Nicholson & Anor v Ghuman & Ors, Re Octavian Security Ltd

The applicants in this case, Mr. Nicholas Nicholson and now Mr. Stratford Hamilton, are the joint liquidators of Octavian Security Limited, which I shall refer to as "the company" or "OSL". The first and second respondents, Mr. Sukhjit Ghuman and his wife Mrs. Kiranjit Ghuman, were at various times officers of OSL and, on the applicants' case, were at all relevant times de facto if not de jure directors of OSL. C E Security Ltd., formerly Octavian Continental Ltd., the third respondent was, or appeared to be until after November 2009, a dormant company but became active to acquire the assets of OSL from administrators pursuant to a pre-pack in January 2010.

The applicants contend that Mr. and Mrs. Ghuman were the directors and the controlling mind of the third respondent (which I shall refer to as 'CESL') at all material times, and certainly they were formerly directors until well into 2010. Mr. Ghuman sold his shareholding in CESL in August 2015 and he resigned as a director of that company then.

In broad terms, the applicants raise four courses of events as the subject matter of this action. First, they refer to undocumented payments by OSL to Mr. Ghuman over the periods January to November 2009, which total £174,682.29. Secondly, they refer to undocumented payments by OSL to Mrs. Ghuman over the same period, January to November 2009, which total £38,333.48. Thirdly, they refer to three unexplained payments by OSL to CESL over the period 10^th to 19^th November 2009, which total £125,591.36. Fourthly, they refer to a payment by OSL to Clydesdale Bank in 2010, probably on or around 27^th July 2010, in the sum of £68,827.01, recovered under the terms of a factoring contract, in respect of costs of a freezing order relating to an alleged fraud by which Mr. and Mrs. Ghuman were said to have diverted customer payments from OSL's Clydesdale Bank account to a bank account with Barclays in the name of a similarly named connected company, Octavian Security (UK) Ltd.

The applicants' claim against CESL was compromised yesterday, 14^th December 2016, on the first day of this trial. The compromise is the subject of a Tomlin order and the terms agreed between the applicants and CESL are confidential.

The third claim that I have referred to is therefore no longer live against CESL and is continued only against Mr. and Mrs. Ghuman under the procedure under s.212 of the Insolvency Act 1986 for misfeasance. If the applicants are successful, and if they seek to enforce liability established against Mr. and/or Mrs. Ghuman, measures will obviously be required to guard against the risk of double recovery. That is not to suggest that there is a real risk but merely to ensure that proper assurances can be provided to Mr. and Mrs. Ghuman.

The legal basis of the various claims against Mr. and Mrs. Ghuman is as follows: The first claim, for the £174,000-odd paid to Mr. Ghuman, is sought, first, against Mr. Ghuman as a transaction at an undervalue, alternatively as a preference and, in the further alternative, as unlawful distributions, and, separately, against Mr. and Mrs. Ghuman jointly and severally for breach of duty as directors via the s.212 procedure for misfeasance.

The claim for £38,000-odd against Mrs. Ghuman is also sought against her as a transaction at an undervalue, alternatively as a preference, and, separately, against both of them as a breach of duty via the misfeasance procedure.

The third and fourth claims, namely the £125,000-odd and the £68,000-odd, are both sought against Mr. and Mrs. Ghuman jointly and severally under the s.212 misfeasance procedure.

In the event, the trial has been completed well within the trial timetable. Quite apart from the efficiency and clarity of the advocacy of Mr. James Pickering, who appears for the applicants, and the conciseness of the trial bundle prepared by the applicants' solicitors, Moon Beever, there are two other important factors. First, the claim as between the applicants and the third respondent was compromised by negotiation which took most of the morning of the first day of the trial. Secondly, Mr. Ghuman, for himself and Mrs. Ghuman, made a telephone application for an order to adjourn the trial to April 2017. On the available evidence, and after hearing Mr. Ghuman, it was apparent that that was a hopeless application which I refused.

In the course of the application Mr. Ghuman said that he was in New York, USA, and for that reason I adjourned the trial rather than continue with it yesterday to afford him and Mrs. Ghuman an opportunity to attend at the start of today, the second day, 15^th December 2016. Mr. Ghuman did not attend and neither did Mrs. Ghuman. Mr. Ghuman evidently contacted Mr. Pickering later yesterday to say that he would not be able to attend. He also engaged in email dialogue with Moon Beever yesterday afternoon. Moon Beever made an email location tracker enquiry, the result of which evidently cast doubt on Mr. Ghuman's stated location. It indicates that he was more likely to have been at or near his UK address. Be that as it may, and I make no finding one way or the other, the position at the start of today was that it fell to Mr. Pickering to prove the applicants' case. To that end Mr. Pickering made submissions and Mr. Nicholson, one of the applicants, gave brief oral evidence.

I should also add that during yesterday afternoon and during the negotiating period yesterday morning, because the trial did not proceed I had an opportunity to read the evidence. My reading included the sixth and seventh witness statements of Mr. Nicholson and the witness statement of Mr. Ghuman. I also read the evidence sworn in freezing injunction proceedings by Clydesdale Bank against OSL and Octavian Security (UK) Ltd by Mr. Robert Payne, Clydesdale's solicitor, and also by Mr. Ghuman, Mrs. Ghuman and by a Mr. Josias Engelbrecht, a sometime director of OSL.

I now turn to the relevant law. In so doing, I make clear that I consider it unnecessary to have regard to the applicants' secondary cases. Transactions at undervalue are addressed at s.238 of the Insolvency Act 1986. It is a precondition that the company should have entered into administration or gone into liquidation, and the claim is made at the suit of the office holder. The issue is whether, at a relevant time, the company gave away or disposed of assets (including money) for no consideration or for significantly less valuable consideration. A relevant time is two years before the onset of insolvency. In this case it is not necessary to ascertain the precise date for the onset of insolvency because a winding up order was made in July 2010, and no transaction at an undervalue is alleged to have occurred before 2009.

Section 238(5) provides that:

This insolvency condition is presumed where the recipient, or other transacting party, is connected with the company. So, the evidential burden is on that party, here Mr. and Mrs. Ghuman, to demonstrate that company's (that is OSL's) solvency.

As alternative cases for the first and second claims, that is the payments directed to Mr. Ghuman and to Mrs. Ghuman, and as the main legal basis for the third and fourth claims, that is the payment to the third respondent, and the costs that fell under contract upon OSL, the applicants invoked the misfeasance summons procedure under s.212 of the Insolvency Act 1986. They seek to recover from Mr. and Mrs. Ghuman jointly and severally as directors of OSL acting in breach of duty. Section 212 is engaged where an officer, or former officer, of a company has misapplied, retained or become accountable for any money or other property of the company or has been guilty of any misfeasance or breach of any fiduciary duty or other duty in relation to the company.

Directors' duties, beyond the fiduciary obligation, are now enshrined in the Companies Act 2006 at s.171 to 177, which require directors to act within their powers (s.171); to promote the success of the company (s.172); to exercise independent judgment (s.173); to exercise reasonable skill, care and diligence (s.174); to avoid conflicts of interest (s.175); not to accept benefits from third parties (s.176); and, to declare the interests of a proposed transaction (s.177). Even so, acting in breach of duty, directors may be absolved from liability, or avoid liability, where they can be seen to have acted honestly and reasonably and where, having regard to all the circumstances, the court is of the view that they should be released from liability on such terms as the court may think fit. That is the effect of s.1157 of the Companies Act 2006.

I shall take each of the four claims in turn, but before doing that I shall address briefly two other issues. The first is whether or not Mr. and/or Mrs. Ghuman were directors of OSL in 2009 and the second is OSL's solvency or insolvency in 2009. As to the first issue, whether Mr. and/or Mrs. Ghuman were directors of OSL in 2009, the starting point is the formal records of the company's registry. Mr. Ghuman was appointed, resigned and was reappointed as a director of OSL several times. So far as is relevant, he last resigned on 30^th January 2008 and he was not reappointed prior to OSL's entry into administration. The second respondent, Mrs. Ghuman, resigned as a director of OSL on 6^th November 2009 and she too was not reappointed. However, there is telling and compelling evidence that, whatever the formal position may have been, Mr. and Mrs. Ghuman each conducted themselves as, and were regarded and treated as, directors and the controlling mind of OSL. Section 250 of the Companies Act 2006 defines a director as including any person occupying the position of director, by whatever name called. Thus it is the factual position which matters.

The evidence pointing to Mr. Ghuman being a director includes that sworn in the Clydesdale Bank proceedings against OSL in December 2009 and January 2010 by Mr. Ghuman himself, by Mrs. Ghuman, and by Mr. Engelbrecht. Mr. Ghuman is referred to as the chief executive officer, having responsibility for the day-to-day management of OSL. Mrs. Ghuman is described as a finance manager. During the telephone application for an adjournment yesterday, Mr. Ghuman urged on me, as one of a number of critical reasons for granting an adjournment, that Mrs. Ghuman is currently ill and that she is a vital witness because she was OSL's “finance director”; those words were Mr Ghuman’s own description of Mrs Ghuman’s role. A further illustration of Mr. Ghuman's authority is that the instruction in November 2009 to OSL's clients to cease payment directly to Clydesdale Bank and to pay instead an account in the name of Octavian Security (UK) Ltd. at Barclays. That instruction came from Mrs. Ghuman by email via her PA. Mrs. Ghuman's affidavit in the Clydesdale proceedings stated that Mr. Ghuman managed OSL's finances whilst she was ill, and her own evidence is that she returned to work in late November 2009.

In an email exchange between Mr. and Mrs. Ghuman, on one side, and an officer of Clydesdale Bank, on the other, in July 2009 (that is one and a half years after Mr. Ghuman resigned as a director of OSL), he and Mrs. Ghuman refer to "our" credibility as directors being questioned by the Bank.

I have no hesitation in finding that Mr. Ghuman and Mrs. Ghuman were each, at all material times, directors of OSL.

As to the second issue of OSL's solvency or insolvency, I have been referred to a note that the management accounts of OSL, prepared as at 30^th June 2009, show overall net assets slightly in excess of £300,000. However, the net current liability position shows net current liabilities in excess of £40,000. The more critical evidence is that OSL had adopted a policy of paying less than was due on wages by way of PAYE and NI through HMRC. In other words, HMRC was used as a source of funds or working capital. The HMRC liability account was last at nil on 30^th June 2006. From then onwards there was a steadily increasing upward trend. As from January 2009 the debt was never less than £795,000; and, as from April 2009 it constantly exceeded £1million. The balance on 2^nd October 2009, which is the last entry available to the applicants, was in excess of £1.5million. It was clearly higher by the time the company entered administration. Including interest and some penalties, HMRC has submitted a proof in the liquidation for a sum in excess of £2.5million. This points to an inability to pay debts as they fall due.

As to balance sheet solvency, Mr. Nicholson provided information in answer to a question from me to the effect that no provision at all was made by the company for PAYE or national insurance in respect of Mr. and/or Mrs. Ghuman. This sheds light on the payments to them.

On the material before me there is no basis on which I can conclude that OSL was other than insolvent at all times from 1^st January 2009 onwards, if not before. In other words, at all material times.

I turn now to the four categories of payment. Starting with the £174,682.29 paid to Mr. Ghuman in numerous payments over the period June to November 2009. These have been described by Mr. Ghuman as variously dividends and, in respect of sums totalling £30,000 paid on 13^th November 2009, as severance. Given that Mr. Ghuman formally resigned as a director on 30^th January 2008, and that there is no payroll or PAYE or national insurance record for him, it is not clear what he was severed from. On the evidence before me, there is no documentation at all in OSL's books and records to explain any payment by way of dividends, severance pay or otherwise to Mr. Ghuman during that period. The only explanation from Mr. Ghuman was given in oral examination before a District Judge when he described the payments as part of his remuneration. However, and despite assurances from Mr. Ghuman that his tax records could be produced, nothing has been produced by him to support this assertion.

In this case there is no basis on which I can accept Mr. Ghuman's word without clear independent or documentary corroboration. I therefore conclude that the payments to Mr. Ghuman were gifts and consequently transactions at an undervalue.

OSL had no business making these payments to Mr. Ghuman, and Mr. Ghuman and Mrs. Ghuman, as directors, were duty bound not to procure the payments and were equally duty bound to seek to recover them in fulfilment of their duties as directors. Their failure to do so was a breach of duty as a director of OSL. It was also dishonest by ordinary standards and unreasonable. Mr. Ghuman and Mrs. Ghuman were plainly misfeasant and are jointly and severally liable under the s.212 procedure to restore those sums to OSL.

I now turn to the payment of £38,333.48 to Mrs. Ghuman. These payments comprise a payment of £30,000 on 13^th November 2009, described as severance, a further unidentified payment of £1,000, and eleven payments over the course of 2009 totalling £7,333.48, said to represent rent of a house owned by Mrs. Ghuman and occupied by the company's employees.

As to the £30,000, Mrs. Ghuman was absent from work through illness from September to November 2009, but she was not severed from her employment. On the evidence before me, she remained of the same status although not attending at work. The £1,000 is wholly undocumented. As to the £7,300-odd for rent, whilst it is accepted by the applicants that Mrs. Ghuman owns the property in respect of which rent is said to have been paid, there is no documentation available to the applicants to support a licence or a tenancy agreement and none has been produced by Mrs. Ghuman. There is therefore no documentary evidence at all to explain or justify, with any degree of credibility, the payments totalling £38,333.48 to Mrs. Ghuman.

These payments are, therefore, also effectively gifts to Mrs. Ghuman which fall within the definition of transactions at an undervalue and she is liable on that account. Further, and as with the £174,000-odd paid to Mr. Ghuman, Mr. Ghuman and Mrs. Ghuman, as directors of OSL, are jointly and severally liable for the misapplication of OSL's monies and should be ordered to restore it or to pay the equivalent sum pursuant to s.212.

Next I come to the £125,591.86 paid to the third respondent in three amounts over the period 10^th to 19^th November 2009: a payment of £30,000, a payment of £40,000 and a payment of £55,591.86. It is clear from OSL's bank statements that these sums were almost immediately paid away to Mr. Ghuman. Mr. Ghuman and Mrs. Ghuman were directors of the third respondent and Mrs. Ghuman signed off the third respondent's accounts as at 30^th November 2009, on or about 27^th July 2010, as a dormant company.

In witness evidence Mr. Ghuman said that the payments were made for genuine commercial reasons, and he referred to a settling of inter-company liabilities, including in the equation a third company, Octavian Recruitment Ltd, which was said to owe money to OSL and be owed money by Octavian Continental Ltd. That makes no sense in the context of the third respondent, Octavian Continental Ltd (as it then was), having the status of a non-trading dormant company. In private examination, Mr. Ghuman said he was unable to give a clearer explanation because Mr. Avhninder Pawar had left the companies in acrimonious circumstances, taking the company's books with him. However, on the evidence, Mr. Pawar had had no involvement with the third respondent and it was not explained how Mr. Ghuman was not able himself to explain or access an answer.

All of this, and the fact Mrs. Ghuman, who was a recipient of the company's bank statements which showed significant commercial activity, was nevertheless prepared to sign off those accounts as for a dormant company, tells damningly against them both.

In respect of this issue, I have no hesitation in finding Mr. and Mrs. Ghuman jointly and severally liable in misfeasance under the s.212 procedure.

Finally, I come to the claim in respect of £68,827.01. This liability fell on OSL because, and only because, of an alleged attempted fraud by Mr. and Mrs. Ghuman in relation to OSL's factoring facility with its bankers, Clydesdale Bank. There being no contrary explanation, I conclude that the liability was caused by Mr. and Mrs. Ghuman's wrongdoing, in obvious breach of their fiduciary duties as directors. There is no ground on which I can do other than hold them liable, jointly and severally, under the s.212 procedure.

That is my judgment.