McTear & Anor v Engelhard & Ors

Where related companies are controlled by the same people, the court may take contemporaneous accounting records at face value when the alleged inter-company agreement is unsupported by documents and inconsistent with those records. Directors must consider whether charges are in the company’s best interests, whether value is received, and whether conflicts or preferences arise. A later accounting adjustment made during administration requires the administrator’s consent if it interferes with the administrator’s powers. Silence during preparation of a statement of affairs does not create an estoppel unless there was a communicated, precise and unambiguous assumption on which the representee relied to its detriment.

The claimants, former administrators and CVA supervisors of Broadland Wineries Ltd, sought recovery of payments made by the company to its holding company, Engelhard Holdings Ltd, and damages from the company’s directors. They alleged that the payments were loans, or alternatively that the directors had breached fiduciary and care duties by authorising excessive management charges while the company was in financial difficulty.

The defendants contended that the payments were made on account of an annual management charge, that the services were provided, that a later ledger adjustment was proper, and that the claimants were estopped by their conduct during the administration. The court determined the debt, directors’ duties, administration-power and estoppel issues.

1. Claims established. Judgment was entered for the claimants against Engelhard Holdings Ltd and each of the directors on the debt and breach-of-duty claims.
2. The Amended Defence did not properly plead an express contract, implied contract or quantum meruit. In any event, no documentary or evidential basis established the alleged annual charge or its terms. The inter-company ledger recorded the payments as an asset of Broadland Wineries Ltd. Given the absence of reliable records created by the defendants, the court was entitled to take that accounting treatment at face value.
3. The directors had to act in the company’s best interests, consider whether the company was receiving value for the charges, address actual or potential conflicts, and consider whether Engelhard Holdings Ltd was being preferred over other creditors. They could not properly negotiate or agree the charges on an arm’s-length basis while acting for both companies and personally receiving much of the money. The evidence did not show that those matters had been considered in the relevant year. The claim against the company and the fiduciary and care claims against each director therefore succeeded.
4. Paragraph 64 of Schedule B1 to the Insolvency Act 1986 applied. The post-administration adjustment, backdated in the ledger, was an exercise of a management power without the administrators’ consent. It interfered with their powers because it sought to preserve money for Engelhard Holdings Ltd to which it had no established right.
5. The estoppel defence failed. There was no agreed or common assumption communicated by the claimants that the adjusted ledger was correct. Their dealings concerned preparation of the directors’ statement of affairs, and any representation was neither precise nor unambiguous. There was also no sufficient basis for reliance, detriment or unconscionability.
6. The judge found it unnecessary to decide whether the adjustment was a sham, although he observed that it was intended to present rights and obligations different from those actually established.

The parties were invited to agree the form of order; costs and any permission to appeal were reserved for further argument.