Morphitis v Leonardo Bernasconi Pasqualino Monti Nicholas Bennett & Co (a firm)

TMC Transport (UK) Limited, a company incorporated under the Companies Acts 1948 and 1981, was ordered to be wound up on 20 December 1994. By these proceedings, commenced by application issued on 1 August 1997, the liquidator sought a declaration, under section 213 of the Insolvency Act 1986, that two former directors of the company and a firm of solicitors formerly instructed by the company were knowingly party to the carrying on of the business of the company with intent to defraud creditors and for other fraudulent purposes and that they were liable to make such contributions to the assets of the company as the court thought proper. On 13 September 2000 the liquidator accepted a payment into court, in the sum of £75,000, made by the solicitors. The claim proceeded to trial only against the two former directors, Mr Leonardo Bernasconi and Mr Pasqualino Monti.

The matter came on for trial before Mr Anthony Elleray QC, sitting as a deputy Judge of the High Court, in November 2000. In February 2001 the judge handed down a lengthy written judgment, in which he held that that fraudulent trading had been made out against the directors; and declared that they should contribute an amount of £35,000 to the assets of the company. That sum included an element (£17,500) which the judge described as punitive. The judge went on to hold that liability of the directors to make contribution had been satisfied – or, as he put it, extinguished – by the liquidator’s acceptance of the payment into court made by the solicitors. He adjourned the matter for further argument in relation to costs.

The matter was restored in June 2001; no order having been drawn up following the judgment in February. The judge was asked to reconsider his decision that the whole of the amount of the contribution which the directors would otherwise have been liable to make should be treated as extinguished by the solicitors’ payment. It was said that, notwithstanding that payment, the directors should remain liable to contribute an amount equal to the punitive element fixed by the judge. The judge rejected that contention. He went on to consider by whom the costs of the proceedings should be paid. He held (i) that the liquidator should pay 75% of the directors’ costs incurred after the date (13 September 2000) on which he accepted the payment into court and (ii) that the directors should pay the liquidator’s costs up to that date, but that those costs should include only 50% of the costs of adducing expert evidence. The judge refused permission to appeal.

The judge’s order is dated 18 June 2001; although it was not agreed by counsel, approved by the judge and entered until February 2002. In the meantime the liquidator had filed an appellant’s notice. He sought an order (i) that the directors be liable to make such contribution to the company’s assets (in excess of £35,000) as this Court might think fit; in the alternative, (ii) that the directors be ordered to pay the punitive element of £17,500 by way of contribution in addition to the £75,000 paid by the solicitors; and (iii) that the directors pay the whole of the costs of the proceedings. Permission to appeal, limited to grounds 2, 3, and 4 in the appellant’s notice, was granted by this Court (Lord Justice Jonathan Parker) on 11 February 2002. On 1 March 2002 the directors filed a respondents’ notice raising issues by way of cross-appeal. Permission to cross-appeal, limited to grounds 3, 4 and 5 in the respondents’ notice was granted by Lord Justice Jonathan Parker on 1 May 2002.

Accordingly, there were before this Court: (i) the liquidator’s application for permission to appeal on ground 1 in the appellant’s notice (which, although refused by Lord Justice Jonathan Parker on paper, he was given liberty to renew at the hearing of the appeal); (ii) the directors’ application for permission to appeal on ground 1 in the respondents’ notice (adjourned for hearing at the appeal) and on ground 2 (refused on paper, with liberty to renew); (iii) the liquidator’s appeal; and (iv) the directors’ cross-appeal. We indicated that we would hear argument on all issues; treating the applications for permission as if they were additional grounds of appeal or cross-appeal.

The issues raised by the appeal and cross appeal may be summarised as follows:

The underlying facts are not now in dispute. I take them from the judgment below. The company was established at the end of 1983 by Mr Monti, who was (and remains) a successful haulier operating throughout continental Europe through a number of locally incorporated companies bearing the initials “TMC” (derived from ‘Transmetal Chimica’) as part of their name. Until early in 1991 the day to day business of the company was managed by Mr Daniel Murat, who had a 25% share interest. Mr Monti and Mr Murat were the directors. In 1991 Mr Murat was replaced as a director by Mr Bernasconi, an accountant in practice in Switzerland. Mr Monti and Mr Bernasconi ceased, formally, to be directors of the company at the end of 1992 – before the events said to constitute fraudulent trading in the present case – but it was not in dispute that Mr Monti continued to control the company to an extent which required him to be treated as a de facto director.

By the end of the 1980’s the company was tenant of warehouse and depot premises on the Sandwich Industrial Estate, in Kent, under four leases; each of which would continue, in accordance with its contractual terms, until 1998 or for some years thereafter. On 28 July 1989 the reversion to those leases was acquired by Ramac Holdings Limited. The leases were guaranteed by Mr Murat alone.

The company had traded profitably until the beginning of 1991 – as appeared from its accounts to 31 December 1990. But, by early 1991 Mr Monti had become concerned at reports of unpaid suppliers and, with the assistance of Mr Bernasconi, had investigated the cause of that concern. That investigation led to departure of Mr Murat; and to Mr Bernasconi’s appointment as a director. To assist the company Mr Monti arranged for loan capital to be provided by Accoulis Tours Establishment, a company which (nominally at least) was owned and controlled by Mr Bernasconi but which was amenable to Mr Monti’s wishes. The amount invested in 1991 was £135,000. A further £235,000 was lent by Accoulis in 1992; but part of that further loan may have represented unpaid interest due under the earlier loan. Nothing turns on the precise amount of ‘new money’ introduced by Accoulis.

The company remained unprofitable during 1992. By June 1992 management accounts showed an excess of liabilities over assets in the sum of £27,275. The company was suffering from a general downturn in the haulage industry; but Mr Monti and Mr Bernasconi identified the company’s principal commercial problem as the onerous rental obligations under the leases. The problem was exacerbated by a pending upwards-only rent review. The solution was seen to be a relocation to other premises near Ramsgate. The difficulty in the way of relocation was the inability to find a purchaser for the leases or to agree terms with Ramac upon which they could be surrendered.

In July 1992 Mr Monti and Mr Bernasconi instructed solicitors to seek advice from counsel. The matter on which counsel was asked to advise appears from paragraph 3 of the opinion which he gave on 14 July 1992:

It is convenient, here, to set out the material provisions of section 216 of the Insolvency Act 1986:

Those provisions made the scheme suggested in the final paragraph of counsel’s opinion of 14 July 1992 unattractive. Following liquidation, the business could not be sold by the liquidator to a new company in which Mr Monti was involved (as he would be) and carried on under the TMC initials, unless Mr Monti had ceased to be a director or shadow director of the old company on a date which was at least twelve months before the liquidation of the old company. If the business were to be carried on by the old company until liquidation and sale (as it would have to be, if it were to be sold by the liquidator as a going concern) it was impossible to envisage circumstances, in practice, in which Mr Monti would cease to be a shadow director prior to liquidation, even if he resigned his formal appointment. The point was recognised by counsel in a second opinion, dated 28 September 1992. He wrote:

In his opinion of 28 September 2002 – written to confirm advice given in conference a few days earlier – counsel put forward a revised scheme which (as he said) would avoid both of the problems which he had identified. The revised scheme is set out in paragraph 4 of that opinion:

Mr Monti and Mr Bernasconi decided to adopt the scheme put forward by counsel in his second opinion. On 24 November 1992, the company’s shares in TMC Northern were transferred to its holding company, Alca Enterprises AG, at a price which the liquidator has not challenged. On 22 December 1992, the company’s own shares were transferred by Alca to PPM Trading Limited, a Liechtenstein company incorporated by Mr Bernasconi. Mr Monti and Mr Bernasconi resigned office as directors of the company. The sole director appointed in their place was Mr Augustoni Domenico, Mr Bernasconi’s father in law. Those steps were (I assume) intended to carry into effect step (1) of counsel’s scheme; but it is difficult to think that counsel would have been satisfied that PPM Trading was an ‘independent’ company in the role of H2 Ltd or that he would have envisaged the appointment of Mr Bernasconi’s father in law as the nominated director of the old company.

Steps (2), (3) and (4) of counsel’s scheme were carried into effect by the incorporation of a new company, Trans Montana Carriers Limited, which could use the initials “TMC”; the transfer of goodwill from the old company to the new company at a price of £1,000; the execution of a leasing contract for the lease by the old company to the new of the 34 trailers which the old company then owned at a rent of £125,000 per annum; and the acquisition by the new company of leasehold premises in Ramsgate from which it could trade. The old company ceased trading as hauliers on 31 December 1992; and the haulage business was thereafter (with effect from 1 January 1993) carried on by the new company. For convenience I shall refer to the old company as “the company” and to the new company as “Newco”.

The financial statements in respect of the company, for the year to 31 December 1992, show fixed and current assets of £843,409 and liabilities of £903,704. The fixed assets were shown at a book value of £206,251; and current assets, principally trade debtors, at a book value of £637,158. Liabilities comprised trade creditors (£428,849), a loan creditor (Accoulis - £370,000), accrued expenses of £100,000 or thereabouts, and Crown debts of about £7,000. The trade creditors included the landlord of the Sandwich premises, Ramac.

During 1993 the company collected its trade debts and received from Newco the rents payable under the trailer lease. By the year end the company had sold its remaining trailers to an associated Belgian company, ICTS, for about £195,000. That sale has not been challenged by the liquidator. The company paid off nearly all its trade creditors, much of the current rent under the leases of the Sandwich premises, and part of the Accoulis loan. The financial position of the company as at 31 December 1993 – as it appeared from a reconstruction by the joint expert which was not challenged – showed current liabilities of £292,000. Those liabilities included the balance of the Accoulis loan (£240,000) and trade creditors of £43,000 – of which £37,000 represented rent due to Ramac. Assets had reduced to £63,000. Net liabilities were £222,000 – suggesting a loss during 1993 of some £160,000. The loss was attributable to losses on the sale of fixed assets below book value, depreciation on fixed assets, interest charges on the Accoulis loan and the rent accruing on the Sandwich premises. But, in broad terms, the objective of realising the company’s assets and paying its trade creditors (other than its landlord) had been achieved.

The sale of the company’s trailers to ICTS followed a third opinion from counsel, dated 14 October 1993. Counsel had been asked to advise whether “on the insolvent liquidation of TMC in due course, there would be any contravention of the provisions of the Insolvency Act 1986 if TMC were now to sell its trailers to a third party”. He wrote:

Counsel advised that, provided that the cancellation of the trailer leases and the sale of the trailers did not result in the financial position of TMC deteriorating so that it was unable to pay its debts as they fell due, no creditor would be in a position to petition for winding up before the end of the 12 month period; so that there was no reason, on that ground, why the trailers should not be sold. Nevertheless, counsel went on to advise against that course on other grounds. First, that there was a risk of challenge to the transaction under section 238 of the Act unless the sale (and the surrender of the trailer leases) were each effected at full value; and, second, that there was a risk that the present directors of TMC would be held liable for wrongful trading under section 214 of the Act. As he explained:

It appears from an attendance note made by the solicitors shortly after that opinion had been received that counsel’s advice was accepted. The note, dated 28 October 1993, records:

If counsel’s scheme was to secure the objective for which it had been devised, it was necessary to avoid circumstances in which the landlord of the Sandwich premises, Ramac, presented a petition for the winding up of the company during 1993. This was recognised, expressly, in the opinion of 14 October 1993 to which I have just referred; but it was implicit in his earlier advice. The need was identified in a letter dated 13 May 1993 from Mr David Saunders, the solicitor dealing with the matter on behalf of the company, to the company secretary, Mr Eddie Borgers. After informing Mr Borgers of a letter from Ramac’s solicitors threatening the issue of a writ in respect of unpaid rent, service charges and insurance, Mr Saunders wrote:

It will be necessary to examine, in some detail, the steps which were taken, following that letter, to forestall the issue of a writ, or the presentation of a winding up petition, in respect of the company’s debt to Ramac. It is sufficient to note, at this point, that those steps did not extend beyond the end of 1993. On 13 January 1994 Mr Saunders was able to report to Mr Bernasconi that . . . “we have successfully utilised the one year period for the purpose of off-loading the premises at Sandwich Industrial Estate.” It was not until 18 September 1994 that Ramac served a statutory demand for the amount of the rent then due (£112,478). That was followed by the presentation of a winding up petition on 10 November 1994. As I have said, the company was wound up by the court on 20 December 1994. The liquidator was appointed on 3 March 1995.

The liquidator disclaimed the leases of the Sandwich premises – as he was entitled to do under section 178(2) of the Insolvency Act 1986. The effect of the disclaimer was to determine the continuing liabilities of the company in respect of those premises – see section 178(4)(a); but Ramac was entitled to prove as a creditor in the liquidation for the loss which it had suffered – see section 178(6) of the Act and the analysis in In re Park Air Services Plc [2000] 2 AC 172, 184A-G. The judge was told that a proof by Ramac in the sum of £621,980.41 – representing the discounted value of the loss of the right to future rent after giving credit for receipts to be obtained on re-letting – had been admitted by the liquidator.

Section 213 of the Insolvency Act 1986 is in these terms:

The liquidator’s case in relation to the allegation of fraudulent trading under section 213 of the Act is pleaded at paragraphs 18 to 24 of the Points of Claim dated 11 November 1997. Paragraph 18 contains the allegation that, from 16 February 1993, the company was in default of its obligations for rent, service charges and interest charges under the leases. Paragraph 19 alleges that, from 13 May 1993, Ramac (through its solicitors) was demanding payment of the monies due; and (on particular dates specified) was threatening proceedings to recover those monies. Paragraphs 20 and 21 are in these terms, so far as material:

On 28 July 2000 Mrs Justice Arden directed that a list of issues be served with the skeleton arguments. The list served on behalf of the liquidator included, as issue 6(b), the following:

The position, therefore, was that the only conduct upon which the liquidator relied at the trial in support of his claim that the former directors were parties to fraudulent trading was the deception of Ramac “into believing that it would be paid the sums due under the leases in due time or within an agreed rescheduling time when at all times the said Respondents knew or intended that no monies would be paid after 23rd December 1993”. It is necessary, therefore, to consider what was said to Ramac during 1993.

As I have said, Ramac (through its solicitors) had demanded payment of outstanding rent and other sums due by letter dated 13 May 1993. Mr Saunders had been concerned that such demand put the implementation of counsel’s scheme at risk; and had written to Mr Borgers. Mr Saunders sought instructions from Mr Bernasconi at a meeting on 19 May 1993. His attendance note records:

Following those instructions, Mr Saunders wrote to Ramac’s solicitors on 20 May 1993. His letter included these paragraphs:

Ramac’s solicitors were not content with the proposal that the monies outstanding would be paid by instalments. They pointed out that, under the terms of the leases, rent, service charges and insurance were payable in advance; and described the letter of 20 May 1993 as “a smoke screen for payment on a monthly basis”. They continued to threaten the issue of a writ.

On 25 May 1993, Mr Saunders wrote to Mr Bernasconi, noting his instructions “to delay matters for as long as possible”. On 28 May 1993 he was able to put a proposal to Ramac’s solicitors for payments of £10,000 in June and July, with a final payment of £2,951 in August to clear the outstanding balance. By early June 1993 that proposal had been accepted. The instalments were paid in accordance with the proposal.

The next quarterly rents (£18,800) fell due on 24 June 1993; but were not paid. Ramac’s solicitors sought payment by letters dated 2 and 26 July 1993. On 12 August 1993 Mr Saunders explained that he was awaiting his clients’ instructions. He wrote: “They would hope to be able to put forward some proposals shortly in connection with an instalment option”. No proposals were forthcoming. On 2 September 1993 Mr Saunders wrote to Mr Bernasconi:

Mr Saunders wrote again to Mr Bernasconi. He pointed out that Ramac was threatening to issue proceedings within the next seven days; and explained what might follow:

By 22 October 1993 Mr Saunders was in a position to promise Ramac’s solicitors that a further £5,000 would be paid by the end of the month. That sum was paid on 1 November 1993. An attendance note of a meeting on 28 October 1993, at which Mr Monti and Mr Bernasconi were present, records that it was agreed that “we would try and stall as long as possible”. On 29 October 1993 Mr Saunders was able to write to Mr Bernasconi expressing pleasure that “we have been able to stall Ramac Holdings sufficiently in order that they do not, as yet, appear to be in a position to wind up TMC Transport (UK) Limited.” As he put it: “In that regard, we have been extremely successful”.

Two more weeks went by. On 12 November 1993 Ramac’s solicitors threatened the issue of a writ by close of business that day unless proposals were forthcoming. The response was a letter from Mr Saunders of the same date. He wrote:

The first instalment of £5,000 promised by the letter of 12 November 1993 was paid on 19 November 1993. It was agreed that the date for payment of the third instalment should be brought forward to 23 December 1993. Mr Saunders explained to Mr Bernasconi that that made no difference to the position. On 25 November 1993 he wrote:

The second instalment of £5,000 promised by the letter of 12 November 1993 was paid on 8 December 1993. The third instalment - £10,000 on 23 December 1993 – was never paid. As I have already noted, on 13 January 1994 Mr Saunders was able to report to Mr Bernasconi that . . . “we have successfully utilised the one year period for the purpose of off-loading the premises at Sandwich Industrial Estate.”

I have explained that the liquidator’s case at trial was that Ramac was deceived into a belief that it would be paid the sums due under the leases in due time or within an agreed rescheduling time “when at all times the said Respondents knew or intended that no monies would be paid after 23rd December 1993”; and that it was that deception on the part of Mr Bernasconi and Mr Monti (through Mr Saunders) – and that alone - which constituted fraudulent trading. As the judge put it, at paragraph [69] of his judgment ([2001] 2 BCLC 1, 21f-g):

The judge accepted that “a purpose of the company’s business in 1993 was to carry on for a twelve month period without being wound up”. He identified, as the reason underlying that purpose, “Counsel’s advice by his second opinion that the survival for twelve months would enable Mr Monti and Mr Bernasconi to avoid restrictions on the use of the TMC name under section 216 of the 1986 Act.” He accepted that “the company, through Mr Saunders at the direction of Mr Bernasconi and Mr Monti, did from May 1993 onwards, represent that Ramac would [be paid] outstanding rent subject to demand by instalments.” But he was satisfied that “representations as to the payment of outstanding rentals were true, save in regard to the final instalment offered on 12th November 1993”. In particular, he declined to hold that the representations which were made during 1993 were representations as to the payment of rents falling due in the future. His conclusions are summarised at paragraphs [130] and [131] of his judgment ([2001] 2 BCLC 1, 39i-40b):

The question for the judge, in the light of his finding that Mr Monti and Mr Bernasconi intended to mislead Ramac on 12 November 1993 (and thereafter) by promising a payment of £10,000 on 23 December 1993 which they knew would not be made, was whether, from 12 November 1993, “any business of the company was carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose” – see section 213(1) of the 1986 Act. The judge had directed himself, earlier in his judgment (at paragraph [86]), that:

The first issue for decision on this appeal is whether the judge was correct to hold that the business of the company was carried on, from 12 November 1993, with intent to defraud creditors or for other fraudulent purposes within the meaning of section 213 of the Insolvency Act 1986. On the findings of fact which the judge made, the only creditor in relation to whom Mr Monti and Mr Bernasconi could be said to have had an intent to defraud was Ramac; and the only relevant intention in relation to Ramac was to mislead it by the promise, on 12 November 1993, of a payment which they knew would not be made. It is necessary to keep in mind that, but for the deception which flowed from the promise of payment, the judge would not have held that the business was carried on after 12 November 1993 for any fraudulent purpose. In particular, he did not hold that the carrying on of the business in the knowledge that Ramac would not be paid monies which were due to it was, of itself, a fraudulent purpose. It is clear that the liquidator had taken the view that, in the light of the decision in Sarflax, the case could not be advanced on that basis.

Miss Hoffmann, who appeared for Mr Monti and Mr Bernasconi on this appeal as she did in the court below, pointed out, correctly, that not every fraud or fraudulent misrepresentation perpetrated by a company amounts to fraudulent trading under section 213 of the 1986 Act. That was made clear by the observations of Mr Justice Oliver in In re Murray-Watson Ltd (unreported; 6 April 1977) which are cited and explained by Mr Justice Templeman in In re Gerald Cooper Chemicals Ltd [1978] Ch 262, 267. In the former case Mr Justice Oliver had said this, of what was then section 332 of the Companies Act 1948 (the statutory predecessor of section 213 of the 1986 Act):

Nevertheless, the judge relied on the Cooper Chemicals case as authority for the proposition that the defrauding of a single creditor by a single transaction can properly be described as the carrying on of a business with intent to defraud creditors – see the passage at paragraph [86] of his judgment ([2001] 2 BCLC 1, 26a-b) to which I have already referred. It is necessary, therefore, to have the facts of that case in mind. The company, through a subsidiary, was engaged in the production of indigo. It had obtained finance by way of loan, the principal amount of which was repayable on 30 June 1976. The company was in no position to make that repayment save from forward sales of indigo against pro-forma invoices. It was alleged that the loan creditor and its directors knew that, if monies paid in advance in respect of forward sales were applied in repayment of the loan rather than for the purpose of the production of indigo, no indigo would be available to satisfy the customer’s order. On 19 August 1976, the company obtained an order from Harrisons (London) Ltd for the delivery of 5,000 kilos of indigo; and, on the following day, received prepayment from Harrisons in respect of that order of an amount in excess of £125,000. Part of those monies (£110,000) were immediately paid by the company to the loan creditor (Jimlou Ltd). The company failed to deliver the indigo for which it had been paid; and subsequently went into liquidation. Harrisons brought proceedings under section 332 of the 1948 Act against the loan creditor and its directors for a declaration that they were knowingly party to the carrying on the company’s business with intent to defraud. The respondents sought to strike out those proceedings on the ground that there was no sufficient allegation of fraudulent trading. Mr Justice Templeman dismissed that application.

In the course of his judgment in Cooper Chemicals Mr Justice Templeman said this ([1978] Ch 262, 267d-268d):

For my part, I would accept that a business may be found to have been carried on with intent to defraud creditors notwithstanding that only one creditor is shown to have been defrauded, and by a single transaction. The Cooper Chemicals case is an example of such a case. But, if (which I doubt) Mr Justice Templeman intended to suggest that, whenever a fraud on a creditor is perpetrated in the course of carrying on business, it must necessarily follow that the business is being carried on with intent to defraud creditors, I think he went too far. It is important to keep in mind that the pre-condition for the exercise of the court’s powers under section 332(1) of the 1948 Act - as under section 213 of the 1986 Act – is that it should appear to the court “that any business of the company has been carried on with intent to defraud creditors of the company”. Parliament did not provide that the powers under those sections might be exercisable whenever it appeared to the court “that any creditor of the company has been defrauded in the course of carrying on the business of the company.” And, to my mind, there are good reasons why it did not enact the sections in those terms.

Until the decision of this Court in In re Cyona Distributors Ltd [1967] Ch 889, it was generally thought that the powers which section 332 of the 1948 Act conferred on the court were exercisable for the benefit of creditors as a class and not for the benefit of individual creditors – see the judgment of Lord Justice Russell (ibid) at 906g-908c. In the Cyona case the majority in this Court (Lord Denning, Master of the Rolls, and Lord Justice Danckwerts) took a different view – at least in a case where the application under section 332 was made (as it could be under that section) by an individual creditor. But the view of the majority in Cyona cannot have survived the enactment of section 213 of the 1986 Act. An application under that section cannot be made by an individual creditor; it can only be made by the liquidator. And the order which the court can now make under section 213 is for contribution to the company’s assets – cf the observations of Lord Justice Russell at page 907d-e in the Cyona case. There is no longer power to declare that persons party to the carrying on of the company’s business with intent to defraud shall be personally liable for particular debts, or (as was held in the Cyona case) to particular creditors. An individual creditor who is defrauded in the course of the carrying the business of the company has his individual remedy under the general law. Section 213 of the 1986 Act is not engaged in every case where an individual creditor has been defrauded. The section is engaged only where the business of the company has been carried on with intent to defraud.

In my view it is impossible to reach the conclusion – on the facts found by the judge in the present case – that the business of the company was carried on after 12 November 1993 (but not before) with intent to defraud creditors – or, in particular, with intent to defraud a single creditor, Ramac. The business of the company was carried on throughout 1993 (as well before as after 12 November) with intent to protect Mr Monti and Mr Bernasconi (as former directors) from the penalties to which they would otherwise be exposed under section 216 of the 1986 Act as directors of Newco. It was inherent in counsel’s scheme that, when the company did go into insolvent liquidation (as it was intended that it would at the end of the twelve month period), Ramac would be an unpaid creditor. The liquidator does not suggest that the carrying on of the business of the company with the intent to protect the former directors from penalties under section 216 of the Act – and with the knowledge that, on liquidation, Ramac would be an unpaid creditor - is, of itself, sufficient to engage section 213 of the Act. The only matter relied on is the promise, in the letter of 12 November 1993, that Ramac would be paid an instalment of outstanding rent at the end of December. The promise was intended to mislead; in the sense that it was intended to persuade Ramac that its interests were best served by not taking proceedings (including the presentation of a winding up petition) to enforce the debt which it was then owed. But it has not been shown that, by carrying on of the business of the company during the period that Ramac was so misled, Mr Monti or Mr Bernasconi intended to defraud Ramac; or, indeed, that the carrying on of the business of the company did defraud Ramac – in the sense that Ramac’s claim as a creditor in the liquidation was prejudiced by the carrying on of the business between 12 November 1993 (when, but for the misleading promise, Ramac might have presented a petition) and 23 December 1993 (when the promised payment was not forthcoming).

For those reasons, I would hold that fraudulent trading within section 213 of the 1986 Act has not been made out in the present case; and would allow the cross appeal on that ground.

It follows that I am of the view that it is unnecessary to decide the remaining issues raised by the appeal and cross appeal. But, in the circumstances that they were fully argued before us, I think it appropriate to address them. I can do so shortly.

The judge declined to hold Mr Monti and Mr Bernasconi party to fraudulent trading prior to 12 November 1993 on the ground that “representations as to the payment of outstanding rentals” made before the letter of 12 November 1993 “were true”. As he put it, at paragraph [121] of his judgment ([2001] 2 BCLC 1, 37c-d):

In the light of his finding that they had been parties to fraudulent trading after 12 November 1993, the judge assessed the contribution to be made by Mr Monti and Mr Bernasconi at £17,500 (exclusive of the punitive element, also £17,500). He did so on the basis that that was the amount which the company would have had to pay to Ramac “to buy off a writ issued on or shortly after 12 November 1993” – see paragraphs [145] and [160] of his judgment ([2001] 2 BCLC 1, 42h-43a, 46c). That might or might not have been the correct measure of damage in an action brought by Ramac in the tort of deceit – given the judge’s view that, but for the deceptive promise made in the letter of 12 November 1993, Ramac would have issued proceedings for outstanding rent, which the company would have then paid – but it is not, in my view, the proper basis on which to assess the amount of contribution to be made under section 213 of the 1986 Act.

The power under section 213(2) is to order that persons knowingly party to the carrying on of the company’s business with intent to defraud make “such contributions (if any) to the company’s assets” as the court thinks proper. There must, as it seems to me, be some nexus between (i) the loss which has been caused to the company’s creditors generally by the carrying on of the business in the manner which gives rise to the exercise of the power and (ii) the contribution which those knowingly party to the carrying on of the business in that manner should be ordered to make to the assets in which the company’s creditors will share in the liquidation. An obvious case for contribution would be where the carrying on of the business with fraudulent intent had led to the misapplication, or misappropriation, of the company’s assets. In such a case the appropriate order might be that those knowingly party to such misapplication or misappropriation contribute an amount equal to the value of assets misapplied or misappropriated. Another obvious case would be where the carrying on of the business with fraudulent intent had led to claims against the company by those defrauded. In such a case the appropriate order might be that those knowingly party to the conduct which had given rise to those claims in the liquidation contribute an amount equal to the amount by which the existence of those claims would otherwise diminish the assets available for distribution to creditors generally; that is to say an amount equal to the amount which has to be applied out of the assets available for distribution to satisfy those claims. In the present case there is nothing to suggest either (i) that the deception which the judge found to have been practised on Ramac led to the misapplication or misappropriation of the company’s assets, or (ii) that the letter of 12 November 1993 led Ramac to make a claim in the liquidation that it would not otherwise have had. In my view there was no material on which the judge could have reached the conclusion that it was correct to order contribution of £17,500, or any other sum.

The judge added a punitive element to the amount which he would otherwise have regarded as sufficient “simply to reflect the loss I find attributable to Ramac”. He did so for the reasons which he expressed at paragraph [161] of his judgment ([2001] 2 BCLC, 1, 46e-g):

The judge had found that Mr Monti and Mr Bernasconi had been advised that they were entitled “to cause the company’s assets to escape Ramac’s claim to future rent” by applying those assets in payment of other creditors; they were entitled to think that preferring some creditors to others was not dishonest. The dishonesty lay in promising (in the letter of 12 November 1993) a payment of £10,000 which they did not intend to make. I accept that the dishonesty which the judge found deserved criticism; but, for my part, I cannot see that it compounded (or was compounded by) dishonesty which the judge did not find to have been made out. Be that as it may, I am not persuaded that there is power to include a punitive element in the amount of any contribution which, in the exercise of the power conferred by section 213(2) of the 1986 Act, a person should be declared liable to make to the assets of the company. As I have said, I think that the principle on which that power should be exercised is that the contribution to the assets in which the company’s creditors will share in the liquidation should reflect (and compensate for) the loss which has been caused to those creditors by the carrying on of the business in the manner which gives rise to the exercise of the power. Punishment of those who have been party to the carrying on of the business in a manner of which the court disapproves –beyond what is inherent in requiring them to make contribution to the assets of a company with limited liability which they could not otherwise be required to make – seems to me foreign to that principle. Further, the power to punish a person knowingly party to fraudulent trading – formerly contained in section 332(3) of the 1948 Act – has been re-enacted (and preserved) in section 458 of the Companies Act 1985. It could not have been Parliament’s intention that the court would use the power to order contribution under section 213 of the 1986 Act in order to punish the wrongdoer. In my view, had the judge been right to find fraudulent trading in the present case, he would, nevertheless, have been wrong to include a punitive element in the amount of contribution which he ordered.

If the punitive element were excluded – as I think it should have been – I can see no basis upon which Mr Monti and Mr Bernasconi could have been required to make a contribution which went beyond that needed to compensate the creditors of the company (including Ramac) for the loss attributable to the fraudulent trading to which the judge had held that they were knowingly party. On the basis that (on the judge’s view) the creditors had already been over-compensated by the payment of £75,000 made by the solicitors, there was no reason to require further payment to be made by the directors. The judge was right to treat their liability as satisfied by the solicitors’ payment.

In my view the judge was right, also, to make no order against Mr Monti and Mr Bernasconi in respect of the costs incurred by the liquidator after the date (13 September 2000) on which the liquidator accepted that payment. It is said that the liquidator was entitled to pursue them for contribution for so long as there was a possibility that Accoulis might claim in the liquidation in competition with Ramac. But there was nothing to suggest that that was ever a real possibility – Accoulis had lodged no proof of debt – and, if that was of concern to the liquidator, he could have raised the point.

I would allow the applications for permission to appeal. I would dismiss the liquidator’s appeal. I would allow the directors’ cross appeal on ground 3 in their respondents’ notice. In those circumstances it is unnecessary to make any order in relation to grounds 1, 2, 4 and 5 of the respondents’ notice.

I agree with my Lord and have nothing to add.

Lord Justice Aldous:

I also agree.

The appellant is granted permission to appeal on ground 1 of the appellant’s notice;

The respondent is granted permission to appeal on grounds 1 and 2 of the respondent’s notice;

The appeal is dismissed;

The respondent’s cross-appeal on ground 3 of the respondent’s notice is allowed and there be no order on grounds 1, 2, 4 and 5 of the respondent’s notice;

The order dated 5^th February 2002 of Mr Anthony Elleray QC sitting as a judge of the High Court is set aside and the action against the respondents is dismissed; the appellant do pay the respondents’ costs of the appeal and the respondents cost of the action.