Overview Of Ratification Of Director Transactions – Davidson v Looney Further Teardown
In a previous post Director Duty To Account For Company Assets, we examined the case of Davidson v Looney and this post looks at the issue of ratification of Director transactions from that case.
It is a good case for the humble student of insolvency to consider when looking at Liquidator Investigating Director transactions and what can happen when you put the evidence before the judge in the courtroom.
Examining the case at the superficial level you might have gotten the impression the Liquidators passed the finish line way ahead. Indeed in this case it does look like the Liquidators coasted home with plenty in reserve with a strong case. Whilst that may be so there are circumstances in which this case with the facts tweaked slightly the results could have been a little bit different. That alone is the purpose of this post through examination of some of the facts as we know them.
The assumptions therefore in this article are with the benefit only of the judgment Davidson & Ors v Looney (Re Kieran Looney & Co Ltd) [2023] EWHC 197 (Ch) to establish the facts. We have seen none of the evidence or submissions and we did not attend the Trial. Therefore the information in this article should be considered subject to the disclaimer at the end of it along with this position on the facts.
Before we zoom in on the feature to which this teardown is devoted it should not go unnoticed that the facts of this case are somewhat unique. The subject matter of litigated Director transactions generally is not. They crop up routinely in Liquidator litigation.
A noticeable feature was notwithstanding the amount of money at stake Mr Looney represented himself as a litigant in person.
Revised Accounts
Another particular feature was not the yacht or the car that were considered but the filed accounts. Rarely do revised accounts feature so prominently. Rarer still does four sets of accounts get filed at Companies House without the authority of the Liquidator in office and then get revised a second time thereafter.
In this case, the judge constructed a table to make the reader’s job of understanding where they were coming from easier because not only were the accounts revised twice but the movement in the net asset position was in some instances striking.
The judge commented as follows:
These accounts were significantly different from both the Original Accounts and the First Revised Accounts.
Key Findings In Davidson v Looney
Central to the case was that between 2011 and 2016 there were c.£2.1 million of payments (“the Payments”) either made by the Kieran Looney & Co Ltd (“the Company”) to Mr Looney or to persons for his benefit and other transactions which collectively did not appear to satisfy the Director Proper Purpose Test. It was also found that Mr Looney had a Director’s loan account overdrawn by c.£1.5 million.
A breach of duty claim when considered in insolvency proceedings generally will commonly seek to consider the timing of the transactions entered into and whether or not the company was insolvent at that point. If a company was insolvent or there was a real as opposed to remote risk of insolvency at that point or as a consequence of the transaction that is being examined, then the likelihood is the Creditor Duty steps in as part of the Director’s duties. This will often make it at least harder for a Director to withstand the suggestion that a transaction undertaken for their personal benefit should not be repaid to the company in question.
How could this have affected Davidson v Looney? Well, in Davidson v Looney the Court examined the matter of the point of insolvency of the Company. It found that point did not arise until January 2014 when the Company’s taxes declared in its 30 April 2013 return became due for payment, not 30 April 2011, being what appears the earliest unpaid corporation tax bill on HMRC’s Proof of Debt form.
What Impact Could Insolvency Have Had On Davidson v Looney?
The impact that insolvency could have had is that the transactions arising before January 2014 could perhaps have been ratified in different circumstances if they had been found by the Court to have been undertaken for the purposes of the Company’s business.
However, in this case the judge rejected Mr Looney’s position that the Payments were loans that he intended to repay. As a result, they were deemed to be unlawful dividends.
How Might The Pre-January 2014 Payments Be Ratified?
The Court here noted the Payments were not made as a dividend under Part 23 of the Companies Act 2006. However, if they had been properly declared as dividends then it would appear possible perhaps for some of the Payments prior to January 2014 to potentially have been ratified but as the Court said:
However, in order for there to be such an informal ratification, the members must have turned their minds to the conduct that is sought to be approved, have understood the matter and made a decision to approve it.
Dividends Offset Against Director’s Loan Account
It would appear that if it were the case that dividends had been properly declared then they could have been offset against the overdrawn loan account position. Had dividends been declared you would have expected the same to appear in a Director’s relevant personal tax returns as well as in the Company’s books and records.
In a different case, this might be relevant to materially reducing a Liquidator’s claims. In this case, it might not have done as we know the following:
… having regard to the fact that the deficiency in the liquidation is likely to be less than the amount of the Payments
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Disclaimer: Ratification Of Director Transactions – Davidson v Looney Further Teardown
This page is not legal advice and should not be relied upon as such. This article Ratification Of Director Transactions – Davidson v Looney Further Teardown 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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