Company Liquidation – Court Strikes Out Multi-Million Wrongful Trading and Clawback Claims
A recent case vividly illustrates the dangers of a Liquidator launching legal action against the Directors or former Directors of the company without giving the matter proper thought. In Johnson (as Liquidator of Strobe 2) v Arden and Others, the High Court struck out multi-million wrongful trading and clawback claims which the Liquidator of Strobe 2, brought against the former Directors of the company. The Court also ordered the Liquidator to pay the former Directors’ costs on the more generous indemnity basis.
The facts of the case were complex but, in summary, Strobe 2 had been part of the Luminar Group (the Group). At one point, the Group operated hundreds of nightclubs and leisure venues in the UK. In 2007, Strobe 2’s Directors decided to undertake a complicated restructuring of the Group with a view to returning cash to Strobe 2’s shareholders. Many of the Group’s venues were sold off and, just before Strobe 2 was sold, a distribution of some £380m was made by Strobe 2 to its parent company in specie (meaning the transfer of specific assets to shareholders – here an intercompany debt – as opposed to cash). The Directors resigned before the distribution was made. At the time of the sale, the Directors also caused Strobe 2 to give of an indemnity up to £3.5m to the new controllers of Strobe 2 in respect of the contingent (i.e. possible future) liabilities which the company had to landlords under a substantial number of lease guarantees.
Then the 2008 crash happened. Strobe 2 went into insolvent liquidation owing landlord creditors sums assessed at between £15–67.5m. The Liquidator first attempted to sue the Directors in 2013 but the proceedings were never served. The Liquidator issued new proceedings in September 2015 – some eight years after the relevant events. The Liquidator’s central complaint was that the Directors had failed to ensure that Strobe 2 retained sufficient financial resources to meet the landlords’ claims. As originally pleaded, the proceedings alleged misfeasance/breach of directors’ duties. However, that claim was struck out as being out of time. That left a wrongful trading claim and a claim to “clawback” the £350m dividend.
The High Court struck out all the Liquidator’s remaining claims:
• Wrongful Trading
The Judge found that the wrongful trading claim was fanciful and had an absence of reality to it. In his view, the Liquidator appeared to have approached pleading the case as if it were a breach of Directors’ duties case, which is was not. The Liquidator had made extremely serious allegations against the Directors – namely, that they had intended to defraud the company’s creditors and that had acted deceitfully in taking professional advice which they never had any intention of following. However, the Liquidator had failed to back up his case with proper evidence. Furthermore, the wrongful trading claim could only succeed if it was shown that at the date of the sale, the Directors knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation. Again, the Liquidator had not produced any proper evidence showing that the Directors knew or ought to have concluded that that default by the tenants was inevitable, that insufficient provision had been made for any liabilities that were likely to arise or that it was likely that calls would be made under the guarantees.
• Clawback Claims
The claims relating to the clawback of the £380m distribution were brought under the sections of the Insolvency Act 1986 relating to transactions at an undervalue and transactions defrauding creditors. The Liquidator did not assert that any of the Directors were parties to the relevant transactions or that any of them were the recipients of preferences or otherwise benefitted from any of the transactions. The Judge ruled that he did not have an unlimited jurisdiction to grant relief against any person. In particular, no relief could be given against a Director whose only role in a transaction was to direct the company to enter into the transaction where the Director did not personally benefit.
The law in this area is complex. A liquidator who wishes to pursue redress against the directors of a company for the benefit of the company’s creditors has a number of weapons in his or her armoury, some of which derive from general company law, such as the general duties which the directors owe to the company, and others specifically given to liquidators under insolvency law. However, each remedy is only available in defined circumstances. It is vital to check carefully that the relevant requirements are satisfied and that any allegations which the liquidator wishes to make are properly supported by credible evidence. This case also illustrates the importance of pursuing claims reasonably promptly. We will never know for sure but it may be that here the Liquidator lost his best chance of a successful claim against the Directors when his allegations of misfeasance / breach of Directors’ duties were struck out.