FEATURE Southill Finance Limited (in ) – looking back in anger

Southill Finance Limited (in Liquidation) – looking back in anger A recent case throws light on how far conventional time periods of investigation may be stretched where losses are concerned.

The current climate opportunity to challenge and avoid effect of which was, to the knowledge of the It has been 17 years since the end of the transactions at an undervalue (s238) and director at the time of the transaction, last official recession during which time, preferential payments to (s239) ultimately to leave the company unable to barring the dot.com collapse, companies and to launch actions for fraudulent (s213) pay its creditors. A of a company around the world have experienced or wrongful (s214) trading. that was cash rich in a boom period may, unprecedented growth. During a boom, However, preferential payments may however, be hard pressed to prove that a few people complain about the handling of only be set aside if they take place within director had this knowledge. An action for companies that generated high returns. the six months prior to the onset of wrongful trading involves establishing that However, as the boom recedes and finances , or two years if to a ‘connected at a point in time prior to the become stretched, losses come to light person’. Transactions at an undervalue commencement of the winding up of the from actions that may have occurred many years in the past. The passage of time will have taken many of these actions beyond conventional limitation periods and out of Here, the applicants sought to challenge actions of the the scope of insolvency recovery actions. finance director dating back to the 1980/90s, a number of years The recent case of Southill Finance Limited (in Liquidation) [2009] EWCA Civ 2 before the company was wound up and more than 15 years provides a timely reminder that, in certain before the case was heard. instances, the limitation period may be extended. Here, the applicants sought to challenge actions of the finance director must similarly have been entered into up to company, a director knew or ought to have dating back to the 1980/90s, a number of two years prior to the onset of insolvency. concluded that there was no reasonable years before the company was wound up Both actions must be brought within six prospect that the company would avoid and more than 15 years before the case was years of the company entering going into insolvent liquidation. There is heard. or liquidation. no maximum look-back period, although A claim for may in practice it may be difficult to establish Actions available to swell the insolvency allow a liquidator to look further back to a the relevant knowledge more than a few estate – look-back periods time when it appeared that the company months prior to the liquidation. Actions for The insolvency of a company triggers a had been carried on with the intent of fraudulent or wrongful trading must be number of potential actions under the defrauding the creditors of the company. commenced within six years from the date . This gives the An example would be a transaction, the of the liquidation.

28 | Summer 2009 Editor [email protected] | Recruitment [email protected]/recruitment Southill Finance Limited (in Liquidation) – looking back in anger FEATURE

Section 423 (Transactions defrauding he never expected to have to deal. Mullarkey made his application but he creditors) Insolvency Act 1986 allows a However, the Limitation Act 1980 provides relied in the first instance on s21(a) of the victim to challenge a transaction entered that no limitation period shall apply to an Limitation Act 1980 – stating that Broad into at an undervalue: action by a beneficiary under a trust, being had acted in fraudulent breach of trust. No (i) for the purpose of putting assets an action: argument was made in relation to s21(b) – beyond the reach of a current or future • s21(a) in respect of any fraud or recovery of trust property. On his own case, of the company; or fraudulent breach of trust to which the despite prompting from the judge, (ii) which is otherwise prejudicial to the trustee was a party or privy; or Mullarkey therefore had to establish fraud interests of such a person in relation to • s21(b) to recover from the trustee trust or the limitation period would provide a a claim which he is making or may property or the proceeds of trust defence to the claims against Broad. make. property in the possession of the The case was hampered by the passage A liquidator or administrator may trustee, or previously received by the of time and the incompleteness of evidence bring the action on behalf of the creditors trustee and converted to his use.1 but the judge did find that Broad had of the company who were collectively the Southill Finance is a case where the received loans in breach of the Companies victims of a transaction. There is no limit on applicant sought to bring proceedings in Act 1985, which were not repaid or how far back in time you can go, and nor is relation to breaches of duty which would disclosed on the winding up. However, the it necessary to establish that the company ordinarily have been time-barred. The case judge found insufficient evidence that was insolvent at the time. However, it will be is also of note because the application Broad had used his powers in a way that necessary to establish that the defendant under s212 was brought by a creditor of the established fraudulent breaches of duty. was motivated to put assets beyond the company and not the liquidator. Broad’s actions were not inconsistent with reach of creditors or that his or her actions the possibility of honest conduct or were prejudicial to potential creditors. If The facts of the case inadvertent action rather than deliberate the company was solvent at the time, the Southill Finance Limited (Southill) was or reckless fraudulent conduct. latter requirement may be difficult to satisfy. incorporated in 1984, as the finance Accordingly, Mullarkey had not satisfied Southill Finance concerned a claim vehicle to a group of companies s21(a) and so the claim was time-barred. under s212 () Insolvency Act specialising in subsidence control (the On appeal, Mullarkey sought to change his 1986. This provides any creditor, official Southill Group) of which Mullarkey and claim and argue that no limitation period, receiver or liquidator with the power to Broad were directors and ultimate owners. applying s21(b) Limitation Act 1980. The apply to court where an officer of the Mullarkey alleged that over the course of court was concerned that at trial, evidence company has misapplied or retained any the late 1980s Broad had, in fraudulent necessary to enable the court to determine money or other property of the company breach of his fiduciary duty as a director, whether this section was made out had not been put before the court in the first instance and refused to allow the appeal. Setting aside practical difficulties, the same set of facts There may be alternatives may give rise to a number of alternative lines of attack. In There are inherent practical difficulties in considering which to pursue, regard should be had to the reaching back in time and challenging relevant limitation and the timing constraints. historic actions. In the case in question, the working papers of the auditor had been destroyed, the records were incomplete or been guilty of any misfeasance or breach come to use Southill as a vehicle to transfer and the participants’ recollections were of any fiduciary or other duty in relation to property and provide unauthorised loans hazy. However, if Mullarkey had from the the company. It is not necessary to establish to himself and companies under his control outset based his case on both limbs of s21 that the company was insolvent at the time. outside of the Southill Group that were Limitation Act 1980 and been able to prove The court can examine the officer’s never fully paid or disclosed on the relevant elements of the claim and of conduct and make an order for him to liquidation. those provisions, he may have succeeded in repay money, restore property or Southill had ceased to trade in 1993 extending the limitation period and contribute to the assets of the company. and was wound up in 1995. The liquidator obtaining an order that funds be repaid. Actions of this nature are ordinarily had reported to the Official Receiver that Setting aside practical difficulties, the same brought by the liquidator rather than the despite his suspicions he had not found any set of facts may give rise to a number of creditors themselves, as any award goes to evidence of wrongdoing. Mullarkey alternative lines of attack. In considering the benefit of the creditors as a whole. therefore brought the claim, acting as a which to pursue regard should be had to Section 212 provides a simpler creditor of Southill under an assignment of the relevant limitation and the timing procedure than ordinary civil proceedings debts by Southill Group subsidiaries, constraints. In addition, where the for the recovery of property or seeking an order against Broad pursuant to liquidator cannot or will not bring compensation on the company’s winding s212. proceedings, there may be matters that can up but, importantly, does not create a new be pursued by others affected by the cause of action. A cause of action under The limitation issue actions in question. existing law will need to be established, for Mullarkey accepted that the limitation example, a breach of duty of care or breach period would be a complete bar to the 1 Section 32 provides an additional exception where the of trust. Accordingly, an action under s212 claims as the relevant breaches of duty had defendant has fraudulently concealed his action from the is subject to the same limitation as the taken place more than six years before claimant but this was not argued in Southill. underlying cause of action. Where the relevant events took place more than six years prior to the winding up, an action under s212 may not therefore be available to the liquidator or creditors.

Overreaching the limitation period Devi Shah is a partner and Jeremy Snead is an The limitation period is intended to associate in the , and provide a defendant with a procedural Insolvency team at Mayer Brown in London. defence to a stale claim; a claim with which

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