Court holds director liable for breach of duties in Bodystretch (UK) Limited case under Insolvency Act 1986 and Companies Act 2006

Citation: [2023] EWHC 2735 (Ch)
Judgment on

Introduction

The case of The Officer Receiver & Anor v Omar Shahzaad Nadeem (Bodystretch (UK) Limited, Re) concerns a claim brought by the Official Receiver against Mr. Omar Shahzaad Nadeem under the Insolvency Act 1986 and the Companies Act 2006. The Official Receiver sought reimbursement of certain payments made to Mr. Nadeem and other parties before and after the sale of the company’s main asset, alleging breaches of directors’ duties, transactions at an undervalue, and preferences.

Key Facts

Bodystretch (UK) Limited, a manufacturer and seller of women’s clothing, experienced financial difficulties leading to its insolvency and eventual liquidation. Mr. Nadeem, its sole director, was accused of making improper payments to himself and third parties prior to the company’s liquidation. Payments included salary, expenses, redundancy pay, and allegedly repayments of a loan used to purchase the company’s trading premises, which were sold for £725,000, leading to a net income of £426,382.82. The Official Receiver claimed these dispositions were made at a time when the company was insolvent and thus in breach of Mr. Nadeem’s duties.

Several key legal principles played a role in this case:

  1. Directors’ Duties (Companies Act 2006): Mr. Nadeem was assessed against his responsibilities under the Companies Act 2006, including the duty to act within the company’s constitution (Section 171), the duty to promote the success of the company (Section 172), and the duty to exercise reasonable care, skill, and diligence (Section 174).

  2. Transactions at an Undervalue and Preferences (Insolvency Act 1986): The Official Receiver relied on Sections 238 and 239 of the Insolvency Act 1986 to argue that the payments represented transactions at an undervalue and preferences to certain creditors over others, both being impermissible during insolvency.

  3. The Objective Test for Director Decisions: The court considered whether a director acted in the company’s best interest at the time of the decision and applied qualifications to the subjective test, referring to relevant cases such as Regentcrest plc (in liq) v Cohen & Anor. [2001] BCC 494 and HLC Environmental Projects Ltd (in liq.) [2013] EWHC 2876.

  4. Relief Under Section 1157 of the Companies Act 2006: The potential for a director who acted honestly and reasonably to be excused from liability was entertained but ultimately dismissed due to the lack of evidence of Mr. Nadeem’s actions meeting the standard of reasonableness.

Outcomes

The court found Mr. Nadeem liable for the repayment of pre- and post-September payments made to himself and third-party creditors, acknowledging the presumption of insolvency given the connection of the parties involved with the company. Mr. Nadeem’s argument that payments were in repayment of a loan for the purchase of the property were not substantiated with evidence. Furthermore, his liability for payments allegedly made as salary and expenses was not supported by any contractual or documented entitlement, and they were also deemed preferences since they placed Mr. Nadeem in a better position than he would have been on an insolvent liquidation. Relief under Section 1157 was not granted due to Mr. Nadeem’s failure to act reasonably.

Conclusion

This judgment highlights the stringent obligations placed upon directors, especially in the twilight period preceding a company’s insolvency. The court applied established legal principles concerning directors’ duties, transactions at an undervalue, preferences, and the liability of directors while interpreting these against the backdrop of insolvency law. Given the evidentiary burden faced by Mr. Nadeem — and not met — the judgment showcases the perils directors face when company assets are disposed of in a manner inconsistent with their statutory and fiduciary duties. The decisions reiterate the paramountcy of creditor interests in insolvency situations and affirm the watchdog role of the Official Receiver in safeguarding such interests.

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