BM Electrical Solutions Ltd

The liquidator sought declarations and recovery of sums paid from the company to its director, Mr Belcher. The court applied the Companies Act 2006 provisions on directors' duties (sections 171-177) and the rules on distributions in Part 23, including the consequences of unlawful distributions under section 847. The judge found that most payments to Mr Belcher were loans (or, alternatively, unlawful distributions) because no dividends were formally declared in accordance with Part 23 and no adequate year-end reconciliations were produced. Cash withdrawals and many miscellaneous payments were, however, satisfactorily explained as company purposes recorded on the company software which the director said he alone could access. Payments for personal gambling and season tickets were not company purposes and must be repaid. The court ordered Mr Belcher to repay the net sum outstanding on his loan account (the figure stated in the judgment) or, alternatively, to pay equitable compensation for breach of fiduciary duty.

The applicant liquidator brought an application seeking declarations and repayment of sums drawn from BM Electrical Solutions Limited by its director, Mr Belcher, during the period after the company's only filed accounts (to 31 January 2012) until liquidation in August 2015. The liquidator's bank-statement analysis identified transfers to Mr Belcher, cash withdrawals, gambling payments and miscellaneous expenditures. The liquidator characterised the transfers as loans and, alternatively, alleged breach of fiduciary duty and sought declarations that Mr Belcher held sums on trust or must account.

Nature of the application: an application by the company and its liquidator for declarations and repayment of sums allegedly due from the director to the company.

Procedural posture: first-instance hybrid hearing on 14 October 2020 following an application dated 4 October 2018, disclosure directions and late witness evidence. The director appeared in person; the liquidator was represented remotely.

Issues framed:

• Whether payments made to Mr Belcher were lawful dividends or were loans/unauthorised distributions recoverable by the company.
• Whether cash withdrawals and miscellaneous payments were for proper company purposes and adequately explained.
• Whether the director breached fiduciary duties and is liable to repay sums or account as trustee.

Court's reasoning and findings: the court reviewed directors' duties under sections 171-177 and the dividend regime in Part 23 of the Companies Act 2006, including section 847 on unlawful distributions. The judge held that the transfers to Mr Belcher were correctly characterised as loans made in the expectation of year-end write-off by declared dividends, but no accounts were produced after 31 January 2012 and no dividends were ever duly declared. Therefore the payments could not be treated as lawful distributions and were recoverable. The court accepted the director's oral explanations and evidence that cash withdrawals and many miscellaneous payments were for company purposes recorded on the company's accounting software, which the director said he could not currently access; the liquidator had not obtained access during disclosure. Payments for betting and personal entertainment were not company purposes and must be repaid. The court quantified the outstanding loan balance as in the judgment and ordered repayment or equitable compensation. The judge indicated he would hear further submissions on costs and interest.

At first instance the court allowed the application in part. The judge held that the bulk of payments made to Mr Belcher were loans (or, alternatively, unlawful distributions) because no dividends had been properly declared in accordance with Part 23 of the Companies Act 2006; accordingly Mr Belcher must repay the outstanding sums on his loan account (the judgment states the sum as £193,029.97 less the £4,215.00 credit as at 31 January 2012) or, alternatively, pay equitable compensation for breach of fiduciary duty. The court accepted Mr Belcher's explanation for the cash withdrawals and many miscellaneous payments as made for company purposes recorded on the company software, but found that gambling and clearly personal expenditures were not company purposes and must be repaid. The judge reserved costs and interest for further submissions.