Ball v Hughes

The liquidator brought claims under section 212 of the Insolvency Act 1986 for misfeasance arising from three credit entries totalling in substance over £750,000 which the directors caused to be applied to their directors' loan accounts by means of employer‑financed retirement benefit scheme mechanics (so‑called 'Lazarus' transactions) and by bare credits. The court found the directors had acted in breach of fiduciary duties (notably section 172 and section 171 of the Companies Act 2006) because by the times of the transactions the company was at least of sufficiently dubious solvency that the interests of creditors had to be considered.

The judge rejected the directors' defences: there was no valid authorisation under the articles or an effective informal members' (Duomatic) approval; reliance on professional/tax advisers did not excuse the failure to obtain company or insolvency advice (OneE had expressly warned on solvency); and quantum meruit was unavailable because the transactions were not properly authorised remuneration (House of Lords authority in Guinness v Saunders applied). The registrar ordered joint and several repayment of the sum found to be misapplied together with interest.

Background and parties: The applicants were the liquidator, Mr Ball, and PV Solar Solutions Ltd (in creditors' voluntary liquidation). The respondents were the company's two directors, Mr Paul Hughes and Mr Martyn Ware, each 50% shareholders. The company traded in solar installations and benefited from feed‑in tariffs until tariff reductions in 2011–2012.

Nature of claim and relief sought: The liquidator applied principally under section 212 Insolvency Act 1986 seeking orders requiring the directors to repay or restore sums said to have been improperly applied to discharge their directors' loan accounts (three credits in March/April, June and December 2012). Alternative causes of action (repayment of loan accounts or restoration under sections 238/241 IA 1986 as transactions at an undervalue) were pleaded but the primary claim proceeded under s.212.

Procedural posture: First instance hearing before Registrar Barber on 18–20 October 2017. Evidence included witness statements from the liquidator, the first respondent and a tax adviser, and oral evidence; the second respondent did not attend for cross‑examination.

Issues framed:

• Whether the credits were properly justified as remuneration or otherwise.
• Whether the Duomatic principle or members' written resolution validated the entries.
• Whether the company was solvent at the material times such that shareholder approval could be relied upon.
• Whether the directors complied with duties under CA 2006 (notably ss.171, 172, 174, 175) and could rely on professional advice.
• Whether a quantum meruit or other restitutionary basis could justify the payments.

Court's reasoning and findings:

• The court examined the detailed transactional mechanics of the EFRBS/Lazarus steps for Credits 1 and 3 and found that those steps effectively created a covenant and then used tripartite deeds to set off director indebtedness against the company's newly created covenantary liabilities.
• Credit 2 lacked comparable transactional documentation and in practice consisted of bare credits entered against the loan accounts.
• Applying the cash‑flow solvency approach (following authorities such as Re Casa Estates and Re HLC), the registrar concluded the company was cash‑flow insolvent or at least of sufficiently dubious solvency by the times of Credits 1 and 2 and both cash‑flow and balance‑sheet insolvent by Credit 3; creditors' interests therefore had to be paramount under s.172(3) CA 2006.
• The directors failed to satisfy the evidential burden to justify the payments: they did not show that the payments were legitimately authorised remuneration (no proper members' resolution or effective application of Re Duomatic), did not obtain or follow company/insolvency advice (OneE had expressly disclaimed such advice), and did not take or adduce adequate professional advice on solvency.
• Quantum meruit was not available to displace the bar on unauthorised remuneration for de jure directors in the circumstances (the judgment relied on Guinness v Saunders in rejecting a quantum meruit remedy).

Result: The registrar concluded the directors were misfeasant under s.212 IA 1986 and ordered them to repay jointly and severally the sum identified (see operative order) with interest; further submissions on interest and related relief were reserved for handing down.

First instance: The Registrar found that the directors had committed misfeasance by causing the Company to apply the three challenged credits to their directors' loan accounts in breach of their fiduciary duties (notably s.172 CA 2006 and s.171 CA 2006) and ordered, pursuant to section 212 Insolvency Act 1986, that the respondents jointly and severally repay the sum found to have been misapplied together with interest. The court rejected reliance on the Duomatic principle, rejected a quantum meruit remedy and rejected reliance on OneE's tax advice as excusing failure to obtain company/insolvency advice; solvency findings (cashflow and, later, balance sheet) were central to these conclusions.