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Summary Of Beyond Company Director Control

Beyond Company Director Control is a post following the case of Re Glam and Tan Limited EWHC 855 (Ch) involving a claim by a Liquidator in relation to the transactions of a company. The Director and her estranged husband benefitted from the same.

Glam and Tan Limited went into Creditors Voluntary Liquidation and its UK Liquidator was Nicholas Barnett. He pursued claims of £143,358.47 against Mrs Litras who was the only registered Director (“the Director”).

This was a case of various payments that the Director could not in certain instances satisfactorily evidence. The lack of company records did not assist.

However, there were two key issues that placed certain matters beyond the Director’s control. The Director said her estranged husband was of a controlling and violent nature and was a de facto Director of the company. She referred to her estranged husband’s responsibility for certain of the impugned transactions. The Director also said that there was a flood that destroyed some records.

The Court relieved the Director of certain transactions taken by her estranged husband that were outside of her control and not of her own free will but not in the case of many other payments that she personally benefitted from.

The Burden Of Proof

The Court recited the well-known principles about Director duties in respect of dividends and of keeping company records:

It is well known and self-evident that a liquidator comes to an insolvent company as a stranger. His duty is to investigate its failings, collect-in and distribute its assets to the creditors of the Company according to the insolvency scheme. The courts acknowledge his absence of first-hand knowledge of the events that led to the insolvency by placing the burden of proof on a defendant director (who does or should have first-hand knowledge) to demonstrate why or how an event took place, if no minute exists, or where there is no other documentary evidence to support the position of a defendant director.

In Murad v Al-Saraj [2005] EWCA Civ 959 Arden LJ (as she was) at [77] referred to the principle that:
“for policy reasons, on the taking of an account, the court lays the burden on the defaulting fiduciary to show that the profit is not one for which he should account …The shifting of the onus of proof is consistent with the deterrent nature of the fiduciary’s liability. The liability of the fiduciary becomes the default rule”.

A few years later Arden LJ applied her reasoning in Re Mumtaz Properties Ltd [2011] EWCA Civ 610 at [16] to [17]:

“The approach of the judge in this case was to seek to test the evidence by reference to both the contemporary documentary evidence and its absence. In my judgment, this was an approach that he was entitled to take. The evidence of the liquidator established a prima facie case and, given that the books and papers had been in the custody and control of the respondents to the proceedings, it was open to the judge to infer that the liquidator’s case would have been borne out by those books and papers.

It was not open to the respondents … to escape liability by asserting that, if the books and papers and other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator. Moreover, persons who have conducted the affairs of limited companies with a high degree of informality … cannot seek to avoid liability or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available …”

In this case, Mrs Litras claims that some relevant records were lost in a flood. There was no elaboration about the flood in her written evidence. Her written evidence was produced by herself. In cross examination she provided detail about the flood claiming that the liquidator’s office knew of the flood. That was not accepted, but by the end of trial Mr Barnett accepted that there had been a flood in the premises, and that documents and computer records had been lost as a result. Mrs Litras explained in oral evidence that she had made a claim on the insurance. The insurers had estimated the damage to the premises and paid £14,700. She could not recall the precise figure but thought this was accurate. The insurers paid the money after the company entered liquidation.

Matters Beyond Company Director Control

It was not just the flood that was outside the Director’s control. The Court received evidence from the Director about the reasons for another matter being beyond her control:

Mrs Litras gave evidence that she has become estranged from her husband. Her evidence was that he had become accustomed to beating her. She spoke of “consequences” if she did not do as he asked, how he controlled all the financial aspects of their personal life and through actual violence and threats of violence would at times control the finances of the Company. As this aspect of her case was not covered in any detail in her witness statement, its accuracy was tested during cross examination. The examination simply reinforced her evidence: she provided significant details of occasions when she suffered “consequences” and how the “consequences” escalated over time. She was beaten in private if she did not do what was asked by Mr Litras. This included noncompliance with financial requests. The beatings were restricted to her body so that her face was unmarked, and she could continue to work. Confined to taking place in private the beatings escalated over time so she was hit and bullied in public. She explained how Mr Litras has the bank debit card and access to the online account; how he would compel her to make transfers; how cash receipts had to be handed over to him if she wanted to avoid “consequences”, and how he would stand over her to watch her make an online transfer for his benefit.

However, what the Court said was that the Director could have resigned if her position was untenable but it recognised that the threat of violence may have trumped such a proposition.

And yet the case against her on liability was “overwhelming”:

Mr Cockburn advances the case on the following basis: First, the impugned payments were not connected with the trading of the Company. There is no evidence that the loans were intended or did in fact benefit (or promote) the Company. Secondly, an objective and reasonable director exercising reasonable care, skill and diligence would not have advanced Company funds as loans without any corresponding documentation or security. Thirdly, the Company was in financial difficulty at the time the impugned payments were made. And lastly, in her report to creditors, Mrs Litras stated that her husband was owed £40,000 for financing the Company. It is unlikely that he would have required a loan if he could have had recourse to the loan he made to the Company. In cross examination it became less clear where or how the £40,000 loan had been made. It is not recorded in any of the existing books and records nor is it mentioned in correspondence with the Company’s accountant. Mrs Litras was not prepared to support the position recognising, as she did, that if the loan did exist, it would not justify making new loans back to him or his family.

It is true that some of the evidence is contradictory, however the court must, in my judgment, rest its decision on the evidence that does exist. By making the impugned payments for no commercial purpose Mrs Litras breached her directors’ duties imposed by section 172 of the Companies Act 2006 as she could not have reasonably believed that the transactions, by their nature (unconnected to the Company’s trading), terms (no evidence that they were interest bearing and no express terms contemplated), the timing (ad hoc payments were made including payments at a time the Company suffered from financial pressures) and by reason of a failure to document or secure the loans, were for the benefit of the Company.

Court Relief For Loss Of Company Director Control

The Court took into account if it would be just when the Director had not exercised free will in relation to some of the challenged transactions:

Mr Barnett accepts that where the Court finds in favour of the applicant, on an application such as this, s.212(3) provides the Court with a discretion to order the director to pay to the company the relevant property or any part of it or to contribute such sum as the Court thinks just. It confers a discretion on the Court to determine precisely what or how much the director should contribute.

I have mentioned the jurisdiction above by reference to Paycheck Services 3 Ltd, Re, Holland v Revenue and Customs Commissioners. There is sparce authority that deals with the application of the jurisdiction. Re Loquitur Ltd [2003] EWHC 999 is one such case. In that matter the court was asked to decide whether former directors of a company should pay £5.9 million for misfeasance or breach of duty in paying an unlawful dividend. The directors were held to be in breach of their duties owed to the company, however Etherton J (as he was) found [249] that it would not be “just” in all the circumstances to make the directors liable for the whole sum. The circumstances are case specific. However, it is of interest that those circumstances, included “a disastrous fire at the Estate” that “both destroyed the majority of the premises on the Estate and undermined the plans of the Respondents for its improvement and development, and also led to expensive litigation”. The Court found that it would not be just because these circumstances were beyond the control of the directors.

Having regard to the evidence, I do not consider it to be just, that Mrs Litras should be made personally liable to contribute the sums wrongfully paid out when her free will had been subjugated to the will of her husband under threat of violence. The impugned payments, contained in the Scheduled Payments and the Cash Payments taken by Mr Litras or paid to Mr Litras under fear of violence, represent losses, I find, that were beyond her control. They are to be contrasted with the Scheduled Payments paid by the Company for the direct benefit of Mrs Litras (£24,963.05) together with the Cash Payments (£15,000) and Scheduled Salary (£16,042.77), dressed as dividends that were in fact unlawful, and the insurance money that should have been paid to Mr Barnett as liquidator (£14,700). These payments totalling £70,705.82 remain her liability.

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Disclaimer: Beyond Company Director Control

This page Beyond Company Director Control is not legal advice and should not be relied upon as such. This article Beyond Company Director Control is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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