Insolvency practitioner criticised for bringing a misfeasance claim against a director under s.212 of the Insolvency Act 1986

Insolvency practitioner criticised for bringing a misfeasance claim against a director under s.212 of the Insolvency Act 1986

The case of Reynolds v Stanbury (Re CSB 123 Limited) [2021] EWHC 2506 (Ch) is a fascinating example of a failed misfeasance claim by a liquidator (“Reynolds”) against a director under s.212 of the Insolvency Act 1986 (“IA 1986”). In a lengthy 129-page judgment, ICC Judge Barber dismissed Reynolds’ application in full. Insolvency practitioners should take note of the lessons to be learned from this misguided application.

The facts of this case centred on Caroline Stanbury, the founder of a small online luxury gifts retailer, Limited (“GL“). Stanbury also provided personal styling services to clients within her vast network of extremely wealthy personal contacts. On the advice of her accountants, a company (“SC1“) was incorporated to contain the personal styling aspects of her business. Stanbury later took on external investment to help grow the GL brand, and on the advice of corporate lawyers, there was a share restructuring which left SC1 as a dormant subsidiary of GL. However, Stanbury eventually found herself at odds with her investors and she was side-lined by co-directors during decision-making at GL. Describing the working relationship as toxic and unworkable, it was informally agreed between the parties that the investors would focus their efforts on making GL a success and Stanbury would devote her time exclusively to her personal styling business, which was now being transacted through a newly incorporated subsidiary (“SC2“). However, GL ultimately failed, and it was put into administration before going into creditors’ voluntary liquidation. Reynolds then pursued Stanbury for misfeasance, alleging that the business and assets of SC1 had been transferred to SC2 for no consideration despite SC1 being valued at £1.4m at the time of the share restructuring. This transfer, it was argued, constituted an unlawful distribution of capital and it was alleged that Stanbury was in breach of her duties as a director of SC1 under sections 171 – 177 of the Companies Act 2006 (“CA 2006“).

The Court dismissed Reynolds’ claim, noting that it failed to prove on a balance of probabilities that a transfer of business and assets had occurred from SC1 to SC2. In fact, the Court found that Reynolds “had proceeded on a ‘false narrative“. There was no inherent value in SC1, it had no business without Stanbury and all material value lay in the personal goodwill of Stanbury herself. Accordingly, the goodwill was Stanbury’s to do with as she wished, and she did not breach her duties to SC1 by ceasing to work for SC1 and starting to work for SC2. Further, the Court held that, even if a liability had been established in the case, Stanbury would have been granted relief by the court for any breaches in accordance with s. 1157 CA 2006. Under section 1157, relief may be granted to a director for negligence, default, or breaches of duty if the court considers (i) they have acted honestly and reasonably; or (ii), having regard to the circumstances, they ought fairly to be excused. The Court found on the facts that Stanbury “acted reasonably, responsibly and with the greatest integrity… and relied upon the advice and assistance of experienced lawyers and accountants at all material times“.

On the other hand, the Court was highly critical of the liquidator’s conduct. Serious failings included causing or allowing the loss of significant electronic data and paper records relating to GL and its subsidiaries during the administration and bringing proceedings against Stanbury after a long delay and without good reason. In addition, the Court found that Reynolds took an obstructive approach during the disclosure process which, taken together, were factors that seriously prejudiced Stanbury’s defence of the claim against her. Further, the expert witness which Reynolds relied upon failed to provide persuasive answers to several key questions and even had to be reminded by the Court that he was “giving evidence under oath and that the court process is ‘not a game’“. The final nail in the coffin was that the claim was in fact time-barred, having been brought more than 6 years after the date of the alleged loss, and would not have been allowed to proceed even if there was any merit to it.

The catalogue of errors made by the office-holder, in this case, provide a useful reminder of what not to do when bringing a misfeasance claim. In particular, it highlights the importance of taking a holistic view of the director’s conduct rather than just the specifics; avoiding delay in bringing the claim; and being cooperative