Managing Director personally liable for preferential payment

08/02/2010

The claimant was a property company (Starglade) which claimed that the first defendant (N) was liable for dishonestly assisting in a breach of trust and sought, on the basis of knowing receipt, payment of money Nash had paid himself. Starglade had sold land to a development company (L). Nash was the managing director of L. Proceedings were later commenced by L against a third party and L sought from Starglade, for use in the proceedings, the assignment of a report previously obtained by Starglade. The third defendant (Mr Twining) was a partner at the second defendant law firm which advised L.

A formal assignment was entered into with a side letter stating that, in return for the assignment, L would pay Starglade half of the net money received in the proceedings and would hold all money received on trust to be divided. To L Starglade had insisted on a harsh bargain but L had little negotiating power.

Approximately three years later the third party proceedings settled. Nash discussed the side letter with Twining but L did not pay Starglade any of the settlement money. Instead, Nash caused the money to be paid to L's other creditors, including himself. It was not disputed that L had acted in breach of trust in failing to comply with the side letter. L was later dissolved.

Starglade submitted that (1) Nash knew from the terms of the side letter that half the money received was held on trust for Starglade and that he was therefore liable for dishonestly assisting in a breach of trust; (2) even if Nash did not know of L's true obligation, he was liable for dishonest assistance as, knowing that L was insolvent, he deliberately paid all other creditors in preference to Starglade, without pressure by them because he felt that Starglade had taken unfair advantage of him; (3) Nash was liable for knowing receipt of the money he paid to himself.

The Second and Third Defendants settled the action with the Claimant prior to trial.

It was held by Mr Justice Strauss that:

(1) Nash did not realise that when he caused L to pay its other creditors in preference to Starglade, that L held the money on trust for Starglade.

(2) Nash admitted that he had deliberately preferred other creditors to Starglade. However, Twining had not advised Nash (nor had he been asked to advise) that in some circumstances a preferential payment was not merely liable to be set aside but might also be regarded as an unlawful act giving rise to personal liability (under the Companies Act 1985). Nash did not know that what he was doing was unlawful.

He asked Twining whether he could pay the largest creditor, received vague and not very clear advice that he might be entitled to do so and concluded, without really understanding why, that the position was sufficiently arguable to go ahead and take the risk. Nash felt that he had done his best to obtain legal advice and that the position was not clear-cut either way. Considering L's financial circumstances and Nash's lack of experience as to such issues, the fact that he did not seek more sophisticated advice did not denote dishonesty.

It would usually be obvious in cases of dishonest assistance that the conduct was at least objectively dishonest; it was conduct which would be regarded as dishonest by any right-thinking person. However, there were subjective elements and the test for dishonesty was not met in this case. The question as to whether a company director could prefer some creditors over others was not one to which most people would know the answer as a matter of law and there would not be a general view as to what was honest or dishonest in that connection.

The Judge noted that whilst considering the question of dishonesty that while an unjustified preferential payment was referred to in previous statutory law as a "fraudulent preference", such payments did not necessarily involve fraud or dishonesty: such payments were deemed by statute to be fraudulent. In current legislation they are referred to as "voidable" preferences.

In the absence of specific advice knowledge, Nash's conduct was not conduct which would have transgressed generally accepted standards of commercial behaviour by a person in his position, even if he had had greater commercial experience.

(3) The test for knowing receipt was whether the recipient's state of knowledge made it unconscionable for him to retain the benefit of the receipt. N knew that there was a letter defining his obligations to Starglade, which he had not looked at for three years, and that it was arguable that he could prefer the largest creditor. His knowledge, together with his failure to read the letter again or to make further enquiries as to the law, could amount to knowing receipt. His conduct was not dishonest but the test for knowing receipt was met in relation to the amount he personally received.

Starglade Properties Ltd v. (1) Roland Nash (2) Warners Law Llp (3) Robert Twining (2010) [2009] EWHC 148(Ch)

Back to news archive