“Blind-eye” defence fails in fraudulent trading claim

The respondent director, “W”, incorporated the company which purchased a property in February 2011 for £550,000 from her friend and former employer, “G”. The purchase was funded entirely by loans, including a loan from a company connected with G’s wife and son.

In October 2011 G was made bankrupt. He and his wife remained in the property before and after the sale until it was sold to a third party in June 2012 for £899,000. The proceeds of sale were distributed to the company’s agents, its lenders and G’s trustee in bankruptcy to settle a claim that the 2011 sale of the property was at an undervalue.

This made the company insolvent with insufficient funds to pay its tax liabilities, resulting in its winding up and compulsory liquidation.

The liquidator brought claims against W for fraudulent trading with intent to defraud the creditors of G, and for breach of directors’ duties (Sections 172, 173 and 172 Companies Act 2006).

W defended the claim on the basis that she was not a financially experienced individual and had also been duped by G.

The court held that W was a knowing party to G’s attempt to conceal the property from his creditors. The requisite level of knowledge includes so-called “blind-eye knowledge”, which exists when a party shuts its eyes to the obvious because of a conscious fear that to enquire further would confirm an existing suspicion of wrongdoing.

W was also found to have breached her duties to the company by causing it to enter into a loan agreement for the benefit of G, and by transferring the proceeds of sale leaving the company with insufficient assets to pay other creditors. W had simply abrogated her decision-making to G, thereby failing to exercise independent judgment (Section 173 CA 2006).

In the matter of Pantiles Investments Ltd (In Liquidation) Sub Nom (1) Pantiles Investments Ltd (In Liquidation) (2) James Ashley Dowers v Sabine Christel Karina Winckler (2019)

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