The recent English High Court decision of Re Glam and Tan Ltd [2022] EWHC 855 (Ch) highlights the ways in which a director can be found liable, as well as the reasons why they may be relieved of responsibility for breaches of section 212 of the Insolvency Act 1986, which penalises delinquent directors and officers.
The legislation
Where a company is being wound up (i.e. is in liquidation), section 212 allows the court to order repayment of sums that have been misapplied or retained by an officer in their management of the company. This section known as "misfeasance" and cover a wide range of conduct by directors.
The case
This matter involved a beauty salon that went into liquidation. It had a sole director, Mrs L. She did not provide the liquidator with full records, or satisfactory responses to the liquidator's queries regarding the company's finances.
The liquidator raised a misfeasance claim for nearly £150,000 alleging Mrs L had benefited from payment of company funds to which she was not entitled. The payments made did not appear to be legitimate business expenses, and included payments to Pets at Home, Ticketmaster and various relatives. Mrs L also took (for herself) cash received by the company (rather than depositing it into the company' account), and gave herself unwarranted additional salary.
Mrs L argued the vast majority of the transactions were business expenses (and those that were personal expenses had been repaid). However she also alleged that her controlling and violet husband was a de facto director of the company who made financial decisions, including forcing the company to make loans to him, his cousin and his mother under threats, of and incidents, of violence against Mrs L. On behalf of the liquidator it was argued that no creditor had had contact with Mr L, his name did not appear on any financial records and that there was no evidence of the personal expenses being repaid.
The decision
The court found that some of the payments were indeed business expenses, but found that the loans were made for no commercial purpose and therefore Mrs L had breached her director's duties under section 172 of the Companies Act 2006 (the duty to promote the success of the company), especially given the financial distress the company had been under at the time. The court held that the taking of additional salary, missing cash receipts and retention of an insurance pay-out were also breaches of her director's duties.
The court has discretion under section 212(3) to determine exactly how much a director, who is found to be in breach, should contribute to the company. The court held that it would not be just for Mrs L to be made personally liable for all of the sums wrongfully paid out when "her free will had been subjugated to the will of her husband under threat of violence". The court therefore relieved her from the liability to repay the loans she was forced to make to her husband and the cash taken by her husband as these were "beyond her control".
Analysis
This is an unusual judgment but it highlights the wide discretion a court has in applying section 212. Even where a director has been found to have breached their duties the courts will have regard to fairness and justice when it comes to deciding what, if anything, should be repaid by them to the company.
At Brodies we regularly advise on claims against directors in insolvency, including for misfeasance. If you need assistance, please contact one of our experts
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