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

The claim concerned alleged breaches of directors' duties and claims under the Insolvency Act 1986 by reference to payments made by Lloyds British Testing Limited in the period from 1 April 2015 to the company entering administration on 24 November 2016. The court applied the duties in the Companies Act 2006, principally sections 172 and 174, and considered the scope of the duty to creditors as explained in BTI 2014 LLC v Sequana SA. The applicant bore the initial burden of proving receipt of the payments by the director and, if proved, the burden shifted to the director to show they were proper.

On the facts the judge found that, objectively, many items of expenditure were not for the company's benefit and were recoverable, but also that a number of the 2015 items had been reconciled in the company accounts for 2015 and were not recoverable. The judge found the company was not balance-sheet insolvent on the evidence before September 2016 and did not become probably insolvent until HMRC's refusal of a payment plan in November 2016, although a real risk of insolvency was identifiable earlier. The court allowed the applicant's claim in part: certain personal expenditure and 2016 items (including specific vehicle and helicopter costs and unreconciled drawings) were held recoverable, and a sum was found due on the director's loan account.

Background and parties: Lloyds British Testing Limited went into administration on 24 November 2016 and into creditors' voluntary liquidation a year later. Manolete Partners plc is the assignee of claims of the company and its liquidators against Mr Ian Russell White, a long-standing director and controlling mind of the group. The applicant alleged Mr White caused the company to make payments for his personal benefit and for third parties, and alternatively that the transactions were at an undervalue under the Insolvency Act 1986.

Nature of the claim / relief sought:

• Declarations and monetary relief for breach of directors' duties (Companies Act 2006, especially sections 172 and 174) in relation to payments to Mr White and third parties in the approximately twenty months before administration;
• Alternatively, relief under section 238 of the Insolvency Act 1986 for transactions at an undervalue; and
• Recovery on the director's loan account.

Issues framed:

• Whether the company was able to pay its debts (section 123 Insolvency Act 1986) at times after 1 January or 1 April 2015;
• Whether Mr White knew or ought to have known the company was, or was likely to become, insolvent (triggering duties to creditors);
• Whether specific payments were made in breach of fiduciary and statutory duties and/or were transactions at an undervalue; and
• Whether the write-off of inter-company loans caused loss and whether sums were due on the director's loan account.

Court reasoning and findings:

• The legal framework was applied: central duties in sections 172 and 174 Companies Act 2006; creditor duty as explained in Sequana (Court of Appeal) was addressed, and the court noted the pending Supreme Court consideration of Sequana but applied the existing law.
• The judge accepted that the applicant carried the burden of showing receipt of payments and that once proven the burden shifted to Mr White to justify them.
• On balance of probabilities the judge found the company was not clearly balance-sheet insolvent before September 2016 and that insolvency was not probable until HMRC rejected the proposed payment plan (early November 2016). The judge did, however, find there was a real risk of insolvency from about April 2016.
• The judge found many 2015 personal expenditures had been accounted for in the 2015 year-end reconciliation of Mr White's director's loan account and therefore were not recoverable; by contrast a large number of 2016 payments were not reconciled and were recoverable.
• Specific recoverable items included certain motor vehicle costs, Timberwolf tractor, unreconciled helicopter costs and maintenance, specified travel and holiday payments in 2016 (except identified legitimate business journeys), and unreconciled drawings in 2016. The judge dismissed the claim in relation to Mrs White's Porsche on the factual basis she provided sales and marketing consultancy and the car expenses were legitimate business expenses.
• The court found the inter-company loans written off were of no value and caused no loss, so no recovery arose from their write-off. The director's loan account was found to be overdrawn and the judge quantified the net amount due as £76,154 (after credit for sums paid in in 2016).

Remedy and procedural posture: The claim was allowed in part: the applicant was entitled to recover various sums identified in the judgment and the director's loan account sum of £76,154. The judge invited the parties to agree a detailed order recording the precise amounts recoverable and offered to resolve any disagreement on the papers.

The application was allowed in part. The court found that many of the payments to and for the benefit of Mr White in 2016 were not bona fide company expenses and were recoverable for breach of directors' duties (Companies Act 2006, ss.172, 174), whereas many 2015 items had been reconciled in the 2015 accounts and were not recoverable. The court also held the write-off of inter-company loans caused no loss, and quantified the net sum due on Mr White’s director’s loan account at £76,154. The judge applied the creditor-duty principles from Sequana and the statutory avoidance provisions in the Insolvency Act 1986, but concluded section 238 did not add anything beyond the breach of duty findings on these facts.