Factual and Procedural Background
The Pursuer operates an online pharmacy business. The Defender founded it and was its chief executive and a director during the relevant period. The dispute concerned payments instructed by the Defender between 4 August 2022 and 30 March 2023: £1,738,001.38 was transferred from the Pursuer’s Bank A account to its Account B, followed by £1,756,998 transferred from Account B to Company A. The Defender was a director and shareholder of Company A. [1][2][3]
The Pursuer alleged that the payments breached the Defender’s statutory duties under sections 171 and 172 of the Companies Act 2006. The Defender accepted instructing the payments but maintained that they supported the Pursuer by enabling Company A to repay lending obtained for the Pursuer’s benefit. [4][5][6]
The matter was heard at proof. The court considered documentary, factual and expert evidence. The experts agreed that Company A owed the Pursuer £1,864,500, although they disagreed about whether later payments extinguished the claim on a first-in, first-out basis. [7][8][9][10]
Legal Issues Presented
- Whether the Defender breached section 171 of the Companies Act 2006 by exercising powers for an improper purpose when transferring the Pursuer’s funds to Company A. [11][12][13]
- Whether the Defender breached section 172 by failing to act honestly and in good faith to promote the success of the Pursuer. [14][15]
- Whether later payments by Company A extinguished the Pursuer’s loss under the first-in, first-out rule associated with Clayton’s case. [16][17][18]
- Whether the Defender should receive relief from liability under section 1157 of the Companies Act 2006. [19][20]
- What loss and damages resulted from the breaches. [21][22]
Arguments of the Parties
Pursuer’s Arguments
- The payments breached section 171 because they lacked board approval and were not made for a proper purpose. Alternatively, the Defender used his power over the Pursuer’s assets to benefit Company A and himself rather than the Pursuer. [23][24][25][26]
- The payments breached section 172 because the Defender did not honestly and genuinely believe they promoted the Pursuer’s interests; objectively, an honest director could not reasonably have regarded them as beneficial. [27][28][29][30]
- The payments depleted the Pursuer’s cash assets, producing loss of £1,756,998. The Defender had not shown that the Pursuer received any benefit or that its loss should be reduced. [31][32][33][34]
- The FIFO argument was misconceived because the concealed payments were not part of the Pursuer’s known inter-company ledger, and the Pursuer could not have intended later payments to discharge debts of which it was unaware. [35][36][37][38]
- Relief under section 1157 was unavailable because the Defender had acted dishonestly and unreasonably. [39]
Defender’s Arguments
- The payments were authorised by a revolving loan facility between the Pursuer and Company A, and were made to prevent the Pursuer’s insolvency and secure its survival. [40][41][42]
- The references to personal debts in conversations were said to concern personal guarantees or Company A’s debts, not misappropriation for the Defender’s personal benefit. [41][43]
- The payments were extinguished by later credits from Company A under the FIFO principle applicable to a continuing running account. [44][45][46]
- The Pursuer’s accounts later incorporated the inter-company balance, which was said to demonstrate acceptance of a running account. [46][47]
- Alternatively, the Defender sought complete relief under section 1157 on the basis that he had acted honestly and reasonably while attempting to preserve the Pursuer. [48][49][50]
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|
| Extrasure Travel Insurances Ltd v Scattergood and anr [2003] 1 BCLC 598 | Four-stage test for determining whether a power was exercised for a proper purpose. | The court applied the test and found that the Defender used the power over the Pursuer’s assets to benefit Company A, not the Pursuer. [24][13][51] |
| Howard Smith Ltd v Ampol Petroleum [1974] AC 821 | Identification of the dominant or primary purpose of exercising a power. | The principle supported examination of the purpose behind the transfers. [52] |
| Saxon Woods Investments Ltd v Costa [2025] BCC 902 | Objective assessment of honesty or dishonesty in the context of the subjective section 172 duty. | The court held that concealment and falsification were objectively dishonest. [27][15][53] |
| Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 | Objective test where there is no evidence that the director considered the company’s interests. | The court held that an intelligent and honest director could not reasonably have regarded the increasing unsecured loan to Company A as beneficial. [28][54] |
| Mitchell v Al Jaber [2025] 3 WLR 849 | Damages for misapplication of company property should restore the value misappropriated; the fiduciary bears the burden of showing no loss. | The court quantified the Pursuer’s loss by reference to the payments made. [55][21][56] |
| Re Loquitur Ltd [2003] 2 BCLC 442 | Compensation equal to payments made where company assets are depleted without receiving value. | The principle supported recovery of the transferred sum. [57] |
| Auden McKenzie (Pharma Division) Limited v Patel [2020] BCC 316 | Compensation for payments made in breach of duty where the company receives no value. | The court agreed that the appropriate loss was £1,756,998. [57][56][58] |
| Macdonald, Fraser & Co v Cairn’s Exrs 1932 SC 699 | Presumed appropriation of payments in a running account on a first-in, first-out basis, subject to contrary intention. | The court treated appropriation as dependent on the parties’ actual or implied agreement and found none here. [59][18] |
| Bradford Old Bank v Sutcliffe [1918] 2 KB 833 | Separate bank accounts are treated as separate running accounts. | The principle supported treating the concealed payment account separately from the known inter-company ledger. [60][61][37] |
| Lacey v Hill (1876) 4 Ch. D. 537 | FIFO cannot be applied to fraudulent or concealed items in a running account. | The court considered the concealed payments analogous to the fraudulent payments in that case and rejected FIFO. [62][63][64] |
| Jackson v Nicoll (1870) 8 M 408 | Later reconstruction of an account does not alter prior attribution of payments. | The Pursuer’s later reconstruction of its ledger did not retrospectively create an agreement to appropriate payments. [65][64][66] |
| Docklock Limited v Christo & Co Limited [2024] EWCA Civ 45 | FIFO in a running account is based on an express or implied agreement that transactions will not be settled separately. | The court held that no such implied agreement existed because the Pursuer was unaware of the concealed payments. [67][18] |
| Gillespie Investments Limited v Gillespie [2010] CSOH 113 | Requirements for relief under section 1157, including honesty and reasonableness. | The Defender failed both requirements and therefore could not obtain relief. [39][68] |
| In Re Duomatic Ltd [1969] 2 Ch 365 | Standard for assessing whether a director acted reasonably for section 1157 purposes. | The court found that unauthorised, unsecured and unregulated payments for another company were not reasonable. [49][69] |
| PNC Telecom plc v Thomas (No 2) [2007] EWHC 2157 | Application of the reasonableness standard under section 1157. | The court concluded that the Defender did not satisfy the statutory requirements for relief. [49][70] |
Court’s Reasoning and Analysis
The court rejected the Pursuer’s argument that Articles 6 and 7 required a separate board decision before the Defender could make the payments. The articles gave directors general authority to manage the company’s business and exercise its powers, and the evidence showed that the Defender had routinely made payments without such decisions. [71][72][73]
However, the court distinguished the existence of the power from the purpose for which it was exercised. Applying the four-stage proper-purpose test, it held that the relevant power was the power to operate the Pursuer’s bank accounts and deal with its assets. The proper purpose was to promote the Pursuer’s commercial interests and survival. [74][75][76]
The Defender’s asserted explanation—that the payments enabled Company A to repay lending obtained for the Pursuer’s benefit—was unsupported by documentary evidence. The cash-flow evidence instead showed that Company A became increasingly indebted to the Pursuer, ultimately owing £1,864,500. The court therefore rejected the contention that the transfers promoted the Pursuer’s interests. [77][78][79][80]
The Defender’s concealment of Account B, failure to provide statements, falsification of a bank statement and July 2024 admissions were inconsistent with his claimed purpose. The court found on the balance of probabilities that the payments were made to promote Company A’s economic interests rather than the Pursuer’s. This established a breach of section 171(b). [81][82][83][51]
For section 172, the court accepted that the director’s belief is relevant, but held that good faith includes objective assessment of honesty. Even if the Defender genuinely believed he was acting for the Pursuer, concealing the transactions and falsifying the statement were objectively dishonest. The absence of evidence that he considered the Pursuer’s interests also meant that an intelligent and honest director could not reasonably have regarded the payments as beneficial. [14][84][53][54]
The court rejected the FIFO defence. FIFO is a presumption based on an express or implied agreement between parties to a running account. The Pursuer was unaware of the concealed payments, so it could not have intended that they formed part of its inter-company ledger or that later payments discharged them. The later reconstruction of the ledger did not change that position. [18][85][86][87][66]
The court concluded that the Defender had not shown that the Pursuer received any benefit from the payments or suffered no loss. The evidence indicated that Company A, not the Pursuer, benefited, and there was no independent evidence that the payments reduced any liability to the lender. [88][89][90]
Finally, section 1157 relief was unavailable because the Defender had acted dishonestly and unreasonably. Concealing the transactions and falsifying the bank statement defeated the honesty requirement; making unauthorised, unsecured and unregulated payments for another company defeated the reasonableness requirement. [20][68][69][70]
Holding and Implications
BREACH ESTABLISHED AND DECREE GRANTED. The court found that the Defender breached both sections 171 and 172 of the Companies Act 2006. The Pursuer’s loss was quantified at £1,756,998, representing the payments made to Company A through Account B. [91][56]
The court sustained the Pursuer’s first and second pleas in law, granted decree as sought, and awarded the Pursuer the expenses of the action because it had been entirely successful. [92]
The opinion identifies no broader implication beyond the direct liability, damages and expenses awarded against the Defender; no new precedent was stated.