IP Briefing: Leases, Loss and Liquidators

The Background

Lord Bannatyne issued his judgement in the case of The Joint Liquidators of CS Properties (Sales) Limited v Soni and Soni on 20 March 2018.  The case concerned an application for an order under section 212 of the Insolvency Act 1986.  We were instructed on behalf of the Liquidators.  

The Facts

The Respondents (who are brothers) were directors of the Company. The First Respondent’s wife and the Respondents’ mother were separately appointed directors of Allied Fleet Management Services Limited (“AFMS”) of which the First Respondent was shadow director. At the date of the Company’s administration it owned various heritable properties which in turn it leases out.  The Respondents traded seprately as partners under the trading name Allied Self Drive (“ASD”).   AFMS entered into a Booking Agency Agreement with ASD. AFMS allegedly entered into an Agent Management Agreement with the Respondents. The Administrators of the Company then became aware that AFMS claimed to be tenants in respect of the leased properties.  AFMS were collecting the rents from the ultimate tenants and claimed to be entitled to the rents (although even in terms of their alleged leases with the Company the rent due to the Company was not being paid).  It also seemed that even if rent was being paid, the Company had lost out given it appeared that the leases interposed between original tenants of the Company and AFMS (allegedly in 2010 but suspected to be shortly before insolvency) resulted in a significant loss in rent due to the Company from AFMS than that which would have been due under original lease arrangements.  An analysis of rent lost to the Company over a four year period was calculated as being £930,816. The funds diverted from the Company paid for the Respondents’ luxury cars, holidays and school fees which they drew out of AFMS before that company entered a CVL.

The Decision

There were three substantive legal issues for the court to decide: (i) whether the Respondents had breached fiduciary duties (in terms of sections 171 (to act in terms of the company’s constitution), 172 (in good faith promote the success of the company) and 175 (to avoid  a situation where own interest conflicted with that of the Company) of the Companies Act 2006 (ii) whether the Respondents had breached their non-fiduciary duties (in terms of section 174 (to exercise reasonable care, skill and diligence) of the 2006 Act) and (iii) whether or not in breaching their duties they caused the Company loss.

If compensation is to be ordered under section 212 of the Act then there should be a causal link between the sum ordered and the Company’s loss. If non-fiduciary duties have been breached the court can award damages. By contrast where a fiduciary duty has been breached the court can award damages or alternatively count reckoning and payment but not both.

On hearing the evidence Lord Bannatyne was of the opinion that the leases were a sham and amounted to a fraudulent scheme.  It was also clear that the Respondents had personally benefited from the diversion of sums due to the Company. The court rejected the argument that the Company had not suffered loss because of the appreciation in value of property, holding the Liquidators were correct to argue that loss could be measured with reference to the rent not recovered.  The Respondents had breached their duties and £930,816 was awarded to the Liquidators, with interest.

Advice

This case contains a useful summary of the requirements to make out a s212 claim.  It also gives further help on circumstances where the court will conclude that a fraud has been carried out.  There is also a useful endorsement of a sensible approach to the measure of loss in these circumstances.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk). This briefing note is current as at 23rd March 2018 and is our understanding of the position described at that date.  Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).