Neville v Krikorian

The Court of Appeal considered whether a former director could be held jointly and severally liable for sums standing to the credit of his co-director's loan account where the loans to directors were made in contravention of section 330 of the Companies Act 1985. The court held that liability under section 341(2)(b) arises where a director authorised, or knowingly allowed to continue, a practice under which the company made loans to a co-director, even if he did not have actual knowledge of every individual payment. The judge's summary judgment against the appellant for the whole of his co-director's loan was varied: the appellant was held liable for lending that took place after 27 July 1999 and for the consequences of his failure to take steps to call in the indebtedness when he became aware of the practice.

Background and parties. Unigreg Ltd entered administration and its administrator brought proceedings against two former directors, Avo Krikorian and his son Krikor Krikorian, seeking declarations and orders in respect of directors' loan accounts which were admitted to be in contravention of section 330 of the Companies Act 1985. The administrator sought repayment by each director of sums shown on their respective loan accounts and contended that each director was jointly and severally liable for the other's indebtedness.

Procedural posture. Summary judgment had been granted by HH Judge Havelock-Allan on 10 December 2004 ordering each director to pay the sums on his own loan account and, in large part, ordering cross-liability. Permission to appeal to the Court of Appeal was granted by Arden LJ; this appeal followed and included applications to admit further evidence.

Nature of the claim. The administrator sought declarations of misfeasance and breach of duty and monetary orders under section 212 of the Insolvency Act 1986 and sections 151 and 322 of the Companies Act 1985, and relied upon section 341(2)(b) of the Companies Act 1985 to establish indemnity/joint and several liability for losses resulting from loans contrary to section 330.

Issues framed. (i) Whether the claim to joint and several liability had been sufficiently pleaded and supported for summary judgment; (ii) whether the judge was wrong to refuse an adjournment so the appellant could put in further evidence; and (iii) whether the appellant was in law jointly and severally liable for his co-director's loan.

Court's reasoning and conclusion. The court admitted the further evidence and held that section 341(2)(b) must be read with subsection (5): an "other director" who authorised the arrangement or, having known of the relevant circumstances, allowed a practice of lending to subsist could be liable unless he shows lack of knowledge of the contravening circumstances. The court found that, at least from 27 July 1999, the appellant knew of the practice of lending to his son, failed to take steps to stop it and failed to call in the indebtedness despite loans being repayable on demand. That conduct amounted to authorisation and breach of duty. The appeal succeeded in part: the earlier summary judgment ordering full cross-liability was replaced by an order that the appellant pay the difference between amounts outstanding at 30 June 2001 and those outstanding at 31 December 1999 (and such further sums lent between 27 July 1999 and 31 December 1999), with interest, and a declaration of misfeasance was made.

Appeal allowed in part. The Court of Appeal admitted further evidence, set aside the judge's order insofar as it made the appellant jointly and severally liable for the whole of his co-director's loan, and ordered that the appellant was liable for lending to his son that occurred after 27 July 1999 (being liable to indemnify the company for loss resulting from that lending). That conclusion rested on the finding that the appellant authorised or knowingly allowed a practice of unlawful loans to continue from July 1999 and failed in his duty to take steps to call in the indebtedness; summary judgment was given for the quantified portion and a declaration of misfeasance made.

Appeal from order of HH Judge Havelock-Allan QC (Deputy Judge of the High Court, Chancery Division, Bristol District Registry) made on 10 December 2004. Permission to appeal to the Court of Appeal was granted by Lady Justice Arden on 31 March 2005. The present judgment of the Court of Appeal is reported at [2006] EWCA Civ 943.