Hunt (As the Liquidator of Wow Internet Ltd) & Anor v Majid

A director defending a liquidator’s claim for payments from a company must provide a satisfactory explanation, supported where appropriate by contemporaneous records, showing that the payments were legitimate and made for the company’s benefit. Material deficiencies in the records may justify adverse inferences, so that the benefit of doubt goes to the liquidator. Informal company administration does not reduce the applicable standard. A director must exercise independent judgment and cannot rely blindly on professional advice. Once insolvency is known or reasonably apparent, creditors’ interests become paramount. The court applies a subjective assessment where there is evidence of the director’s actual consideration; otherwise it applies an objective test. Relief under section 1157 of the Companies Act 2006 will generally be unavailable where the director has failed to account properly for company payments.

The liquidator and the company sought recovery of sums withdrawn from the company’s bank account by its sole director. The claims concerned payments for another company’s liabilities, an overdrawn directors’ loan account, withdrawals after liquidation, personal or unexplained expenditure, and unexplained cash withdrawals before insolvency.

The company had entered creditors’ voluntary liquidation in July 2014 and was later restored to the register. The director relied on alleged advice from the former liquidator, asserted that some payments were legitimate company expenditure, and sought relief under section 1157 of the Companies Act 2006. The central issues were the evidential burden, the effect of inadequate accounting records, the scope of directors’ duties after insolvency, and whether relief should be granted.

1. Disposition. The Applicants succeeded in full. The Respondent was liable for the sums claimed, subject to consequential orders to be addressed separately.
2. Evidential burden. Once company payments made to or for the benefit of a director are identified, the director must provide a satisfactory explanation showing that they were legitimate. The director cannot rely on inadequate record-keeping to invite the court to assume that payments were lawful. Materially deficient financial records, missing contemporaneous documents, and the failure to call available corroborative witnesses may justify adverse inferences. The benefit of any doubt therefore went to the Applicants.
3. Directors’ duties. The statutory and fiduciary duties in sections 171 to 177 of the Companies Act 2006 continued to apply. The Respondent was required to account for company assets and to exercise independent judgment. Reliance on advice from an insolvency practitioner was not a complete defence, particularly where the advice and its terms were not proved by contemporaneous evidence.
4. Insolvency. Once the Respondent knew, or ought to have known, that the Company was insolvent, creditors’ interests became paramount. Where there was evidence that the director had actually considered the company’s interests, the subjective test applied. In the absence of such evidence, the court asked whether an intelligent and honest director in the circumstances could reasonably have believed that the transaction benefited the company.
5. Application. The Respondent failed to explain or substantiate payments to accountants for another company, the alleged discharge of his overdrawn loan account, withdrawals after liquidation, personal and unexplained expenditure, and substantial cash withdrawals. The evidence did not establish that the payments benefited the Company or its creditors.
6. Relief. Section 1157 of the Companies Act 2006 did not assist. The Respondent had not shown that he acted reasonably, and the deficiencies in his accounting records undermined rather than supported an application for relief.