Ball (PV Solar Solutions Ltd) v Hughes & Anor

Where a company is insolvent, or there is a real and not remote risk that creditors will remain unpaid, directors must consider the interests of creditors as a whole. The assessment is fact-sensitive and looks beyond a snapshot of debts due on the relevant date to the reasonably near future and the company’s trading context. The directors’ subjective belief is ordinarily relevant, but an objective test applies where they failed actually to consider the company’s or creditors’ interests, or overlooked a material creditor interest without objective justification. Directors cannot rely on informal shareholder approval where they did not apply their minds to ratification or where the company was insolvent. A de jure director cannot recover unauthorised remuneration by quantum meruit where the articles reserve authority to the company.

The liquidator and the company applied under section 212 of the Insolvency Act 1986 against two directors. They alleged that the directors had caused three credits, totalling £750,800, to be entered against their directors’ loan accounts after implementing arrangements connected with an employer financed retirement benefit scheme.

The applicants alleged breaches of directors’ duties and sought repayment or restoration, alternatively relief concerning transactions at an undervalue under sections 238 and 241 of the Insolvency Act 1986. The respondents relied on remuneration, informal shareholder approval under the Duomatic principle, professional advice and quantum meruit. The central issues were whether the credits were authorised, whether creditor interests had to be considered, and whether the respondents could justify the sums retained.

1. Outcome. The court found that all three credits were misfeasant. The respondents were ordered jointly and severally to repay £758,020 to the company, with interest to be determined after submissions.
2. Creditor duty. Under section 172 of the Companies Act 2006, the duty to promote the company’s success becomes a duty to act in the interests of creditors as a whole where the company is insolvent or there is a real, rather than remote, risk that creditors will be left unpaid. The question is fact-sensitive and must be assessed in the context of the company’s business. The court may consider significant foreseeable trading events and their likely effect on viability. It is not confined to whether the company was technically insolvent on a particular day: [64]-[73].
3. Subjective and objective assessment. The directors’ honest belief is ordinarily relevant. However, the objective test applies where there is no evidence that they actually considered the company’s best interests, or where a materially important creditor interest was overlooked without objective justification. Since the respondents had not considered creditors’ interests, an intelligent and honest director could not reasonably have believed that the credits benefited creditors as a whole: [74]-[78], [184]-[186], [208]-[211], [223]-[225].
4. Solvency. The company was cash-flow insolvent, or at least of sufficiently dubious solvency to engage creditor interests, when Credits 1 and 2 were made. It was both cash-flow and balance-sheet insolvent when Credit 3 was made. The cash-flow assessment had to include the reasonably near future and the evidence of unpaid supplier debts, unpaid tax and inadequate liquidity: [149]-[151], [175]-[183], [203]-[210], [212]-[225].
5. Remuneration and Duomatic. The articles required remuneration to be determined by ordinary resolution. No such resolution existed. The respondents had not applied their minds to ratifying the credits as remuneration; instead, they had deliberately used the scheme machinery. In any event, the Duomatic principle could not assist because the company was insolvent or of doubtful solvency, and the respondents had not proved solvency: [134]-[150].
6. Quantum meruit. The respondents could not recover the credits as reasonable remuneration. They were de jure directors, had no employment contracts, and the articles did not authorise the payments. The reasoning in Guinness Plc v Saunders prevented the court from implying a remuneration contract or usurping the function reserved to the company. Global v Hale was distinguishable: [231]-[259].
7. Final findings. The respondents breached their fiduciary duty under section 172, misapplied company assets for their own benefit and exercised their powers for improper purposes contrary to section 171 of the Companies Act 2006. They were therefore liable under section 212 of the Insolvency Act 1986: [260]-[263].