned by the First Respondent, Mr Balvinder Shergill (“ Mr Shergill”) and he alone controlled and managed their commercial and financial operations; both carried on business as a furniture retailer at the Premises, an uncomplicated venture which comprised the display and sale of goods which continued to be owned by suppliers until such time as sold to a customer; accordingly, the Companies themselves owned no stock of any value; at any moment, their assets comprised, principally, any sums received from their customers. There was no distinction of substance between the business of Stacks and that of Staffs, which the Respondents' own Points of Defence described “ in real terms … [as] … a successor company”. Mr Fagan, for the Applicants, described it more pejoratively, but equally accurately, as a “ phoenix”, which assumed and carried on for a short time, before its own failure, the failed business of its immediate predecessor.

Except for the period between 17 July 2018 and 19 October 2018, when the Second Respondent, Miss Miranda Smith (“ Miss Smith”) was the sole appointed director of Staffs, Mr Shergill was the Companies' sole appointed director; during the period of Miss Smith's directorship, she had — by the Respondents' own open admission — no involvement at all in the affairs and business of the company, which continued, both as before and subsequently, to be managed and operated by Mr Shergill, who was therefore, during that period, a de facto director; during that period, on 21 September 2018, the Council secured a liability order against Staffs in respect of NDR; it presented a winding-up petition in respect of Staffs on 1 November 2018, after Miss Smith's resignation.

Miss Smith is Mr Shergill's (life) partner; she currently works as a Workforce Co-Ordinator in the Children and Families Department of Staffordshire County Council, for which she has worked for some 21 years; her evidence, which I accept, was that she was somewhat prevailed upon by Mr Shergill to become Staffs' director; nonetheless, despite her misgivings, she was appointed and knew of her appointment, an appointment to which she agreed; inescapably, she was therefore during that period subject to all the usual duties of a company director.

The Companies are insolvent.

5.1. In respect of Stacks, the Applicants estimate creditor claims in the total sum of £57,857.17, including £42,885.07 owed to the Council in respect of NDR; in respect of Staffs, the total sum of £19,579.44, including £15,431.59 owed to the Council in respect of NDR.

5.2. During its lifetime, Stacks paid (in total) only £580.28 to the Council in respect of NDR (in fact, as a result of enforcement action by bailiffs, Rossendales, in August 2018); Staffs paid (again, in total) £2,000, by means of eight instalments of £250, between 27 September 2018 and 5 December 2018.

5.3. In addition, in each case, is the possibility of a claim by HMRC. In that regard, neither company registered for (or therefore paid any) VAT, PAYE or NIC; neither used the services of an accountant or book-keeper; their records, such as they were, do not enable the Applicants to calculate, with any degree of precision, what might be due to HMRC, although sums were estimated in respect of unpaid VAT.

On 29 March 2020, Mr Shergill gave an undertaking to the Secretary of State for Business, Energy and Industrial Strategy, not to act (amongst other things) as a director of a company for a period of six years commencing on 21 April 2020. Contravention of that undertaking would be a criminal offence under section 13 of the Company Directors Disqualification Act 1986 (“ the CDDA”). By the schedule of unfit conduct to that undertaking (albeit given solely for the purposes of the CDDA) Mr Shergill did not dispute that he had failed to ensure that Staffs maintained or preserved adequate records and had failed to deliver up sufficient accounting records to explain its financial affairs; in respect of both Staffs and Stacks, Mr Shergill did not dispute that trade had been carried on “ to the detriment of the Council” based on the failure to pay NDR; neither did he, for the purposes of the case presently advanced against him by the Applicants, seek to contradict the basis upon which he gave that undertaking.

Against that background, the Applicants made the following claims.

7.1. First, fraudulent trading under section 213 of the Insolvency Act 1986 (“ the IA 1986”), that the business of the Companies was carried on with intent to defraud their creditors — specifically, the Council and/or HMRC — and that in each case Mr Shergill was knowingly party to the business being carried on in that fashion. The fraudulent trading claim was not made against Miss Smith.

7.2. Second, wrongful trading under section 214 of the IA 1986, that from about 31 July 2018, and at all times afterwards, both Respondents either knew or (in the case of Miss Smith) ought to have concluded that there was no reasonable prospect that Staffs would avoid going into insolvent liquidation or entering insolvent administration, and that neither of them took every step with a view to minimising the potential loss to creditors which ought to have been taken. Although submitted that Staffs was effectively insolvent from the outset (its business being a continuation of that which had failed through the medium of Stacks, against which a winding-up order was made on 4 July 2018) 31 July 2018 was chosen as the relevant date for the purposes of the wrongful trading claim because it fell a reasonable time after the Council had raised against Staffs, on 10 July 2018, an NDR bill for the period 1 April 2018 to 31 March 2019 in the sum of £29,897.65, payable by instalments beginning on 3 August 2018, and a reasonable time after Miss Smith's appointment on 17 July 2018. No wrongful trading claim was made in respect of Stacks.

7.3. Third, against both Respondents (in respect of Miss Smith, limited to the period of her directorship of Staffs) claims were made in respect of allegedly unexplained and/or otherwise improper or unjustified payments made by the Companies:

7.3.1. to Mr Shergill personally by Stacks in the total sum of £8,205;

7.3.2. in cash withdrawals from the Stacks' bank account in the total sum of £9,982;

7.3.3. to various retailers by Stacks in the total sum of £3,421.97;

7.3.4. to Mr Shergill personally by Staffs in the total sum of £17,621 (including £2,735 paid after the presentation of the winding up petition, and therefore void under section 127 of the IA 1986, subject to court order);

7.3.5. to Miss Smith personally by Staffs in the total sum of £3,400;

7.3.6. in cash withdrawals from Staffs' bank account in the total sum of £3,900 (including £120 after the presentation of the winding up petition) of which £1,720 was paid during the period of Miss Smith's directorship;

7.3.7. to various retailers by Staffs in the total sum of £7,474.80 (of which £1,609.61 was paid during the period of Miss Smith's directorship).

The Applicants' claims were opposed. In addition, if and to the extent that a claim might otherwise exist, based on negligence, default, breach of duty or breach of trust, the Respondents sought to rely on the provisions of section 1157 of the Companies Act 2006 (“ the CA 2006”) which allows the court to give relief from liability in circumstances where a person has acted honestly and reasonably and ought fairly to be excused. In particular in that respect, having regard to the circumstances of Miss Smith's appointment, and her relationship with Mr Shergill, it was submitted that no relief should be granted against her.

The Witnesses

The court's approach to the assessment of witness evidence has been the subject of numerous explanations and comments in the authorities. For present purposes, and with gratitude, I will adopt the following summary, taken from the judgment of ICCJ Barber in Reynolds v Stanbury [2021] EWHC 2506, at [10]–[13]:

“ 10. In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), Leggatt J opined (i) (at [18]) that...