RJH Stanhope Ltd, Re

A director who knowingly permits a disqualified person to act as a shadow director breaches the duties to promote the company’s success and to exercise reasonable care, skill and diligence. A director must also make sufficient independent enquiry before authorising the rapid disposal of funds received from a person known to be unreliable, particularly where the company lacks proper documentation or security. An unchallenged liquidator’s adjudication of a proof of debt is not determinative of the company’s loss in a claim under section 212 of the Insolvency Act 1986. The court must independently assess loss. Section 1157 of the Companies Act 2006 may relieve a director from part of the liability where the director acted honestly and reasonably and, considering all the circumstances, ought fairly to be excused.

The liquidators of RJH Stanhope Ltd brought a claim under section 212 of the Insolvency Act 1986 against John Robert Harriss for misfeasance and breach of statutory directors’ duties. The claim arose from the receipt and subsequent disbursement of £400,000 paid into the company’s account by Heather Birkhead. Harriss admitted that he was a director and had allowed his father, who was subject to disqualification and bankruptcy restriction undertakings, to act as a shadow director.

The company subsequently became liable to Birkhead. The liquidators adjudicated her proof of debt at £87,231, but Harriss did not challenge that adjudication. He argued that the liability had been released by a Tomlin order, that the adjudication was binding, and that the proceedings were an abuse of process. The central issues were breach, causation and loss, the effect of the settlement and adjudication, abuse of process, and relief under section 1157 of the Companies Act 2006.

1. Breach of duty. Harriss’s admitted conduct in allowing his father to act as a shadow director, despite knowing that he was unfit and disqualified, was not likely to promote the company’s success and showed a lack of reasonable care, skill and diligence. It therefore breached sections 172 and 174 of the Companies Act 2006. Harriss also breached those duties by authorising payments to Project Management without satisfying himself that the company had received Birkhead’s money with her informed consent and on agreed terms.
2. The fact that Harriss accepted his unchallenged evidence about his state of mind did not exculpate him. His reliance on his father and nominee co-directors was insufficient. The evidence also supported a breach of section 173, because he may have failed to exercise independent judgment. It was unnecessary to decide the scope of section 175(3), since breach of sections 172 to 174 was sufficient.
3. Causation and adjudication. Receipt of the £400,000 was not itself shown to have caused loss. The loss arose when the money was paid away so that the company could not meet Birkhead’s claim. The liquidators’ adjudication of the proof was not binding on the court. Although Harriss could have challenged it under rule 14.8(3) of the Insolvency (England and Wales) Rules 2016, the court had to make its own assessment of the company’s loss in the section 212 proceedings.
4. Settlement and abuse. The Tomlin order settled Birkhead’s claims against Harriss’s father and specified individuals, but did not release the company. A reservation of Birkhead’s rights against the company was implied. The present claim was brought by the company’s liquidators for a different liability and was not a collateral attack or abuse of process. The delay, within the limitation period and without specific prejudice, did not alter that conclusion.
5. Relief. Harriss acted honestly. Although his conduct was reckless, it was not a gross breach and was reasonable for the purposes of section 1157. Having regard to his payment of £475,000 to Birkhead, his lack of personal benefit, his disqualification undertaking and the questionable additional payments, it was fair to relieve him from most, but not all, liability. Judgment was entered for the applicants in the sum of £15,000.