Director's attempt to defraud bankrupt's creditors was fraudulent trading: High Court

Out-Law Legal Update | 05 Jul 2019 | 12:40 pm | 3 min. read

A director of a company that had played a significant part in a third party bankrupt's scheme to distance his assets from creditors was found to have breached her fiduciary duties to the company and engaged in fraudulent trading.

  • Company was used to distance assets from bankrupt's creditors
  • Liquidator brought successful action against director for fraudulent trading and misfeasance
  • Re Pantiles Investments Ltd (in liquidation); Pantiles Investments Ltd (in liquidation) and another v Winckler [2019] EWHC 1298 (Ch)

Sabine Winckler was the sole shareholder and director of Pantiles Investments Ltd, which had been incorporated to purchase a property owned and occupied by Peter Goldbart, a friend of Winckler. The property was purchased in February 2011 for £550,000, funded by a variety of loans, some of which were from entities and parties that were connected to Goldbart and his family.

Goldbart entered into a tenancy agreement with Pantiles and lived at the property with his family. In October 2011 Goldbart was made bankrupt. In June 2012 the property was sold to a third party for £899,000. In August 2015, Pantiles was wound up following a petition from uk tax authority HM Revenue and Customs (HMRC). The liquidator was of the view that Pantiles had been involved in a scheme to defraud the creditors of Goldbart and brought claims against Winckler for fraudulent trading under section 213 of the 1986 Insolvency Act (IA86) on the basis that she was "knowingly a party to the carrying on of the business of [Pantiles] with the intent to defraud the creditors of Goldbart" and for misfeasance under section 212 IA86.

During a case in the High Court in England the extent of Goldbart's control and influence over Pantiles became clear. Winckler effectively acted on Goldbart's instructions; he had access to the company's email address; instructed Winckler not to cooperate with his trustee in bankruptcy, and told her which creditors had to be paid once the property was sold. Winckler had even permitted the property to be used as security for a loan transaction designed to benefit Goldbart's wife, with no corporate benefit whatsoever claimed. In addition, there was no evidence that any money had actually been received from one of the companies that apparently lent money to Pantiles to purchase the property.

A claim for fraudulent trading can be brought if during the course of a winding-up it "appears that any business of the company has been carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose".

The court may declare any persons who were "knowingly parties" to the fraudulent activities to contribute to the company's assets. Winckler disputed that she was knowingly a party. Winckler's explanation was that she had been duped by Goldbart. She had intended to purchase a property to provide a retirement income for herself but when she was unable to obtain a mortgage, Goldbart offered her a solution in the form of Pantiles and arranged the finance. She claimed that she did not know of Goldbart's impending bankruptcy until Goldbart's trustee in bankruptcy told her when investigating the sale of the property, some time after the transaction had completed.

The test for knowledge for the purposes of fraudulent trading was set out in Morris v. Bank of India [2004] BCC 404. It requires that:

  • the defendant actually realised from the their own observation or what they were told that the purpose of the transaction was to defraud creditors - but the defendant does not need to know every detail of the fraud
  • the knowledge has to be contemporaneous with the transaction - hindsight is not enough
  • knowledge can include "blind eye" knowledge i.e. "shutting one's eyes to the obvious"

Section 213 does not specifically require dishonesty, but it follows that if a party has knowledge of a fraud they are dishonest. The court applied the criminal test for dishonestly set out in Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2018] AC 391 that first the actual state of mind of the defendant as to knowledge or belief of facts has to be established and then the question of whether the conduct was dishonest is to be determined by applying the objective standard of "ordinary decent people". There is no requirement that the defendant must appreciate that what they have done, by that objective standard, is dishonest.

The court found that Winckler had been aware of Goldbart's financial difficulties and her explanations regarding the structure of the transaction and arrangements with Goldbart were improbable. Winckler was, the court said, a knowing party to an attempt to conceal the property and the proceeds of its sale from Goldbart’s creditors from the outset. She had, therefore, engaged in fraudulent trading within the meaning of section 213.

The court also ruled that, in any event, Winckler had been in breach of her duties to act in the best interests of Pantiles, to consider the interests of the company's creditors and to exercise independent judgement. She had operated Pantiles in a manner that no honest director would, and simply followed Goldbart's instructions. Therefore, she was liable for misfeasance under section 212.

It is rare for fraudulent trading claims to be brought by office holders, but this case is a reminder that in the right circumstances they can be successful.

Additional reporting: Tim Green