Neville & Anor v Krikorian & Ors

A director may authorise unlawful loans to a co-director by knowingly allowing a continuing company practice under which such lending is treated as acceptable. Actual knowledge of every individual payment is not required once the director knows of the practice and fails to stop it.

Under section 341(2)(b) of the Companies Act 1985, liability extends to lending made after that knowledge. A director who fails to require repayment of earlier unlawful loans also commits a breach of duty, but damages for that breach are limited to the loss caused by the failure to seek recovery at the relevant time.

The administrator of Unigreg Ltd sought summary judgment against its two former directors for unlawful directors’ loans. Each accepted liability for the balance of his own loan account. The disputed issue was whether Avo Krikorian was also jointly and severally liable for his co-director son’s loan account.

HH Judge Havelock-Allan QC gave summary judgment against Avo Krikorian for the balance on his own account and for £1,692,174 on his son’s account. He refused an adjournment sought to enable Avo Krikorian to file evidence that he had not known of his son’s borrowings.

On appeal, the court admitted further evidence and considered whether joint and several liability under section 341(2)(b) of the Companies Act 1985, or liability for misfeasance, was established on the fuller facts.

1. Appeal allowed in part. The court admitted the further evidence, set aside the part of the order making Avo Krikorian liable for £1,692,174 of his son’s debt, and substituted a more limited order.

2. Section 341(2)(b) of the Companies Act 1985 makes a director who authorised an arrangement or transaction contravening section 330 liable to indemnify the company for resulting loss. Section 341(5) makes it necessary to identify the relevant arrangement or transaction and permits a director to establish lack of knowledge of the circumstances constituting the contravention.

3. The arrangement alleged was not confined to discrete payments. It was the practice of operating directors’ loan accounts on the footing that company lending to the directors was acceptable. A director who knowingly allowed that practice to continue authorised payments made under it, even without actual knowledge of each payment.

4. Avo Krikorian had not been shown to know of every payment or necessarily to know of the lending before the board approved the 1997 accounts in July 1999. From then, however, he knew of the practice, took no step to stop it, and did not cause the company to demand repayment. He therefore authorised the lending to his son after 27 July 1999. Summary judgment was appropriate for £561,162, being the minimum increase in the son’s indebtedness after that date, plus any further lending proved between 27 July and 31 December 1999, with interest.

5. His failure to require recovery of the existing debt was also a breach of duty. That misfeasance did not make him liable for the whole pre-existing debt. His liability was limited to the difference between the amount recoverable had repayment been sought immediately after 27 July 1999 and the amount now recoverable. A declaration to that effect was ordered.

• Court of Appeal (Civil Division) — Allowed the appeal in part and varied the summary judgment: [2006] EWCA Civ 943.
• High Court of Justice, Chancery Division, Bristol District Registry — HH Judge Havelock-Allan QC gave summary judgment on 10 December 2004, including judgment against Avo Krikorian for part of his co-director’s loan indebtedness.