Hinton v Stobinski

The latter issue gave rise to an interesting, if arid, argument about the scope of the use of s 212 Insolvency Act 1986 and the procedural consequences, which, although important, made little or no difference to the overall result in this case, but might do in others.

The liquidator’s claims were brought by way of application in the liquidator’s name under r 1.35 Insolvency (England and Wales) Rules 2016. A procedural objection to that was raised on behalf of the respondent, Dr Stobinski, which turned on the scope of s 212. Counsel for Dr Stobinski submitted that the liquidator was precluded from asserting a claim in debt against his client by an application under r 1.35 because only “insolvency proceedings” (i.e. proceedings under Parts A1 to 11 Insolvency Act 1986) could be brought by such an application. He submitted that a debt claim did not fall within the definition of “insolvency proceedings” so s 212 was not an available gateway to doing so. Instead, a debt claim had to be brought in the name of the company using the CPR Part 7 procedure. He relied on Manolete Partners plc v Hayward and Barrett Holdings Ltd [2022] 1 All ER (Comm) 1293 (in which the deputy judge had appeared) as authority for this, but also contended that, unlike the position in that case, the liquidator’s debt claim in the present case was a nullity incapable of cure.

Section 212 provides:

(1) This section applies if in the course of the winding up of a company it appears that a person who–

1. 1. is or has been an officer of the company,
      […]
      has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
      […]

(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him–

1. 1. to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or
   2. to contribute such sum to the company’s assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.

The procedural argument turned largely on the words “or other duty in relation to the company” in s 212(1).

It will be recalled that in Manolete, an assignee had sought to bring in its own name claims that had formerly been vested in two companies in liquidation as well as claims formerly vested in the company’s office-holder under s 239 Insolvency Act. Had the company claims not been assigned, they could have been pursued by the liquidator in his own name using the statutory gateway in s 212 of the Act, but the assignment meant that  s 212 was no longer available as a means of bringing the company claims because it could only be used by an office-holder, which the assignee in Manolete was not. The court accepted that submission, but, rather than dismissing the claims, it directed the assignee to pay the issue fee for a Part 7 claim and made an order rectifying the proceedings under CPR r 3.10 without the need to issue a separate claim.

In the present case, counsel for the applicant liquidator offered a similar undertaking and invited the court to make an order rectifying the proceedings. Counsel for Dr Stobinski submitted that a workaround of that kind was not available here because of an important factual difference between the Manolete case and this one. He argued that there were two stages to consider. First, he said, there was established authority that a simple debt claim could not be pursued by a liquidator using the s 212 statutory gateway, a proposition that had been put beyond doubt in In re ETIC Limited [1928] Ch 861, at 871. Second, the proceedings had been commenced by the liquidator in his own name, yet he had never had title to the debt claim, which was an asset of the company and could be pursued only by and in the name of the company. That made all the difference, because in each of Manolete (and a predecessor case,  Re Taunton Logs Ltd (in liquidation) [2021] BPIR 427) the applicant had title to sue on the cause of action in question: in Manolete, the assignee had itself owned the claim, and in Taunton Logs the company had been named as a co-applicant along with the office-holders in the application notice. The defects in Manolete and Taunton Logs did not go to standing or title to sue but were simply concerned with the form of originating process employed; in the present circumstances, by contrast, the debt claim purportedly commenced by the liquidator without title had always been a nullity.

The deputy judge expressed surprise that the question of whether or not breach of a duty to repay a contractual debt fell within s 212 had not been considered since the wording of the provision had been introduced, but, having given counsel for the parties an opportunity to research the point, he concluded that there had indeed been no reasoned decision on the issue: “I emphasise here ‘reasoned’”, he said, “as Re ETIC has been applied in support of the proposition that such a debt claim is not covered by s 212 during that time, but apparently without any argument or decision on [the] point that the statutory provision under which that case was decided was relevantly different from the modern wording.” Accordingly, it fell to counsel for the parties to argue their respective positions from first principles.

Counsel on both sides agreed that in the ordinary course a borrower is under a contractual obligation to the lender that may properly be described as a “duty” to repay a loan in accordance with its terms. However, in Re ETIC the court had held that the word “misfeasance” in a predecessor provision meant “misfeasance in the nature of a breach of trust” and did not extend to a debt claim against a director. That proposition had been repeated since the enactment of s 212 Insolvency Act 1986 but not subjected to analysis or reasoning: see Re Eurocruit Ltd (in liquidation) [2007] 2 BCLC 598 and Re Taunton Logs, in  both of which the proposition had simply been accepted, as it had been in McPherson & Keay’s Law of Company Liquidation and Goode on Principles of Corporate Insolvency Law.

The deputy judge ultimately sided with the position taken by counsel for Dr Stobinski:

“A straightforward reading of the expanded words of s.212 seems to support Mr Hodge’s [counsel for the liquidator] interpretation: where a director fails to repay a debt owed to their company, they would seem to have breached ‘…any other duty in relation to the company.’ But I have nonetheless reached the conclusion that Mr Brown [counsel for Dr Stobinski] is correct. First, there is considerable authority, including at Court of Appeal level, that has emphasised that the provision now found in s.212 of the IA 1986 is concerned with wrongdoing in the sense of misconduct: see, for example, Kingston Cotton Mill Company (No 2) [1896] 2 Ch 279, 288, per Lopes LJ; In re ETIC, 872, per Maugham J; Cohen v Selby, 183d, per Chadwick LJ. Mr Brown is right that non-repayment of a straightforward debt cannot necessarily be characterised in that way. Second, the types of wrong covered by the old version of the provision were ones that arose from breaches of duty to which the wrongdoing director was subject as a consequence of their office as such, i.e. by reason of being subject to a fiduciary duty qua director. In the passage already cited from In re B Johnson & Co (Builders) Ltd, Evershed MR appeared to suggest, at 648, that to be actionable under the provision the range of acts had to be ones ‘…done by the person charged in his capacity as “promoter, director,” etc’ (emphasis added). There is nothing to indicate that the new words on which Mr Hodge relies (‘…any other duty in relation to the company’) were intended to introduce liabilities unconnected with the respondent’s office as a director. Further, the words relied on are general catch-all words and they should be construed ejusdem generis as being within the same class as the preceding words. If they are read in that way, then although they are apt to expand the scope of the provision to capture a breach of a common law duty of care (i.e. a duty other than a fiduciary duty to which a director is subject in their capacity as such), the same logic does not apply in relation to a duty to repay a simple debt obligation. A liability to repay a debt arises under the relevant contract of loan and is not a necessary incident of a director’s office; it is of a different quality to duties (whether fiduciary or at common law) that come with that office and which are covered by s.212.”

But, as the deputy judge also said,

“[I]t will often be the case that where a director is subject to a liability capable of being described as a director’s loan account, the facts giving rise to that liability will also be capable of being characterised as disclosing a breach of duty in their capacity as director. For example, the loan may not have been properly disclosed or authorised under s.197 of the CA 2006 in the first place, or the director may have continued drawing on it without regard to creditors at a time when those interests were relevant, or in failing to repay the director may otherwise have preferred their own interests to those of the company. Where those kinds of features are present, then the director’s liability may be brought within the scope of s.212 of the IA 1986. By definition, the discussion in the preceding paragraphs applies to cases where the liability under a director’s loan is not alleged to have any features of that kind and is simply a lawful loan due for repayment.”

That was, in fact, the reality of the outcome in this case which was ultimately unaffected by the procedural argument that prevailed: the judge reached the view on the evidence, and having regard to the creditor duty, that Dr Stobinski was  liable to compensate the company in the same sum as the director’s loan account balance by reason of breach of his fiduciary duties under ss 172 and 175 Companies Act and his common law duty of care under s 174 of that Act. The liquidator was therefore largely successful in his claim. The deputy judge also declined to hold that the liquidator’s debt claim was a nullity, indicating that he would have allowed rectification under CPR r 19.2 and r 3.10, if it had been necessary.

The main lesson from the judgment in this case is that a simple debt claim such as one under a director’s loan account cannot be brought using the s 212 gateway as it does not amount to “misfeasance” or breach of “any other duty in relation to the company” within the meaning of the provision, following In re ETIC Limited; but it is also a more general warning to ensure that any claim brought under s 212 does fall within the scope of “insolvency proceedings”  as defined before bringing it by application notice rather than claim form.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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