Pantiles Investments Limited & Anor v Winckler  EWHC 1298 (Ch)
The Liquidator of the Pantiles Investments Limited (Company) brought a claim (among others) for fraudulent trading against its former director, Ms Winckler. The claim related to a property transaction involving Ms Winkler, an associate (Mr Goldbart) and the Company. In summary, the transaction was as follows:
- Ms Winckler wished to purchase a property, which she maintained was for the purpose of letting the property out in order to provide a retirement income for herself
- She found a property that she wished to purchase, which was owned by Mr Goldbart and (she claimed) happened to be the first one she was shown by the estate agents
- Ms Winkler attempted to obtain a mortgage, was unsuccessful and ultimately (on Mr Goldbart's advice) incorporated the Company to purchase the property by way of 3 high-interest loans
- Having purchased the property, the Company then let the property to Mr Goldbart and his wife. The rent was significantly less than the interest payments on the loans
- Throughout this time, Mr Goldbart was having significant financial issues, leading to his eventual bankruptcy, which Ms Winkler was aware of and
- Following the bankruptcy order and the appointment of a trustee in bankruptcy, Ms Winckler sold the property, refusing to cooperate to a full extent with the trustee and distributing the sale proceeds as she and Mr Goldbart saw fit. Whilst the lenders were repaid in full, HMRC were left as a significant creditor in Mr Goldbart's bankruptcy.
In summary, the thrust of the fraudulent trading claim was that the property transaction was intended to defraud Mr Goldbart's creditors and Ms Winkler was a 'knowing party' to this, with Mr Goldbart the true controlling mind behind the Company and its dealings. Ms Winckler's defence was primarily that she bought the property as to provide retirement income, with no intention herself (or knowledge of Mr Goldbart's scheme) to defraud creditors, who claimed to have been 'duped' by.
Current law on fraudulent trading
The judgment helpfully sets out the current state of the law in respect of fraudulent trading.
Section 213 Insolvency Act 1986 states that:
- If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect
- The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.
The first hurdle is therefore the 'fraud' test. It was not disputed by Ms Winkler that through the transaction, which the Company was the SPV for, Mr Goldbart was seeking to defraud his creditors. Given Ms Winckler's defence, the case was primarily concerned with the second, 'knowledge', test.
What amounts to 'knowledge'?
The test is as follows:
- The parties do not need to know every detail of the fraud but, either from their own observation of what was being done or from what they were told, that they were intent on a fraud.
- Knowledge, for this purpose, means an actual realisation of the potential fraud.
- A failure to recognise the truth of what was going on is not enough however obvious that may seem to have been in retrospect.
- The knowledge also has to be contemporaneous with the assistance of events at the time.
- Subsequent knowledge based on hindsight is not enough, nor is negligence the test of liability; however, knowledge does include so-called 'blind-eye knowledge', which exists when the party in question shuts his/her eyes to the obvious because of a conscious fear that to enquire further will confirm a suspicion of wrongdoing that already exists.
Is 'dishonesty' a requirement?
It was accepted that knowledge also requires dishonesty. The Judge adopted the test used in the criminal context, which is:
- Firstly to establish (subjectively) the actual state of mind of the individual's knowledge or belief as to the facts. It is not an additional requirement that the individual's belief must be reasonable. 'Reasonableness' is part of determining whether the belief was in fact held. The question is not whether the belief was reasonable but whether it was genuinely held;
- Then to ask whether the individual's conduct was honest or dishonest by the (objective) standards of 'ordinary decent people'. It is not a requirement as part of this that the individual must appreciate what he/she has done is (by those standards) dishonest.
It was held that, on the balance of probabilities, Ms Winkler had been a knowing party to an attempt to conceal the property and the proceeds of its sale from Mr Goldbart's creditors from the outset. Standing back, and looking at the way in which the purchase and sale of the property had proceeded as a whole, it was entirely at odds with the explanation given by her for purchasing it. Mr Winkler's evidence was found to be inherently inconsistent and improbable for a number of reasons:
Ms Winckler's account of the method and reasoning for purchase was highly inconsistent and improbable
Ms Winckler stated in evidence that, despite knowing Mr Goldbart for some years, it was by complete coincidence that when she occasioned her local estate agents in search of a property the first and only property she was shown was that of her friend, Mr Goldbart. This was held to be 'just about plausible'. However, this £500,000 purchase was originally going to be financed by a £220,000 gift from Ms Winckler's parents and the renaming funds by way of mortgage, whilst Mrs Winckler's yearly salary was at £17,000. When three separate mortgage brokers declined to lend the amount required, Ms Winckler took out 3 separate short-terms loans under the Company's name, on the advice of Mr Goldbart.
The proposed plan to let the property was highly flawed.
The terms of one of the loans for £345,000 was to pay £4,485 interest per month over 6 consecutive months, with the remaining amount payable at the end of the 6 month period. Two aspects of this led the Judge to believe that Ms Winckler was acting to assist Mr Goldbart in defrauding his creditors.
- Firstly, Ms Winckler let the property to Mr Goldbart and his wife (without ever seeking any other tenants) at £2,000 per month, less than half the interest payments, which was a commercially unsound decision to an intellectually competent person who was purchasing the property as an investment. This was further evidence that the property purchase was intended for the sole benefit of Mr Goldbart remaining in possession of the property, disproving the suggestion that the property was intended as an investment, in which Ms Winckler would rely on the rental income
- Secondly, when questioned about the rational of accepting these terms, Ms Winckler stated that even though she now saw the terms as 'unbelievable' and a somewhat of a 'joke', at the time Mr Goldbart gave an explanation that reassured her, but the wording of such she was not able to remember. The Judge felt that this was sufficient to at least show the 'blind-eye knowledge' referred to above.
Ms Winckler was aware of Mr Goldbart's impending bankruptcy.
Ms Winckler denied any knowledge of the pending bankruptcy, despite evidence of multiple letters and emails informing her of such. Ms Winckler stated that the only reason she could remember why she decided to agree the terms of the short-term loans was due to 'time running out'. This was inferred by the Judge to mean that time was running out for Mr Goldbart's pending bankruptcy, as this was the only logical assumption, which would indicate knowledge and an intention to participate in the fraudulent activity.
Ms Winckler did not seek advice or fully cooperate, even when prompted, from the professional trustees in Mr Goldbart's bankruptcy when distributing the sale proceeds of the property.
Despite knowledge of the bankruptcy having been made aware of the criminal and civil consequences of fraudulent trading by the trustee in bankruptcy, Ms Winckler, on advice from Mr Goldbart, was not willing to cooperate with the trustee. Ms Winckler stated that she 'did not want to believe' what the trustee was saying was true. Again, the Judge found this to be another clear example of 'blind eye knowledge'.
Fraudulently trading claims are brought relatively rarely, so there are few reported cases. However, where the facts fit, fraudulent trading claims are a very powerful weapon in an office holder's armoury. Although the facts are peculiar to the case, it helpfully sets out the state of play of the law in respect of requisite 'knowledge'. The case also shows that such claims can (at least in part) be made out on the basis of the implausibility of a respondent's defence. There will not always be a 'smoking gun' among the available evidence, particularly when books and records have been destroyed. The case also highlights the Court's willingness to stand back and take a holistic view.