RJH Stanhope Ltd, Re

The liquidators sued a former director (John Robert Harriss) under section 212 Insolvency Act 1986 for misfeasance/breach of directors' duties arising from the receipt and rapid disbursement of £400,000 paid into the company. The court found breaches of duties under Companies Act 2006 ss172, 173 and 174: in particular John had allowed a disqualified person (his father) to act as a shadow/de facto director and had authorised payments out without independent enquiry as to the investor's consent and the terms on which the money was provided. The adjudication of the creditor's proof of debt by the liquidators was held not to be determinative of the court's assessment of loss. The court rejected that the Tomlin settlement with the creditor discharged the company's right to pursue recovery from directors and held the Tomlin order impliedly preserved the creditor's position against the company. Considering mitigation under Companies Act 2006 s1157, the court accepted aspects of the director's unchallenged evidence and applied a discretionary reduction. The court made a declaration that John's liability to compensate the company for loss was £15,000.

This is a first instance insolvency/companies claim brought by the joint liquidators of RJH Stanhope Ltd against a former director, John Robert Harriss, under section 212 Insolvency Act 1986 for misfeasance and breach of directors' duties. The company received £400,000 from a third party (Ms Birkhead) in July 2011 and the monies were largely paid away, principally to a related project management company and to various other recipients. The company was non-trading and entered creditors' voluntary liquidation in September 2012. The liquidators adjudicated the creditor's proof of debt at £87,231 and seek recovery from John for that amount as the company's loss.

Parties and posture:

• Applicants: Mr Andrew Poxon and Mr Martin Maloney, joint liquidators of the company.
• Respondent: Mr John Robert Harriss, former director.
• The claim was originally against four individuals but proceeded only against John (and default judgment had earlier been obtained against Robert Harriss).

Issues framed:

• Whether John breached duties under Companies Act 2006 (notably ss172, 173, 174 and 175) by allowing his father to act as a de facto/shadow director and by authorising payments without independent enquiry.
• Whether those breaches causally resulted in loss to the company and the quantum of any loss.
• Whether the Tomlin settlement between the creditor and the father (and discontinuance as to certain individuals) discharged the company's rights or otherwise precluded the liquidators' claim.
• Whether the liquidators' adjudication of the creditor's proof of debt binds the court or is challengeable.
• Whether relief under Companies Act 2006 s1157 (court power to relieve officer who acted honestly and reasonably) should be applied to mitigate liability.
• Whether the proceedings amounted to an abuse of process.

Court's reasoning and outcome:

1. The court accepted that John admitted he allowed his father to act as a shadow director and found that to be a breach of s172 and also to involve lack of reasonable care under s174; the court also found a failure to exercise independent judgment under s173.
2. The receipt of the £400,000 per se did not cause loss; rather the disbursement of the funds in the manner authorised by John caused the company to be unable to repay the creditor and therefore to incur liability.
3. The liquidators' adjudication of the proof of debt (£87,231) was not treated as determinative of the court's assessment of loss; the court must make its own independent assessment. The Tomlin order did not, in the court's view, discharge the company's rights to pursue recovery because it did not expressly (and by necessary implication did not) extinguish the company's position.
4. Applying s1157, the court accepted aspects of John’s unchallenged evidence and concluded his conduct, though reckless and a breach, could be characterised as sufficiently reasonable to merit mitigation. Considering all circumstances (including payment already made to the creditor of £475,000 by or on behalf of John, the co-directors not being pursued, and his disqualification undertaking), the court exercised its discretion and fixed John's liability at £15,000 by declaration.

The application against John succeeded in part. The court held that John breached duties under Companies Act 2006 ss172, 173 and 174 by allowing a disqualified person to act as a shadow director and by authorising payments without adequate independent enquiry; those breaches caused loss to the company. The adjudication of the creditor's proof of debt by the liquidators was not determinative of the court's assessment of loss. Applying Companies Act 2006 s1157, the court exercised its discretion to mitigate liability and declared John liable to compensate the company in the sum of £15,000.