Manolete Partners Plc v Ian Russell White (Re Lloyds British Testing Limited (In liquidation))

A director must apply company assets for proper purposes and in the company’s interests. Personal expenditure cannot be justified by an intention to reconcile it through a director’s loan account later. The ordinary section 172 duty is subjective, but becomes objective where the director failed to consider the company’s interests or overlooked a very material interest. The creditor duty is engaged, on the law stated in [2019] EWCA Civ 112, when insolvency is known or probably foreseeable. The Duomatic principle cannot validate an unlawful distribution or a payment lacking bona fide corporate purpose.

Manolete Partners Plc, as assignee of claims belonging to Lloyds British Testing Limited and its liquidators, brought an insolvency claim against Ian Russell White, the company’s former director and controlling shareholder. The claim concerned personal and family expenditure, third-party payments, overseas inter-company loan write-offs and an allegedly overdrawn director’s loan account.

The court determined whether the company was insolvent or likely to become insolvent during the relevant period, whether Mr White knew or ought to have known that, whether the payments breached statutory and fiduciary duties, whether they were transactions at an undervalue under section 238 of the Insolvency Act 1986, and whether the director’s loan account liability was established.

The claim succeeded in substantial part. The court held as follows.

1. Pending the Supreme Court’s decision in Sequana, the creditor duty was governed by the approach in [2019] EWCA Civ 112: it was triggered when the directors knew or ought to have known that the company was, or was probably going to become, insolvent. On the evidence, Mr White neither knew nor ought to have regarded the company as insolvent or probably insolvent before HMRC rejected the proposed repayment plan in November 2016. The court would have found a real risk of insolvency from at least April 2016 if that lower threshold proved applicable, but little turned on the distinction.

2. The claimant bore the burden of proving that a director received relevant company payments. Once that was shown, the burden shifted to the director to establish that the payments were proper. Company assets had to be applied for proper purposes and in the company’s interests.

3. The section 172 duty was ordinarily subjective: the question was whether the director honestly believed the act or omission to be in the company’s interests, including creditors’ interests where that duty was engaged. It became objective where the director did not in fact consider the relevant interests or overlooked a very material interest. On the facts, the helicopter expenditure and other identified personal expenditure were not in the company’s interests, and Mr White had not subjectively considered that expenditure to be justified for the company.

4. The Duomatic principle could not assist. Where solvency was disputed, the party invoking it bore the burden of proving solvency. The principle could not authorise an unlawful distribution or a payment not made bona fide for the purposes of the company. Nor was an intended future reconciliation of personal expenditure in the director’s loan account a defence to breach of duty.

5. The section 238 claims added nothing and produced no different result. The overseas inter-company loans had no value when support for the overseas businesses was withdrawn, so their write-off caused the company no loss.

6. The court allowed recovery of the unreconciled 2016 personal expenditure and found £76,154 due on the director’s loan account, while dismissing claims for expenditure accepted as legitimate business expenditure, including the Porsche Cayenne supplied for Mrs White’s consultancy arrangement.

The parties were invited to agree the total sum and consequential order, with unresolved differences to be identified in a tracked draft for determination on the papers.