Liability of De Facto Directors in a Section 423 Claim

18 January, 2023

In Integral Petroleum S.A. v Petrogat and others [2023] EWHC 44 (Comm), handed down today, the Commercial Court ruled on a claim under section 423 of the Insolvency Act 1986 (“IA 1986“). Of particular interest is the Court’s assessment of the appropriate order to make in the exercise of its wide discretion under sections 423(2) and 425 IA 1986, finding that the de facto directors of the First Defendant (“Petrogat”) and its legal owner were jointly and severally liable to make payment of the relevant sums directly to the Claimant (“Integral”).

The section 423 claim was brought following an LCIA Award in favour of Integral, payment of which remained outstanding. It was subsequently discovered that certain transfers and withdrawals (the “Transfers”) had taken place while the LCIA arbitration was ongoing and Petrogat’s USD and AED bank accounts had been emptied. A worldwide freezing order, granted by Calver J and continued by Sir Michael Burton GBE (the “WFOs”), imposed disclosure obligations on the Second to Fourth Defendants (for ease, referred to as the Defendants).

Having failed to comply with the disclosure obligations contained in the WFOs, the Defendants’ Defence was struck out and they were debarred from defending the claim, pursuant to an order of Cockerill J (the “Debarring Order”). Notably, this failure also included a refusal to identify the company which the Defendants claimed to be the recipient of the Transfers, and which the Defendants referred to as Company A. Following the Debarring Order, Integral applied for judgment, pursuant to CPR r 3.5(5).

The Judge determined that the Transfers were transactions defrauding creditors within the meaning of section 423 IA 1986.

As to the appropriate order under sections 423(2) and 425 IA 1986, the Court considered whether it  had the jurisdiction to make an order against a person who may have been involved in the transaction but who him or herself may have received no benefit from it (see Wilson v Masters International Limited [2009] EWHC 1753 (Ch) and Johnson v Arden [2018] EWHC 2633 (Ch), both cases in which the court did not consider they had jurisdiction to make the orders sought). In this case, as Integral could not bring a claim against ‘Company A’, not knowing its identity, Integral sought an order against the Second and Third Defendants who had been found to be de facto directors of Petrogat, and the Fourth Defendant, who was the legal owner of Petrogat.

The Judge considered both authorities and noted the contrary proposition by Stephen Gee KC in Commercial Injunctions (7th edn) at 13-037, that an order can be made against a person who has directed, but who has not received any benefit from an impugned transaction. The Court held:

  • It was reluctant to read into section 423 a jurisdictional hurdle that was not expressly there.
  • The facts of Wilson v Masters and Johnson v Arden were different from the facts of the present case.
  • In the circumstances, he could not hold that the Defendants obtained no benefit from the Transfers. Instead, and drawing such inferences as were appropriate, each received sufficient benefit, at least equivalent to the amount sought by Integral to justify an order under section 423 against them and an order that they be jointly and severally liable for that sum was an appropriate and just order.

Accordingly, the Court ordered payment to be made directly to Integral. While a receiver over Petrogat’s assets was in place, an order for the sums to be paid to the receiver would serve no purpose on the facts of the case [127].

The judgment also contains a summary of the Judge’s ex tempore judgment, made in the course of the hearing, which held that the Defendants were not permitted to make submissions to the extent that it was inconsistent with the debarring order (applying Times Travel (UK) Limited v Pakistan International Airlines Corp [2019] EWHC 3732 (Ch)) [46].

The judgment is available here.

David Peters and Lorraine Aboagye appeared on behalf of the Claimant, Integral, instructed by David Wright of Seddons Law LLP.