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Overview Of Director Duty To Account For Company Assets

The case of Davidson & Ors v Looney (Re Kieran Looney & Co Ltd) [2023] EWHC 197 (Ch) highlighted the Director duty to account for company assets to their companies and the Director proper purpose test.

It was an application by the Liquidators of Kieran Looney & Co Ltd (“the Company”) for compensation due to alleged misfeasance under Section 212 of the Insolvency Act 1986 for the tidy sum £2,169,604.91 (“the Payments”). The Liquidators said the Payments were:

… not made for a proper purpose and were a misapplication by Mr Looney of the Company’s monies

In the alternative, it was pleaded that Mr Looney had an overdrawn director’s loan account at Liquidation in the sum £1,713,502 that needed to be repaid.

The background to the winding up order was a petition by HMRC for £132,828.66. Compulsory Liquidation resulted.

Revised Accounts

Following the winding up order four sets of revised accounts were filed at Companies House without the Liquidator’s authority. Directors lose their powers on Liquidation in light of Section 103 of the Insolvency Act 1986.

The Court said the revised accounts were rather different from the original filings. A notable feature highlighted by the Court was that in some of the revised accounts, material sums were declared as paid by Mr Looney for the benefit of the Company:

In particular, the accounts for 2011 to 2014 claim that significant sums were paid out by Mr Looney on behalf of the Company and that, as a result, Mr Looney was owed: as at 30 April 2011, the sum of £1,724,585; as at 30 April 2012, the sum of £2,477,966; as at 30 April 2013, the sum of £2,122,030; and as at 30 April 2014, the sum of £1,892,280.

The Liquidators’ Case

The Liquidators’ case was that there was no lawful basis for the Payments to Mr Looney.

The burden on a Director was explained using the traditional analysis that case law is replete with:

… once a liquidator has proved that a payment has been made to or for the benefit of a director, the evidential burden shifts to the director to explain what the payment was for ….

The problem was that Mr Looney it seemed did not provide the documents requested by the Liquidators or provide a “proper response”:

The Liquidators’ evidence was that prior to commencing these proceedings, they investigated the Payments and that, in the absence of any or any proper explanation of those Payments, they concluded that they had not been made for a proper purpose. I accept that evidence. Letters were sent both to Mr Looney and to Mr Fonseka, who dealt with the correspondence from the Liquidators on behalf of Mr Looney, requesting both Mr Looney’s response to the payments made to him as well as documentation to support Mr Fonseka’s (and now his) contention that he was a creditor, and not a debtor, of the Company on his DLA. No proper response was received to the Liquidators’ requests and none of the requested documentation was provided. Whilst Mr Looney relied upon the correspondence in support of his submissions that the Liquidators had failed to act co-operatively in relation to these proceedings and in a way that benefitted the Company, unfortunately, the opposite is the case. The correspondence from the Liquidators’ solicitors is not, as claimed, needlessly aggressive. The problem arises, as admitted candidly by Mr Looney in his oral evidence, from the lack of cooperation by Mr Looney’s agent, Mr Fonseka.

Mr Looney’s Case

Mr Looney appears to have suggested the Liquidators did not secure all books and records of the Company from the Official Receiver. This allegation was rejected by the Court as it was said not to be backed up by evidence. The Court noted Mr Looney did not seek to inspect the records the Liquidators had:

Neither did Mr Looney make any attempt to obtain from Mr Fonseka any of the books and records he retained, in particular, copies of the Sage records, even though he frankly admitted in his oral evidence that it was likely that Mr Fonseka had these records and that he could have asked for them had he thought about it. I must decide this case on the evidence before me and Mr Looney must unfortunately take the consequences of his failure to investigate and provide documentation which he believes might have supported his case.

The Court deduced from Mr Looney’s evidence that he took money from the Company when he wanted to without regard for what the same was. As a result, the Court said the Payments were not loans. The Payments were held to have been made from the Company’s property and were therefore not for a proper purpose for the Company’s benefit. As such the Court said they were unlawful dividends of capital to him for no consideration:

In my judgment, the Payments, at least, insofar as they were made to Mr Looney or for his benefit, were unlawful distributions of capital to him. They were made to him or for his benefit as the sole shareholder of the Company, without the Company receiving any consideration in return and without the distribution falling within any of the exceptions permitted by the CA. The only payments, which are an exception to this, are the payments referred to in Sch B and Sch D made directly to family members (none of whom carried out any work for the Company); these payments were not made to Mr Looney or for his benefit and cannot, therefore, be classified as a distribution to Mr Looney in his capacity as a shareholder. However, whilst these payments were not unlawful distributions of capital, they were still improper payments, as was conceded by Mr Looney, who accepted that they were “irregular”.

The Car

A payment of £167,758.30 was made by the Company for a car purchased in Mr Looney’s name. It was then sold but the proceeds remained with Mr Looney. 

Mr Looney said the car was used by the Company. However, the car was not on the Company’s balance sheet and no explanation was provided as to why it was not purchased in the name of the Company or why when it was sold the proceeds were not handed over to the Company. The Court said:

… Mr Looney has not satisfied the burden on him to show that the payment was made for the purposes of the Company business. In my judgment, it was made for an improper purpose to benefit himself and the monies used for its purchase were an unlawful return of capital to him.

The Yacht

A payment of £39,762.60 was made to a Spanish bank or other entities in Spain relating to a motor yacht moored in Club de Vela. Mr Looney said this was owned by the Company. However, a payment of some of the money paid to Spain was actually five months after the yacht was sold on 16 April 2015. 

The Court said there was no evidence this money related to the yacht and therefore insufficient evidence was provided to demonstrate the payments were for a proper purpose:

Accordingly, even if the yacht was owned by the Company, which I deal with below, Mr Looney has not satisfied the evidential burden of proof on him that any of the payments constituting part of the sum of £39,762.60 were payments which related to the yacht and, therefore, were payments made for a proper purpose.

Misfeasance Claims

The Court said no proper purpose was evident for the Payments and they were therefore unlawful in light of Section 171 of the Companies Act 2006:

In light of my findings in relation CA s 171(b), that none of the Payments was made for proper purposes and, indeed, that the majority of the Payments, namely, those made to Mr Looney or for his benefit, were unlawful, it must follow that an intelligent and honest man in the position of Mr Looney could not reasonably have believed that Payments were to promote the interests of the Company. Indeed, as I have found earlier on in this judgment, Mr Looney appears to have made no distinction at all between himself and the Company.

The Creditor Duty position was also considered because the Company was insolvent. The Liquidators said the Company was cashflow insolvent from 30 April 2011 based on the HMRC Proof of Debt. The Court disagreed. 

It said the Company was cashflow insolvent from the end of January 2014 and seemed largely unconcerned about a smallish short term cashflow issue earlier. What the Court found persuasive was the matter of the Company’s own return for the year ended 30 April 2013 became due for payment nine months later:

In conclusion, I accept that as a result of the Company being found to have been commercially insolvent from 31 January 2014, something which Mr Looney would or should have known from financial and commercial information available to him, such as the bank statements and his knowledge of the Company contracts with its customers, Mr Looney was, in respect of such of the Payments made from that date, under a duty to consider the interests of creditors (BTI 2014 LLC v Sequana SA [2022] UKSC 25). There is no evidence, or indeed, any claim by him that he did so. Accordingly, adopting the objective test referred to in paragraph 69 above, this is yet an additional reason for finding, at least in respect of the Payments made after 30 January 2014 that Mr Looney acted in breach of his duty under CA s 172(1).

Director’s Loan Account Analysis

The Court then went on to examine various transactions offset as credits to Mr Looney’s Director’s Loan Account. 

Notably, although a yacht was purchased as an asset of the Company for £930,000 the sale proceeds of £800,000 were not accounted to the Company. 

In the end, the Court said:

… I find that Mr Looney has not established that he is a creditor of the Company and that, based on the evidence before me, he is in fact a debtor of the Company in the sum of £1,583,502.

What Next?

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Disclaimer: Director Duty To Account For Company Assets

This page is not legal advice and should not be relied upon as such. This article Director Duty To Account For Company Assets 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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