Director misfeasance and phoenixing: £175,000 commercial dispute

The Client

An individual business advisor in the first claim, representing the liquidated company in the second claim.

Value of Dispute

£175,000

The Commercial Dispute

This director misfeasance dispute was double-sided as it involved two directly linked cases; the original claim involving a company in the electrical installations sector (the defendant), and the second claim concerning the director (also a defendant) of the aforementioned company, who was pursued separately on behalf of the liquidators. 

Escalate’s client – a business advisory consultant – provided extensive support to the electrics company, helping it expand. Despite the advisor’s significant contribution and success in growing the business, the company failed to pay the agreed fees for their services, pursuant to the contract between both parties.

After being approached by the advisor, we commenced a claim to recover the outstanding fees. However, it quickly transpired that the Defendant company’s director had set up a new business entity on the very same day the claim was filed. This raised serious concerns that the director was attempting to ‘phoenix’ the business – in other words, transfer the company’s operations to the new business in order to avoid paying the advisor if the court ruled in our favour. This practice essentially allows a business to start again, often with the same directors and operations, free from the debts of its original predecessor. 

How Escalate Resolved – Services Used

Over the next 18 months of litigation, numerous commercial offers were made by Escalate, all of which were ignored or rejected by the defendant. 

The case proceeded to a two-day trial, where Judgment was awarded in our favour to the sum of £75,000. However, the company refused to pay the judgment, ignored all communications from Escalate, and did not respond to a statutory demand or winding-up petition issued against it.

As a result, the company was wound up and as the largest creditor, Escalate and our client appointed a specialist practitioner and Head of Insolvency and Recovery, Matt Howard of Price Bailey, to investigate the affairs of the Defending company.

Following a detailed investigation, Matt confirmed that he shared the same concerns over the director’s handling of the underlying claim brought by our client, and the manner in which the director had conducted the defending company’s affairs in light of those proceedings. The investigation found that the director had transferred all business operations, contracts, and assets to his new company, without any payment to the original business, leaving nothing to pay the advisor or other creditors.

Our position was that this claim was threefold; for misfeasance, transaction at an undervalue, and/or transaction defrauding the creditors of the defendant.

The findings of the investigation triggered the second claim, in which we pursued the director personally on behalf of the wound-up electrics company, which was now under the control of the appointed liquidators.

Working closely with Matt and the insolvency team at Price Bailey, Escalate was instructed to assist in interviewing the director and after a thorough analysis of the evidence and the information provided by him, we determined that his handling of the company’s affairs provided strong grounds for a misfeasance case.

A detailed letter before action was sent to the director, outlining the case and allegations, and just over a month after its submission, we were able to successfully negotiate a pre-action settlement. This saw the director agree to personally pay £175,000 to his old company, for the benefit of its creditors, resolving the matter without further court proceedings.