T6: Bankruptcy

- Carrying on business through association with a company's business

[12] There are parallels between the facts with which the Court of Appeal had to deal in Re Brauch and the facts relied on by the petitioning creditor in this case. There is a convenient summary of the factors concerning jurisdiction in the judgment of Buckley LJ (at 335G-336F):

“There is, in my opinion, no doubt on the evidence that the debtor in this case carried on a business in England, which I would describe as that of a property developer. For the implementation of his projects he made use of a large number of limited liability companies, each company being apparently concerned with only one project at any one time. The fact that the contractual liabilities of the companies occurred in connection with the developments with which they were severally concerned may have been the companies' liabilities and not in any way liabilities of the debtor does not, in my judgment, in the least deprive those parts of the entire operations which were undertaken by the debtor himself from constituting a business carried on by him on his own behalf. It was he who found and selected the properties to be developed; it was he who had them valued. The correspondence between Mr. Maydwell's firm and the debtor, as well as Mr. Maydwell's own evidence, clearly indicates, in my opinion, that they were dealing with him on valuations as a principal and not as an agent of any company or companies. The debtor and not the companies seems to have organised the financing of the transactions. It was he who selected the company to carry out any particular project; he either promoted the companies or acquired them specifically for the purpose of carrying out those projects; he enabled and procured the companies to acquire their properties and carry out the developments, and in doing so he undertook very considerable personal liabilities in the form of guarantees and in other ways. Informally the debtor controlled these companies in the sense that the boards of directors, of many, and perhaps most, of which he was not formally a member, did whatever he told them to; and the debtor had a beneficial interest in the ultimate profits arising from these activities. The precise nature of this interest and whether he was or was not the only beneficiary does not appear clearly, but that he had such an interest is clear.
The role assumed by the debtor in these transactions was, in my judgment, certainly not confined to that of an investor in companies engaged in property developments, as he claimed. Nor was he acting in all respects merely on behalf of the companies: on the contrary I think on a true view of the evidence it would be more accurate to say that the companies were part of the machinery by which the debtor implemented his business projects. It is probable that in the course of doing so the several companies entered into contracts and incurred liabilities in respect of which the debtor could not have been made personally liable. There is no inconsistency between this and the debtor's having carried on a business which was distinct from the companies' activities, although associated with them, just as in In re Clark[1914] 3 K.B. 1095Mrs. Clark's activities in her personal capacity and not as managing director of the hotel companies constituted a business of her own distinct from the business of those companies. I am consequently of opinion that the registrar was right in finding that the debtor in this case was carrying on a business of his own in England."

[13] One can identify the factors relied upon by Buckley LJ (also referred to or added to by Goff LJ) as the following:

(1) the debtor was a property developer (cf. the judgment of Goff LJ (at 324E) who refers to his business as “property speculation”);
(2) he used limited companies for his business, one per project (cf. Goff LJ at 324G);
(3) he found and selected the properties to be developed (cf. 324G);
(4) he arranged their valuation (cf. 324G);
(5) he selected the company to be used for any project;
(6) he organised the financing (cf. 324H);
(7) he promoted or acquired the companies to be used;
(8) he enabled or procured the companies to acquire and develop the properties;
(9) he controlled the companies (although, as Goff LJ noted, the shareholding was obscure (324-325));
(10) he had a beneficial interest in the ultimate profits (cf. Goff LJ's reference to making a profit for himself at 325A);
(11) he gave personal guarantees (cf. 324H);
(12) he could deal with loan money at his discretion (Goff LJ 325A).

[14] The Court of Appeal drew an important distinction between business carried on by the debtor's companies and business carried on by him in his own right:

“[I]t would be wrong to hold that section 4 (1) (d) applies to a man who is running his company's business even though he be the sole beneficial shareholder and in complete control. There is, however, nothing in Salomon v. Salomon and Co. Ltd. inconsistent with finding that such a person is also conducting a separate business of his own, as was indeed what Vaughan Williams L.J. did in In re Charles Bright (1901) 18 T.L.R. 37” (328F).

But,

“[T]he evidence of the debtor himself in the light of all the circumstances compels one to find that the debtor was carrying on personally the business of promoting companies, or acquiring shell companies, to speculate in land, or alternatively that of finding suitable sites for development or investment, negotiating a price, including of course obtaining all necessary valuations, and financing the purchase. He then caused the properties to be vested in companies, which the 'one company per project' scheme shows that he must have promoted or acquired for the purpose. Once the property came to the company, its future management, development and realisation was, of course, the business of the company, and any liabilities which it incurred, for example for breach of covenant as landlords or for defective work or anything of that sort, would be the company's liability, not the debtor's; but all the preliminary stages I have described were, in my judgment, his business” (329A)." (Re Flannery [2013] BPIR 1)

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Giving a guarantee is not enough

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"[16] Mr Hardwick said that it was apparent from this document that it was Mr Flannery (who Mr Hardwick accepted was not in fact a director and whose Christian name was James rather than John) who approached the bank for funding in 2000. He said, too, that the form showed the importance that the bank attached to Mr Flannery's involvement with the application. I have to say, however, that to my mind this document does not take Mr Hardwick very far. The document shows that Mr Flannery was to give a personal guarantee, but taken on its own that can be explained in more than one way; it does not obviously carry the inference that Pentagon Estates Limited was to be used as part of a business carried on independently by Mr Flannery. Further, the fact that the bank hoped to obtain further business via Mr Flannery does not seem to add anything of importance." (Anglo Irish Bank Corporation Limited v. Flannery [2012] EWHC 4090 (Ch), Newey J)

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