Directors guilty of contempt after disposing of firm’s goodwill

Two directors have been found guilty of contempt of court after disposing of their company’s goodwill assets in breach of a freezing order.

The two directors were involved in a family based agency which sold mechanical breakdown insurance policies.

An insurance company became unhappy with the way the directors ran the agency and blamed them for causing it to make substantial losses. It obtained a freezing order over the agency’s assets.

The directors then set up a new company using a different insurer but using the same network of contacts, office premises, staff telephone number, website text and product documentation.

The court held that the directors had underpaid their original insurance company by £2.3m and had deliberately disposed of their company’s assets in the form of goodwill to frustrate the freezing order.

They were found guilty of contempt of court; one director was sentenced to four months imprisonment and the other to nine months.

The case then came before the Court of Appeal which held that the elements of goodwill, such as the network of contacts, were the very foundation of the directors’ business and as such, was covered by the freezing order. The appeal against contempt of court was dismissed.

The Appeal Court said that breaches of a freezing order would usually merit an immediate sentence of imprisonment. However, in this case there was considerable personal mitigation and so suspended sentences were substituted.

Please contact Sarah Liddiard about the issues raised in this article or any aspect of company law or Deborah Rupping on any aspect of company litigation.