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Glam and Tan Ltd, Re
Factual and Procedural Background
Following incorporation, Company A began trading as a beauty salon in November 2014. Its sole de jure director was the Respondent, Defendant. Defendant was absent from the business for nine months starting July 2016. Shortly after her return, HMRC issued a notice of distraint. Company A entered creditors' voluntary liquidation in July 2017 with an estimated deficiency of approximately £132,428.
Defendant was unable to provide the liquidator, Attorney A, with a full account of the Company’s financial dealings. The last filed accounts were for the years ending 30 June 2015 and 30 June 2016. Attorney A sent Defendant a schedule of impugned payments in October 2019, to which Defendant responded with assistance from her accountant. However, Attorney A remained unsatisfied with these responses.
The current application, filed in January 2021, seeks payment of £143,358.47 or such other sum as the court deems fit, pursuant to claims including misfeasance, transaction at an undervalue, and preference. During closing, Attorney A was permitted to amend the application to increase the sum by £14,700 based on an admission by Defendant.
Legal Issues Presented
- Whether Defendant breached her duties as a director under the Companies Act 2006, including duties to promote the success of the company, exercise reasonable skill and care, and avoid conflicts of interest.
- Whether the impugned payments constituted misfeasance, transactions at an undervalue, or preferences under the Insolvency Act 1986, section 212.
- The extent and nature of relief to be granted under section 212(3) of the Insolvency Act 1986.
- The applicability of statutory presumptions regarding insolvent transactions and preferences.
- Whether Defendant’s conduct was influenced or excused by coercion from a third party affecting her free will.
Arguments of the Parties
Applicant's Arguments
- Defendant breached her fiduciary duties by authorising payments not connected to the Company’s business, including loans to family members and payments for personal benefit.
- Payments characterized as dividends were unlawful as they were not properly declared and the Company lacked distributable profits.
- Defendant failed to provide adequate records, impeding reconstruction of financial dealings.
- Defendant’s failure to repay or account for certain sums justifies relief under section 212 of the Insolvency Act 1986.
- The liquidator claims some payments were voidable preferences or gifts made during insolvency.
Respondent's Arguments
- Defendant asserts that her estranged husband, who acted as de facto director, controlled the Company’s financial decisions during her absence and exerted coercive control over her.
- Some impugned payments were for legitimate business expenses or repaid sums.
- Evidence and records were lost due to a flood at the business premises.
- Loans to family members were made under duress and fear of violence, which compromised her ability to act freely as director.
- Discrepancies in cash takings are estimations by Attorney A, and Defendant challenges their accuracy.
- Defendant denies receiving or benefiting personally from some payments attributed to her.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Re Barings plc (No 5) [2000] 1 BCLC 523 | Directors’ duty to maintain sufficient knowledge and supervise delegates; limits on delegation of duties. | Court held that directors retain duty to supervise and cannot delegate all responsibilities; reasonableness of delegation is fact-sensitive. |
| BM Electrical Solutions Ltd [2020] EWHC 2749 (Ch) | Unlawful dividend payments require formal declaration; undeclared payments treated as loans repayable to the company. | Court confirmed payments without declaration are unlawful dividends or loans, requiring repayment. |
| TMG Brokers Ltd [2021] B.C.C. 756 | Distributions made prior to requisite declaration breach director's duties. | Court found unlawful distributions breach duties; no lawful basis for such payments without proper declaration. |
| Paycheck Services 3 Ltd, Re, Holland v Revenue and Customs Commissioners [2010] 1 WLR 2793 | Section 212 discretion; strict liability of directors for unlawful dividends; scope of court's discretion to limit awards. | Court held director not de facto director, so s.212 not applied; commented directors are strictly liable for unlawful dividends with discretion on remedy. |
| Murad v Al-Saraj [2005] EWCA Civ 959 | Shifting burden of proof to fiduciary to show profit is not accountable; deterrent nature of fiduciary liability. | Court placed burden on director to prove absence of liability where fiduciary duty breached. |
| Re Mumtaz Properties Ltd [2011] EWCA Civ 610 | Prima facie case established by liquidator; adverse inferences drawn from absence of company records. | Court accepted liquidator’s evidence and inferred liability due to lack of records controlled by defendant. |
| Re Loquitur Ltd [2003] EWHC 999 | Section 212 discretion to adjust remedy based on just circumstances; external disasters may mitigate liability. | Court found it unjust to hold directors liable for entire sum due to circumstances beyond control; applied discretion under s.212. |
Court's Reasoning and Analysis
The court began by outlining the statutory duties of directors under the Companies Act 2006, emphasizing duties to act in good faith, exercise reasonable care, and avoid conflicts of interest. It rejected the absolute proposition that directors cannot delegate duties, recognizing delegation is permissible if reasonable and supervised.
The court examined the impugned payments, categorizing them into payments to third parties (including family members), payments to Defendant, and payments for Company benefit. It found that payments to family members were unsecured, undocumented loans with no commercial justification, made while the Company was in financial difficulty, breaching Defendant’s duties.
Regarding payments to Defendant exceeding her salary, the court found no lawful declaration of dividends or sufficient distributable profits, rendering them unlawful and repayable. Similarly, cash payments received by Defendant were treated as unlawful dividends or misapplied assets, as no proper records or declarations existed.
The court considered Defendant’s evidence of coercion by her estranged husband, who acted as de facto director and controlled Company finances through threats and violence. Accepting this, the court distinguished between payments made under duress (loans to family members and payments benefiting the estranged husband) and those benefiting Defendant personally.
Applying section 212 of the Insolvency Act 1986, the court held that relief is discretionary and must be just in all circumstances. It found it unjust to hold Defendant liable for payments made under coercion but held her liable for payments that directly benefited her, including unlawful salary and dividends, and the insurance money payable to the Company post-liquidation.
The court noted the burden of proof shifts to Defendant due to her control of Company records and the absence of documentation, consistent with established case law. It found Defendant’s explanations credible in part but insufficient to justify all impugned payments.
Holding and Implications
The court’s final ruling is that Defendant was in breach of her directors’ duties and is liable to contribute to Company losses by restoring the sums totaling £70,705.82, plus interest at 1% above base rate to judgment.
DISPOSED OF
The court invited the parties to agree on an order for approval. The decision directly affects the parties by requiring Defendant to repay specified sums. No new precedent was established beyond the application of existing statutory and case law principles.
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