The High Court on 21 June 2018 handed down judgment in the case of Steven Leslie Smith and Frank Wessely (as Joint Liquidators of Iconic Hotels Limited) v Clive Oliver Travers and Others ordering a misfeasant director to pay £787,830.59 plus interest and costs to Iconic Hotels Limited (“the Company”).
Debenhams Ottaway LLP acted for the successful Liquidators, who were awarded 100% of the quantum claimed against the director plus costs on an indemnity basis as the director failed to accept or beat the Liquidators’ Part 36 offer.
The judgment, delivered by Deputy Insolvency and Companies Court Judge Schaffer (“the Deputy Judge”), is required reading for those involved in bringing or defending preference and misfeasance claims. Of particular importance is the treatment by the Deputy Judge of the existence of a prior equitable charge on the question of whether the subsequent registration of a legal charge can amount to a preference and/or be a breach of duty.
The Company originally operated a hotel known as The Black Lion Inn in St Albans (“the Property”). It had entered into a CVA in 2009 but found it difficult to meet its obligations and was in default by 2012. Its then directors, Mr Spark and Ms Payne, decided to develop the site by building residential dwellings. Planning permission was obtained in 2011 but finance was required to undertake the proposed development. The First Respondent, Clive Oliver Travers (“Mr Travers”), who was a director and majority shareholder of E. Greenham Limited (a building company that offered bridging finance) was approached to build 3 houses at the Property. As part of the agreement, Mr Sparks’ shares and loan account in the Company were transferred to Mr Travers and arrangements were put in place so that Mr Travers became the Company’s sole director.
It was agreed that Mr Travers would facilitate the advance of funds to the Company to enable the development to proceed and that he would engage contractors to build out the 3 houses. Mr Travers then arranged the funding facility between the Company and E. Greenham Limited for £1.58m. The Company was to give a second ranking legal charge to secure the advance (a first legal charge already being in place to Santander UK PLC). To enable E. Greenham Limited to make the advance, Mr Travers and his son, Oliver Travers (“Oliver”) personally borrowed just over £1m from United Trust Bank Limited. To secure that loan, United Trust Bank Limited took mortgages over, inter alia, the Property. Mr Travers and Oliver then lent the bank’s money to E. Greenham Limited, who then onward lent that money to the Company. Mr Travers then facilitated a building contract with Thorne Barton Estates Limited (“TBE”), a property development company (which Mr Travers was a director of and his partner, Ms Hicky, was a majority shareholder) to develop 3 houses on the Property.
By mid-August 2013, the first 2 houses in the development had sold and Santander’s first charge had been redeemed. The 1 remaining house had received an offer of £1m. At that point, United Trust Bank were owed £245,359 on the Property. United Trust Bank had an all monies charge over the Property which included another advance the bank had made to Mr Travers and Oliver (“the Saracens Head Advance”) of £210,000, which would also need to be paid from the sale of the final house. It is worth noting at this point that the final house was the sole remaining asset of the Company.
Mr Travers, on behalf of E. Greenham Limited, chased his solicitors to put a legal charge in place in favour of E. Greenham Limited over the Property, emphasising that “every day that goes by Greenhams are progressively more exposed to potential losses and dangers. We must secure our position”. The charge to E. Greenham Limited was given by the Company on 11 September 2013 (“the Greenham Charge”) but was never registered at Companies House. The final house sold in November 2013 and £465,492.21 (of which £210,000 was paid to United Trust Bank via E. Greenham Limited) was forwarded to United Trust Bank to clear the balance due under its third party security over the Property. The balance was paid to E. Greenham Limited. Prior to the sale of the final house, the Company owed its principal creditors just over £2m. The Company then entered into creditor’s voluntary liquidation in June 2014 at which time the Joint Liquidators were appointed.
The Joint Liquidators brought a claim against Mr Travers, E. Greenham Limited and Oliver on the following basis:
- That the Greenham Charge created by the Company in September 2013 was a preference pursuant to section 239 of the Insolvency Act and that the payment of £787,830.59 (being the balance of the purchase monies together with the £210,000 which Mr Travers and Oliver owed to United Trust Bank) should be repaid to the Company
- A claim against Mr Travers for misfeasance. The Company was insolvent in September 2013. Mr Travers owed duties to the Company to act in its best interests and not to act in his interests. The Company’s best interests therefore conflicted with the Greenham Charge and the payment of £210,000 remitted towards the Saracens Head Advance (which was Mr Travers’ personal liability);
- An indemnity sought by the Company. The Company had discharged Mr Travers’ and Oliver’s personal liability to United Trust Bank and therefore stood in the shoes of United Trust Bank for the sum of £210,000. The Company had nothing to do with Saracens Head and should be indemnified for that sum.
The Court’s Decision
The judgment goes into detail on the law relating to sections 239 (preference) and 212 (misfeasance) of the Insolvency Act 1986 and director’s duties under the Companies Act 2006.
In relation to Mr Travers, the Deputy Judge did not find him a witness “upon which [he] could have confidence in accepting what he told [him] was true”. Mr Travers’ evidence was criticised as being unreliable for the main part due to his own reconstruction of events being tainted by advancing, as much as he could, his perspective position. The Deputy Judge found Mr Travers to be evasive and took the view that, unless Mr Travers said anything that was supported unequivocally by documents, the Court would treat his evidence with considerable caution.
The Respondents accepted that Mr Travers and E. Greenham Limited were connected parties but argued that they were significant creditors of the Company. They alleged that when Mr Travers arrived on the scene, the Company was in a financial crisis; there were arrears on the CVA and to Santander. The only hope was the development of the Property. Mr Travers had saved the Company and arranged the completion of the Company’s obligations under the CVA and cleared the arrears to Santander coupled with a payment to the former director, Ms Payne, of her outstanding wages. They argued that this was a venture that had gone wrong but that it could not be foreseen in July/September 2012.
The Respondents accepted the equitable charge was void against the Joint Liquidators but maintained that it still gave E. Greenham Limited security because the September 2013 charge was made as a consequence of the equitable charge. It being void did not play on the mind of Mr Travers at the time and he therefore did not have the requisite desire.
The Deputy Judge was satisfied that an equitable charge existed, but held that the equitable charge was not registered within the 21 day period prescribed under Section 889 Companies Act 2006. In those circumstances, the Deputy Judge found that the equitable charge would have been void as against the Joint Liquidators and so the creation of the legal charge amounted to a preference. The Deputy Judge was also satisfied that it never occurred to Mr Travers that he had equitable security and the question of whether an equitable charge was enforceable was only raised by Mr Travers’ current solicitors, not those solicitors instructed at the material time.
The Deputy Judge had no difficulty in finding that the payment to E. Greenham Limited was a preference, as the requirements of section 239 had been met: E. Greenham Limited was an unsecured creditor of the Company; the charge had the effect of putting E. Greenham Limited into a position which, in the event of the Company going into insolvent liquidation, would be better than it would have been if the charge had not been given; the charge was given within 2 years of the date of the liquidation and E. Greenham Limited was a connected party. The Deputy Judge accepted the Respondents’ submissions that United Trust Bank’s all monies charge captured the £210,000 Saracens Head Advance and that the Company had no option but to pay it. Accordingly, the Court deducted the £210,000 that E. Greenham Limited ultimately paid to United Trust Bank from the net sale proceeds paid to E. Greenham Limited and ordered E. Greenham Limited to pay the sum of £577,830.59 with interest to the Company.
Turning to the claim of misfeasance against Mr Travers, the Deputy Judge found that Mr Travers was in breach of his fiduciary duties to the Company by: allowing the Company to provide security to United Trust Bank for the benefit of a connected third party without taking any corresponding security of its own to protect its position; distributing company funds to a connected party to the detriment of the general body of creditors; seeking to put in place a legal charge in favour of a connected party, over the Company’s property, when he knew the Company was insolvent; and being in conflict of interest. Objectively, no director acting reasonably would have done what Mr Travers did. The Court ordered Mr Travers to pay the full sum of £787,830.59 to the Company and refused to give Mr Travers relief from liability under Section 1157 of the Companies Act 2006, as he had not acted reasonably or honestly.
Finally, the Deputy Judge held that the Company was entitled to an indemnity of £210,000 from both Mr Travers and Oliver as the Company had discharged an indebtedness owed by Mr Travers and Oliver to Unit Trust Bank and, in doing so, the Company stands in United Trust Bank’s shoes.
The High Court’s decision is a resounding win for the Joint Liquidators.
Luke Harrison, Lead Commercial and Insolvency Dispute Resolution Partner at Debenhams Ottaway LLP, who acted for the successful Liquidators commented:
“The judgment represents an excellent outcome for the creditors of the Company including Mr Travers’ former “joint venture partner” Ms Payne. If a director acts in a way which breaches his or her duties it can result in personal liability. Here the director’s veiled attempts to justify his actions by reliance on an earlier equitable charge failed because the Companies Act 2006 and Insolvency Act 1986 have built in statutory safeguards to protect the interests of unsecured creditors.”
Steve Smith, Corporate Advisory Partner at Mercer and Hole and Joint Liquidator of Iconic Hotels Limited commented:
“It was clear to me from the outset of the liquidation that Mr Travers had little regard to his responsibility to safeguard the interests of the company’s creditors as a whole. Unfortunately, Mr Travers was of that view. This case required considerable forensic investigation undertaken by both the Joint Liquidators and Debenhams Ottaway in achieving this successful result.”
A copy of the Judgment may be found here
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