Solid Homes Ltd, Re

The liquidators sought to recover three payments made by Solid Homes Limited in January 2011 from its former directors/shareholders. The claims relied on breaches of directors' duties under the Companies Act 2006, principally ss.171, 172 and 174, and on the proposition that the payments were unlawful distributions made when the company lacked distributable profits. The court applied the established tests for the subjective/objective element of s.172 (Regentcrest) and the three qualifications described in Re HLC where solvency is in issue. The burden shifted to the respondent directors to explain payments once the liquidator proved their receipt (Re Idessa; Toone v Robbins).

On the facts the judge found: (a) the First Payment (banker’s draft for £83,000) was not actionable against the second respondent because an objective assessment did not show she ought, prior to the withdrawal, to have curtailed her co-director's access and, in any event, she acted honestly and was relieved under s.1157; (b) the First and Second Payments were more probably distributions/resolutions agreed by the two shareholders at a December 2010 meeting and, applying the Duomatic principle and having regard to the company’s last annual accounts (to 31 March 2009), the distributions were lawful because the company was found to be solvent at the relevant time; and (c) the Third Payment (£31,126) was, on the balance of probabilities, a payment to discharge an invoice of a long‑standing creditor/contractor and not a payment for the second respondent’s personal benefit. The liquidators' claims were therefore dismissed.

Background and parties:

• Solid Homes Limited (in liquidation). Applicants: the joint liquidators and an insolvency practitioner. Respondents: two former directors/shareholders, Mr Rodney Adu‑Kingsley and Ms Sharon Maria Smith. The liquidators originally pursued only the first respondent but also pursued Ms Smith. A Registrar had earlier made a summary determination against Ms Smith which was set aside and the proceedings continued.

Nature of the application: The liquidators sought repayment or contribution in respect of three payments made by the company in January 2011 (the First Payment: £83,000 by banker’s draft to a third party; the Second Payment: £60,000 by on‑line transfer to Ms Smith; the Third Payment: £31,126 by banker’s draft to Ms Smith) on the basis they were for no consideration, or were unlawful distributions and/or made in breach of duties in ss.171, 172 and 174 Companies Act 2006.

Issues framed by the court:

• Whether each payment was for no consideration or was a lawful distribution;
• If a distribution, whether it was lawful having regard to Part 23 CA 2006 and the common law rule against distributions out of capital;
• Whether Ms Smith breached duties in allowing unilateral account access and in making payments; and
• Where relevant, whether she should be relieved under s.1157 CA 2006.

Procedural and evidential context: The trial judge noted considerable gaps in contemporaneous documentation and variable witness recollection after nearly nine years. The court applied authorities on the subjective/objective elements of s.172 (Regentcrest; Re HLC), on the burden shifting once a payment is proved (Re Idessa; Toone v Robbins) and on the Duomatic principle for shareholder agreement (Re Duomatic).

Court’s reasoning and findings:

• First Payment: although relations between the directors had deteriorated, there was no objective basis to conclude Ms Smith should have foreseen and prevented the First Respondent making the banker’s draft; she acted honestly and promptly took steps to prevent repetition; relief under s.1157 was appropriate; no liability for the £83,000 was imposed.
• First and Second Payments as distributions: the judge accepted the evidence that the two shareholders had agreed distributions at the December 2010 meeting, invoked Duomatic and, having accepted the company’s last audited accounts (to 31 March 2009) and other factual material, found the company was solvent at the time such that the distributions were lawful and not a breach of ss.171, 172 or 174.
• Third Payment: on balance the payment matched an invoice from a long‑standing contractor (the Johnson Samuel Partnership), the manner of payment was explained, and there was no persuasive evidence of fabrication or personal enrichment; no breach was found.

Outcome: the liquidators’ claim was dismissed in its entirety.

The claim is dismissed. The court held that the liquidators had not established liability: the First Payment did not attract liability because objectively Ms Smith was not obliged to restrict her co‑director’s account access and she was relieved under s.1157 CA 2006; the First and Second Payments were more probably lawful distributions agreed by the two shareholders and supported by the company’s last accounts and the Duomatic principle; the Third Payment was a legitimate discharge of a contractor’s invoice. Documentary gaps and witness evidence were considered but did not displace those findings.