Solid Homes Ltd, Re

A director’s duty to promote a company’s success may require objective assessment where there is no evidence that the director actually considered the company’s interests. However, disagreement between directors does not automatically require one director to restrict another’s access to company bank accounts. The court must assess whether an intelligent and honest director could reasonably have anticipated that protective steps were required, without relying on hindsight.

Payments to directors are presumed to require explanation once made by the company. A distribution may be validated by unanimous shareholder assent under the Duomatic principle, but only where the company was solvent and the statutory and common-law restrictions on distributions were satisfied. Temporary liquidity difficulties do not necessarily establish insolvency.

The joint liquidators of Solid Homes Limited claimed against Sharon Maria Smith, a former director, in respect of three payments made shortly before the company entered administration. They alleged breaches of statutory and common-law directors’ duties, and contended that two payments were unlawful distributions.

The first payment of £83,000 was made by the other director to a third party. The second payment of £60,000 was made to Ms Smith. The third payment of £31,126 was made by banker’s draft to Ms Smith, which she said was transmitted to discharge an invoice owed to a partnership.

The central issues were whether Ms Smith was liable for failing to restrict her fellow director’s access to the company’s accounts, whether the first two payments were dividends and lawful distributions, and whether the third payment was made for the company’s benefit.

1. First payment. The alleged breach of section 172 of the Companies Act 2006 involved an omission. Since there was no sufficient evidence that Ms Smith had actually considered the company’s interests, an objective test applied. The question was whether an intelligent and honest person in her position could reasonably have anticipated that steps were required to prevent the other director’s unrestricted access to the company’s accounts. Actual knowledge of a risk would form part of the factual matrix, but being put on notice of possible misapplication was not a precondition.
2. The deterioration in the directors’ relationship and disagreements about the company’s future did not, without more, create an obligation to terminate the other director’s access. The analogy with signed blank cheques was rejected. The claim under sections 172 and 174 failed. In any event, Ms Smith acted honestly and reasonably and would have been relieved from liability under section 1157.
3. Second payment. The evidence established on the balance of probabilities that the first and second payments were intended as dividends. The company was entitled to rely on its 2009 accounts showing substantial distributable profits, although updated financial information was required. The evidence showed temporary liquidity problems rather than insolvency. All shareholders had assented to the payments, so the Duomatic principle applied. The payments complied with the relevant statutory and common-law restrictions, and no breach of sections 171, 172 or 174 was established.
4. Third payment. Once the liquidators proved that the payment had been made, the evidential burden fell on Ms Smith to explain it. Her explanation that the payment discharged a genuine invoice owed to a longstanding creditor was credible and supported by the amount, the invoice and the prior trading relationship. No breach of duty was established.
5. The liquidators’ claim was dismissed.