Director and shareholder found in contempt of court for selling company assets

A High Court judge has held a director and a shareholder in contempt of court after they sold company assets.

The case involved a company, Motorcare Warranties, which sold car breakdown policies through a network of appointed dealers. Director, Harbinder Panesar, was found to have breached a freezing order imposed against the company. Justice Eder ruled that he was in contempt for “wilful interference with the administration of justice."

Motorcare Warranties acted as an agency for the insurance company Templeton but in 2007 the relationship broke down with Templeton accusing Motorcare Warranties of falsifying information and underpaying by £2.3m. It obtained freezing injunction preventing the Motorcare from disposing of its assets.

However, within a week of the freezing order against the company it was claimed the men had set up a new company – Motorcare Elite – and transferred assets including its website and its premises and staff, “and that thereafter Motorcare in effect then transferred its entire business to Motorcare Elite”.

This transfer of assets effectively rendered the judgment against Motorcare Warranties worthless as it would not have any assets

Motorcare Elite collapsed last March. An investigation found some customers' policies were not backed by underwriters. The FSA referred all these customers to the Financial Ombudsman.

The court held that the actions of both the director and the shareholder constituted a wilful interference with the injunction.

I his judgement last month, Mr Justice Eder stated: “There is no suggestion that any monies or other tangible assets belonging to Motorcare were actually disposed of or dealt with contrary to the freezing injunction.

“However, Templeton contends that this transfer of Motorcare’s business was a breach of the freezing injunction, since it involved the ‘disposal of’ and/or ‘dealing with’ Motorcare’s assets (in particular its goodwill) and that this took place with the knowledge and involvement of Mr Anthony Thomas and Mr Panesar.”

He ruled it “could not sensibly be suggested that the conduct of which complaint is made was casual or accidental or unintentional” and said he was “sure” both Mr Panesar and Mr Thomas understood the goodwill of Motorcare “was an important and valuable asset at the heart of the business which fell within the scope of the freezing injunction”.

The Court decided that the managing director of a company can be held in contempt for breaches of a freezing injunction. Paragraph 22 of the freezing order advised that it is a contempt of court for any person notified of it knowingly to assist in, or permit, a breach of the order. The claimant sought to argue, however, that the managing director should be liable for the company’s breach of the freezing injunction solely by virtue of his office and the knowledge that the order had been made. The managing director sought to argue that he was no different from a “stranger” to the company and could only be held in contempt if he was responsible for the breach.

Eder J rejected both arguments. Where an order is made against a company, and a director of the company is aware of the order, he/she is under a duty to take reasonable steps to ensure that the order is obeyed and if he/she wilfully fails to take those steps, and the order is breached, he can be punished for contempt. It will however be a defence if the director reasonably believes that some other director or officer is taking those steps. Thus a director can be liable for civil contempt without necessarily being in contempt under the general law.

On the facts of the case, the managing director (as well as the owner of 50% of the shares in the company) were held to be in contempt of court (a transfer of the business being a breach of the order, even though no tangible assets were disposed of). The judge added that “all options remain open, including a sentence of imprisonment”.

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