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

Company directors must account for payments made from company funds unless they establish a lawful and proper purpose. The evidential burden shifts once the liquidator proves receipt or payment. A director cannot avoid responsibility by delegating financial affairs to a fellow director or by relying on informal shareholder consent.

Where a company is insolvent or likely to become insolvent, creditors’ interests become paramount. The statutory relief under section 1157 of the Companies Act 2006 requires both honesty and objective reasonableness. It is unavailable for money personally received unlawfully. Under section 212 of the Insolvency Act 1986, directors may be made jointly and severally liable to compensate the company.

The liquidator of TMG Brokers Limited sought declarations and compensation under section 212 of the Insolvency Act 1986 against two former directors, Mr Staines and Mr Madu.

The claims concerned payments from the company’s Liechtenstein bank account, cash withdrawals, and the diversion of trading receipts to an account held by a connected company. The respondents contended that the payments represented expenses, salary or legitimate business expenditure, and relied on the Duomatic principle and section 1157 of the Companies Act 2006.

The central issues were whether the payments were unlawful extractions or breaches of duty, whether Mr Staines was jointly liable despite lacking direct control of some payments, and whether either respondent was entitled to relief.

1. Liability for payments. The Applicants proved that the relevant payments had been made and that the Frick cash withdrawals were probably received by Mr Madu. The evidential burden therefore shifted to the respondents to explain and justify them. They failed to do so. The payments were unlawful extractions of company money and, in the case of the Frick Payments and Frick Cash Withdrawals, ultra vires disguised distributions of capital.
2. Mr Madu. Mr Madu breached sections 171, 172 and 174 of the Companies Act 2006. He used company powers for no legitimate purpose, failed to act in the interests of the company and, once insolvency was likely, its creditors, and failed to exercise reasonable care, skill and diligence. Objectively, an intelligent and honest director could not have believed that the payments benefited the company or its creditors.
3. Mr Staines. Although Mr Staines did not have actual knowledge of each payment, he knowingly acquiesced in a practice of payments being made to the director-shareholders without questioning their basis. Under Neville v Krikorian, that was sufficient to treat him as having authorised the payments. His reliance on Mr Madu did not discharge his own duties. A director may delegate responsibility, but cannot comprehensively abrogate financial oversight. His failure to enquire breached section 174 of the Companies Act 2006.
4. Insolvency and Duomatic. From November 2015 the respondents should have appreciated that the company was more likely than not to become insolvent. Informal unanimous shareholder consent could not validate unlawful distributions or override creditor-protection rules. The Duomatic principle also failed because there was no evidence that the shareholders had sufficient knowledge of the nature and purpose of the payment to Mr Staines.
5. Section 1157 relief. Mr Staines acted honestly but not reasonably, assessed objectively. His gross negligence and failure to oversee the company’s finances disentitled him to relief. Mr Madu could not rely on section 1157 in respect of money unlawfully received by him and provided no evidence that he acted honestly or reasonably in relation to the remaining payments.
6. Disposition. The respondents were jointly and severally liable under section 212 of the Insolvency Act 1986 to repay the Frick Payments, Frick Cash Withdrawals and TPL Payments. The liquidator was directed to give credit for any part of the £13,786 paid to Mr Staines which he could convincingly prove within fourteen days was used for the company’s legitimate benefit.