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Directors didn’t breach duties when paying themselves £1.2m

November 8th 2021

Two directors did not breach their legal duties when they paid themselves a total of £1.2m from their failing company.

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

That was the decision of the High Court in a case involving, Brookmann Home Ltd (In Liquidation).

The company had been formed as a vehicle to purchase a textile business.

Most of the purchase price was raised from money advanced to the textile company under a factoring agreement. The directors used a bank account in Brookmann’s name for the textile company’s business transactions.

They also became directors of the textile business.

Between May 2011 and January 2013 over £1.2 million was paid to them from the bank account.

They contended that the payments were remuneration for their services to the textile business. The payments included £150,000 for services in connection with the acquisition of the business and payments for management services.

Brookmann was compulsorily wound up on a creditor’s petition in August 2013. The textile business went into administration in November 2013.

The liquidator submitted that the payments to the directors were not authorised by Brookman’s articles, were made when Brookmann was insolvent and were in breach of their duty to have proper regard to the interests of its creditors.

The High Court dismissed the claim.

It held that the bank account from which the payments had been made had been entirely funded from money paid to or for the benefit of the textile company. That money was to be treated as an asset of the textile company, not of Brookmann.

The directors could reasonably be expected to make their decisions in respect of the textile company in their capacity as directors of it. It would not have been open to them to use the bank account for Brookmann’s purposes.

The liquidator had failed to establish that the payments were made with Brookmann’s money and the claim must therefore fail.

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

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