Misfeasance claims against those involved in the management of a company

Investment funds are often incorporated in offshore jurisdictions and managed by professional Corporate Service Providers (“CSP”), typically subsidiaries of substantial global enterprises.  They provide the deep pockets that a Liquidator may wish to pursue for losses suffered by creditors of a fund.  The English Court will assume jurisdiction if the Centre of Main Interest (“COMI”) is in England and Wales.  COMI is usually the place in which a company is incorporated unless its central administration functions are performed elsewhere1.  These functions are assessed by objective factors ascertained by third parties, such as investors in a fund and potential creditors.  Lending agreements arranged in London often require a company to establish and maintain COMI in England.
A route to recovery by a Liquidator may be pursued against a CSP for misfeasance, on demonstrating breach of contract or fiduciary duties owed to the company if the CSP has assumed duties to, or performed functions on behalf of the company that has failed.

Liquidators’ jurisdiction for misfeasance is contained in Section 212 Insolvency Act 1986
Section 212 applies when:

• a company is in liquidation; and
• someone 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.

• Directors and officers (s212(1)(a));
• liquidators or administrative receivers (s212(1)(b)); and
• more cryptically, any person who “has been concerned, or has taken part, in the …management of the company” (s212(1)(c)) (emphasis added).

The management of a company

What level of involvement must a person have had in the management of a company for s212(1)(c) to apply? There is no clear authority.
“Officers” are defined non-exhaustively by s251 as including “directors, managers and secretaries.” Therefore, section 212(1)(c) must have a wider meaning than those acting as managers in the strict sense.
In Re Clasper Group Services Ltd2, the judge found that the respondent (who was a management trainee in his father’s business) had never risen much above the status of “office boy and messenger, although he was provided with some management training” despite being one of the authorised signatories on the company bank account.  It was held that his position was too lowly for him to be concerned with the management of the company for the purposes of Section 212(1)(c).
In Claughton (Liquidator for George Andertons (Sales) Ltd) v Mitchell & anr3, the Court of Appeal agreed that the ultimate beneficial owners of a company, who were actively involved in its management and gave instructions to its directors, were sufficiently concerned in the management of the company for the purposes of s212(1)(c).
It has been suggested that a supervisor of a CVA and a management consultant may be caught by the provision (Sealy & Milman and Gore Browne respectively).

Memery Crystal’s recent experience

Our team recently acted for the liquidators of two Jersey companies4. We made applications under section 212(c) against an offshore CSP, which was retained by the companies to provide professional directors and maintain the financial records of the companies. The CSP was also contractually obliged to maintain the companies in good regulatory standing and to do all things consistent with the proper operation of the companies.
We alleged that this level of involvement in the management of the companies put the CSP squarely within the ambit of s212(2).
The CSP threatened to make a strike out application on the basis that the jurisdiction of s212 did not extend to CSP, but this was not, ultimately, pursued.

Conclusion

Section 212(c) is underused, most likely because its scope remains largely untested.
Our experience and research suggests that s212(c) is wide enough to catch contractors, service providers and decision makers who are closely involved in and/or have significant control over the management of the company.
Often, in these scenarios, there will also be a contractual relationship between the parties. Therefore, there may be a parallel right of action for breach of contract (brought by a liquidator in the name of the company).

However:

• s212(3)(b) confers upon the court a discretion as to the quantum of compensation that would not in an ordinary damages action be applicable;
• The court fees in a claim for breach of contract (£10,000 for a claim exceeding £200,000) significantly exceed those for an application under s212 (£155); and
• A breach of contract claim would be brought in the name of the insolvent company, which may lead to an order for security for costs being made against the Companies, whereas security for costs would not be ordered against Liquidators who bring s212 Applications in their own name.

Harvey Rands, Jenni Jenkins, Eleanor Hassani and Nick West of Memery Crystal advised the Liquidators of the Jersey Companies in Liquidation.

1 Interedil [2011] EWECJ C-396/09
2 (1988) 4 BCC 673
3 [2005] EWCA Civ 993
4 http://www.bailii.org/ew/cases/EWHC/Ch/2017/1105.html

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