Green v Marston [2016] EWHC B11 (Ch)

Green v Marston

Green v Marston [2016] EWHC B11 (Ch) was a case largely concerned about a De Facto Director who had held himself out as a Director in various ways, including but not limited to having done so on social media platforms.

The case examined the De Facto Director’s involvement in transactions of a company called Sports Management Group Limited that went into insolvent liquidation, when he had benefited personally from them.

The case followed on from the Liquidator’s investigations into the conduct of the De Facto Director and the Liquidator issued proceedings for compensation on the basis of misfeasance, transactions at undervalue and preferences.

The key extracts from the case are:

As stated there is no real dispute over the legal test to be applied. In the absence of a definition it is accepted that the court must look at the factual matrix objectively. It is accepted that the term used to describe an individual’s position in the company, in this case Corporate Finance Director, is not conclusive and the court must look at what he was doing on a day to day basis. For Mr Lochner it is said he was not making decisions but acting on instructions given by Mr Marston and that he did not have access to financial information. The burden of proof is on the Liquidator.

A relevant factor is whether the company considered him to be a director and held him out as such and whether third parties considered him to be a director – see Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar [2014] EWCA Civ 939.

The oral evidence in this case was not satisfactory and so the court has to look at the documents. I have already in consideration of Mr Lochner’s cross-examination indicated that I find many of his explanations to be implausible and incredible. I am satisfied on a balance of probability that he was held out by the Company as a director. For example on his business card, his title on emails and letters sent to third parties. I am also satisfied on a balance of probability that Mr Lochner held himself out as a director of the Company, for example his LinkedIn account, the Ariadne papers, the press release in respect of LHKX. The contemporaneous documents show that the solicitors ACLF believed him to be a director, they expected him to sign the under lease and they accepted instructions from him in relation the Conroy/Oxigen dispute. I am satisfied on a balance of probability that he gave them instructions on behalf of the Company. I am also satisfied that he instructed Burlington’s. This is not the conduct of a consultant.

There is no evidence that Mr Lochner wrote or spoke to Mr Marston to get instructions. In fact Mr Lochner acknowledged that Mr Marston was the accountant, responsible for the finances. On one view that was very convenient as it distanced him from the Company’s financial affairs and meant he was not on the bank mandate, did not have access to the company accounts except through Mr Marston and no responsibility for paying staff, HMRC and creditors. It has been suggested that this is evidence that he was not a director and certainly not the Corporate Finance Director but as Mr Green’s said in his evidence it is not unusual in a small company for responsibility for finances to be restricted to one party, generally an accountant who is not involved in the day to day business. Mr Lochner’s said in cross-examination Mr Marston was not involved on the day to day business. I am satisfied that the evidence shows on a balance of probability that Mr Marston acted on the instructions of Mr Lochner and/or Mr Nuttall.

The one person who we have not heard from who might have been expected to know what the position was is Mr Marston. As stated it is accepted by Mr Lochner that Mr Marston was not involved in the day to day running of the business and that although he was recorded at Companies House as the sole shareholder and director this was in name only and his role was that of accountant. In my judgment he acted at all times on the instruction of Mr Nuttall and Mr Lochner.

On one view, as counsel for the Liquidator submitted, when viewed objectively it could be said that Mr Lochner was involved with/in the Company from the outset in a fundamental way. The Company was incorporated on 16 June 2009, on his own case Mr Lochner accepted he was involved from August 2009, he signed the contract with Manor on 6 October 2009, he agreed that this contract was worth about £50,000 to him personally and that it was the second largest asset of the Company, on his own case he said he was fronting those negotiations, the two employment contracts with his sons he signed as HR Director on 23 October 2009. On 4 November 2009 he loaned £10,000 to the company and on 25 November 2009 he loaned a further £40,000. The evidence shows that this was a ‘soft loan’. It is relevant that there was no provision for interest and in my judgment this supports the case that Mr Lochner was a de facto director. His evidence is that he did not want to lose his desk which he valued as being worth £1000 per month to him.

The Consultancy Agreement dated 19 May 2010 is signed by Mr Nuttall and not Mr Marston, despite the fact Mr Lochner’s evidence is that it was submitted to Mr Marston. Mr Lochner now accepts that it relates to one deal. His evidence is now that there was an oral agreement but that does not explain the basis on which he was entitled to a desk, his right to sign contracts, his role in respect of HR or the Manor deal where he acknowledged that he was fronting this negotiation. There are no documents to show that he was reporting back to Mr Marston, the only documents we see are where he is asking Mr Marston for payment.

In relation to the Investment Agreement we see that Mr Marston is treated the same way as other staff and he is to get 5% of the shares. When viewed objectively this is indicative of the fact he is staff , he is the accountant and Mr Lochner and Mr Nuttall are the management and key shareholders.

I have no doubt that Mr Lochner pursued other business interests in this period which is why we have the press release for LHKX where he says he is Corporate Finance Director of SMG but he was in my judgment central to the business of the Company. I am satisfied on a balance of probability that Mr Lochner was involved in the corporate governance of the Company, taking operational and strategic decisions, and entering into numerous contracts for the Company with staff, landlords and clients. He made payments on behalf of the Company. The impression he gave, through express representations and how he was treated, was that he was a director, with Mr Marston being the Company accountant. In my judgment on a balance of probability, he was part of the corporate governance structure of the Company and assumed a role which imposed on him the fiduciary duties of a director.

Payments

On the basis that I have found that Mr Lochner to be a de facto director of the Company he has no defence to the Liquidators claim in respect of the payments to Mr Marston.

On the basis I have found Mr Lochner to be a de facto director of the Company it is not in issue that the payments are either in breach of section 239 or 240 IA86 as appropriate and s 212 IA86 in the alternative.

The first tranche of payments totals £10,452 between 9 February 2011 and 24 May 2012. There are three payments in total which are described by Mr Lochner in his written evidence as being Commission;

i) £550 on 9 February 2011, Mr Lochner has said that this was for a commission payment services provided and/or expenses on the Conroy/Oxigen matter. The Consultancy Agreement does not provide for any such payments and no evidence has been produced to show that they are a legitimate Company expense which should be reimbursed. This has also been credited to Mr Lochner’s loan account and as such is a preferential payment.

ii) £1902 on 23 December 2011, Mr Lochner said that this was a commission payment for introducing the Manor deal in October 2009. There is no evidence to support this and again it is not covered by the Consultancy Agreement and there is no obvious link between the Manor contract and the payment.

iii) £8000 on 24 May 2012, Mr Lochner said in his witness statement that this was commission payment for City FX introduction, again there is no entitlement under the Consultancy Agreement and it is not properly explained. This has also been credited to Mr Lochner’s loan account and as such is a preferential payment.

The second tranche totals £18,995 and were credited to Mr Lochner’s loan account. The three payments are as follows;

i) £15,000 paid on 5 October 2010 recorded as ‘KW Corporation’. Mr Lochner said that the money was not received into the bank account of KWC, which ignores the possibility of the monies being used for KWC’s benefit. Mr Lochner suggested in cross-examination that he was being reimbursed for rent payment made in June 2010. I accept that there is an email in which he said he paid £8634.56 for rent. But there is no obvious link between that and these payments made in October 2010.

ii) £2000 paid on 30 December 2010 recorded as ‘Wayne Lochner (Memo: repay Abbey Business Centre). Mr Lochner says that this is reimbursement for monies he has paid. The documents relied upon do not support this.

iii) £1995 paid 1 August 2011 and recorded as Newlyn plc. Mr Lochner said this was reimbursement for rates paid on behalf of the Company but in cross-examination he accepted that this was not factually correct.

Mr Nuttall was made bankrupt on 21 January 2010. £12,000 was paid to him on 2 February 2011 and 25 May 2012. The Liquidator claims that there is no basis for these payments to have been made and they are misfeasant. Mr Lochner and Mr Nuttall do not appear to challenge this

Finally there is a payment to Marshall & Co, a third party associated with Mr Marston of £7,500 paid on 12 December 2012. Mr Lochner says he was unaware of this payment. There is no clear basis for it to have been made. In circumstances where I have found that Mr Lochner is a de facto director there is no defence to this claim.

For Mr Lochner it is said that the court should exercise its discretion to grant relief under s 1157 Companies act 2006 for a directors breach of duty if, the director acted honestly and reasonably: and having regard to all the circumstances of the case he ought fairly to be excused.

For Mr Lochner counsel submitted:

i) He was not aware of the financial situation of the Company at the time of the payments.

ii) He had no access to the bank accounts or company accounts.

iii) He honestly believed he was being paid for work carried out and he was entitled to the payments.

In the circumstances where I have held that Mr Lochner was a de facto director and taking account of my findings in respect of his evidence I am not prepared to grant relief.