Preventing outgoing officers and employees retaining/misusing corporate property

Liquidators face significant mountains to climb on first appointment and in this series of articles we have previously looked at how they might go about getting information about a company’s affairs. This article covers what can be done in certain circumstances should a liquidator discover that an officer or employee of a company in liquidation has retained the property of a company and/or intends to use it for personal ends.

S. 196 Companies Act 1931 provides:

The court may, at any time after making a winding-up order, require any contributory for the time being on the list of contributories, and any trustee, receiver, banker, agent or officer of the company to pay, deliver, convey, surrender, or transfer forthwith, or within such time as the court directs, to the liquidator any money, property, or books and papers in his hands to which the company is prima facie entitled.

Therefore, a liquidator is prima facie entitled to a company’s records, even if they are in the hands of lawyers appointed by the company prior to liquidation and the liquidator will not be subject to any lien the lawyer asserts over the books etc (see for example In re Aveling Barford Ltd [1989] 1 W.L.R. 360).

If the documents/property in the hands of a third party belong to the company then the third party has no right to take copies. This is even where said documents etc may become relevant to subsequent litigation between the company in liquidation and third party.

When a liquidator is appointed in a compulsory liquidation, a director is unlikely to hold rights to access company information or documents as the director is now a former director only. A director’s common law right to access information is generally applied as follows:

“The right of a director to inspect the books and records of the company flows from his office as a director and enables him to perform his duties as a director … Such right is an important one, as the books and records of a company are a primary, and sometimes the only, source of information as to the state of affairs of a company. It follows that unless a director has access to these sources of information he would be severely inhibited in the proper performance of his duties. So long, therefore, as such right is exercised for that purpose and not with a view to causing detriment to the company, the right to inspect is ‘absolute’. In this sense and to that extent, the right may be termed ‘absolute’. The corollary of this is that the right will be lost where it is exercised not to advance the interests of the company but for some ulterior purpose or to injure the company: Edman v Ross, 22 SR (NSW) 351 , 361 [and] Molomby v Whitehead, 63 ALR 282 , 292 …”(Oxford Legal Group Ltd v Sibbasbridge Services Ltd and another [2008] EWCA Civ 387)

There are three possible (not necessarily exhaustive) avenues of approach in seeking to retrieve documentation/property belonging to a company in liquidation retained by a director/employee:

1) An application under S.196 CA 1931 for the provision/delivery of books and papers.

2) A claim for delivery up of the property on the basis that the holder’s continuing retention and use of it is conversion.

3) A claim for delivery up of confidential information or the restraint of the use of the information.

A former director, owes duties of confidence and confidentiality to a liquidated company and received documentation/data, or the means to access it as part of the officer’s relationship with the company. As for employees, then reference should be made to employment contracts (if any) to ascertain whether any express obligations of confidentiality are applicable (or excluded) else reliance will need to be placed on broader equitable principles of fidelity applicable to employees.

An application to obtain delivery up of any company information retained/copied held by past officers or employees could perhaps be made on a breach of confidence basis therefore. Such applications are not without precedent. The editors of Toulson & Phipps on Confidentiality write:

Where the successful plaintiff seeks an order for delivery up of material containing confidential information it will usually be granted, especially if the defendant cannot be relied on to destroy it. In Robb v Green, for example, the defendant was ordered to deliver up for destruction a customer list which he had surreptitiously copied while employed by the plaintiff, and an injunction was granted restraining him from making use of the information so obtained.

The more recent authority of Media Entertainment NV v Sapar Karyagdyyev, Alfonso Gonzalez Garcia [2020] EWHC 1138 (QB) is also useful wherein the court said:

102. I note that in many of the cases cited injunctions appear to have been granted simply because the defendant held confidential information without authorisation from the claimant whose confidential information it was; and those injunctions included delivery up or destruction of the material, or material derived from it, and prohibitions of dissemination (see e.g. Paragraphs 59, 60 and 62 dealing with Prince Albert v Strange , and Moat v Morison and Duchess of Argyll v Duke of Argyll, all cases of an innocent recipient from a wrongdoer).

While the point is not specifically considered in Tchenguiz, it seems to me to be consistent with the analysis of the entitlement to protect the confidential information, and if a Prohibitory Injunction (and Mandatory Injunction to deliver/destroy) can be granted then I can see no reason why further or ancillary orders cannot also be granted. As I say above, the grant of Injunctions is discretionary and can generally be triggered by invasion of a proprietary or quasi-proprietary right, and it is then for the court on the evidence to consider what Injunction is appropriate. For all these reasons, I do not regard the APC as disclosing no reasonable grounds for the (potential) grant of that relief.

Confidential information sought to be protected must generally be identified and particularised in the statement of case seeking the appropriate remedies. This is particularly important if an injunction is requested when the court will require a claimant to identify with precision the information in respect of which relief is sought.

Finally, there are potential criminal and/or civil liabilities that may flow from attempts to access company information/data by third parties electronically. The Computer Security Act 1992 (act of Tynwald), S.1(1) may be engaged which provides:

A person is guilty of an offence if —

(a) he causes a computer to perform any function with intent to secure access to any program or data held in any computer;

(b) the access he intends to secure is unauthorised; and

(c) he knows at the time when he causes the computer to perform the function that that is the case.

As to civil remedies, the authors of Clerk and Lindsell on Torts suggest that there is scope for “cyber trespass” namely the interference with a particular electronic device in such a manner as to alter its electronic constitution, albeit potentially temporarily. This would apply only if the computer used was company property.

Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on dpm@mplegal.im This article does not constitute legal advice, specific advice should be sought for individual circumstances. Damian acknowledges (with thanks) the assistance of James Saunders of New Square Chambers.

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