Pre-winding up settlement with director set aside

For a short time, Officeserve Technologies Limited (OTL) made a big impact in the ‘lunch at work’ market.  Its director and majority shareholder,  CAM, oversaw a rapid expansion to an estimated value of £40 million.  However, OTL was unable to pay the instalments due on two businesses it had acquired and in October 2016 was served with a winding-up petition. 

CAM was removed as a director and in December 2016 he entered into a settlement agreement with OTL, which included CAM giving up his shares in the company.  It was hoped that this would allow OTL to reach a settlement with its creditors.  That wasn’t possible and OTL was wound up in February 2017.

Notwithstanding the settlement agreement, OTL’s liquidators sought declarations against CAM that he had misapplied company money and that payments to him were void under section 127 Insolvency Act 1986.  They sought an order that he repay to OTL more than £500k.

Section 127 provides that dispositions of company property between presentation of a winding-up petition and a winding-up order are void.  The Court had to consider (1) whether the settlement agreement precluded such a claim being brought and (2) whether the giving up of a cause of action is a disposition of property within the meaning of s127.

CAM lost on both counts.   The Court noted that in the settlement agreement CAM gave up all claims as an employee and director.  In contrast, OTL only gave up claims against CAM as an employee.  Accordingly, the liquidators remained free to bring claims against him in his capacity as director.

The Court went on to find that the settlement would have been void under s127 in any event.  Although the settlement was not obviously a transfer of property, the intention behind s127 is to prevent the reduction in the value of the company’s assets as a whole, including causes of action.

The Court was invited by CAM to validate the settlement agreement under s127.  It declined to do so.  The Court was entitled to judge this issue with the benefit of hindsight.  Had the settlement allowed the company to be saved, it may well have been in OTL’s interests.  However, as this wasn’t possible, it became a bad deal from OTL’s creditors’ perspective and should be set aside.

This case is significant because it is the first reported decision of whether the settling of claims against a director in the context of an employment settlement agreement is a disposition of property and void in the context of winding-up.  Accordingly, it is a helpful reminder of the width of s127 and the care a company should take before entering into any transaction once a winding up petition has been served.