Northampton Borough Council v Cardoza & Ors

A director must treat company property as belonging to the company and must not divert it for personal benefit, including by routing payments through third parties. A director’s informal understanding that company money reduces a loan account does not establish appropriation where the payment was unauthorised and was never recorded in the company’s books. The company may obtain restorative compensation for misapplied assets even where its balance-sheet net assets appear unchanged. A breach involving drawings from a formally deferred director’s loan account may establish liability in principle but yield no remedy where restoration would be punitive rather than restorative. Relief under Companies Act 2006, s.1157 requires honesty, reasonableness and fairness, cumulatively. A transfer for no consideration may fall within Insolvency Act 1986, s.423 where putting assets beyond the reach of a person who may claim is one purpose of the transfer.

Northampton Borough Council, as assignee of claims belonging to Northampton Town Football Club Ltd, sued the former controlling directors, Anthony and David Cardoza, concerning payments made from loan drawdowns and the use of company funds. The Council alleged breaches of fiduciary duty, including diversion of £2.05 million to Anthony Cardoza, further payments to the defendants, and expenditure on David Cardoza’s home. It also challenged David Cardoza’s transfer of his interest in the family home to Christina Cardoza under Insolvency Act 1986, s.423.

The principal issues were the construction of a prior settlement deed, the alleged contractual implication that loan defaults would be tolerated, the scope and breach of directors’ duties, the engagement of creditors’ interests, the availability of relief under Companies Act 2006, s.1157, the appropriate remedies, and whether the transfer of the home was a transaction at an undervalue intended to prejudice potential claimants.

1. Construction and implied terms. The prior settlement deed did not compromise claims by the football club against its directors. Properly construed against its background and structure, it concerned disputes between the parties to the deed and did not extend to undisclosed internal claims arising from the directors’ own breaches. The proposed implied term that the Council would not enforce loan defaults following minor delays in interest payments was inconsistent with express contractual provisions and was hopeless.
2. Directors’ duties and insolvency. Directors owe the statutory duties in ss.171–177 of the Companies Act 2006, together with the duty of reasonable care, skill and diligence. Their fiduciary obligations require loyalty to the company and proper regard to conflicts. The company was insolvent, or on the verge of insolvency, by April 2013 and thereafter. The interests of creditors were therefore engaged, although the Council’s claim was brought as assignee of the company’s rights rather than as a creditor.
3. Breach and remedy. Anthony Cardoza deliberately diverted £2.05 million through third parties as key money or an advance, outside the company’s accounting records. The payments were not appropriated to his director’s loan account and amounted to unlawful exploitation of company property. He was liable to pay £2.79 million, subject to credit for proven repayments. David Cardoza knowingly authorised or permitted the diversion and was liable in relation to expenditure on works at his home. His drawings through his loan account breached duty, but restoration of those drawings would have been punitive in the particular circumstances and no remedy was awarded for that breach.
4. Relief and transfer. Neither director acted honestly and reasonably, so relief under s.1157 was unavailable. David Cardoza’s transfer of his interest in the family home to Christina Cardoza was for no consideration and was made partly to put the asset beyond the reach of a person who might claim against him. It was therefore a transaction at an undervalue within s.423, and the Council was entitled to declaratory and restorative relief.