No business wants to find itself holding funds on trust for an indefinite amount of time with no way to escape the situation. For IPs, this can happen if funds are transferred in anticipation of an appointment which then does not happen for any reason.
In a recent case dealt with by Trowers & Hamlins' Insolvency Team, we navigated an efficient and protective way out of this situation.
Background
In January 2022, a firm of insolvency practitioners (the Firm) was contacted by an individual (A) who was the sole director and sole shareholder of a small company (the Company). A explained that the Company was in financial difficulty and its assets were likely to be sold. The Firm suggested that any sale proceeds be ringfenced for potential liquidation of the Company and subsequent distribution to creditors.
Upon the Company assets being sold, A contacted the Firm for further advice and the Firm indicated that liquidation of the Company would now be sensible. The parties agreed that the Company assets sale proceeds, (the Funds), should be transferred from the buyer into a designated client account belonging to the Firm, in anticipation of the liquidation.
On 9 February 2022, the Firm issued a Client Care Letter (a CCL) to A and sent the necessary paperwork to A for the liquidation of the Company. The next day, 10 February 2022, A returned the signed CCL and all other signed paperwork. The Firm duly notified the Company's creditors of the proposed decision and the date for the planned board and shareholders resolutions was set as 21 February 2022.
Issues
On that same day, 10 February 2022, the Firm received a phone call from the Official Receiver as A's Trustee in Bankruptcy (the OR). A had been made bankrupt on 2 February 2022 on his own application. A had never mentioned this to the Firm.
The fact that A had been made bankrupt raised two key issues:
- At the point of being made bankrupt, A was automatically disqualified from acting as a director of a company pursuant to section 11 of the Company Directors Disqualification Act 1986. Therefore:
- A had not been a director of the Company since 2 February 2022;
- A had not had authority to sign the CCL or liquidation paperwork on behalf of the Company on 10 February 2022;
- A would not have any authority to pass the necessary board resolutions in regard to liquidation of the Company on 21 February 2022; and
- It seemed that the Company did not have any other directors in office according to the Companies House appointments register.
- At the point of being made bankrupt, A's 100% shareholding in the Company vested in the OR pursuant to section 306 of the Insolvency Act 1986. Therefore:
- A had not been a shareholder of the Company since 2 February 2022;
- A would not have any authority to pass the necessary shareholders resolutions in regard to liquidation of the Company on 21 February 2022; and
- The OR held a 100% stake in the Company.
The Firm was forced to halt all work for the Company and could not proceed with the liquidation as planned. However, the Firm was still holding the Funds on trust for the Company.
There was no one on behalf of the Company who could give instructions as to the Funds.
Corresponding with A
After a year or so, A began to correspond with the Firm. A asserted that he had been discharged from his bankruptcy and was once again a director of the Company. Despite great efforts, the Firm could not obtain any evidence which supported these assertions. At first, A wanted the liquidation of the Company to go ahead, later, A wanted the Firm to scrap the liquidation and send the Funds back to the Company. Due to the fact that the Firm was unable to obtain any evidence which supported A's assertions, the Firm could not be sure that A had any authority to make decisions in relation to the Company or the Funds. The Firm sensibly chose not to act and instructed us for assistance.
We corresponded with A at length and attempted to obtain evidence. A asserted that we were applying an overly strict burden of proof and that the Funds were being unfairly withheld.
A did eventually provide us a Share Purchase Agreement which purportedly showed that A had transferred his 100% shareholding in the Company to a family member (B) prior to A's bankruptcy, and a director's resolution which purportedly showed that B, as the sole shareholder of the Company, had validly reappointed A as a director.
This appeared to contradict the OR's position that the shareholding remained vested in the bankruptcy estate, and in any event, the director's resolution was simply ineffective (A would have needed to produce a shareholder's resolution in relation to appointment of a director).
The Firm's Claim
Nearly 18 months had passed and the Firm was still holding the Funds on trust for the Company.
On 25 September 2023 we issued a Part 8 claim with the Firm listed as the claimant and four parties listed as the defendants; the Company, A, the OR and B. The claim was made under Civil Procedure Rule 64, and it was requested that the court determine the administration of the Funds held on trust. Initially, we sought an order along the following lines:
- The Firm's agreed fee in relation to the Company liquidation to be deducted from the Funds;
- The Firm's legal costs to date to be deducted from the Funds (allowed for under Practice Direction 64B); and
- The balance of the Fund to be transferred from the Firm's designated client account to the Company's bank account.
Two interesting things happened in the months following our claim being issued.
Only A acknowledged the claim and filed a 'witness statement'. The court requested that A amend and re-file, but A failed to do so. No other parties responded to the claim and, notably, we never received any communication from B throughout the proceedings.
Secondly, the OR disclaimed its interest in the 100% shareholding in the Company. At this point, because the shareholding was disclaimed property, it devolved to the Crown as bona vacantia.
We provided the court with a copy of the OR's Notice of Disclaimer but requested that the proceedings carry on as planned due to the fact that share ownership did not go to the heart of this claim. The question surrounding share ownership was really not one for the Firm to be involved in, it was between A, B, the OR and the Crown via the Treasury Solicitor.
Outcome
An order was handed down as per the following:
- The Firm to deduct its agreed fee and its legal costs (almost exactly what was specified within the Statement of Costs) from the Funds;
- The balance of the Funds to be paid into the Court Funds Office;
- Any of the Defendants be permitted to apply for a vesting order in relation to the balance of the Funds; and
- Notice to be given to the Treasury Solicitor so that it may comment on and/or take action in regard to ownership of the balance of the Funds if it wishes to do so.
Comment
Although issuing a court claim may have seemed laborious and costly, it allowed the Firm to deal with the Funds in a legally sound manner, avoiding any future criticism, especially by either a disgruntled A, or the OR, as custodian of the bankruptcy estate, or B, as possible owner of the shareholding. Additionally, both the Firm's own costs and legal costs were recovered, with only the net sum payable into Court.
CPR 64 allowed us to seek an order resolving the position to the satisfaction of the Firm, and the Court was pragmatic in the approach ultimately taken.
