Directors who breached their duties ordered to repay £600k

Two businessmen who breached their legal duties as company directors have been ordered to repay £600,000, even though the court accepted that one of them probably hadn’t realised that anything unlawful was happening.

Sam Lyon Head of Corporate & Commercial reports on this recent case.

The case involved TMG Brokers Ltd, which had gone into liquidation.

The liquidator applied for declarations under the Insolvency Act 1986 in relation to certain payments out of the company’s bank account involving two directors, referred to as D1 and D2.

The payments totalled more than £600,000. The liquidator claimed that they were disguised distributions of capital and that the directors were in breach of their fiduciary duties under the Companies Act 2006.

One payment was a debt owed to the company which the director had requested be paid to a connected business that the directors also controlled. D1 maintained that he had received a single payment, thought to be salary, and repaid it when he realised it had not been properly accounted for in the company’s accounts.

He explained that D2 had ultimate control of the company and that any other payments had been without his consent. D2 denied wrongly receiving payments from the company, or that he had breached his obligations to it.

The High Court ruled in favour of the liquidator.

It held that the payments made by D2 were disguised distributions of capital. In making them, D2 had breached his fiduciary duties as a director.

D1 admitted to ignorance of his duties as director and to signing accounts showing the company to be dormant when it was not. The judge accepted that on the balance of probabilities, he did not know that D2 had a bank card from which he could withdraw cash from the company and had not therefore knowingly acquiesced in those withdrawals.

However, he had knowingly allowed the practice of D2 making payments. Having acquiesced in that practice, without knowing, understanding, or even asking about it, he was to be treated as having authorised the payments.

He had not seen the company’s bank statements but, as director, he had been entitled to ask to see them.

Directors would not be held in breach of the duty to exercise reasonable care, skill and diligence simply for trusting other persons in a position of trust. However, a director with grounds for suspecting the honesty of a fellow director would be liable if they refused to act on their suspicions.

Several matters should have put D1 on alert to check that D2 was properly handling matters.

Had he checked, it would have been clear that D2 was not. The fact that D1 had placed trust in D2 did not excuse him.

D1 and D2 were jointly liable for repayment of the £600,000.

If you would like more information about the issues raised in this article or any aspect of company law and directors’ duties please contact Sam on 01228 516634 or click here to send him an email.