Could a director of an insolvent company, who was held to be in breach of his directorial duties, be ordered to draw down his personal pension benefits to pay a judgment debt?
Could a director of an insolvent company, who was held to be in breach of his directorial duties, be ordered to draw down his personal pension benefits to pay a judgment debt?
While company directors are not usually held responsible for the company’s debts or defaults, if the company enters liquidation the director’s actions leading up to the time of insolvency will be investigated and action can be taken against them if they have engaged in (s212-214 Insolvency Act 1986):
- misfeasance: misapplying, retaining or becoming otherwise accountable for any money or other property of the company or being guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company;
- fraudulent trading: knowingly carrying on the company’s business with the intention of defrauding creditors of the company or of any other person, or for any other fraudulent purpose; and
- wrongful trading: failing to take every reasonable step to minimise the potential loss to the company’s creditors when they knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration.
Where such a claim is upheld, the director can be disqualified and/or be required to compensate the company’s creditors for any loss caused by their actions.
The High Court has recently ordered a director, who was guilty of misfeasance and breaches of fiduciary duty while acting as the company’s controlling director and shareholder, to draw down his pension benefits to pay a judgment debt.
W formed LBT (the company) in May 2002 and served as a director of the company over a 14-year period between 2002 and 2016. Due to financial difficulties, the company entered administration in November 2016 and into creditors’ voluntary liquidation a year later. Claims were successfully brought on behalf of the company’s creditors alleging that, in the 20 months leading up to the company entering administration, W had engaged in misfeasance and breaches of his fiduciary duties. In particular, in addition to substantial direct payments to W, the company had made payments towards the purchase of high-end vehicles (including two Bentleys, two Lamborghinis, and a Porsche), expensive foreign holidays, W’s home and the rent on his son’s flat, and the cost and expenses of acquiring and operating a helicopter. The High Court held that these payments had been made in breach of W’s duties as a director and W was ordered to pay a total judgment debt of £996,014.22, which he failed to pay.
An application was later made seeking an order that W should be compelled to draw down his benefits under his occupational pension scheme in order to pay the outstanding debt. W resisted this application by relying on s.91(2) of the Pensions Act 1995, which prohibits the assignment, commutation or surrender of an occupational pension scheme to another.
The High Court upheld the application and ordered W to draw down his pension benefits to pay the outstanding judgment debt. The High Court reaffirmed the principle that debtors should not be allowed to avoid paying their creditors by hiding their assets away in a pension fund, which they had a right to withdraw.
It is clear from the High Court’s judgment that two highly important considerations in this case were:
- the fact that the principal asset within W’s pension fund was derived entirely from funds provided by the company; and
- the fact the judgment debt was the result of W’s misfeasance and breaches of fiduciary duty whilst he was acting as the company’s controlling director and shareholder; had W not committed beaches of the fiduciary duties, he would have been able to retain his pension pot.
The High Court held that it would not be just or equitable to allow W to retain the benefit of his pension, while the judgment debt remained wholly unpaid. Finally, s91(2) of the Pensions Act 1995 did not act as a bar to the order made because W was not being ordered to assign his pension benefits directly to the claimant, he was being ordered to draw down his pension funds into a nominated bank account and then use those funds to pay the outstanding judgment debt.
This case confirms that the courts will be willing to make an order requiring defendants to draw down their pension pots in cases of misfeasance and breach of fiduciary duty, which takes the approach further than previous cases which have applied such reasoning where fraud was concerned. Directors should therefore be aware that their pension pots are vulnerable in situations where their company enters into a creditors’ voluntary liquidation and a judgment debt falls on the director due to breach of director’s duties. Each case will be fact dependent; however it seems that the courts will be ready to act in the interest of fairness to creditors where available pension pots could satisfy all or some of an outstanding judgment debt.
