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The limits of Directors’ powers to grant inter-company loans were highlighted in the case of Northern Powerhouse Developments Ltd & Ors v Woodhouse [2023] EWHC 3124 (Ch).

This was a case involving claims brought by Liquidators against a company Director in respect of overdrawn directors’ loan accounts. It concerned several companies where Gavin Woodhouse was the sole Director.

The Liquidators succeeded in obtaining a judgment in which Mr Woodhouse was found to have to pay a substantial sum.  

Limits Of Directors’ Powers To Grant Inter-Company Loans

How Are Directors’ Powers Restricted?

The companies were involved in the hotel and leisure industry. The business model raised money by promoting and selling rooms in properties to people and in return they were usually promised a 10% annual return along with full repayment and a 25% bonus usually 10 years later.

What this article on the case looks to do is highlight the limits of Directors’ powers in the deployment of company money through inter-company loans as suggested by this decision.

The overarching duty of a Director is to act within their powers. That duty arises from Section 171 of the Companies Act 2006.

Section 171 Companies Act 2006

The company’s constitution is a reference to its Articles of Association. The Articles empower a Director but they do not enable them to act without restriction. The Articles regulate the company and places limits on the powers of the Directors.

Directors are in charge of running a company when solvent for the benefit of shareholders and when insolvent largely for the benefit of creditors as there is a Creditor Duty. They are deemed to be trustees of the company’s assets.

As a result, when challenged in entries on their Director’s loan account the burden is on them to prove items they wish to obtain credit for by virtue of GHLM Trading Ltd v Maroo [2012] EWHC 61(Ch) and Re Idessa (UK) Limited [2011] EWHC 804.

Inter-Company Loan Limits

The case considered an array of matters linked to the overdrawn director’s loan accounts of which one point was inter-company loans.

The Court considered inter-company loan payments on the basis of whether or not they were made for an improper purpose and in breach of Director’s duties:

142. Allowing for the role of the First Claimant in the NPD Group the business model should have operated as follows:

i)                   When an individual chose to take a lease or an agreement for a lease in one of the hotels the individual would, usually, transfer the monies for the lease to the SPV (see the section of this judgment dealing with the Second Claimant for exceptions to this); 

ii)                 The SPV would then transfer any surplus funds after purchase of the hotel to the First Claimant, receiving in return an inter-company loan, and;

iii)               This would enable the First Claimant to provide a treasury function for all the hotels. 

143. It appears from the papers before the Court that monies paid by individuals were frequently paid not to the SPV but rather directly to the First Claimant (C/1372).  In my judgment whether the monies were paid to the SPVs and transferred to the First Claimant or were paid directly to the First Claimant does not affect the outcome of this case.

144. The difficulty in this case for the Defendant is that the accounts of the First Claimant and companies associated with the Defendant show that the monies received by the First Claimant from the hotel room leases were not then used for the hotels.  Rather, the accounts show that the monies transferred to the First Claimant were, in part, paid to and used to finance non-hotel companies in which the Defendant had an interest, but not the First Claimant, and that this commenced soon after incorporation of the First Claimant.  There are numerous examples of this in the papers before the Court including, but not limited to,:

i)                   The loans to the obviously insolvent, Clifton Moor and Hawthorn between 1 April 2016 and 31 March 2017;

ii)                 Payment of expenses of £163,669 for Afan Valley Limited (a company with no turnover and outside of the hotel businesses) between 14 April 2016 and 31 March 2017 (C/1317), and;

iii)               A payment for the Defendant personally of £200,000 for the purchase of his family home in October 2016.

145. Supporting companies outside of the NPD Group was not however a purpose of the First Claimant.  It may, in my judgment have been acceptable for the First Claimant to make inter-company loans beyond the hotel wing of the Group if it or the SPVs as a whole had achieved operational stability and/or had been making a profit.  The accounts before the Court however show that this was not the case. Therefore, in transferring monies beyond the reach of the SPVs relating to the hotels, the First Claimant, and the SPVs, were denuded of the funds needed for the hotels.

146. The payments identified in paragraph 37 of the Particulars of Claim being payments to companies outside of the NPD Group therefore removed needed money from the First Claimant and from the SPVs. The loans were not made on commercial terms such that the First Claimant would make a profit from the loans and they were  made to companies which were either insolvent at the time of the loan or where an insolvency was probable due to the manner in which the Defendant operated his web of companies: Taking money from one company to pay creditors in another or to make investments for his personal benefit irrespective of the original company’s need for working capital. 

147. I am therefore satisfied that the inter-company loans made by the First Claimant and referred to in paragraph 37 of the Particulars of Claim did not further the proper purpose of the First Claimant.  They did not further the hotel business, instead they deprived that part of the Group of capital money needed for the hotels.  Given the Defendant was the sole director of the First Claimant he must have been aware of those transfers as he is the only person who could have authorised them on behalf of the First Claimant.  In doing so the Defendant failed to use his powers for a proper purpose of the First Claimant in breach of section 171 of the 2006 Act.

148. Further, the result of the transfers was that the First Claimant and its related SPVs were left with insufficient monies to operate the hotels according to the business model of the NPD Group.  This was at a time when the individual hotels were not operationally stable and when the Group was not trading profitably.  Hence the First Defendant must have known that the result of the transfers would be to make an insolvency of both the First Claimant and its related SPVs probable as, on his evidence, until the hotels were at operational stability, traditional finance to permit a refinancing would not be available to the First Claimant or the SPVs (see paragraph 39 of his fourth witness statement).

149. In diverting monies from the First Claimant intended for the hotels’ operations, the Defendant ensured that either the hotels could not reach operational stability or could only do so by utilising additional expensive bridging finance when there was no surplus in the business model to permit such funding to be incurred. Yet despite this, the Defendant has produced no evidence that at any time he considered or had regard to whether the inter-company loans would promote the success of the First Claimant, given the need to consider such when authorising the inter-company loans. The evidence is silent in this regard despite the Defendant clearly knowing the dire financial position the transfers left the First Claimant facing (see further the next section of this judgment).

Oliver Elliot Comment

Oliver Elliot Comment !

This court decision appears to demonstrate the ability of a company Director to grant inter-company loans is not unfettered, particularly if the same is granted to an insolvent connected company or if the company itself is insolvent (or becomes) insolvent as a consequence of the transaction.

A potentially useful question for a Director to consider generally is whether by granting the loan to a connected company, the lender is promoting its own success. If not, then at the very least it should not be getting a raw deal by being put into a foreseeably worse position than it otherwise would have been had it not lent the money in the first place. Lending should also be done on commercial terms.

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Author: Elliot Green
Last Updated: May 20, 2024

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Disclaimer: Limits Of Directors’ Powers To Grant Inter-Company Loans

This page is not legal advice and is not to be relied upon as such. This article Limits Of Directors’ Powers To Grant Inter-Company Loans is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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