Mumtaz Properties Ltd, Re

A person is a de facto director where, considering all relevant circumstances, the person’s actual conduct shows an assumption of directors’ responsibilities and participation in the company’s corporate governance. Formal appointment and holding out are not essential.

Oral evidence must be assessed against contemporaneous documents, independent evidence and inherent probabilities. Where documents likely to exist are withheld by the party responsible for them, the court may draw adverse inferences. Informal management of a company supplies neither a lower standard of responsibility nor an answer to missing records.

Directors who permit colleagues to use company money through unlawful overdrawn loan accounts may be jointly and severally liable for the resulting loss, including where permission consists of failing to exercise effective financial control.

The liquidator of Mumtaz Properties Ltd brought misfeasance proceedings under section 212 of the Insolvency Act 1986. The High Court ordered members of the Ahmed family to restore money recorded as owing on directors’ loan accounts and awarded compensation for breach of fiduciary duty.

Saeed and Shafiq Ahmed, formally appointed directors, challenged their joint and several liability for money drawn by others. Zafar Ahmed challenged the finding that he was a de facto director. Munir Ahmed challenged a debit of £74,551.37 on his loan account. Shafiq also sought to rely on an alleged debt owed to him by the company as a set-off.

The appeal concerned the test for de facto directorship, the evidential consequences of missing company records, liability for permitting other directors’ unlawful drawings, the proposed set-off and the disputed accounting entry.

Appeal dismissed unanimously. Arden LJ delivered the reasoned judgment. Aikens and Patten LJJ agreed.

1. A trial judge assessing oral evidence must consider contemporaneous documents, independent evidence, admitted facts and inherent probabilities. Demeanour is only part of the assessment. Where documents would probably have existed if a party’s evidence were true, and that party is responsible for their non-production, their absence may justify adverse inferences. The liquidator had established a prima facie case from the company’s accounting records, and the judge could infer that the missing books would have supported it. Persons conducting a company informally cannot invoke the absence of records to obtain a lower standard of responsibility.

2. For de facto directorship under section 212 of the Insolvency Act 1986, there is no single test. Following the guidance in HMRC v Holland [2010] 1 WLR 2793, all relevant factors must be considered. The principal questions are what the person actually did, whether the person assumed directors’ responsibilities and whether the person formed part of the company’s corporate governance structure. Holding out may be evidence but is not essential.

   The company operated informally as a family enterprise. Zafar could act with authority in managing its properties, dealt with local authorities and suppliers, had access to accounting records and maintained an account identified as a director’s loan account. On the totality of the evidence, the judge was entitled to find that he was one of the company’s centres of corporate governance and therefore a de facto director.

3. Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA 344 did not require a judge to accept unchallenged evidence regardless of the remaining evidence. A judge may assess its weight, prefer conflicting evidence and find a witness mistaken. Findings of falsity, bad faith, negligence or irrationality ordinarily require the allegation to have been put fairly. In any event, the material allegations had been put to Zafar.

4. The overdrawn loan accounts were, by common agreement, unlawful under section 330 of the Companies Act 1985. The findings that Saeed and Shafiq permitted other family members to use company money, or failed to exercise effective control over its finances, were not open to challenge on appeal. Their breaches caused the whole loss, and the judge was entitled to impose joint and several liability.

5. Shafiq’s set-off argument failed because the judge had rejected, without appeal, his evidence that the company owed him £50,000. The judge was also entitled to treat the £74,551.37 entry as an effective debit increasing Munir’s liability. Munir supplied neither evidence explaining the entry nor an explanation for the absence of such evidence. Any confusion in the judgment between a debit and a credit caused no material error.

• Court of Appeal (Civil Division): In Mumtaz Properties Ltd, Re [2011] EWCA Civ 610, the court unanimously dismissed the appeal and affirmed the High Court’s order.
• High Court of Justice, Chancery Division, Leeds District Registry: On 3 August 2010, HHJ Simon Brown QC held the relevant family members liable to restore sums recorded on directors’ loan accounts, imposed joint and several liability subject to a limitation for Mumtaz Ahmed, and awarded the liquidator costs. No neutral citation was stated.