Liquidators of Safe Depot Limited v Sabir Esa and Stone Key Limited [2023] EWHC 2011 (Ch)

The recent case of Ms Katherine Merry and Mr Ben Dyer, Joint Liquidators of Safe Depot Limited v. Sabir Esa and Stone Key Limited, provides a useful reminder of the pertinent issues when considering breach of duty, transactions at an undervalue and wrongful trading under the Insolvency Act 1986.

Safe Depot Limited (the “Company”), incorporated on 8 April 2002, offered storage spaces for rent across three sites in north-west England at Blackburn, Bury and Birkenhead.

The Company was wound up on 24 July 2017, upon the petition of Mr Geoffrey Carmel, the landlord of the Birkenhead premises. Ms Katherine Merry became the liquidator on 14 September 2017, followed by Mr Ben Dyer’s joint appointment.

The case revolved around allegations made by the liquidators against Mr Sabir Esa, the Company’s director and shareholder, that he failed to fulfil his fiduciary responsibilities. The liquidators accused Mr Esa of permitting the Company to participate in transactions at an undervalue, granting preferences, engaging in activities to defraud creditors and wrongful trading.

Central to the case were certain transactions involving Stone Key Limited (“Stone Key”). Mr Esa was one of the founders of Stone Key in 2015 and was its sole shareholder and director at the relevant time. Proceedings were also issued against Stone Key but were stayed following Stone Key entering creditors voluntary liquidation.

Discussion
The liquidators advanced that the Company faced financial difficulties since 2014, becoming cash flow insolvent from April 2016 and in any event by August 2016. In August 2016, Mr Esa facilitated the transfer of the business and assets carried on at the Bury and Blackburn premises by the Company to Stone Key, including goodwill, customer lists and the debtor book, without proper consideration. He later facilitated the transfer of the customer list for the business carried on at the Birkenhead premises to a competitor in November 2016 without proper consideration.

The liquidators asserted that these asset transfers occurred at an undervalue and in breach of Mr Esa’s fiduciary duties. They claimed Mr Esa disregarded the interests of the Company and creditors, prioritising his own personal gains. The alleged breaches of duty included not only Mr Esa’s failure to exercise care, skill and diligence in his decision-making but also his failure to avoid conflicts of interest.

Although Mr Esa did not dispute the Birkenhead customer list was given to the competitor for no consideration, the liquidators’ claims in relation to that transaction were dismissed due to the lack of valuation evidence. While the judge acknowledged that Mr Esa may have breached his duties, it was not possible to quantify the loss to the Company.

A lack of clarity also surrounded the transfer of businesses from Bury and Blackburn premises in terms of the value ascribed to the transactions by the parties and the value paid (or not paid). Mr Esa alleged that Stone Key took over debt collection on behalf of the Company and paid some of its bills. However, the details remained unclear and there was limited documentation to validate Mr Esa’s claims.

However, it was evident that Stone Key had at least benefitted from the Company’s debtor book and there was no evidence any consideration whatsoever had been paid, despite Mr Esa’s assertions. The judge concluded that Stone Key had gained a benefit equivalent to £46,345.79 from the debtor book alone and that amounted to a transaction at an undervalue. The judge also found that, in allowing the Company to enter into that transaction, Mr Esa had not considered the interests of creditors or his wider duties at all. He also placed himself in a position of conflict. As a result, Mr Esa was ordered to compensate the Company in this amount.

The judge reached a firm conclusion based on the evidence presented in the case. It was established that the Company was unable to meet its financial obligations by April 2016. Mr. Esa was well aware of this dire financial situation and yet proceeded to transfer profitable segments of the Company’s business to Stone Key, a company he was associated with. In doing so, Mr. Esa clearly breached his fiduciary duty to (amongst other things) act in the best interests of the company and the Company’s creditors.

The Decision
The liquidators also claimed that as from the end of September 2016, Mr Esa knew or ought to have known there was no reasonable prospect of the Company avoiding an insolvent liquidation and yet allowed it to trade until it was placed into compulsory liquidation on 24 July 2017. During that time the Company’s creditors increased by at least £433,964.10. The judge agreed that the end of September 2016 was the trigger point for wrongful trading; the Company had disposed of much of its business, its inability to pay its debts had caused Mr Esa to seek professional insolvency advice to place the Company into CVL and there was nothing to suggest any possibility of a rescue. Further, there was nothing to suggest that Mr Esa had taken any steps to minimise the loss to creditors.

However, in determining the quantum of Mr Esa’s liability, the judge disregarded a dilapidations claim of £343,451 on the basis that it would have arisen in any event. The increase in deficiency, for which Mr Esa was liable to compensate the Company, was therefore limited to £90,513.10.

The total amount Mr Esa was ordered to pay for both the breach of duty and wrongful trading claim was £136,858.89.

The case underscores the intersection of fiduciary duties, insolvency law and corporate behaviour.

Andrew Cawkwell
Assoiciate Director (North East) and Head of Business Development

Q&A

Graham Briggs
Associate Director

What is your legal background?
I joined the firm Booth & Co upon qualifying as a solicitor in 1984; it was then the largest law firm in Leeds. Early years were spent in finance litigation but I migrated to Insolvency in 1986 when the ‘new’ Insolvency Act became law – glad we still have it today. Booth & Co became what is now international law firm Addleshaw Goddard, where I remained for the whole of my practising career, through to retirement in 2020.

How long have you been at Manolete?
I joined Manolete in the autumn of 2020 – a little surreal with the world then locked down by Covid. Having practised in Leeds and the greater Yorkshire region for my whole career, my role was to sit ‘geographically’ between Manolete colleagues Dom Vincent in the North West and Andrew Cawkwell in the North East. I had worked with Manolete in my practising years and so already had first-hand experience of how the Manolete model could unlock value for the benefit of insolvent estates.

What have been your main impressions?
A great team to be with. I am one of 17 highly specialist solicitors that make up the Manolete Legal Team. The team is spread throughout UK regions so as to be accessible to clients and markets, importantly however we operate to a national ‘one team’ model so that cases can be directed to the team member best placed to deal. We have great communication together with great cooperation. Secondly, ease of access. We have no formal referral procedure - no application form, no prescribed list of requirements, no necessity for Counsel’s opinion. These can each amount to a barrier to access for busy practitioners. We talk the case through, see the relevant available papers and move quickly to an investment decision.

What are the other highlights?
Speedy case outcomes. It is gratifying to see how our involvement in a case changes the claim dynamics. In my time with Manolete I have seen many cases where despite their best efforts, the IP has made little progress over months, sometimes years. Put simply, the respondent to the claim knows the estate does not have the financial resources to pursue it. With Manolete acquiring the claim, that dynamic changes overnight and respondents know they can no longer ‘kick the ball into the long grass’. As a result we often achieve early outcomes at very significant values.

What do you do outside of work?
I have always had an interest in motorsport, particularly the historic scene. I have competed in historic racing for many years and continue to compete in historic road rallies – Ford, Volvo, Saab, Mercedes, VW, Lotus and Morgan are all represented within my modest collection. Gardening I used to find a chore, but now I rather enjoy it. To have James Hunt and Monty Don, as persons I aspire to, results in rather strange bedfellows!

Stephen Baister writes
Access to Justice

“In England, justice is open to all, like the Ritz hotel.”

This pithy comment, attributed to Sir James Mathew (1830-1908) but also to others, is often cited as a legal joke. I am not sure it was intended as such, not least because it was, and remains, largely true.

Legal aid was originally established by the Legal Aid and Advice Act 1949. The system, intended to operate in parallel with the NHS, worked well enough, but increasing recourse to it (together with higher costs of litigation) eventually resulted in its costing the state over £2 billion a year. Access to the law has never been a political or electoral priority, so unsurprisingly it has become more and more restricted over the years. Civil legal aid is now rarely available; and of course it never was available for commercial users of the legal system – and rightly so.

In place of legal aid we now have CFAs, DBAs, litigation funding in its many forms, all available, through a range of providers, to both individual and commercial users. Section 246ZD of the Insolvency Act 1986 allows an office-holder to assign certain claims that he or she would otherwise be entitled to bring, a valuable tool that improves access to justice for liquidators and administrators. It is unfortunate that when it was passed it only covered corporate insolvency causes of action, not their bankruptcy equivalents. At the Insolvency Service’s Forward Thinking conference in Nottingham last year I presented a short paper advocating extending the ability to assign to office-holder claims in bankruptcy.

You can find all the lectures online at the link below:

https://sites.google.com/view/forwardthinkingconference2022/home

I think it was well received and hope it will result in legislative change, although, as the Insolvency Service’s policy team invariably points out, legislative time is hard to come by.

Welcome to our new colleague

Caleb Bompas
Associate Directos

Caleb joined Manolete earlier this month as an Associate Director with a decade of experience in complex insolvency litigation and commercial disputes. Previously he was in the Restructuring and Insolvency team at Stephenson Harwood LLP where he was a key member of its Chambers-ranked Tier 1 Personal Insolvency practice. Since qualifying as a solicitor in 2014, Caleb has acted primarily for Insolvency Practitioners on a wide variety of contentious insolvency matters, including several high-profile bankruptcies. Caleb has been recognised in Legal 500 as having "great litigation instincts".

Case study
The Manolete Model in Action

Manolete periodically releases anonymised case studies that highlight the outstanding benefits of our unique model.

At Manolete, we firmly believe in showcasing the real impact and success stories behind our work. These anonymised case studies shed light on the transformative power of our model, demonstrating a proven track record of achieving great outcomes in litigation. We can breathe new life into insolvency legal claims, enabling insolvent estates to recover maximum value and achieve favourable settlements. With Manolete by your side, you can navigate the legal landscape with confidence and reap the rewards of our tailored approach.

Naturally, our success lies in our powerful partnerships with exceptional IPs and their expert insolvency lawyers. Our significant financial strength frequently becomes the decisive factor, setting us apart from the rest.

EVENTS
R3's Northern Forum - 13 September

R3's Northern Forum will hosted at the Crow Wood Hotel, Burnley on 13 September.

This insolvency event will explore the big issues facing the profession and the northern economy. Given the profession’s important role in dealing with financial distress and economic fallout, this will provide a great opportunity to discuss and debate the new challenges facing northern businesses as we all emerge from the impact of these last few years. The Northern Forum will provide plenty of opportunity to renew past acquaintances and make new connections within a packed day of topical sessions.

Manolete's Dominic Vincent will be presenting: also attending for Manolete will be Andrew Cawkwell, Jean Boldero, and Graham Briggs.

Date and time: 13 September, 9am - 11pm

Location: Crow Wood Hotel, Holme Road, Burnley, BB12 0RT. Map