Sheriff Appeal Court reinforces fair notice requirements in insolvency claims

A recent Sheriff Appeal Court decision gives insolvency practitioners useful direction when pursuing claims against former directors and gives directors a clear warning when defending them. The court confirmed that a director can’t simply make broad statements in their defence, they must set out enough factual detail to make their defence clear.

The appeal arose in the case of Collinge & Hamilton as Joint Liquidators of AyMa IOT Ltd (in Liquidation) v MacMillan & Ahmad [2026] SAC (Civ) 58. The joint liquidators alleged that the company had paid substantial sums to its directors before liquidation and sought recovery under Insolvency Act 1986 provisions through claims of breach of duty and misfeasance, wrongful trading, and gratuitous alienations.

One claim sought repayment of just under £360,000 received by a former director between April 2020 and March 2022. The liquidators argued that the director had misapplied or misappropriated the payments and should repay them under section 212, or that the court should treat them as gratuitous alienations under section 242.

The director accepted that he had received the payments but maintained that they represented legitimate salary and bonus payments, with PAYE and National Insurance deducted.

At first instance, the Sheriff found that the defence lacked sufficient detail and granted decree for repayment. The director appealed.

The company’s financial position

The liquidators maintained that the company had already become balance sheet insolvent by 31 March 2020, with net liabilities of £92,740. They also alleged that later trading significantly worsened the position, increasing the deficit to approximately £3.56 million by January 2021 and at least £4.15 million by the date of liquidation in August 2022.

The director argued that commercial disputes and litigation caused the company’s financial difficulties. However, the court found that these explanations did little to justify why he had personally received almost £360,000 from an insolvent company.

The court reinforces the need for detail

The court accepted that claims for breach of duty and misfeasance under section 212 do not require the same level of formality as ordinary court pleadings. However, parties must still provide enough detail to allow opponents and the court to understand the case being advanced.

The court emphasised that pleadings must give both the opposing party and the court a clear understanding of the case. The degree of detail required will depend on the nature of the dispute.

In this case, the liquidators clearly identified the payment period, the amount the director received, the company’s alleged insolvency, and why the payments were alleged to be breaches of duty or misfeasance.

The director’s response failed to provide equivalent detail.

Why the director’s defence was unsuccessful

The director argued that the payments represented agreed salary and bonuses. However, the court identified several critical omissions.

The director didn’t explain:

• When the remuneration was agreed.
• How it was approved by the company.
• The basis of any bonus arrangements.
• How entitlement to bonuses arose.
• Why payments of that size were reasonable in light of the company’s financial circumstances.
• What work he carried out during the relevant period.

The court also rejected the director’s reliance that the payments had been subject to PAYE and National Insurance deductions. Tax treatment was irrelevant. The key consideration was that the payments should never have been made. Payslips and payroll deductions didn’t answer allegations of breach of duty, misfeasance or gratuitous alienation.

Similarly, references to software contracts, prospective customers and ongoing discussions were regarded as lacking essential detail. The director failed to identify the organisations involved, the value of any contracts, or how those matters justified his belief that the company was trading profitably.

Relevancy and specification are different concepts

The judgment draws an important distinction between relevancy and provision of supporting detail.

The appellant relied heavily on the principle that a case shouldn’t be dismissed unless it must necessarily fail even if the stated facts are proved.

The court explained, however, that a defence may be legally relevant in principle while still failing because it lacks adequate specification. A director who can demonstrate that payments represented approved remuneration for genuine services may have a valid defence to a section 212 claim. The difficulty arises where the director fails to set out the facts needed to support the argument.

The judgment reinforces a long-established procedural principle: parties must plead the facts they intend to prove. Simply asserting conclusions isn’t enough.

Why amendment wasn’t allowed

The appellant also argued that amendment could have addressed any deficiencies. The court rejected that argument. The director had known since October 2024 that the liquidators challenged his pleadings on grounds of relevancy and specification. He had multiple opportunities to amend before the debate took place but didn’t seek amendment.

The court held that the sheriff didn’t need to guide a party towards repairing deficiencies in its case.

The decision reminds parties facing office-holder claims to address specification issues early, rather than assume they can remedy deficiencies later.

Practical implications for insolvency practitioners, directors and their advisers

The decision gives office-holders and their advisers several practical lessons. For liquidators, the judgment shows the value of clearly structured pleadings that:

• Identify specific payments.
• Explain the statutory basis of recovery.
• Link the payments to the company’s financial position.
• Articulate why the payments amounted to misfeasance or breach of duty.

Where a director’s response relies largely on assertions without supporting factual detail, practitioners should consider whether to challenge it for lack of specification.

For directors defending claims, the decision underlines the need to provide evidence and pleadings covering:

• Board approval processes.
• Remuneration policies.
• Bonus arrangements.
• Services performed.
• The commercial rationale for payments.
• Why the payments remained reasonable despite the company’s financial position.
• General assertions that payments were salary or bonus are unlikely to be sufficient.

The decision does not change the law on directors’ duties or insolvency law. However, it makes clear that directors defending recovery claims must do more than make general assertions or simple denials. They must provide enough factual detail to explain their case clearly.