Manolete Partners Plc v Matta & Ors

Company directors’ powers cannot be used to fund substantial personal expenditure over a prolonged period. The company’s ability to afford the expenditure at the time does not answer whether the director acted for a proper corporate purpose or exercised reasonable care, skill and diligence. A director who leaves a long-standing overdrawn loan account unregularised may breach those duties and remains liable to repay the outstanding debt. In a summary application challenging transactions as undervalue transactions or preferences, disputed issues about services, consideration, insolvency and statutory presumptions generally require a full hearing.

Manolete Partners Plc, as assignee of claims formerly belonging to Saint George Investment Holdings Ltd, applied for declarations and repayment orders against the company’s former director, members of his family and a company. The application concerned an overdrawn director’s loan account, payments to family members, and payments made to the fourth respondent for charitable donations. Manolete relied on directors’ duties under the Companies Act 2006 and on provisions concerning transactions at an undervalue and preferences under the Insolvency Act 1986.

The central issues were whether the director had breached his statutory duties, whether the payments were reviewable insolvency transactions, and whether those questions could be decided at a short summary hearing.

1. Director’s loan account. The duties in sections 171 to 176 of the Companies Act 2006 are owed to the company. Authorising substantial personal expenditure from company funds on a continuing basis was not a proper corporate purpose. Failing over many years to regularise the overdrawn loan account breached the duties to promote the company’s success and to exercise reasonable care, skill and diligence. The fact that the company could afford the payments when made did not answer the issue. The outstanding loan remained repayable.
2. Payments to family members. The court could not safely determine on a summary basis whether the payments were made under employment contracts, whether services had been provided, whether proper consideration had been given, or whether the company was unable to pay its debts when the payments were made. The applications concerning transactions at an undervalue, preferences and related director-duty claims were therefore refused, with directions towards a full hearing. The court applied the reasoning in Phillips & Another v McGregor-Paterson [2009] EWHC 2385 (Ch).
3. Payments to the fourth respondent. The payments were charitable donations made on the director’s behalf and were not said to benefit the company or further his duties as director. They were therefore authorised in breach of his duties under the Companies Act 2006, for which the director was liable. The court declined to determine whether they were reviewable transactions under section 238 of the Insolvency Act 1986.
4. Judgment was given for the applicant against the director in respect of the overdrawn loan account and the payments to the fourth respondent. The remaining applications were refused. Consequential matters, the form of order and costs were reserved.

First-instance decision. Consequential issues, the form of order and costs were to be dealt with separately.