The implications for directors' duties of the High Court's decision in Stacks Living Ltd and others v Shergill and another

KEY POINTS

• A director is under an irreducible duty to inform him or herself at least to some extent about the company's business and affairs.
• A director in name only can be held liable for wrongful trading and misfeasance.
• Blindly injecting funds into a company will not facilitate a director's ability to rely on s 214(3) of the Insolvency Act 1986.
• Complete inactivity by a director was by definition unreasonable, and precluded reliance on s 1157 of the Companies Act 2006.

Stacks Living Ltd and others v Shergill and another [2025] EWHC 9 (Ch) involved two companies, Stacks Living Ltd (Stacks) and Staffs Furnishing Ltd (Staffs) (together the “Companies”). 

The companies entered compulsory liquidation as a result of unopposed winding-up petitions presented by Stafford Borough Council based on a failure to pay National Non-Domestic Rates Tax ("NDR").

Both companies were wholly owned by Mr Balvinder Shergill ("Mr Shergill") and he alone controlled and managed their commercial and financial operations. Except for the period between 17 July 2018 and 19 October 2018 when Miss Miranda Smith ("Miss Smith") was the sole appointed director of Staffs, Mr Shergill was the companies' sole appointed director. During Miss Smith's directorship, she had, by the Respondents' own admission, no involvement at all in the affairs and business of Staffs, which continued to be managed and operated by Mr Shergill (who was acting as de facto director during that period).

On 29 March 2020, Mr Shergill gave an undertaking to the Secretary of State for Business, Energy and Industrial Strategy, not to act (amongst other things) as a director of a company for a period of six years commencing on 21 April 2020.

Contravention of that undertaking would be a criminal offence under s 13 of the Company Directors Disqualification Act 1986 ("CDDA"). By the schedule of unfit conduct to that undertaking (albeit given solely for the purposes of the CDDA) Mr Shergill did not dispute that he had failed to ensure that Staffs maintained or preserved adequate records and had failed to deliver up sufficient accounting records to explain its financial affairs; in respect of both Staffs and Stacks, Mr Shergill did not dispute that trade had been carried on “to the detriment of the Council” based on the failure to pay NDR.

As a result, the Liquidators of the companies made the following claims: (i) fraudulent trading under s 213 of the Insolvency Act 1986 (IA 1986) against Mr Shergill only; (ii) wrongful trading under s 214 of the IA 1986 against both Mr Shergill and Miss Smith; and (iii) misfeasance/breach of duty arising out of unexplained payments made by the Companies to Mr Shergill and Miss Smith against both Mr Shergill and Miss Smith.

Mr Shergill and Miss Smith opposed the claims and sought to rely on the provisions of s 1157 of the Companies Act 2006 ("CA 2006"), which allows the court to give relief from liability in circumstances where a person has acted honestly and reasonably and ought to be fairly excused.

PRACTICAL IMPLICATIONS FOR DIRECTORS' DUTIES

The CA 2006 codified certain common law and equitable duties of directors at ss 171-177.

“Splitting” duties

In considering the liability under s 214 IA 1986 against Miss Smith, the court considered whether, she “ought” to have concluded that there was no prospect that Staffs would avoid insolvent liquidation or administration. It was accepted by the parties that that Miss Smith did not actually know that fact, and indeed, that she knew nothing or practically nothing about the company's affairs or prospects; moreover, that she took no part in the conduct of its business and took no steps to inform herself about its business.

The applicants alleged that various payments were made from the Companies to Mr Shergill and Miss Smith. In respect of the claim against Miss Smith, the court commented that payments made during her directorship to Mr Shergill have not been explained or properly justified as being in the interests of the company and as such Miss Smith abdicated her duties entirely: she was thus in breach of duty by failing to inform herself about the company's business and affairs, failing to safeguard its property, failing to ensure proper records were maintained, and failing to prevent the use of its assets for purposes other than those of the company and its creditors.

The court clarified that a director is under an irreducible duty to inform him or herself at least to some extent about the company's business and affairs. The court made explicitly clear that directors in name only can be held liable for wrongful trading and misfeasance. The court describes as a minimum that Miss Smith should have taken even the most “elementary” steps to inform herself about the uncomplicated affairs of the business and complied with the most basic duty of record keeping. A failure to do so carries with it significant risks.

It follows therefore that directors should exercise caution in “splitting” duties and roles and delegating to other directors and subsequently attempting to use this as a defence as to why they are not appraised of a company's financial position, particularly in situations of smaller companies, where directors are appointed informally and with minimal expectations of active participation in management.

Previous failings

ICCJ Greenwood concluded that Mr Shergill operated the business of Staffs with an intent to defraud the Council and/or HMRC such that he is liable to make a contribution to the Companies' assets.

In considering Mr Shergill's liability under s 213 IA 1986, the court took into consideration the fact that Mr Shergill “had, by 2012/2013, acquired some experience as a director of several companies, and of the protection from personal liability that they afforded (or might have seemed to afford) their directors and owners, even where insolvent; in addition, he had acquired personal experience of certain liabilities to HMRC which a company might involuntarily come to owe”.

Directors ought to be aware that in exercising their duties, consideration will be given to the previous experience they may have at managing other companies (or not). Particularly, in this case, Mr Shergill had a history of “incurring but not paying liabilities, and then dissolving or abandoning the company in question before continuing the same business through another newly incorporated 'phoenix' company for as long as possible, paying those voluntary trade creditors required for the continuation of the business itself, but not involuntary creditors (except to a very limited extent, in order to prolong the scheme)”.

Payments to creditors

In considering the availability of the defence under s214(3) IA 1986 for Mr Shergill, i.e. that Mr Shergill took every step to the minimise the potential loss to the company's creditors, the court decided that off the back of ICCJ Greenwood's finding against Mr Shergill in respect of s 213 IA 1986 the defence under s 214(3) IA 1986 was plainly unsustainable. 

In respect of s 214(3) IA 1986 Mr Shergill was relying on several payments he had made to Staffs and the court held that those payments did not comprise of the taking of “every step with a view to minimising the potential loss to the company's creditors”; none of them were made (directly at any rate) to the Council, the company's principal creditor, and if anything, the payment of suppliers and trade creditors served only to extend the period of trading, and thus to increase the Council's losses.

Directors should give careful consideration to interjecting funds into a company which are not going to minimise the potential loss to the company's creditors and seek only to increase creditors' losses.

Relief from liability

Both Mr Shergill and Miss Smith sought to rely on s 1157 of the CA 2006.

Miss Smith particularly sought to rely on s 1157 CA 2006 on the grounds that she had been a director for a comparatively short time; and that during that time, she had neither been, nor had she been expected to be, responsible for the conduct of the business, in which she was wholly uninvolved. The judge drew reference to the case of Lexi Holdings Plc (In Administration) v Luqman [2007] EWHC 2652, in which it was held by Briggs J (as he then was) that complete inactivity by a director was by definition unreasonable and precluded reliance on s 1157 of the CA 2006). At [219], Briggs J said:

“… it is in my judgment now firmly established as a matter of law that no company director may simply leave the management of the company's affairs to his or her colleagues, or to other delegates, without committing a breach of duty. The reason for this is because, although the law permits and to an extent encourages delegation by directors of their functions, every act of delegation gives rise to a concomitant obligation to supervise the delegate … every director had to take such care as an ordinary man might be expected to take in relation to his own affairs.”

Relief under s 1157 CA 2006 will not be available to a director who does nothing even if that individual became a director unwillingly and therefore helpfully elaborates on some of the core duties of a director which will apply regardless of the extent of a director's involvement in the management of a company.

QUANTUM OF CLAIM CONSEQUENCES

In respect of s 213 IA 1986 the judge ordered Mr Shergill (being solely responsible for the fraudulent conduct of the business of the Companies) to contribute to the liquidations of both Stacks and Staffs, a sum sufficient to meet, in each case, the “totality of the loss” incurred, including the costs and expenses of the liquidations.

This is a substantial remedy and will be well received by creditors who have been the victims of fraudulent trading.

In respect of s 214 IA 1986 the court stated that against Miss Smith, the judge held that the appropriate contribution was the amount by which the company's net deficiency increased after 31 July 2018 until her resignation from the company on 19 October 2018. The judge commented that he had considered whether to reduce the amount of Miss Smith's contribution because of the circumstances in which she was appointed, or by virtue of her role at the company. The judge decided against doing so because to reduce the sum due would be unprincipled — it would be a reduction based on Miss Smith's failure to know about the company's affairs, in circumstances in which that failure was part of the very wrong on which her liability was based.

In respect of the misfeasance claim the court ordered Mr Shergill to compensate the companies in the aggregate amount of all the payments challenged in the proceedings by the liquidators, and an order for Miss Smith to compensate Staffs in the aggregate amount of the challenged payments made during the period of her appointment as a director.

The judgment and subsequent relief awarded, sends a clear message that directors cannot escape liability by being uninvolved or unaware of a company's operations.

CONCLUSION

The case sends a fundamental reminder to all directors of the duties and responsibilities that directors hold. It highlights the risks associated in being a director in name only, and expresses the importance of directors considering the skills, experience and level of engagement of their fellow directors, particularly when there are doubts about the solvency of the company. Directors must act with integrity and be proactive in exercising their duties to avoid significant legal and cost consequences.

_{This article first appeared in the April Issue, volume 18, 2025 of the Corporate Rescue and Insolvency Journal.}