Idessa (UK) Ltd, Re

A person who has assumed the duties and real influence of a director may be a de facto director for the purposes of Insolvency Act 1986 section 212. Once a liquidator proves that company payments were made, directors must account for them. An unexplained payment may support an inference of breach, but does not automatically establish liability.

When a company is insolvent or creditors are at risk, directors must act with creditors’ interests in mind. A director is liable for wrongful trading when the director knew or ought to have concluded that insolvent liquidation was unavoidable and did not take every proper step to minimise creditor loss. The contribution is compensatory and normally reflects the increase in net deficiency, without duplicating recovery for misfeasance.

The liquidator of Idessa (UK) Ltd sought relief against its statutory director, Mr Povey, and Dr Morrison, alleged to be a de facto director. The claims concerned misfeasance, transactions at an undervalue and wrongful trading.

The company was balance-sheet insolvent throughout its trading life. It obtained substantial income through a United States account. The respondents contended that the income and account belonged to a separate American entity. The liquidator alleged that the arrangement diverted company income and enabled unaccounted salary payments.

The central issues were whether Dr Morrison was a de facto director, whether disputed payments were company payments made for proper purposes, and whether the respondents should have ceased trading by 30 June 2005.

1. Application granted in substantial part. Dr Morrison was a de facto director from incorporation to liquidation. The relevant inquiry was whether he had assumed the duties of a director and was part of the company’s corporate governing structure. His equal role with Mr Povey, access to banking and financial information, participation in decisions, and repeated holding-out as a director established that status.

2. The company was balance-sheet insolvent throughout. Its United States account was used extensively for the company’s expenditure. The supposed American contracting entity was merely a vehicle for perceived tax efficiencies. The court found that the company had the benefit and burden of the AVS contract and that its receipts belonged to the company.

3. Once the liquidator proved payments, the respondents bore an evidential burden to explain them. An inadequate explanation could justify an inference that the payment lacked proper justification. It did not impose automatic liability where other evidence showed that the payment was made in good faith for proper company purposes.

4. The court ordered repayment or compensation under Insolvency Act 1986 section 212 for unauthorised payments, payments for Consilia, personal and unexplained expenditure, an unjustified payment to AVS, and unpaid PAYE and national insurance. Legitimate salary, some business expenses, voting memorabilia and payments to an employee were not recoverable.

5. By the end of June 2005, the loss of the AVS contract and cessation of external investment meant that the respondents ought to have concluded that insolvent liquidation was unavoidable. They failed to establish that they took every proper step to minimise creditor loss. Wrongful trading was therefore established. The compensatory contribution was calculated by the increase in adjusted net deficiency and reduced pro tanto by overlapping section 212 recoveries.

6. The respondents were jointly and severally liable for £1,431,513.23. Mr Povey was additionally liable for £7,000. The total liability was £1,438,513.23. The court directed that the judgment be sent to the Secretary of State for possible disqualification proceedings.

not stated in the judgment.