Directors and alienations

You may have seen recently reported the decision of the High Court in Johnson -v- Arden. The case revolved around a dividend declared and paid by a company to its shareholders approximately 18 months prior to liquidation. The liquidator raised proceedings on the basis that the dividend was either a transaction at undervalue (section 238, this was an English-registered company, section 242 would be the appropriate provision in Scotland) and/or an unfair preference (section 239, section 243 in Scotland) and/or a transaction defrauding the creditors (section 423, applicable only in England).

The decision does not deal with which, if any, of these claims was the appropriate one (and so doesn’t address how the payment of a dividend in such circumstances should be characterised) but addresses the basic principle of the identity of the respondents. The liquidator had raised the action against the directors, not the recipient shareholders. The decision seems to indicate that the liquidator did so on the basis that each of the relevant provisions enables the Court to make such order which it thought fit for restoring the company to the position it would have been in had the relevant transaction or preference not occurred. The Judge correctly analysed the various provisions as entitling the Court to order restitution to the insolvent estate but only by putting the parties back in the position that they had been in before the transaction that was complained of. In other words, if the directors in this case had not benefitted, the Court could not make an order for them to restore the Company to its pre-transaction position if that would not restore the directors to their pre-transaction position. If they had not benefitted, they held no asset which they could “restore” to the Company.

This does seem manifestly obvious from the Act and the Judge went on to point out that the correct approach for the liquidator was to assess whether or not the directors had committed some wrong in declaring and paying the dividend and, if so, to pursue them in terms of section 212. You may recall that I provided a note a few years ago of a case where I successfully pursued directors under section 212 on the basis that the statutory time limit for an unfair preference had passed between the transaction complained of and the date of liquidation. I said at the time that too few people were looking at using section 212 and this recent case does seem to suggest that this failure may be still be all-too-prevalent. Trying to shoe-horn a claim into the ambit of the provisions of sections 238 and 239 (or 242 and 243) was doomed to fail and the obvious solution (if there was anything wrongful about the declaration and payment of the dividend) was section 212. If there was nothing wrongful in the conduct of the directors meaning that a section 212 claim was not going to succeed, pursuing the action that was raised could be characterised as improper. The Judge apparently commented that the application had no real prospect of success and the claim gave no reasonable grounds for it to be brought.

Liquidators (and other office holders) should always remember that they are officers of the Court and to pursue claims that have no merit and no basis in law can give rise to claims against them personally, not least in respect of expenses.

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