In the recent case of The Secretary of State for Business Industry and Skills v Akbar [2017] EWHC 2856 (Ch) the court had to consider the conduct of the directors in a group reorganisation which left creditors behind. Mark Baldwin, the solicitor who attended the trial, considers the judgment.
BACKGROUND
Greentabs Limited (formerly Mumtaz Food Industries Limited) ran a restaurant in Bradford and also manufactured and sold ready meals under the Mumtaz brand. It was part of a group of companies and in 2012 the group underwent a reorganisation which was broadly as follows:
- 16 December 2012 – the food processing and sale of Indian food business transferred to Mumtaz Foods plc for £1 with most liabilities transferred;
- 16 December 2012 – the restaurant business was transferred to Mumtaz Bradford Ltd for £1 with all liabilities transferred;
- November to December 2012 – an intercompany debt owed by Mumtaz Food Products Limited of circa £1 million was reduced to nil by funds being paid into Greentabs Limited and then paid by Greentabs Limited to or for the benefit of an Employee Benefit Trust (“EBT”); and
- the EBT loaned the circa £1 million to one of the directors, Dr Akbar, to purchase gold bullion.
KEY FACTS
The practical effect of this was that the company was left with little or no assets and some £465,643 of creditors who were not transferred.
Greentabs Limited was placed into creditors voluntary liquidation in May 2013 with a deficiency, on the basis of claims received, of £1,670,412.
The Secretary of State issued disqualification proceedings alleging that:
“Between 30 November 2012 and 11 December 2012 the directors failed to act in the best interests of the Company when they caused or allowed it to enter into agreements to purchase gold bullion with a value of £976,055 for Dr Akbar’s sole benefit. At the time of the agreements, the Company owed £465,634.27 to seven creditors which remained outstanding at liquidation”.
JUDGMENT
After a 5 day trial, His Honour Judge Davis-White QC concluded that:
- the balance sheet as at 16 December 2012 contained information that was available to the directors prior to that date and it showed a balance-sheet insolvent position of £299,655;
- the fact that the company would be rendered net-asset insolvent by the 2012 reorganisation and the fact that there must have been a very serious risk that it would be cash-flow insolvent were enough to have engaged the directors’ duty to act in the best interests of creditors;
- as a result of the reorganisation, the company was at the very least on the brink of insolvency and in a parlous financial position;
- to distribute circa £1 million of assets under the tax-saving scheme was not acting bona fide in the best interests of creditors; and
- if that conclusion was wrong, it was clearly at the least grossly incompetent such as to make the directors unfit to be concerned in the management of a company.
Dr Akbar, the hands-on director and main beneficiary, was disqualified for 6 years. His brothers Mumtaz Akbar and Rab Nawaz Akbar, who deferred to Dr Akbar but were otherwise involved in the company, were disqualified for 3 years each. Fameeda Akbar and Kauser Akbar, who were the wives of Dr Akbar and Mumtaz Akbar and did nothing in the company, were disqualified for 2 years each. Their conduct was described as “abysmal in the sense that there was a complete dereliction in the performance and understanding of their duties”.
CONCLUSION
The main point of interest from this case is that the Secretary of State avoided criticism of the EBT, but concentrated on the net result of the company’s entering into the scheme. The defendants tried to argue, unsuccessfully, that the scheme was in the best interests of the company.
The case is also a salutary reminder to those who allow themselves to be made directors of companies, but take no part in their management, that they fall to be disqualified for failing to oversee the acts of their fellow directors.
© Howes Percival LLP
