MANOLETE PARTNERS PLC v EBRAHIM DALAL & Ors

A person is a de facto director only if they occupy part of the company’s corporate governing structure and perform functions properly dischargeable only by a director. Management, administrative work, consultation, or following the instructions of the registered director is insufficient.

Where a director causes company money to be paid away by way of a purported family gift in breach of duties owed to creditors, the company retains its beneficial interest in the money and its traceable proceeds. It may assert a proprietary claim against volunteers, regardless of notice.

A balance-sheet deficit does not, by itself, establish insolvency. A substantial claim which the company is unlikely to defend may nevertheless require directors to consider creditors’ interests.

The claimant, as assignee of Bolton Poultry Products Ltd and its liquidator, pursued claims against members of the Dalal family arising from the company’s liquidation. It alleged that the company had concealed substantial cash sales, that company money had been used to acquire properties, that payments had been made in breach of directors’ duties, and that goodwill had been transferred to a new company without payment.

The central issues included whether Sajid and Anisha remained de facto directors after ceasing to be registered directors, whether additional sales receipts had been proved, whether £250,000 paid towards the Brinksway Property was recoverable, and whether various cheque payments required repayment.

1. De facto directors. Sajid and Anisha were not proved to have acted as directors after 20 June 2008. The test is objective and requires participation in the company’s governing structure and the discharge of functions properly belonging only to a director. Responsibility for operations, banking, staffing, payroll, accounting, administration, or communications may be undertaken by a senior manager or agent. Deference to the registered director does not establish directorship.

2. Additional sales receipts. The claimant bore the burden of proof. The court was entitled to examine challenges to the Business Economics Exercise even though they had not been particularised in the defences. On the evidence, the calculation involved substantial uncertainty concerning bird numbers, weights, wastage, proportions of whole birds and cut parts, prices, and bad debts. The estimated discrepancy of about 12% was insufficient to prove, on the balance of probabilities, that additional sales receipts existed.

3. Creditors’ interests and the Brinksway Property. Although the company’s balance sheet showed a deficit, that did not establish insolvency. However, in September 2014 HMRC’s substantial claim was difficult to defend and the company was probably insolvent for the purpose of the creditor-duty rule. Ebrahim had not considered creditors as a class. Applying an objective test, he breached his duty by causing £250,000 owed to him to be paid away for the benefit of Sajid and Anisha.

4. The payment could not be treated as a proper repayment to Ebrahim. The company retained its beneficial interest in the money and could trace it into the Brinksway Property. The claimant was entitled to elect between a proportionate proprietary interest and an equitable lien for £250,000.

5. Ebrahim was liable to repay unjustified cheque payments totalling £24,373.78. Sajid and Anisha were each liable to repay £7,000 bonus payments made in breach of duty. The claims concerning the other properties, additional goodwill, Johra, and the remaining payments failed or were abandoned.