The clean hands of an assignee?

The directors of a company were in breach of their fiduciary duties by diverting business to their own company. Further, the misapplication of company assets was dishonest, denying the defendants of the defences of limitation and delay, acquiesce or laches. Whilst it was queried whether the claimant came to court with clean hands, as an assignee of the claims, no equities could be asserted against the claimant such as to deny relief.

The facts

Davies brought the claim as an assignee of a company, Green Box Recycling Ltd in liquidation (“GBR”) against former fellow directors Ford and Monks that had breached their contractual and fiduciary duties by incorporating and diverting business to another company, Green Box Recycling Kent Ltd (“GBRK”), in January 2011. Ford did not engage in the proceedings, and claimed that Monks had reassured him that the claims would be settled prior to trial. He was denied permission to file a defence on the first day of the trial. It is a salient reminder to defendants to engage with the procedural requirements of litigation.

Breach of duty

The court held that Monks had breached his fiduciary duties. He had incorporated a new company intending that it would trade from the business site instead of GBR. He had acted in the interests of GBRK for example by leasing the site and obtaining regulatory authority to conduct the business and, by doing so, had placed himself in conflict. 

Limitation/time barred

It was held that although most of Monks’ actions did not involve misapplication of GBR’s pre-existing assets, he had acted deliberately and dishonestly (and therefore fraudulently) in placing himself in a position of conflict and had taken the benefit of the business for himself (via GBRK). The claims were therefore not time-barred.

Relief under Section 1157 CA2006

Monks sought relief under Section 1157 claiming that he had acted honestly and reasonably. Given the court’s findings as to his dishonesty, that relief was denied.

Clean hands?

The court found that the question of clean hands was not a question of weighing up the relative equities as between Davies personally and Monks/GBRK, but it was a question of assessing whether there are any equities that Monks/GBRK could assert against GBR so as to lead to a denial of relief. Even if Monks’ allegations had not been exaggerated and Davies did not have clean hands, that would not be sufficient to warrant a refusal of the relief sought by Davies, because he was suing in the right of GBR.

Constructive trust following restoration

Davies failed to persuade the court that Monks and Ford were and are subject to continuing duties by means of the deeming provision in the Companies Act, notwithstanding the dissolution and subsequent restoration of GBR. Had Davies wanted to ensure that the position upon restoration was broadened, he could have asked the court for a direction to that effect upon restoration.

Kenneth Davies v (1) Stephen Ford (2) Richard Monks (3) Green Box Recycling Kent Ltd [2020] EWHC 686 (Ch)

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