The High Court heard a case involving various companies and trusts forming an informal family group (IFG). As the joint administrators argued, “the failure to treat one company as being distinct from the other group 'members’ and to recognise its discrete obligations, was at the heart of what had gone wrong.”
Background:
Health and Home Ltd. operated a care home business from four properties before it entered into administration on 11 September 2013 and creditors' voluntary liquidation on 17 September 2015. The properties belonged to Elite Property Holdings (Elite) Ltd. A written agreement existed between Health and Home and Elite dated March 2001.
Mr. Andreas Stavrinides and Mr. Anthony Stavrinides were directors of the company and are also father and son. Anthony denied having had any involvement in its management, aside from its day-to-day operations. Mrs. Maria Christoforou, who lived in Cyprus, is Mr. Stavrinides' sister and was, until the 25 March 2010, a director of the company. She was also Elite’s sole appointed director.
Health and Home and Elite were part of an informal "group" of family-owned companies (FOCs) and trusts. In addition to the care homes, in 2010, Elite acquired a hotel in Essex, which was refurbished, apparently at some cost, and which, from around the end of 2011, was operated by another associated English company, Travelforce Ltd., of which Mr. Stavrinides and Anthony were again the directors.
Health and Home’s main source of income was the NHS, and it was doing well. However, the company was the only profitable member of the family group, and its income was, therefore, used to support the group.
On or about 19 March 2013, the company received a letter from HMRC warning it that it owed £444,550.01, threatening the presentation of a winding-up petition. Even though £50,000 had been paid to HMRC on 12 April 2013, HMRC wrote again to the company. This time, they said that £690,960.89 was due and that, unless the company paid that sum in full within seven days, instructions would be given to present a winding-up petition, which transpired on 20 May 2013.
Two days before the petition was presented, on 18 May 2013, the company entered into two written agreements for which minutes were signed by Mrs. Christoforou, yet they were only disclosed to the company’s liquidators in October 2024.
Health and Home claimed to be owed £659,022.66 by Elite and that the dividend declared by Health and Home for 2012-2013 was unlawful, either wholly or in part. It was alleged that the declaration and payment by the company of the 2012 dividend of £950,000, and the 2013 dividend of £250,000, were transactions at an undervalue as per Section 238 of the Insolvency Act (IA) 1986, and that Elite and/or Mrs. Christoforou, as recipients, ought to be ordered to repay those sums.
Decision:
The High Court found that there was an established agreement between Elite and Health and Home regarding the cost of improvements of the properties, which is not subject to the limitation defence of the amount of £552,737.
Regarding the dividend claims, the joint liquidators’ claim under Section 238 of the IA 1986 was upheld, and Elite was ordered to pay £1,200,000 in respect of transactions at an undervalue involving the declaration and payment of the 2012 and 2013 dividends. Mr. Stavrinides was ordered to pay compensation of £250,000 under Section 212 of the IA 1986.
With respect to the May 2013 agreement, Travelforce and Elite were ordered to pay a sum equal to £174,471.66, less the extent to which any such contingent liabilities eventuated, and Mr. Stavrinides the equivalent sum.
Implications:
This very lengthy ruling and its complicated facts highlight the importance of keeping each company separate within a group. By failing to do so, the defendants were unable to escape the consequences of their conduct under Section 238 of the Insolvency Act 1986.
This case highlights the necessity of a good corporate governance structure to avoid causing an otherwise profitable company from going into liquidation.