Re Mumtaz Properties Limited

The Court of Appeal upheld the High Court's finding that a number of family members were liable under section 212 of the Insolvency Act 1986 to repay directors' loan account balances and for misfeasance. The court accepted the trial judge's approach of testing oral evidence against contemporaneous documents and, in particular, drawing adverse inferences from the absence of relevant company books and papers. The court endorsed the judge's findings (i) that one appellant, Zafar, was a de facto director because he had assumed director functions and exercised real influence over corporate governance, (ii) that the duly appointed directors were jointly and severally liable for the aggregate overdrawn directors' loan accounts because they permitted other persons to apply company monies for their own use (contrary to section 330 Companies Act 1985), (iii) that a proposed pre-liquidation set-off was not established by the respondent's evidence, and (iv) that the large debit on Munir's loan account stood unexplained and properly increased his liability.

This is an appeal from HHJ Simon Brown QC's order of 3 August 2010 in the Chancery Division, Leeds, in proceedings brought by the liquidator under section 212 of the Insolvency Act 1986. The liquidator sought declarations that various members of the Ahmed family were liable to repay directors' loan accounts and sought compensation for misfeasance and breach of fiduciary duty.

The principal factual background was that Mumtaz Properties Ltd was a family property company which went into administration on 19 March 2003 and into liquidation on 8 November 2004 with a substantial deficiency. The liquidator relied on the company's accounting records (Sage ledger entries) showing debit balances on directors' loan accounts and alleged that those entries evidenced unauthorised personal expenditure by the named individuals.

The court identified four issues on appeal:

• whether Zafar was a de facto director;
• whether Saeed and Shafiq were jointly and severally liable for the aggregate overdrawn directors' loan accounts;
• whether appellants could set off pre-liquidation debts owed to them by the company;
• whether the large debit of £74,551.37 on Munir's loan account was rightly attributed to him.

The Court of Appeal reviewed authorities on de facto directorship and emphasised that the trial judge was entitled to evaluate credibility by reference to contemporaneous documentation and to draw inferences from its absence where the respondents controlled the missing material. On the facts the judge was entitled to conclude that Zafar had assumed functions and exercised real influence consistent with a de facto director. The judge's factual findings that the appointed directors permitted the misuse of company funds, thereby giving rise to joint and several liability for the total of the overdrawn accounts, were held to rest on permissible inferences and credibility findings and were not open to appellate disturbance. The judge was also entitled to reject the asserted set-off for lack of documentary support, and to treat the unexplained £74,551.37 entry on Munir's account as properly increasing his liability.

The court therefore dismissed the appeal.

Appeal dismissed. The Court of Appeal upheld the trial judge's factual findings and inferences: contemporaneous documents and their absence were rightly used to test witness credibility; the judge did not err in finding Zafar a de facto director on the totality of the evidence; the duly appointed directors were properly held jointly and severally liable for the aggregate overdrawn directors' loan accounts because they permitted company money to be applied for personal use; the claimed pre-liquidation set-off lacked documentary proof and was rightly rejected; and the unexplained large debit against Munir's loan account could properly be treated as increasing his liability.

Appeal from the High Court of Justice, Chancery Division, Leeds District Registry, order of HHJ Simon Brown QC (sitting as a High Court judge) dated 3 August 2010. This judgment is reported as [2011] EWCA Civ 610.