The principal wrongdoer and his wife were liable to account for all monies extracted from the company in liquidation, which they received via an associated entity they owned and controlled. Whilst the decision notes all the ingredients of dishonesty and calculated plan to denude the main company in liquidation and its creditors of assets, the interesting features of the decision record: (i) the basis for accessory liability of the non-director wife; and (ii) the scope for relief, in circumstances where legal advice had been obtained for the impugned transaction.
Mr Nag was a director and owner of Quore Ltd (‘Quore’). Quore was part of a group of companies run by the Defendants, including:
Separately, the Defendants also controlled a BVI company by the name of Capital Bridge International Limited (‘Capital BVI’). Mr Nag was a director of the each of these companies. Mrs Nag was either a secretary and / or a director.
Quore’s major client was Vodafone Ltd (‘Vodafone’). Quore would receive commission for each of Quore’s customers that entered into a contract with Vodafone. To assist with their desired business expansion and via the above group entities, in 2011/12 the Defendants purchased two companies, namely In Touch Cellular Limited (‘ITC’) (via QTL), and Bridgwater Communications (South West) Limited (‘Bridgwater’) (via Capital BVI and later transferred it to Quore). It is noteworthy that Quore loaned almost £300,000 to assist with QTL’s purchase of ITC and guaranteed the purchase price due to Bridgwater of which around £300,000 which was the final instalment was not paid.
As a result of the above features and other payments due (including £250,000 due to Vodafone for advances it had made and which had been guaranteed by Mr Nag), in late 2012 it became clear that Quore was in serious financial difficulties. Despite this, Quore’s business and assets were transferred in early 2013 to QTL, which was owned and controlled by Mr and Mrs Nag. The consideration for this asset sale was deferred. Almost immediately thereafter, Mr and Mrs Nag transferred the shares in QTL to an arm’s length purchaser known as Evolve Telecom Limited (‘Evolve’) for approximately £1.3 million. Devonshires LLP had been instructed to document certain of the relevant transfers.
In spite of very clear obligations and liabilities, none of the proceeds were applied for the benefit of Quore and its creditors. Instead, and on his deliberate and false instruction (concerning the Company’s bank accounts), the proceeds paid by Evolve were received by Mr and Mrs Nag in their entirety. Moreover, on his instruction, the Company forgave and released the £269,523 directors loan to Mr Nag; and the above £300,000 loaned to QTL to purchase ITC.
On 7 June 2013, Quore changed its name to 1008 Limited. 1008 Limited was compulsorily wound up in 2015 (on the petition of Bridgwater). Thereafter, the benefit of all claims against Mr and Mrs Nag were assigned by the liquidator to the Claimant. The Claimant brought a claim for misfeasance against Mr Nag. Mrs Nag was sued as a constructive trustee for dishonest assistance and knowing receipt.
The Court made a number of findings of fact and law.
Findings of facts concerned the role in the proceedings of Mr Nag, Mrs Nag, and the Liquidator. The Court concluded as follows:
Mr Nag: was considered to be a ‘thoroughly unsatisfactory and unreliable witness’. Mr Nag was found to have consistently blamed others for matters that were his own responsibility. It appeared an aggravating feature that Mr Nag would say whatever he thought would help his case when answering questions, whether it was true or not and withhold documents only to introduce them if he thought it would assist his case.
Mrs Nag: did not present as dishonest. Mrs Nag trusted her husband, such that she did not read documentation presented to her. However, she admitted her de jure position within the wider group, understood that she signed documents permitting the relevant sale, authorised the relevant impugned payments and understood that she had made money out of the sale of the shares in QTL. Ultimately, the transaction could not have happened without her authorisation.
The Liquidator: was considered to be a careful and reliable witness.
Legal analysis primarily focussed on Mr Nag’s fiduciary breaches as a director of Quore; reliance on ‘legal advice’ which Mr Nag says he was given by Devonshires LLP; and Mrs Nag’s accessory liability for dishonest assistance and knowing receipt.
Mr Nag - Breach of Duty: As a director of Quore, Mr Nag owed duties of care and fiduciary duties (under the Companies Act 2006 and in common law). Composite in these duties was Mr Nag’s clear duty to consider the interests of the creditors as a class [1] which he failed to do. By late 2012 it was clear that Quore was insolvent on both the cash flow and the balance sheet test. As such, Mr Nag was found to have breached his fiduciary duties by (i) signing documents which diverted a significant part of the sale price to himself and his wife as shareholders in QTL; (ii) making the payment of £203,503 to prefer Vodafone (his overriding concern being to obtain a discharge from his personal guarantee to that same entity); (iii) providing false company account details to Devonshires LLP to misappropriate monies into his own account – for absolute clarity, there is no suggestion that Devonshires LLP had any part in the diversion of the net proceeds due from the QTL share sale to Evole; (iv) using the purchase consideration to pay not only Vodafone, but other parties which included his mother and father in law who had advanced sums to Mr Nag; and (v) signing the deed of release to write off the debt owed to Quore by QTL which was plainly contrary to the interests of other creditors.
Legal Advice: In an attempt to obfuscate liability, Mr Nag placed heavy reliance on ‘advice’ allegedly given by Devonshires LLP. The Court concluded that such advice goes a long way in assisting a director to show that he had discharged his duties of care[2] and skill, and has far greater force in a case of breach of fiduciary duty because breaches are so much more obvious. However, as Devonshires LLP were not a party to proceedings and no specific advice was put before the Court, it was not capable of reaching a finding on the issue, other than to conclude that the transaction was so obviously improper that it could not infer that Devonshires considered the point and decided that it was proper.
Mrs Nag - Accessory Liability for Dishonest Assistance: The court found that Mrs Nag conducted herself with wilful blindness which was not the way an ‘ordinary decent person would have behaved in the circumstances of the case’. Mrs Nag acquired 50% shareholding in QTL some 15 months prior to their sale for more than £400,000. As she did not pay anything towards the shares, the sale amount should have been a surprise to her. She understood that she was being asked to sign important documents and the sale was dependent on her giving authority to the transaction solicitors. Her defence that she trusted her husband and signed any documents he asked her to without question was not successful. As a result of the above, Mrs Nag was found liable to account as a constructive trustee on the grounds of dishonest assistance.
Whilst findings of dishonest assistance are often fact sensitive, the decision rightly serves as a helpful authority to counter those accessories who claim ignorance in unjustifiable circumstances and when the monetary value in question is significant.
[1] GHLM Trading Ltd v Maroo [2012] 2 BCLC 369 at [168] per Newey J.
[2] Sharp v Blank [2019] EWHC 3096 at [629] per Sir Alistair Norris
For more information on this article, please contact Crispin Jones in our Restructuring & Insolvency team.
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