Baker (Liquidator of TMG Brokers Limited) v Staines & Anor

The liquidator applied under section 212 of the Insolvency Act 1986 for declarations and orders in respect of sums paid from the company’s bank accounts to the two director-respondents and to a related company. The court held that substantial payments from the company’s Frick Account and transfers to a related company’s Barclays account were unlawful extractions of company assets and, in relation to payments received personally by the second respondent, were ultra vires disguised distributions and/or breaches of directors’ duties. The court found breaches of statutory and fiduciary duties under sections 171, 172 and 174 of the Companies Act 2006 and applied the principles on burden of proof and adverse inferences where directors had failed to produce books and records. The discretionary statutory defence in section 1157 CA 2006 and the Duomatic principle were considered and rejected on the material facts for the principal recipient of the payments; relief under section 1157 was refused to both respondents on the available evidence. The court ordered joint and several liability to repay the sums, subject to a limited concession concerning a discrete payment if proved to be bona fide company expenditure.

This is a first instance hearing of an application by the liquidator of TMG Brokers Limited seeking declarations and consequential orders under section 212 of the Insolvency Act 1986 in respect of three categories of payments: sums paid from the company’s Bank Frick accounts to Mr Madu (the Frick Payments and Frick Cash Withdrawals), and sums diverted by instruction to a related company (TMG Pay Limited) and paid out from that account (the TPL Payments), including specified identified payments and an unaccounted balance.

The principal factual background was that TMG purported to provide online card processing services for PPI recovery merchants, but filed dormant accounts while operating, worked mainly with a single acquirer OSMM which retained a rolling reserve and then, after the merchants ceased trading, became subject to many chargebacks. From February 2015 OSMM payments were directed to TMG Pay Limited (TPL). Large sums were drawn from the company’s Frick Account and transferred to TPL or paid to the second respondent, who lived in Italy.

The applicants advanced that the Frick Payments were ultra vires disguised distributions and/or paid in breach of fiduciary and statutory duties; that the TPL transfers were diversions of company funds by deception; and that the respondents ought to be ordered to account and to repay. The court framed issues including whether the payments were unlawful distributions, whether duties under sections 171, 172 and 174 CA 2006 had been breached, whether the evidential burden shifted to the respondents once payments were proved, whether the Duomatic principle or section 1157 CA 2006 could excuse the respondents, and whether the liquidator should obtain relief under section 212 IA 1986.

The court found that the liquidator had proved the payments and, on the respondents’ failure to provide records, drew adverse inferences (applying the Re Mumtaz approach and Toone v Robbins). The court concluded that the Frick Payments and Frick Cash Withdrawals were not supported by any credible explanation and were unlawful extractions of company assets, breaching sections 171, 172 and 174 CA 2006. The diversion of receipts to the TPL Account was deliberate and, although some sums were used to discharge liabilities, a substantial proportion was extracted for the respondents’ benefit without justification. The Duomatic principle did not validate the payments because requisite shareholder knowledge was not shown. The respondents failed to establish the subjective honesty and objective reasonableness required for relief under section 1157 CA 2006; the court refused to grant relief. Exercising its discretion under section 212 IA 1986 the court ordered the respondents to be jointly and severally liable to repay the Frick Payments, Frick Cash Withdrawals and TPL Payments, but allowed a time-limited concession that the liquidator will not enforce against the respondent any part of the £13,786 paid to him if he produces convincing evidence within 14 days that those amounts were bona fide company expenditure.

At first instance the liquidator's application under section 212 IA 1986 succeeded. The court found that the Frick Payments, the Frick Cash Withdrawals and the payments diverted to the TPL Account were unlawful extractions of company assets and that the respondents had breached duties under sections 171, 172 and 174 CA 2006. The respondents failed to discharge the evidential burden to justify the payments and were refused relief under section 1157 CA 2006; the Duomatic principle did not validate the payments. The court ordered the respondents jointly and severally to repay the sums claimed, subject to a limited concession permitting a narrow evidential challenge to a discrete payment of about £13,786.